Govt won't force banks to merge: Burhanuddin

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)