State banks reformed

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.