T

he executives of Indonesia’s largest banks, state-owned Bank Mandiri and Bank BNI, collectively asserted earlier this month they were ready to compete in Singapore — a place where almost all the world’s giant banks are strongly entrenched — provided they were given more leeway to expand services on the island state.

No wonder both banks seemed to be the most aggressive in lobbying Bank Indonesia (BI) to use the planned acquisition of Indonesia’s sixth largest bank, Bank Danamon, by Singapore’s Bank DBS, as a bargaining chip to obtain easier access for Indonesian banks to expand services in Singapore.

But while the statements of state bankers can be brushed aside simply as harmless remarks for confidence-building, most analysts here doubt the credibility of these statements, questioning the ability of Indonesian banks to compete in Singapore, where the banking market is already quite mature.

None other than BI’s Deputy Governor Halim Alamsyah bluntly stated early last week that Indonesian banks were not yet fit for competing neck and neck with their counterparts in Southeast Asia due to a lack of capital and inefficiencies in their operations.

In fact, Halim simply amplified the point made by BI Governor Darmin Nasution at the annual Bankers’ Dinner late last month, which said that generally Indonesian banks were still less efficient than their Southeast Asian counterparts.

Darmin cited one major indicator of gross inefficiency: The cost-to-income ratio of Indonesian banks averaged 75 percent, compared to a range of 40-60 percent in other ASEAN countries. Many of the local banks even had a cost-to-income ratio of more than 90 percent.

The inefficiency certainly affects the banks’ intermediation capabilities as they have to impose unusually high lending rates, sometimes as high as 30 percent for microcredits.

Another glaring shortcoming is the fact that only about four percent of banks’ third-party funds are placed in the interbank market, while only the 10 largest banks enjoy excess liquidity. This not only causes oligopoly in the deposit market but also forces the other 110 banks to compete fiercely for deposits, thereby further contributing to raising interest rates.

Low capital standards are another reason why Indonesian banks — which have just recovered from near bankruptcy during the 1997/1998 crisis — lack competitiveness. Even though Indonesia is the largest economy in the ASEAN region, Bank Mandiri, its largest bank, ranks only the seventh largest in the region. Only four of Indonesia’s 120 banks ranked among the top 20 banks in the region.

Putting his money where his mouth is, Darmin announced at the Bankers’ Dinner a package of new regulations to force banks to consolidate and prepare for the free financial service market in ASEAN, scheduled for 2020.

Darmin appeared impatient with the snail’s pace of bank consolidation.

One of the regulations will launch a multiple-license system, which will tie the expansion of foreign and national bank networks and services to capital and good governance standards starting next year.

This requirement will force a faster pace of consolidation in the banking industry, decreasing the number of commercial banks. Hopefully, these new regulations will not suffer a similar fate as those of the 2004 Indonesian banking architecture, which has by and large remained on the shelf.

But consolidation would have been much faster had the government allowed the Deposit Insurance Corporation to halve the maximum amount of deposits covered by its guarantee scheme from Rp 2 billion (US$207,000) per account at a single bank at present.