Analysts say the pressure is on small Indonesian banks to merge with their bigger brethren, now the government has outlined its criteria for selecting "anchor banks" in an effort to strengthen the financial industry.
On June 30 the central bank, Bank Indonesia, announced its criteria for selecting "anchor banks", which will help reduce the number of overall lenders from 132 to 70. But analysts are critical of some parts of the plan.
Eligible anchor banks will be those that, in the past three years, have continuously recorded a core capital of over Rp100 billion ($10.1 million), a capital adequacy ratio of 12%, and NPL (non performing loan) ratio below 5%. They should have annual loan growth of 22%, or a loan-to-deposits ratio of 50%, plus an ROA (Return on Assets) of 1.5%. And they should be publicly listed, or have plans to be publicly listed in the near future, says deputy governor for banking affairs, Siti C. Fadjrijah.
Several industry watchers are already questioning the criteria, noting that a 22% annual loan growth requirement could lead more banks to accept potential NPLs in an effort to simply hit the target. They have also noted that Bank Mandiri, Indonesia's biggest lender by assets, may not qualify because its NPL ratio exceeds the criteria. At the end of the first quarter, Mandiri reported an NPL ratio around the 19% level.
Arguably more important than guessing which banks will become the "anchor banks" is the decision by the central bank that all lenders in the country will be required to have a minimum capital of Rp80 billion by 2007 and at least Rp100 billion by 2010. Banks that do not comply will face sanctions that will restrict operations.
"This is really going to stress the smaller banks," says Michael Chambers, head of TIPS Research for CLSA Asia-Pacific Markets, noting that it will force smaller banks to merge more quickly, or become basically irrelevant.
Now the question is who will merge with whom? Thus far, PT Bank Negara Indonesia, the third-largest lender, has proposed merging with Bank Tabungan Negara. If Bank Negara and Tabungan merge they would have Rp163.22 trillion ($17 billion) in assets, which would mean they would be number two behind Bank Mandiri, which has Rp248.2 trillion.
Analysts have suggested that Bank Central Asia, the second biggest lender in Indonesia, may merge with Bank Danamon, the fifth largest, but neither bank has confirmed this plan. And Bank Mandiri has said it is looking to acquire other banks. It seems the government wants the state-owned banks to merge, which would pressure private banks to merge to stay competitive, says David Chang, direct of Research at Kresna Securities.
The government has interests in Bank Mandiri, Bank Rakyat Indonesia and Bank Negara Indonesia.
Although, Indonesia's $258 billion economy, the largest in Southeast Asia, is forecast by the government to expand 6% this year, from 5.1% growth in 2004, many local banks are still grappling with recovering from the 1997 Asian financial crisis when Indonesia rescued its banks with a Rp450 trillion bailout.
Indeed, post crisis banking consolidation is an Asian-wide effort. Neighbouring Malaysia combined 54 banks into 10 and Thailand has reduced its number of lenders to 12 from 16 since the financial crisis.
