A Little Light May Shine On Indonesia's Ledgers

Privatizing the state's biggest bank will test Jakarta's reforms

Keep an eye on Bank Negara Indonesia 1946. As the largest of seven banks owned by the Indonesian government, BNI '46 is part of an opaque and confusing banking system that is hampering the country's economic growth. That may be about to change.

BNI '46 is a test case for whether Indonesia can clean up its banking system and attract big foreign investment. With the government making modest efforts at reform, BNI '46--named after the year it was founded--is preparing to go public in the third quarter of this year. State banks are tarnished by an average nonperforming debt level of 17%, and BNI '46 will be the first of them to open its ledger books to outside scrutiny.

As in everything involving Indonesia, the initial public offering is not quite so simple. Just last month, BNI was assigned by Bank Indonesia, the nation's central bank, to "nurse" several other banks that are closely affiliated with the ruling Suharto family. Whether this involves financial support or just lending management talent is unclear. Even the central bank governor, J. Soedradjat Djiwandono, admits the situation is murky. But he denies the banks are being aided solely because of their connections.

HAND BRAKES. However, saddling BNI '46 with responsibility for banks that have hundreds of millions of dollars in bad debts, partly because of failed real estate ventures, doesn't help the plan to go public. The "nursing" arrangement includes Bank Yama, which is owned by President Suharto's eldest daughter, Siti Hardiyanti Rukmana, says Soedradjat. Another beneficiary is Bank Pacific, run by a daughter of the founder of state-run oil monopoly Pertamina.

BNI '46, whose IPO is expected to raise $600 million by listing 35% of its stock on the Jakarta Stock Exchange, is going to need a clean balance sheet to attract foreign capital, which drives at least 70% of the $60 million daily turnover on the Jakarta exchange. The bank hasn't decided on a lead underwriter.

Not surprisingly, no one expects a cleanup of the whole system overnight. "You've got to take a 10-year-plus view on this country," notes Philip Holberton, chief executive of the Indonesian branch of Hongkong & Shanghai Banking Corp. (HSBC) "Things take at least twice as long to happen here as they would anywhere else."

But because of the crucial role that banking will play in Indonesia's economic emergence, the pressure is going to be strong to keep moving in the right direction. Some 240 commercial banks--including five state banks--currently act as hand brakes on the economy. They are mostly owned by family businesses that use them to finance often uncreditworthy ventures. Notoriously inefficient, their lending capacity is stretched, slowing growth.

The central bank is putting newly tightened requirements on capital adequacy and minimum reserves to force weak banks to merge with strong ones or get out of the business. "We want them to be more competitive," says central banker Soedradjat in a rare interview. "We want them to say, `Let's stop a minute, and let's consolidate."'

RARE CHANCE. Foreign banks that have managed to enter the market see a rare opportunity. Standard Chartered Bank is currently helping restructure state-owned Bank Pembangunan Indonesia, known as Bapindo, which lost $436 million in a 1994 loan fraud for which a business partner of Suharto's youngest son is now serving a prison term. The central bank sacked Bapindo's management two years ago and since then has been trying to clean up its loan portfolio. Aiding this process helps Standard Chartered gain access to the powerful Finance Ministry, says Michael C. Roberts, head of corporate institutional banking at the British bank's Jakarta branch.

The big attraction for the foreign banks is in lending to state-owned enterprises. Chase Manhattan Bank is ahead of the pack, having raised $2 billion for the state-owned phone company P.T. Telkom and an additional $500 million for Bank Indonesia to shore up the country's balance of payments, says Morgan McGrath, vice-president of Chase's Jakarta office. Last year, Chase started privatizing Indonesia's power sector with a $2.5 billion loan for the Paiton power plant in East Java.

For others to penetrate it, the Indonesian banking system needs a drastic change in culture. Privatizing BNI '46 shapes up as another example of how Indonesia's hopes of modernization collide with the structure of power. But if Indonesia wants to remake its banking system, taking the largest state bank public is the critical first step.