The Final 4 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 was not the steep fall in the rupiah value that precipitated the banking crisis in Indonesia in 1997. The meltdown of the rupiah was merely a symptom of -- and revealed the magnitude of -- all the bad banking practices, notably the connected lending binge, that had taken place under the corrupt administration of authoritarian president Soeharto who fully controlled the central bank.
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.
Obviously, none of the three local bidders will help bolster market confidence in BCA. After all, the public is still traumatized by the failures in the 1997 to 1999 period of almost all major banks affiliated with business conglomerates.
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 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.