Incentives termed vital to prompt bank mergers

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)