Incentives termed vital to prompt bank mergers

JAKARTA (JP): The central bank's appeal for 74 private banks to merge into several larger banks would be realized only if it provides incentives, according to a senior advisor with the Indonesian Private Banks Association (Perbanas).

"The authority has to provide a sweetener so that the merged banks can survive the current harsh environment," banker Thomas Suyatno said on Friday.

He said without incentives, the merger would not prove beneficial to the banks, which are currently frustrated by a negative spread problem.

Banks were suffering a negative spread problem due to the higher interest rates they paid for time deposits compared to their lending rates.

Bank Indonesia (BI) Governor Sjahril Sabirin said on Wednesday the central bank would play a "matchmaker" role to encourage the 74 private banks to merge into several big banks in a bid to strengthen the beleaguered banking industry.

He said BI had studied and listed the strengths and weaknesses of the 74 banks, which could be used as a basis for matching banks for possible mergers.

He emphasized that the central bank would not force the banks to merge.

The 74 private banks are those which have capital adequacy ratios (CAR) equal to or more than the minimum 4 percent criteria established by the government in its bank restructuring program. The relative health of the banks prevented them from being closed down or recapitalized.

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

Thomas said, however, if the current negative spread environment continued, in six months time many of the banks would suffer a negative CAR.

Banks are currently providing about a 40 percent interest rate for time deposits, but no business sector could afford the high rate. The excess liquidity has been mostly channeled into the Bank Indonesia one-month SBI promissory note, currently carrying an interest rate of 36.4 percent.

Thomas said the government should provide the banks with various incentives, including export financing projects or two- step loans.

He acknowledged the government had limited resources to finance every program, but he questioned the necessity to set up a new bank with the mission to provide a government-sponsored export financing scheme.

"Why doesn't the government just give the funding to existing banks?"

He said if the banks were provided with cheaper credit facilities the negative spread problem would be overcome and be an effective reason for them to merge and continue their operations.

He feared the government might have to close down the banks if their CAR slumped into the negative.

Earlier, BI director Subarjo Joyosumarto said the government would avoid closing any more banks.

But Thomas said this was no guarantee that the authority would not close down more banks.

"Former finance minister Mar'ie Muhammad told the House in 1997 that the government would not close down any banks," said Thomas, who is also a House member.

The government was lambasted for the Nov. 16, 1997, bank closure which triggered massive runs on banks causing most of them to suffer liquidity problems and other difficulties. (rei)