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Indon banks facing a shakeout

AsiaOne Online - February 10, 1997

S N Vasuki – Indonesian banks are suffering a long-expected shakeout as higher capital requirements and increased competition force gut-wrenching change in the industry.

In recent weeks, several banks have announced merger plans while larger, listed entities are on a cash-raising binge to boost their capital levels.

Last week, Bank Indonesia (BI) presided over the merger of Bank Guna and Bank Sake, two small institutions with a total asset base of around 390 billion rupiah (S$232 million).

The combined bank, Bank Guna officials said, will have a healthier capital base and be better able to cope with the profound changes underway in the industry.

Signs of the squeeze

Analysts welcome the trend and say it will improve the overall health of the banking sector. They add that Indonesia has too many banks – 240 at last count – and a prolonged period of consolidation is needed.

Stockbroking firm Vickers Ballas pointed out in a recent report that the pace of mergers will accelerate over the next two years.

"With most of the reputable domestic banks already listed, the task of raising capital for the smaller non-listed banks will become increasingly difficult and expensive," the report said.

"Failing to meet the new capital requirements, as set by the central bank, will have an adverse impact on their ability to grow. These banks are likely to merge or be acquired."

In 1995, BI introduced tougher capital adequacy requirements (CAR) aimed at strengthening the banking industry. Banks have until the end of this year to boost their CAR to 10 per cent from the existing level of 8 per cent and will have to raise it further to 12 per cent by 2001.

The central bank also introduced a new ruling requiring banks to have a minimum paid-up capital of 50 billion rupiah, or 150 billion rupiah for banks wishing to conduct foreign exchange transactions.

To encourage mergers, the minimum capital requirements are less stringent for banks that join forces. "These new rules are designed to encourage bank mergers, particularly mergers involving banks currently holding foreign exchange licenses," stockbroking firm GK Goh said in a report last year.

"Obviously, Bank Indonesia does not want to issue more licences than necessary."

The new measures are forcing Indonesia's listed banks to resort to huge cash-calls in order to boost capital levels. Last year, the listed banks raised an estimated 1.6 trillion rupiah through rights issues. This is seen to grow to at least 2.5 trillion rupiah this year.

Analysts feel that the increased capital levels will protect the listed banks from problem loans, particularly to the property sector.