BCA strategic sale
The government's commitment to sell a 51 percent controlling stake in publicly listed Bank Central Asia (BCA) before the end of this year, as stipulated in the Aug. 27, 2001, letter of intent (LoI) with the International Monetary Fund (IMF), will be the first test of President Megawati Soekarnoputri's government in executing its reform agenda.
The divestment plan will make or break the government's ability to gain political acceptance for its reforms. It will show whether the strong support Megawati is supposed to be enjoying in the House of Representatives (DPR) is real.
Members of the House who immediately opposed the plan, arguing that the divestment will not benefit the country, may not have realized the real condition of the local banks, notably BCA, and the vital role banks play in accelerating economic recovery.
The fact is as long as the majority shares of all major banks are owned by the government, as they are now, the banks will not have enough financial muscle to support the economy as the bulk of their capital are in the form of illiquid government bonds.
Yet more important than the quality of capital is public trust, which is the bedrock of a bank as a fiduciary institution. The banks will not regain the full trust of the public, let alone the international financial community, unless strategic or internationally reputed investors join the banks.
Just look how foreign banks in the country have been reaping huge profits simply because rich customers, concerned about security, keep the bulk of their savings at these banks although their interest rates are five percentage points below the benchmark interest rates set by the central bank for its certificates of deposits.
Nor will the economy be able to enjoy a robust recovery unless banks fully resume their intermediation role of injecting lifeblood into cash-strapped businesses. At present, major banks are surviving primarily on the interest revenue from government bonds and the latter's blanket guarantee on bank deposits and claims.
BCA is undoubtedly the country's largest retail bank with the strongest core deposit base, a clean balance sheet and an extensive and modern branch network.
However, its strengths will remain inconsequential as long as more than 62 percent of its Rp 96.2 trillion assets consists of illiquid government bonds and its loan portfolio is negligible, amounting to only 8.7 percent of its total assets as of last December.
House members who tout BCA as one of the most profitable banks in the country should be fully aware that most of the bank's revenue is currently derived from the taxpayers' pockets. In fact, investors who bought BCA's shares at its initial public offering (IPO) in May 2000 have lost, on paper, 18 percent of their investment due to a fall in its share price from Rp 1,400 (its IPO price) to about Rp 1,150 now.
Only new investors with big capital and long-term views would be able to introduce a good management system and create credibility to turn BCA around within two to three years. BCA is not for short-term investors or fund management intending to make a kill within a year after investment.
This means the strongest candidates to buy the 51 percent stake in BCA are foreign investors. It would be better if a major foreign bank won the bid as it would create a strategic alliance.
An international bank will bring to BCA a better risk management system and expertise to develop new products. A foreign-controlled BCA with disclosure, accounting and reporting requirements closely aligned with international best practices will competitively pressure other banks to improve their efficiency too.
The House will be well-advised to remember that the delay in the government's divestment of BCA was one of the reasons that prompted the IMF to withhold its loan tranche since last December. And more importantly to realize is that the economy was brought down primarily by the collapse of the banking industry in late 1997. Consequently, the economy will not be able to pick up without the recovery of the banking industry.