Troubled small banks expected to merge

JAKARTA (JP): The planned merger of four state-owned banks as part of banking reform measures would encourage small private banks to follow the move in order to survive, an economist has said.

Arief Ramelan Karseno of Yogyakarta's Gajah Mada University said yesterday the merger would force ailing private banks to merge in order to compete with the new state bank.

"The merger of the four banks will give birth to one giant bank with capital of about Rp 95.5 trillion," Arief said.

"This will force other private banks with a grim future to merge just to stay alive," he was quoted by Antara as saying.

With the large amount of capital, the new state bank could perform better and could be flexible in meeting the demands of its customers, he said.

The merger would reduce transfer fees between banks, thus lowering the interest rate, he said. This would restore customers' confidence in government banks, he said.

He said small private banks must consolidate to prevent losing their customers to the new bank.

Private banks had already been losing customers since the government closed 16 private banks in November as part of reform measures backed by the International Monetary Fund, he said.

Minister of Finance Mar'ie Muhammad announced Tuesday the government would merge four of seven state-owned banks into a single bank.

The merger of Bank Bumi Daya, Bank Dagang Negara, Bank Ekspor Impor Indonesia and Bank Pembangunan Indonesia will be completed by July.

The government will also allow foreign banks to become shareholders in the yet to be named new bank.

Another Gajah Mada University economist, Sri Adiningsih, said yesterday the participation of foreign investors in state banks might make the new state bank more commercially oriented.

"The government's mission to be an agent of development by providing loans to small-scale entrepreneurs would face obstacles," Sri said.

Small businesses would be the worst hit by this transition, she said.

To avoid this, the plan to sell the bank's shares to foreign investors should be implemented gradually, she said.

This would give time for the transition of technology so that the management of the new bank could learn to manage large capital efficiently, she said.

Arief said the government's challenge in merging the banks would be in combining the corporate cultures of four different institutions, which could take a long time.

The merger would also inevitably lead to layoffs and the lowering of some staff positions, he said.

Arief said the participation of foreign investors would help enforce transparency in the new bank.

Bank analyst Nyoman Moena urged the government to make complete preparations before the bank merger.

"In a situation like this, when the monetary authority is being burdened by other things, the merger must not be done hastily," he said.

Moena said a merger would not be an easy matter, because the four banks were very different from each other.

The government must conduct a complete feasibility study before the merger actually took place, he said.

The study would show what the government wanted to achieve with the merger, he said. This would help indicate whether or not the government would reach its goal after the merger took place.

Moena said the merger would fail without good preparation. He compared it to the government's failed attempt to merge its banks in 1965.

He said the failure in the 1965 merger was due to political instability.

Conditions were not any better now, he said.

"Without good preparation, this will be the beginning of (the merger's) failure," he said. (das)