Indonesia: Consolidation not likely under “single presence”
July 19 2006
Peter Hoflich writes in this Comment, the Indonesian government’s latest idea for reducing bank ownership will test the regulator’s definition of ownership, and may create instabilities in the system without affecting the number of banks.
Can an adverse macroeconomic situation actually be good for a central bank? Last week, Bank Indonesia (BI) proposed a “single presence policy” which stipulates that no institution can own over 25 percent in a bank. With increased NPLs, sluggish loan demand and shattered consumer confidence, combined with an economy still reeling from oil price shocks and higher inflation, the timing may actually be good for BI to again try for results in its Indonesian Banking Technology Architecture (ATPI) reform plan, designed to promote consolidation in the industry. The last time this happened in the industry was after the 1997 crisis, when the number of banks reduced to 130, from over 300.
The new “single presence” proposal will affect banks that share the same majority investor with other banks, “multiple presence” players who will be required to divest, merge their banks or place them under a financial holding company (FHC). A clarification of the points of the ruling is expected in August, with implementation in 2007. As a carrot for consolidation, it is a high end version of a separate ruling that requires small banks that have less than Rp80 billion ($8.6 million) in capital by 2008 to merge with strong partners.
Nearly all of the larger players in Indonesia will be affected, but ironically the most affected party will be the government itself. It has stakes in five of the country’s largest banks, including Bank Mandiri, Bank Rakyat Indonesia and Bank Negara Indonesia. According to its own rules, whether it merges, divests, or creates a holding company will have a huge impact on the state of the industry. In this way, the proposal almost seems more likely to become a force for privatisation rather than the push for consolidation it is being called.