Decision on BCA status to come after deal closing

Decision on BCA status to come after deal closing

The Jakarta Post, Jakarta

The government said it would wait until shortly before it
announces the winner of the tender for a 51 percent stake in Bank
Central Asia (BCA) to decide whether the bank would retain its
status as a local bank should a foreign investor win the bid.

Director General of Financial Institutions, Darmin Nasution
said on Wednesday the government was still debating over what to
make of BCA if it falls into foreign hands.

"We will answer them (the foreign investors) shortly before
the decision is taken over who the winner will be," Darmin told
reporters after a hearing with the House of Representatives'
Commission IX, which oversees financial affairs.

Two of the four final bidders for BCA are consortia led by
foreign investors, the British based Standard Chartered Bank Plc,
and U.S. investment firm Farallon Capital Management.

Questions have surfaced as to whether or not BCA should retain
its local status if foreign investors take over the bank.

At stake is the government's blanket guarantee scheme that
covers banks' accounts should massive bank runs dry up liquidity.

Darmin said that only local banks were eligible to join the
blanket guarantee program.

Turning BCA into a foreign bank would mean it loses that
protection, which could undermine public confidence in the bank.

The bank had once been hit by massive runs during the 1997
financial crisis, forcing the government to spend over Rp 52
trillion (about US$5 billion) in emergency liquidity loans.

But while the government leaves the foreign bidders in the
dark over BCA's future status, it requires that they issue a
"letter of undertaking", with which the government can claim back
the money it had spent on bailing out local banks.

A source familiar with the sale process said that both,
StanChart and Farallon had refused to provide that letter.

They would agree to it only after assuming managing control of
BCA, the source said.

"This is probably the reason why Bank Indonesia or the
government has changed the format of letter of undertaking from
letter of guarantee to letter of comfort," the source said.

According to him, StanChart has signed the letter of comfort,
which unlike the previous formats is not binding.

The signing of the letter of comfort has become one of 17
prerequisites that bidders must meet to qualify for the BCA
stake.

StanChart and Farallon have both expressed their wish to
retain BCA as a local bank, reasoning they planned no major
changes in the bank.

"BCA will not become a foreign bank nor will it merge with any
foreign bank. BCA must be kept as one of Indonesia's national
banks," said Farallon Asia Pacific director Raymond Zage in a
press statement.

As the sale process for BCA is nearing its end, some also
questioned whether it was appropriate to spend public funds on a
bank owned by foreigners.

BCA relies heavily on interest rate earnings from government
bonds, which amounts to some Rp 58 trillion on its balance sheet.

The cash-strapped government must set aside some Rp 7 trillion
a year on BCA to serve the interest rates on its bonds.

But Darmin ruled out question of withdrawing government bonds
from BCA if the bank were to become a foreign bank.

"We must be consistent; raising this issue would set us back
to the year 2000 when we first debated over the divestment of
BCA," he said.