Bill Guerin, Jakarta – This week yet another glitzy road show will set out to sing the praises of yet another Indonesian bank that has clawed its way back to financial health. The People's Bank, Bank Rakyat Indonesia (BRI), Indonesia's oldest and fourth-largest bank, is going public. UBS Warburg Indonesia and the local Bahana Securities are the lead underwriters for an upcoming initial public offering (IPO) of 30 percent of BRI on the Jakarta bourse next month.

BRI is the developing world's largest micro-finance institution. Virtually all of its ratios are either the best or among the best in the Indonesian banking sector. It has a solid banking business built on lending to the poor. No online banking facilities, cash-point machines or telephone banking are available, or needed, for this bank's customers. But the bank was nearly wrecked by corruption and bad loans to failing tycoons in the wake of the 1997-98 Asian financial crisis and the government was forced to inject Rp28.9 trillion (US$3.5 billion) in bonds into the bank to save it.

Today a nationwide network of 3,700 rural branches serves more than 27 million depositors, even in the most remote areas of the archipelago. The overwhelming majority of customers are farmers and ultra-small businesses with sums as little as $100 on deposit.

These unit desa (village units) are a vital source of finance in the villages. Usually operating from simple one-story concrete buildings, they lend money to the poorer farmers and traders who make up more than a quarter of the bank's total assets and account for at least 15 percent of its loan portfolio.

The bank has some 2.5 million borrowers, borrowing an average of only $300.

Though founded in 1895, it wasn't until the 1970s that BRI was modernized and mandated to channel loans to farmers. It slowly but surely built its network to reach out to an estimated 80 percent of the rural population.

The economic crisis that hit the region in 1997 saw millions turn to rural farming to supplement their income. Between 1997 and 1999, agricultural-sector employment grew by 8 percent, and occupied about 45 percent of the overall workforce. Agriculture thus became a major source of employment and served as a safety net for many families.

The crisis eventually forced government spending on a so-called Social Safety Net, and the poverty excuse was used yet again to enrich aid agencies, consultants, and government departments though the funds rarely reached out to the rural poor.

These farmers, fishermen and small businesses drove the country's rural economy of 129 million people, and BRI was there at their time of need. Illegal moneylenders who charged interest of anything up to 300 percent per annum were the only alternative.

Though the farmers' record of repaying their loans was infinitely better than that of the country's highly indebted conglomerates, cumulative bad loans and defaults brought BRI to the edge of crisis.

As with almost all Indonesian banks, corruption was present though not exposed until the new era of reformasi that coincided with attempts to restructure the whole of the banking sector.

In October 1999 the Indonesian Corruption Watch (ICW) disclosed evidence of lawbreaking, abuse of power, the amassing of wealth for personal and third-party benefit, and losses to the state budget/economy, all stemming from corruption within BRI.

According to evidence uncovered by ICW, the then-president director of BRI, Djokosantoso Moeljono, the tycoon The Nin King, and Djoko S Tjandra, of "Baligate" fame, were implicated in channeling huge amounts of credit by BRI.

BRI lent Rp340 billion to PT Griya Tangerang Estetika, part of Nin King's giant Argo Manunggal textile conglomerate, in September 1996. The loan was to be used to build low-class housing, but ICW alleged collusion between BRI and The Nin King resulted in the price of land being marked up and the legal lending limits violated.

ICW said that in December 1996, Prijadi Praptosuhardjo, whom Indonesian president Abdurrahman Wahid later appointed as his finance minister but was at the time a director of BRI, changed the status of the loan from investment to working capital.

Prijadi was said to have allowed the Rp200 billion to be disbursed straight away, instead of the "stage payments" used for loans in the construction industry. In the case of the non-performing loan made by Tjandra valued at $50 million, Prijadi was also considered to have played an important role.

PT Mulia Griya Indah – part of Tjandra's Mulia Group – in 1997 applied for a BRI loan of $120 million to BRI, to build a mall in West Jakarta. BRI disbursed an advance payment of $50 million, signed off by Prijadi, although, as in many other cases, the project was fictitious. BRI was left high and dry with the non-performing loan, as no other bank would touch it. Thus the government's $3.5 billion in bonds to save it.

By any standard the current deal looks good for investors. BRI boasts a 39 percent ROE (return on equity), the biggest in any Indonesian bank, and outperforms even Bank Mandiri, the largest bank, with its still-healthy 24.5 percent. BRI also has a much higher proportion of loans as a proportion of its total assets than most other Indonesian banks, and its recap bonds contribute only 28 percent of its total interest income.

Interest rates are falling sharply, but some 75 percent of BRI's re-cap bonds are fixed-rate, leaving the bank relatively immune. Not only that, loans produce higher returns than holding bonds does, giving another good reason to buy BRI.

BRI's asset base of $8.5 billion is not that far off that of Bank Central Asia, which had an asset base of $9.9 billion at the end of 2001. Only a third of this value is from government bonds.

BRI's 7 percent net interest-rate margins, compared with 4 percent on average for the other banks, stems from its higher interest rates for the micro-loans, anywhere between 25 and 30 percent.

In the year to June, the bank earned Rp1.17 trillion, up less than 1 percent from Rp1.16 trillion in the same period a year earlier.

In May BRI issued $150 million in bonds, that were three times oversubscribed, to help boost its capital-adequacy ratio, which stood at 12.4 percent at the end of June. BRI also plans to issue Rp1 trillion in local-currency bonds and $150 million in dollar-denominated bonds once the IPO is finished.

In advance of the IPO, BRI has focused on re-engineering its capital structure to accommodate losses incurred in the aftermath of the financial crisis. It is also continuing to reduce its exposure to the corporate sector.

Though risky corporate lending was not a particularly dominant feature of BRI's business, the bank has now slashed its corporate loans to only 10 percent of total lending, down from 25 percent before the crisis.

Though at least two-thirds of the deal is expected to be placed offshore, Indonesian stocks remain more in demand than at any time in the past six years and more upside in the Jakarta Composite Index is predicted. The index has soared 40 percent already this year, though the forthcoming sale would represent nearly a week's trading volume on the Jakarta Stock Exchange (JSX).

Already this year, the government has sold a 20 percent stake in Bank Mandiri via an IPO on the JSX, which was heavily oversubscribed, largely by foreign investors.

Most banking analysts remain fairly upbeat about the Indonesian banking sector and the government expects to raise about Rp2.6 trillion from the sale. BRI has been lobbying the House of Representatives (DPR) to support its bid to keep some of the IPO proceeds.

The bank disclosed that it needed about Rp2.5 trillion to strengthen its capital base, and State Enterprises Minister Laksamana Sukardi hinted that the government might allow BRI to keep about 30 percent of the proceeds. However, Minister of Finance Boediono said earlier that the government would take all the proceeds, to help bridge the predicted budget deficit of Rp35.2 trillion ($4.1 billion).