INDONESIA has almost 2,000 banks and a currency that has plunged 11 per cent since January, a combination that overburdened regulators hope will prove irresistible to foreign acquirers.
The country's lenders are in much better shape than during the Asian financial crisis of 1997-98, and have stood up well to the weakening of the rupiah this year, said Fauzi Ichsan, chief executive officer of the Indonesia Deposit Insurance Corp, known as LPS.
"Consolidation will be good and with a weakening rupiah, it would be cheaper for global investors to buy our banks," Mr Ichsan said in an interview last week.
Even after a few recent mergers, Indonesia still has 115 conventional and syariah banks and almost 1,800 rural lenders, catering to the archipelago's more than 260 million people, data from the Financial Services Authority show.
As the government has warmed to the idea of foreign takeovers, Japanese banks in particular have stepped up, with Mitsubishi UFJ Financial Group Inc and Sumitomo Mitsui Financial Group Inc announcing plans to gain control of local counterparts.
Meanwhile, Australia & New Zealand Banking Group Ltd has rekindled a long-running effort to sell its stake in family-controlled lender PT Bank Pan Indonesia, people with knowledge of the matter said last week.
The South-east Asian nation does not have a sufficient number of experienced finance staff to sustain so many institutions, said Mr Ichsan. "As a regulator, we don't have enough bank supervisors; and the industry doesn't have enough qualified bankers."
Indonesian regulations make it difficult - though not impossible - for foreign banks to invest more than 40 per cent in local lenders. Singapore's DBS Group Holdings Ltd scrapped a bid to buy PT Bank Danamon Indonesia in 2013 after the ownership rule was introduced.
Other deals have since been approved because they either involved buying two lenders and merging them, or purchasing distressed assets. The rupiah has tumbled almost 11 per cent since the emerging market sell-off began in late January, prompting the central bank to raise interest rates four times and intensify market intervention by draining foreign reserves.
But unlike the situation during the Asian crisis - when the rupiah endured a steeper collapse - Indonesia's banks have so far been relatively unscathed, Mr Ichsan said.
"The key indicators for banks are far better now," he added, recalling the hysteria that swept through the markets during the Asian crisis, when he was a bonds trader at Citigroup Inc in Singapore.
Indonesia closed 16 lenders as the industry-wide capital adequacy ratio sank to a negative 15.7 per cent, and nonperforming loans soared to almost 50 per cent.
Now, the capital adequacy ratio for Indonesian banks stands at about 22 per cent, among the highest in the region, while the gross nonperforming loan ratio has fallen to 2.7 per cent, according to data from LPS, whose chairman is a member of the country's Financial System Stability Committee.
The agency has a record 101.3 trillion rupiah (S$9.3 billion) available in the event that it is called on to pay back savers should a bank fail, Mr Ichsan said. That figure may reach 120 trillion rupiah by the end of next year, he added. The agency expects acceleration in loan disbursement to continue in the coming months but sees downside risks from third-party funds with growth slowing due to rising interest rates. Credit growth is seen expanding 10 per cent this year, according to Samsu Adi Nugroho, the agency's spokesman.
However, recent progress on bank mergers has been slow. Since Bank Indonesia laid out a consolidation programme in 2005, only a handful have been merged while 90 rural lenders have either been shut down or are in the process of winding down.
Still, the LPS has enough money to cover a run on deposits at seven lenders, including a so-called systemically important bank, Mr Ichsan said. LPS covers savings up to two billion rupiah per customer, and the total amount of guaranteed deposits was 2,411 trillion rupiah as at July, LPS data show.
"The size of our fund is sufficient to instill confidence in the the public not to rush to a bank to withdraw money even if the bank isn't too healthy," Mr Ichsan said. BLOOMBERG