Govt won't force banks to merge: Burhanuddin

JAKARTA (JP): The government will avoid forcing domestic banks into merging as part of its efforts to restructure the weak and overcrowded banking sector.

The newly appointed Coordinating Minister for the Economy Burhanuddin Abdullah said that it would be better and less costly to the government to let market mechanisms do the job.

"We must try to avoid a compulsory (merger) process ... The new banking landscape should be based on market mechanisms," he told reporters late on Friday following a closed-door talk on banking issues with finance minister Rizal Ramli, top officials of the Indonesian Bank Restructuring Agency (IBRA) and Bank Indonesia, and several legislators at a luxurious private club in South Jakarta.

Burhanuddin was installed as the country's new economics chief during a recent cabinet reshuffle, replacing Rizal.

The banking authorities have been determined to consolidate the banking sector, which has been plagued with structural problems, including a very large number of banks catering to the same market; the marginal levels of assets and capital; lack of competitiveness; and weak human resources and information technology capabilities.

Although the number of banks has dropped significantly from 238 before the financial crisis started in the middle of 1997 to 149 currently, experts have said that the sector is still overcrowded.

Consolidating the banking sector has been one of the planks of the country's economic reform program.

The requirement for banks to have a minimum capital adequacy ratio (CAR) level of 8 percent by the end of this year or risk closure should help push undercapitalized banks to merger with stronger banks.

CAR is the ratio between capital and risk-weighted assets.

But experts have said that arranging bank mergers was no easy task.

The latest example of that has been the collapse of the high profile merger plan between the weaker Bank Universal and the stronger Bank Danamon.

Bank Danamon president Arwin Rasyid was quoted by the press as saying that the merger plan had been dropped because it had lost momentum and would not produce the best outcome.

The merger plan was announced to the public several months ago.

Creating a new banking landscape may also prove difficult to implement due to the different concepts being applied by the country's two powerful banking authorities: IBRA and Bank Indonesia.

A legislator who attended the late night Friday meeting said that Burhanuddin, a former Bank Indonesia deputy governor, had tried to play the role of mediator between IBRA and Bank Indonesia so that the two could unify their perceptions.

IBRA, a unit under the finance ministry, currently controls around 11 private banks, mostly large ones. These include the publicly-listed Bank Central Asia (BCA), Danamon, Universal, Bank Niaga, Bank Bali, Bank Lippo, Bank Internasional Indonesia, Bank Prima Express, Bank Artha Media, Bank Bukopin and Bank Patriot.

The agency took majority control of the banks as part of a bailout following the financial crisis.

IBRA has said that it planned to develop four banks into well- capitalized "core banks" with good market share in a bid to restructure the banking industry.

The agency said that two of its banks and two state-owned banks were qualified to become core banks which would have assets of more than Rp 100 trillion (US$19 billion) each, offer an extensive range of banking products and services, and be equipped with up-to-date banking technology.

The core banks would acquire the weaker and smaller banks without having to face the risk of deterioration in their CARs.

IBRA also said that medium-sized banks with total assets of between Rp 10 trillion and 50 trillion could be developed into specialized banks focussing on particular market niches.

Meanwhile, Bank Indonesia proposed that the banking industry be stratified into four categories.

Commercial banks with strong capital, managements, networks, skills, and information technology should be developed to become the backbone of a banking industry which would be able to compete on the international market.

Banks sufficiently endowed with the above qualities could be grouped into the "national bank" category, and would be expected to play the financing intermediation role in the local market.

Banks with only limited capacities in terms of capital and the other qualities would be directed to operate only in particular provinces or regions. The last category would consist of smaller group of banks operating only in rural areas.(rei)