Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

If more banks could provide more efficient services to a greater number of people, Indonesia should probably be encouraging a new one to set up every month.  The country of 256 million people is home to 118 commercial lenders and 1,644 rural banks. The U.S., with 25 percent more people, has three times as many federally insured deposit-taking institutions.

The thinking in Jakarta is the opposite: The Financial Services Authority, known as OJK, says it will keep reducing the number of banks.

Lazy Banking
Net interest margin for trailing 12 months
Source: Bloomberg

Less is more is exactly the right recipe for introducing competition to the Indonesian banking industry. The country's 40 publicly traded banks currently enjoy a fat 5 percent average net interest margin, compared with 3.3 percent for all other Asian banks. Yet of the poorest 40 percent of households, only 22 percent have bank accounts.

Rather than expanding the industry, there's a strong case for shaking it up, so depositors get higher interest rates and borrowers are charged a bit less. Lower margins won't necessarily hurt bank shareholders.

The three-year average return on equity for Indonesian banks is slightly more than 8 percent, lower than the 10 percent average for other publicly traded Asian lenders. For Bank Central Asia, Bank Rakyat and Bank Mandiri, the top three banks, with market value of more than $10 billion apiece, ROE is more than 20 percent. Rakyat and Mandiri are majority-owned by the government. If OJK pushes them to start a wave of consolidation, there's no reason why more reasonable returns for shareholders shouldn't lead to a more competitive banking industry overall.

Large Indonesian Banks Earn Fat Profits
Return on Equity (3-Year Average)
Source: Bloomberg

If the motivation is compelling, the opportunity for consolidation is no less so. Crumbling commodity prices have hit Indonesian exports, leading to what may be a protracted period of slow lending growth and a jump in bad loans. In good times, it's impossible to get much done in Indonesia, especially in the banking industry -- nationalist fervor gets in the way of selling the family jewels to foreigners.

In bad times, however, common sense prevails. After the 1997 Asian crisis, the Indonesian banking industry was successfully recapitalized, scrubbed and turned around. This time may be no different. The more prolonged the crisis in commodities, the better the chance for banking consolidation.

Just letting a few big banks become bigger won't be enough. There also has to be a war on lazy banking. One template for that is South Korea, which recently allowed a messaging app company and a former government phone monopoly to start the country's first Internet-only banks.

That's the way to go for Indonesia. In McKinsey's estimates, digital technologies could wipe out 29 to 36 percent of the global banking industry's profit. Just the threat of an online incursion would keep the entrenched players on their toes, anxious to preserve a stranglehold on household deposits.

In Jakarta's business district, it's difficult to throw a stone without hitting a bank. Having fewer lenders, and restricting some of them to cyberspace, could help depositors, borrowers and shareholders.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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