S&P says RI needs fewer but strong banks

JAKARTA (JP): Rating agency Standard & Poor's has suggested Indonesia reduce the number of banks in the country and strengthen their capital bases to meet future competitive threats from overseas players.

As Indonesia became more involved in the global marketplace decreased restrictions on overseas banks in Indonesia and the growing demands of a sophisticated customer base would be major threats to the domestic banking system, it said.

"To overcome these challenges Indonesian banks need to strengthen their finances, product systems and human resources," Standard & Poor's said in the January edition of its Asia Focus publication.

"To reach those goals, decreasing the number of banks would give them adequate resources in the areas of products, processes and people, while achieving economies of scale," it added.

The report said the existing 239 commercial banks were far too many for the Indonesian banking sector at its present level of development.

Indonesia's banking sector has too many banks but not enough branches relative to other financial systems. A bank which is too small cannot take advantage of economies of scale in information technology, the agency said.

"Standard & Poor's is not confident that the small to midsize Indonesian banks can compete with fellow Association of Southeast Asian Nations (ASEAN) banks when the barriers to entry fall," the agency said.

Banking in ASEAN, along with other financial services, is likely to be liberalized under the ASEAN Framework Agreement on Services (AFAS).

ASEAN finance ministers will meet next month in Phuket, Thailand, to discuss the possible liberalization of financial services.

Negotiations on financial services under the World Trade Organization (WTO) will also start soon. And most developed countries, which have a competitive advantage in services, will continue to press developing countries like Indonesia to open up their financial sectors.

Therefore, Indonesia should strengthen its financial services, especially its banking sector, because it only has five years or so before overseas banks enter the market because of relaxed barriers on the heels of pressure from the AFAS and WTO, the agency said.

But Standard & Poor's commended the unheralded shift in market share dominance to private sector banks from state-owned institutions.

The shift signaled "an important trend toward heightened professionalism in Indonesian banking," the agency said.

Standard & Poor's assigned new public information ratings to 13 Indonesian banks last November.

The public information rating is graded from the highest AAA to the lowest D, but with a "pi" subscript indicating the rating is based on analysis of an issuer's published financial information and information in public domain.

Such ratings do not reflect in-depth meetings with an issuer's management or incorporate nonpublic information. So the ratings are based on less comprehensive information than ratings without a "pi" subscript.

Of the 13 banks four were rated BBBpi: Bank Dagang Negara, Bank Ekspor Impor, Bank Rakyat Indonesia and Bank Tabungan Negara.

The remaining nine were rated BBpi. They were Bank Bali, Bank Bumi Daya, Bank Central Asia, Bank Dagang Nasional Indonesia, Bank Duta, Bank Internasional Indonesia, Lippo Bank, Bank Niaga and Pan Indonesia Bank.

Standard & Poor's said government support was a major factor leading to generally higher ratings among state-owned banks.

As privatization continued government support of state banks might change.

While the government was likely to provide financial support, state banks with difficulties might find the government's willingness to do so decreases as continuing financial deregulation leads to the partial privatization of state banks.

But over the medium term the outlook for large private sector banks is more favorable than for state banks, Standard & Poor said. (rid)