Weak banks have 'no choice but to merge'

BOGOR (JP): Financially weak banks have no choice but to merge with larger banks if they want to escape from being closed by the government, a senior bank executive said.

Arwin Irsyad, Bank Danamon's president, said on Thursday that many banks would face difficulty in meeting the minimum capital adequacy ratio (CAR) requirement by the end of this year.

For most of them, raising fresh funds from existing shareholders or new investors to improve their capital ratio would be quite difficult due to high investment risks in the banking industry, he added.

"It is therefore important for them to consider a merger plan with larger banks, or be closed by the government," he said to journalists at a banking workshop.

Indonesian banks should have a CAR of at least 8 percent by the end of this year to comply with the minimum capital level imposed by Bank Indonesia.

But the central bank indicated recently that at least 20 banks would not be able to meet the requirement, due to their worsening business activities.

Most of the banks' shareholders were unlikely to be able to inject fresh funds, while the government has ruled out the possibility of bailing them out.

"Merging with other banks would therefore be the only alternative left to enable them to survive," Arwin added.

In addition to having at least an 8 percent CAR level, banks were also asked to reduce their non-performing loan (NPL) level to a maximum of 5 percent by the end of this year.

Arwin said that the central bank might allow the banks to have an NPL of slight higher than 5 percent.

"But the tolerance given by the central bank to have an NPL of more than 5 percent would not be able to save them from the threat of closure," he said.

According to Arwin, many banks still have an NPL of more than 18 percent.

Arwin acknowledged that despite these financial problems, many bank shareholders still refused to merge their banks due to the fear of losing ownership and control.

Bank analyst from Indosuez WI Carr Securities Mirza Adityaswara said that given the reluctance of bank shareholders, the central bank should issue a special rule forcing the weak banks to merge.

The government has issued around Rp 430 trillion worth of bonds to finance the recapitalization of 27 banks, including four state-owned banks, several regional development banks, and the 11 private banks.

The central bank has recently warned that several of banks under the control of the Indonesian Bank Restructuring Agency (IBRA) might fail to meet the year-end CAR requirement, and urged the government to merge the banks to avoid the greater costs that would result from the bank closure alternative.

But Finance Minister Prijadi Praptosuhardjo said that merging banks was not an easy process due to the complexity of the banks' problems. (05)