State banks reformed

The reform of the state banking industry -- the second big wave of reform in the banking sector after the Nov. 1, 1997 closure of 16 insolvent private banks -- contains several major strategic components.

The first, as announced by Minister of Finance Mar'ie Muhammad last week, is the consolidation of four state banks, Bank Bumi Daya, Bank Dagang Negara, Bank Pembangunan Indonesia and Bank Ekspor Impor Indonesia, into one large bank. Bank Tabungan Negara will also be made into a subsidiary of publicly listed Bank Negara Indonesia. The merger is to be completed by the end of July, after which only three state banks will exist: Bank Negara Indonesia, Bank Rakyat Indonesia and the one resulting from the merger.

Another important component is the strengthening of the industry's capital base through a capital consolidation of the four merged banks. On top of this, the newly formed bank will look to improve its asset quality by stripping bad credits out of the four merged banks and putting them into a new state credit- settlement company which will be set up during the merger process.

The merged bank will then seek an alliance with a major international bank and float its shares on domestic and international stock exchanges by 2000.

The three state banks remaining after July will result in a better, more efficient division of business missions within the state banking industry. Bank Negara Indonesia will focus its operations within the country, the new bank will be designed to become both a national and international player while Bank Rakyat Indonesia will act as a government tool to serve rural communities, small businesses and cooperatives to enhance equity development.

It is obvious that the ultimate objective of the reform is to create a strong, efficient and internationally competitive bank. The seven state banks, in their present condition, are grossly inefficient and uncompetitive, not only in the domestic market but even in the regional (Southeast Asian) market. They are also highly vulnerable to political intervention and lobbying by politically well-connected businesspeople.

The stripping of bad credits out of the four merged banks is designed to enable the new bank to operate efficiently with high- quality assets without being burdened with the costly collection of bad debts. No figures were immediately available as to the size of bad credits incurred by the four state banks, but the central bank's latest data put the total amount of bad loans at all seven state banks at 5 percent, or more than Rp 7 trillion (US$1.16 billion converted at Rp 6,000), as of last June.

The alliance of the newly formed bank with a major international bank as a shareholder and its eventual public listing have even more strategic significance. Even though the banking act still bans foreign investors from becoming a majority shareholder in a national bank, bringing in an international bank as a shareholder would generate many benefits.

The foreign partner would be able to inject modern technology and new skills into the bank. The alliance would also help the bank expand its international network and introduce international-standard accounting, thereby improving its public image. The new bank would be able to further strengthen its capital and gain stronger international trust when it goes public after 2000.

The only question remaining about the state banking reform is how the credit-settlement company, which will be set up to take over the bad credits of the four merged banks, will go about collecting these debts. State banks have often been criticized for their complete lack of vigor in collecting their bad loans, most of which were extended under questionable credit assessment procedures to big business groups, notably those with strong political connections. Hopefully, the establishment of the credit-settlement company will not amount to the write-off and forfeit of these huge bad credits to the great benefit of several big business groups.