Merger of state banks

Merger of state banks

We had almost disregarded Presidential Instruction No.5/1988
concerning the reform of state enterprises as another government
program which had petered out for lack of political will when
Minister of Finance Mar'ie Muhammad confirmed last week a plan to
merge the seven state banks. Mar'ie said President Soeharto had
agreed in principle on the planned mergers.

The measure obviously will be monumental work, much more
complex and intricate than the merging of the three state cement
companies two years ago. Hence the President's seal of approval
is essential to garner the support of all parties involved.

Moreover, the move will have a far-reaching impact in view of
the vital role of state banks in the financial sector -- the
lifeblood of economic activities. Though state banks, in terms of
number, account for only around 3 percent of the 237 banks
throughout the country, they are responsible for more than 37
percent of total bank lendings and control one third of total
banking assets.

However, the size of assets does not automatically reflect
operational efficiency and level of competitiveness, as shown by
Indonesian bank ratings announced by the Infobank banking
magazine early this month. None of the state banks ranked very
sound in the rating, which was based on the main parameters used
by the central bank to assess banks such as capital standards,
profitability, liquidity, net interest margin, legal lending
limits.

Only Bank Rakyat Indonesia and Bank Tabungan Negara were rated
as sound, three others -- Bank Dagang Negara, Bank Ekspor Impor
Indonesia and Bank Negara Indonesia -- ranked fairly sound, while
Bank Bumi Daya was assessed as not sound and Bank Pembangunan
Indonesia (Bapindo) was not even rated as it had not issued
financial reports since 1994.

Mar'ie asserted that the planned mergers had nothing to do
with the problem of bad credits at state banks, which amounted to
4.6 percent of their total loans outstanding as of March.
Instead, Mar'ie said, the restructuring was designed to prepare
the banks for the increased competition following the
liberalization of the region's financial markets, especially when
the ASEAN Free Trade Area (AFTA) starts operating in 2003.

As the country has become an increasingly significant player
in the international market both as exporter and importer, it
needs the support of strong and competitive financial
institutions. The state banks, though ranked among the 15 largest
banks in the country in terms of assets, simply lack the capital
resources, networks, sophistication and technological advantage
to provide adequate support to Indonesia's foreign trade. Their
combined assets totaled only around $87.5 billion as of December,
much less even compared, for example, to Wells Fargo & Co., the
11th largest bank in the U.S. with total assets of US$108.8
billion.

The mergers are not likely to be completed before 2000, given
the considerable, delicate work involved. First, thorough studies
have to be made to choose which bank should be merged with which
to get the best synergy. Then follows the long process of asset
evaluation, distribution, network realignment, operational
synchronization. But if the government is really serious about
the restructuring, the mergers should be completed by 2001 at the
latest, thereby giving the newly merged banks almost two years to
consolidate operations before the start of AFTA in 2003.

The mergers, however, will be rendered less effective in
improving the efficiency and effectiveness of the state banks, if
the government continues to meddle in their managements. In fact,
lack of management autonomy has become one of the biggest
obstacles faced by the managements of most state companies. Many
state firms are still often treated by ministries as their cash
cows. The World Bank, for example, notes in its 1997 report on
Indonesia that state banks' efficiency seems little changed, as
does their credit assessment procedures, resulting in large bad
credits.