Small Banks face hurdles in meeting merger appeal

Small Banks face hurdles in meeting merger appeal

JAKARTA (JP): Small banks are still facing difficulties in meeting the government's appeal to merge among themselves, even though there are a number of incentives offered to encourage such deals, analysts say.

Riyanto Sastroatmodjo, a former senior official of Bank Indonesia, the central bank, said that the difficulties are not only faced by banks which have unsound performances but also those categorized as healthy banks.

He said that healthy banks are generally reluctant to receive a merger offer from their unsound "colleagues" because if the merger deal is accepted, it could deteriorate the quality of their performances.

"The sound banks also face a dilemma because shareholders do not want to lose control in their operations," he told a seminar on merger and acquisition in the banking industry on Friday.

The government has issued a number of incentives to encourage mergers in the country's over-crowded banking industry. They include tax facilities related to the transfer of their assets in a merger deal and an automatic promotion of their status to foreign exchange bank. For example, a bank which acquires assets of a merged partner is exempted from paying income tax on the transfer of goods in the deal.

However, most analysts said that the incentives are not strong enough because they do not cover many important aspects in the merger deal, such as those related to the treatment of non- performing loans.

At least 10 banks have unveiled their plans to merge with other banks but face difficulties to realize them due to the lack of incentives in dealing with their non-performing loans.

Riyanto called on the central bank to consider the issuance of more incentives so that banks which at present suffer financial problems could merge among themselves to enable them to survive the fierce competition in the banking industry.

"Small banks, on the other hand, should be aware that a merger is the only alternative to enable them to maintain their existence," he said. "Small banks, sooner or later, should merge with other banks to meet the central bank's tighter capital requirement."

Capital

According to the new capital requirement, a bank should increase its paid-up capital to at least Rp 150 billion (US$65.21 million) if it wants to upgrade its status to a foreign exchange bank. In addition, its capital adequacy ratio should reach 10 percent.

Those banks which at present have already been licensed as foreign exchange banks, should raise their paid-up capital to at least Rp 50 billion, with a capital adequacy ratio of at least 9 percent by September 1997. The capital and capital adequacy ratio should be further increased to Rp 100 billion and 10 percent by September 1999 and to Rp 150 billion and 12 percent by September 2001.

There are at least 240 commercial banks operating in the country at present, 77 of which have been licensed to operate as foreign exchange banks -- a status which allows them to participate in foreign exchange transactions and in the international banking system.

The other 163 banks are still categorized as non-foreign exchange banks, with paid-up capitals ranging only from Rp 10 billion to Rp 15 billion.

In addition, there are also around 6,750 secondary banks operating in the country. (hen)