Govt has yet to decide on crucial bank merger issue

Govt has yet to decide on crucial bank merger issue

JAKARTA (JP): Minister of Finance Prijadi Praptosuhardjo said
on Thursday that the government had not made any decision on
whether to merge weak banks under its control despite a strong
warning from the central bank that the banks must be merged
before the end of this year or else face closure.

Prijadi said that bank mergers were not easy because of the
complexity of banking problems.

"We don't have any plan yet (to merge banks), we're currently
checking the condition of each bank ... We have appointed a
consultant for this job," he told reporters.

"We don't have any target (for bank merger)," he added.

In addition to four state banks, the government, via the
Indonesian Bank Restructuring Agency (IBRA), controls majority
ownership in 11 private banks after the government financed the
bulk of the cost to recapitalize the banks.

Bank Indonesia Governor Sjahril Sabirin recently said during a
hearing session with the House of Representatives Commission IX
for financial and development planning affairs that several banks
under IBRA, a unit of the finance ministry, would not be able to
meet the minimum 8 percent capital adequacy ratio (CAR)
requirement by the end of this year.

Sjahril called on IBRA to merge the weak banks with banks that
possess a higher CAR to avoid greater expenses incurred to the
government.

But Prijadi said that the bank mergers could not be solely
based on their CAR condition.

He said that other factors including liquidity and asset size
must be considered.

"We will not merge two banks that can not look forward to good
synergy," Prijadi said.

"Mergers are actually just one alternative to resolve (the
banking) crisis," he added.

Analysts have also said that bank mergers in Indonesia would
be difficult due to resistance from founding shareholders and the
differing business culture of each bank.

The government, so far, has only managed to merge eight banks,
and incorporated them into the publicly listed Bank Danamon,
which is majority owned by IBRA. There are currently around 150
banks compared to 238 banks prior to the economic crisis that
began in mid-1997.

Banks must meet the minimum 8 percent CAR requirement by the
end of this year or risk closure.

The government can always step in to bail out banks which are
unable to meet the CAR requirement by recapitalizing the banks
again, though this would be politically unpopular because it
would require spending more tax-payers money, and economically
damaging because it will add an extra burden to the already
strained state budget.

The government has injected around Rp 430 trillion worth of
bonds to help finance the recapitalization of 27 banks. The state
budget covers the interest rate of the bonds.

The current weakening in the exchange rate of the rupiah
against the U.S. dollar and the increasing interest rate of Bank
Indonesia SBI promissory notes have created problems to certain
banks, including those under IBRA control.

The increase in SBI rate has left some banks vulnerable to the
spread of negative interest rates, which is seen as one factor
eroding banks' capital.(rei)