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tate-lender Bank Tabungan Negara (BTN) will remain a separate entity after a planned takeover by fellow state lender Bank Mandiri, a top government official said, dismissing rumors that the two would merge.

'€œBTN will be part of the Mandiri group,'€ State-Owned Enterprises Minister Dahlan Iskan, whose ministry is responsible for controlling stakes in the two banks, said on Thursday.

The acquisition would put Mandiri among Southeast Asia'€™s top 10 largest lenders by assets.

Mandiri is expected to issue new shares for the government in exchange for the government'€™s 60 percent stake in BTN in a transaction mechanism called inbreng, Mandiri president director Budi Gunadi Sadikin said.

Bank Mandiri'€™s new shares would unlikely exceed 10 percent of the bank'€™s enlarged stake, hence, the transaction would be done in a private offering with no pre-emptive rights, according to a State-Owned Enterprises Ministry document obtained by The Jakarta Post.

Following the transaction, the government'€™s ownership in Mandiri will increase and it will retain control over BTN as Mandiri'€™s subsidiary. Meanwhile, the public'€™s stake in Mandiri, which now amounts to 40 percent, will be diluted.

Budi said the bank was also open to other plans, including new shares offerings with pre-emptive rights or swapping some of Mandiri'€™s recap bonds with the government'€™s stake in BTN. Budi considered the latter to be the '€œmost business-sensible'€.

'€œIt'€™s a clean process because no actual cash is involved,'€ he added.

Banks have not been allowed to trade the '€œrecap bonds'€ and could not state them as assets either, making them a burden to the banks'€™ finances. Mandiri currently owns about Rp 70 trillion (US$6.12 billion) recap bonds.

Still, Mandiri would wait for its shareholders'€™ decision before taking any actions. Bank Mandiri and BTN'€™s shareholders meetings are scheduled for May 21.

'€œBank Mandiri is always open to inorganic growth opportunities, including by supporting Indonesia'€™s banking consolidation ahead of the ASEAN Economic Community 2020,'€ Budi said.

Indonesia'€™s banking industry is the most fragmented in the region, with the nation having more than 100 banks while other countries host less than 50 banks. Neighbor Malaysia has less than 10 retail banks operating in the country.

The domestic fragmented banking system makes banks less competitive in the region because assets are spread and not concentrated. Some of the nation'€™s banks have had troubles expanding overseas due to their relatively small size in comparison to banks in Singapore, Malaysia and Thailand.

While the acquisition would increase Bank Mandiri'€™s competitive edge in the region, it would also boost BTN'€™s capacity to provide housing loans, which had been its primary role.

'€œFrankly speaking, BTN will not be able to meet future housing demands if it relies on its own capacity. Mandiri can help achieve that with its large size,'€ Dahlan said.

Indonesia was short of 13.6 million houses in 2010, according to the Central Statistics Agency (BPS) and analysts have predicted that the number would continue to increase to top 15 million this year.

BTN'€™s housing loans programs have helped millions of people afford houses but its capability is now restrained by limited funding, as the bank'€™s loan-to-deposit ratio (LDR) remains above 100 percent, higher than the central bank'€™s healthy level of 92 percent.

News and rumors about Mandiri'€™s planned takeover have been circulating over the past three months and led to BTN'€™s share price climbing by more than 40 percent, reaching Rp 1,365 on Thursday from early February.

The House of Representatives on the other hand demanded the ministry present Bank Mandiri'€™s acquisition plan on BTN.

'€œThe acquisition cannot proceed without the House'€™s approval,'€ said chairman of the House'€™s Commission VI that oversees state-owned companies, Airlangga Hartato.