Indonesia’s Bank Regulator Pushes Consolidation of Small Lenders

Indonesia needs greater consolidation in its banking industry and will push small lenders to merge or seek strategic investors, the Financial Services Authority’s top official said.

The agency wants to talk with the owners of fewer than 10 small lenders needing improvement, Chairman Muliaman Hadad said in Jakarta today, declining to name the companies in case it sparked bank runs. The authority will increase industry regulation by tightening non-performing loan levels and issuing risk management rules for financial groups, he said.

Bank consolidation in Southeast Asia’s largest economy has reduced the number of lenders to 120, from 130 in 2007, even as total industry assets more than doubled in the past six years, according to the agency’s data. The authority is trying to develop the country’s capital markets and boost oversight ahead of a planned 2015 Southeast Asian economic community and the potential for higher U.S. interest rates next year, Hadad said.

The regulator, known by its Indonesian abbreviation OJK, plans to issue the rules on groups’ risk management in the fourth quarter of this year, Hadad said. The agency plans to cut the maximum level of banks’ non-performing loans to below the current 5 percent, he said.

Lenders such as PT Bank Danamon (BDMN) and PT Bank Internasional Indonesia (BNII) expanded over the past decade by acquiring financing companies, while PT Bank Central Asia (BBCA) started a brokerage business to grow beyond commercial banking.

Risk Profiles

From 2015, banks with investment, securities, insurance and other units will need to include the risk profile of subsidiaries when assessing capital adequacy, Hadad said in December. The OJK took over the regulation of lenders from Bank Indonesia at the start of this year.

The central bank implemented rules in 2012 that limited financial institutions to buying a 40 percent stake in Indonesian lenders. Singapore’s DBS Group Holdings Ltd. (DBS) in August ended a bid to buy Bank Danamon for $6.5 billion in what would have been Southeast Asia’s largest bank takeover, after failing to win regulatory approval for a majority stake.

The OJK will be selective about giving approval for foreign investment, and will favor investors who can improve technology or knowledge in the financial industry, Hadad said.

The regulator is setting a more conservative bank lending growth target of about 16 percent to 17 percent for 2014, compared with 22 percent growth last year, he said. Loans have slowed after rate increases by the central bank last year.

To contact the reporter on this story: Novrida Manurung in Jakarta at nmanurung@bloomberg.net

To contact the editors responsible for this story: Stephanie Phang at sphang@bloomberg.net Neil Chatterjee, Russell Ward

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