'Power Bank' merger may slow privatization

Berni K. Moestafa, The Jakarta Post, Jakarta

Plans to merge recapitalized banks into the so-called "Power Bank" have come under the scrutiny of the World Bank, which warned the move could delay privatization.

The World Bank said that a merger conducted under the supervision of the Indonesian Bank Restructuring Agency (IBRA) could result in a new institution with a weak capital base and poor risk management.

"While further consolidation within the banking sector is overdue, a generalized, forced merger of IBRA banks would delay privatization and produce a large, unmarketable bank," the World Bank said in a report issued last week.

IBRA has nationalized and recapitalized a total of 11 private banks following the devastating 1997 financial crisis. The government must gradually sell the banks back to the private sector to help accelerate the country's bank restructuring program and promote economic recovery.

Earlier this month, the government said it planned to merge IBRA banks, as they had remained vulnerable to further closures despite having been recapitalized.

The planned new bank, often dubbed the "Power Bank", is an effort to consolidate the banking sector, which many see as being too fragmented.

Banks face liquidation if they fail to meet a minimum capital adequacy ratio (CAR) of four percent this year, and eight percent by year's end.

Most banks have remained weak as they have been unable to shift their earning base from recapitalization bonds to new loans.

Consolidating them may help strengthen the banks' overall CAR levels. But the move has its risks, according to analysts.

They said such a merger would only be helpful if the government combined weak banks with stronger ones.

They warned merging weak banks was counterproductive, as the combined capital base in the new bank would remain low.

"Such a bank would likely soon need rescue and recapitalization, adding further to the already enormous public cost of banking restructuring," the World Bank said.

Indonesia's biggest bank, Bank Mandiri, is the result of four state banks merging, each to avoid liquidation.

To keep Bank Mandiri afloat, the government injected it with recapitalization bonds worth some Rp 175 trillion (about US$16.5 billion).

In total, the government has spent about Rp 430 trillion on recapitalizion bonds, the interest payments on which are burdening the state budget.

"It would be far wiser to sell these institutions to the private sector as soon as possible, and then allow market forces to dictate the direction of mergers and acquisitions," the World Bank added.

In another consolidation move, Bank Mandiri is still in talks over acquiring Bank Internasional Indonesia (BII).

The latter's CAR level is at risk, due to massive exposure to the Sinar Mas Group, whose unit has imposed a debt moratorium.

As part of the acquisition process, the government injected BII with state bonds in exchange for the risky Sinar Mas loans.

The government and Bank Mandiri denied calling the acquisition plan a move to save BII from closure.

But the deal may falter, as the government and Bank Mandiri have yet to reach an agreement on the price of the acquisition.

According to local media reports last week, Bank Mandiri president E.C.W Neloe said the bank had also imposed four new preconditions on an acquisition.

These concerned the non performing loans belonging to non- Sinar Mas debtors, issues related to BII's fixed assets, loan exposures to BII's subsidiaries, and litigation issues.

Neloe did not elaborate on the four preconditions.