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)