Best synergy for BCA

Best synergy for BCA

Bank Indonesia's insistence that the four final bidders for
the government's controlling stake in Bank Central Asia (BCA)
complete their dossiers for assessment in a fit-and-proper test
is crucial in the effort to make the transaction credible and
fair and to ensure that BCA's new owners have high credibility
and integrity in the banking industry.

Thorough assessments of the bidders, the management and
business plans they propose for BCA, however meticulous they may
be, aim to ensure that BCA's new majority owners are trustworthy
and its management possesses high technical competence and
professional integrity.

This requirement, more than anything else, is fundamental for
a bank as a trust institution with fiduciary responsibilities.
This also is a vital element of an effective banking supervision
system. No amount of prudential rules, not even such capable
supervisors as those of the American Federal Reserve Bank, can
prevent bad banking practices if, in the first place, bank owners
or management are crooked.

Experiences in most countries show that almost all bank
failures were caused not by keen market competition nor by
professional incompetence, but by crooked, greedy bankers who
tried by all means to circumvent prudential rulings to advance
their own interests.

It is therefore most imperative for the central bank not to
expedite the fit-and-proper test despite delay after delay in the
filing of all the necessary documents by bidders. The deadline
pressures should not be allowed to compromise the thoroughness of
the test.

Passing the fit-and-proper test should precede all other
requirements such as the viability of the business plan or the
bidding price. Without a highly capable management and the
support of highly credible shareholders, public confidence in BCA
will not increase and its market credibility will continue to
depend mainly on the government's blanket guarantee on bank
deposits and claims like all other national banks do now.

Ideally, the winning bidder should be investors who can
simultaneously bring in synergy to BCA and offer a very high
price to generate bigger revenues for the cash-strapped
government. But it is rather futile now to insist on getting
such ideal investors, given the fragile condition of the banking
industry, Indonesia's adverse political and economic condition
and the poor composition of the four final bidders.

Only the Standard Chartered-led bidder consortium is close to
meeting the basic requirements for highly credible shareholders
and highly capable management with an international reputation.
The other three bidders are led by Indonesian business groups,
who are virtually unknown within the banking industry.

The small number and the poor qualifications of most of the
final bidders should jolt the government to the harsh reality
that the country is still shunned by most foreign investors.
The almost total lack of interest also shows that BCA is not
really as solid and sound as many have claimed and investing in
the banking industry is still highly risky in view of the adverse
political and economic condition.

The two-phase tender process whereby the winning bidder will
initially acquire only 30 percent with an option to take another
21 percent also makes potential investors uneasy, given the
government's reputation of failure to meet its commitments.

True, BCA is the jewel of the assets held by the Indonesian
Bank Restructuring Agency. Yes, it is potentially a good bank
with more than 8 million accounts, 800 branches, over 2,100 ATMs
and total assets of almost Rp 100 trillion (US$9.5 billion) as of
last year.

But one should not forget that Rp 60 trillion of the bank's
assets consist of bonds with a near total lack of liquidity that
were issued by the government, which itself is groaning under
mountains of debt and whose sovereign risks are seen by
international credit rating agencies as quite high. The bank's
loan-to-deposit ratio is only about 17.5 percent, meaning that
its income still depends largely on the taxpayers' money (bond
interest).

It is precisely because of this condition and the fragility of
the banking industry that BCA's new owners and management should
be highly credible and highly competent in the view of the
international financial community and have a long-term vision for
developing the bank.