RESTRICTED Report No. DB-90a This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF BANK PEMBANGUNAN INDONESIA (BAPINDO) May 8, 1972 Developm ent Finance Companies Department urr=ency Equivalents ftpiah 1 = US$0.0024 Us$1 - anpiah 1415 Rupiah 1 million a US$2,,400 APPRAISAL OF BANK PEMBANGUNAN INDONESIA (BAPINDO) Table of Contents Page SUMMARY i-ii 10 INTRODUCTION 1 II. HISTORICAL PERSPECTIVE 1- 2 III. INDUSTRIAL AND FINANCIAL ENVIRONMT 2- 7 Industrial Environment 2- 4 Financial Ehvironment 4- 7 Interest Rates 7 IV. THE REORGANIZATION OF BAPINDO 8-13 The Act 8 Policy Statement 8- 9 Supervisory Board 9-10 Board of Managing Directors 10 Organization and Procedures 11 Accounts 11-12 Financial Structure 12-13 V. OPERATIONS, PORTFOLIO AND FINANCIAL POSITION 13-17 Operations 13-15 Portfolio 15-16 Financial Position 16-17 VI. PROSPECTS 18-23 General Outlook 18 Business Forecasts 19-20 Resource Requirements 20-21 FutureFinancial Results and Position 21-23 Schedule of Estimated Disbursements 23 VII. CONCLUSIONS AND RE3OMMENDATIONS 23-24 This report is based on the findings of a mission composed of Messrs. Hasan, Dinh, von Stauffenberg and Lord (IFC), which visited Indonesia in September 1971, and on subsequent dis- cussions. LIST OF ANNEXES I. Draft Policy Statement II. Organisation Chart III. loan Qperations, 1968-1971 IV. lending Operations Under Joint Financing Scheme V. Analysis of Medium-Term loans Committed under Joint Financing Scheme up to June 30, 1971 VI. Sectoral Distribution of Short-Term Portfolio VII. Balance Sheets, December 31, 1969-1970, March 31, April 1 and December 31, 1971 VIII. Income Statements for the Years Ehded December 31, 1969, 1970 and 1971 II. Current Interest Rates - Received and Paid I. Forecast of Operations, 1972-1975 XI. Projected Income Statements, 1972-1975 XII. Projected Balance Sheets, Year-1hd 1972-1975 XIII. Projected Source and Application of Funds, 1972-1975 XIV. Schedule of Estimated Disbursements of the Proposed IDA Credit MAP Location of Branches SUMMARY i. In June 1970 the Government of Indonesia and the Association agreed on the steps necessary to reorganize the Development Bank of Indonesia (BAPINDO). This reorganization is a key element in ration- alizing the institutional set-up for the provision of resources for long-term investment in industry and in increasing the effectiveness with which resources are channeled to industry. At present there are no active specialized institutional sources for long-term finance for industry. The vacuum has been partially filled by the five State com- mercial banks. After BAPINDO's reorganization is complete, it should become the principal institutional source of term finance for medium- and small-scale industries. ii. The reorganization of BAPINDO involved, inter alia, appointment of a new President and enlargement of its Board of anagement, selection and secondment of four Advisors by the Association, strengthening of its financial structure by increasing its equity, eliminating from its portfolio of many loans to State enterprises and providing for bad debts, establishing a new charter and adopting a policy statement. iii. BAPINDO's auditors were unable to certify its accounts for 1969 and 1970 because, in their opinion, internal control and account- ing systems were too weak to enable them to express an opinion. How- ever, as a result of the reorganization and improvement of procedures carried out in 1971, the auditors have expressed an opinion, although qualified, on BAPINDO's Balance Sheet as at December 31, 1971. The Auditors' Report is acceptable. BAPINDO's financial condition is now much better and is expected to improve further as the Government pays in additional amounts to increase BAPINDO's equity, as agreed with the Association. iv. BAPINDO expects to make new loan commitments amounting to about Rp. 40.6 billion in the 1972-75 period. This amount does not include the estimated loans that BAPINDO will make for the maritime sector, for which the Association is considering an additional credit. v. Although BAPINDO's overall resource position appears satisfac- tory for the two-year period 1972-73, some of its resources are restricted in use. Mbreover, it needs to build up its liquidity to lay a basis for later operations. A credit of US$10 million would serve these purposes and