T

he banking industry is under pressure for consolidation through mergers and acquisitions as the regulator is preparing stricter capital requirements.

Financial Services Authority (OJK) chairman Muliaman D. Hadad said on Friday that the OJK was in the process of formulating a new capital scheme for banks, setting higher requirements than those in place at present.

“We need to strengthen their capital, because banks cannot expand if they have insufficient capital,” he said, adding that the OJK was hoping to issue the new policy by June.

By raising the bar for bank capital, Indonesia is moving in harmony with the international Basel III framework, which requires banks around the globe to increase their capital adequacy ratio (CAR).

Under existing national regulations, a commercial bank only needs to maintain its core capital at a minimum of Rp 100 billion (US$7.57 million) to operate.

Some have blamed the relatively low requirement for the mushrooming of commercial lenders across the archipelago. Their number stands at 118 as of now, whereas the total assets only amounted to Rp 6.12 quadrillion at the end of February.

Critics say this situation has created inefficiency within the industry and presents the country with heavily fragmented banking operations as well as a huge gap between the few leading lenders and the many small ones.

The OJK plan to require higher capital will most likely take a toll on the 40 smallest banks in terms of core capital, also known as BUKU I lenders, with capital below Rp 1 trillion each.

The OJK expects the four state-owned banks, which control a significant share of total assets, to play a key role in the anticipated consolidation by acquiring their smaller counterparts.

State-owned lender Bank Rakyat Indonesia (BRI) president director Asmawi Syam said the bank was open for acquiring smaller lenders.

BRI, he added, had in fact specifically allocated funds for acquisitions that would help the second-largest lender grow inorganically. However, Asmawi declined to mention the amount of funds set aside for possible acquisitions.

To find the right acquisition target, he said, BRI needed to have a clear objective and scrutinize any small bank for specific expertise in products and services that would match its own.

“Basically, as long as the prospective bank is feasible, affordable and good, why not?” he asked.

Meanwhile, analysts said the OJK, or the government, should offer incentives for banks to merge and consolidate.

“Bigger banks with higher capital and financial strength just don’t see the incentive to buy mid-sized or smaller lenders right now,” said Ivan Tan, primary credit analyst and financial services rating director at Standard and Poor’s.

These major banks already own well established networks with a wide customer base, as opposed to their smaller counterparts.

Tan also pointed to the current rule on foreign ownership as a stumbling block for consolidation.

As long as foreign ownership was capped at 40 percent, banks lacked an important driver to consolidate, he argued. “You see that among these 118 commercial banks, there has not been a lot of internal merger or consolidation for a long time,” he said.

Bank Central Asia (BCA) economist David Sumual voiced his support for the OJK’s planned new policy. An increase in the minimum capital would help accelerate the banking consolidation process and maintain healthy stability of the overall banking system to avoid systemic risk, he said.
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