would also enable BAPINDO to meet financing requirements for imports during the period. vi. The terms of the proposed credit include a "free limit" of US$100,000 with an aggregate limit of US$2.5 million. BAPINDO's indebted- ness would be limited to three times not worth. The rate of interest at which the Government would relend the proceeds of the credit to BAPINDO would be 7k per annum, the Bank' s current rate, or such higher rate as would leave BAPINDO a spread of not more than 4%. BAPINDO's re- payments to the Government would conform to its own collections from its borrowers in respect of each sub-loan. Other terms and conditions would be similar to those in recent Bank loans to development finance companies. APPRAISAL OF BANK PEMBANGUNAN INDONESIA (BAPINDO) I. INTRODUCTION 1.01 Since late 1968, the Association has been working with the Government of Indonesia (GO) to improve the conditions for the provision of resources for medium- and long-term investment in industry. A key element in this process has been the reorganization of the Government development bank, BAPINDO. In June 1970, 001 and the Association agreed on a plan for strengthening and reorganizing BAPINDO. Substantial progress having been made in implementing that plan, a mission visited Indonesia in September/October 1971 to appraise BAPINDO for an IDA credit. This report is based on its findings and on subsequent discussions. II. HISTORICAL PERSPECTIVE 2.01 RAPINDO was established in 1960 to succeed Bank IndustrL Negara which had been in existence since 1951. During its first five years BAPINDO was used as a conduit for Government funds for purposes specified by the Government; these were not necessarily developmental. It had no autonomy. Its resources were exhausted by 1965, and its operations virtually stopped. In 1966, BAPINDO's functions were enlarged to include commercial banking and it began to accept deposits from the public. In 1966 and 1967 it operated mainly as a commercial bank. In 1968 and 1969 the Government allocated budgetary funds to BAPINDO for lending to selected State enter- prises. Also,in April 1969, BAPINDO became a participant (together with the five State commercial banks) in the Joint Financing Scheme (JFS)l/aimed at providing medium-term finance to both public- and private-sector enter- prises. In October 1970, Bank Indonesia (Indonesia's central bank) stopped BAPINDO from term-lending to new clients because of its critical financial position and organizational problems. Bank Indonesia withdrew that restriction on December 10, 1971. 2.02 The Association's first detailed examination of BAPINDO in December 1969 revealed that BAPINDO was an inefficient institution, poorly managed and in financial difficulties. It had a staff of about 1,350 employees, which was clearly excessive for its needs, located in 20 widespread branches. The organization suffered from poor coordination at all levels. The standard of record-keeping was not good. BAPINDO was not equipped to make adequate appraisals for term-lending, and it did no follow-up work. Its liabilities were uncertain; its debt/equity ratio was unsoundl the quality of its port- folio was in doubt; its books and accounts had never been audited by inde- pendent qualified accountants; and its financial condition at the end of 1969 could not be exactly ascertained. 1/ See paragraph 3.14. - 2 - 2.03 BAPINDO's management had had relatively little experience of either term financing or commercial banking. Moreover, the degree of autonomy allowed to BAPINDO was severely restricted. Except in short-term lending, it had almost no independent powers of decision. 2.04 Discussions were held in Djakarta in May 1970 between representa- tives of 001, BAPINDO and the Association to chart out a course of action for strengthening and reorganizing BAPINDO. 001 agreed that BAPINDO should concentrate mainly on term finance and should gradually withdraw from its commercial banking operations except on behalf of its term clients. It was agreed that BAPINDO would lend to medium- and small-sized enterprises, mainly in the industrial and transportation fields. GOI also agreed that BAPINDO would have autonomy to carry out its operations in accordance with sound financial and economic criteria within the overall framework of Government economic policy. III. INDUSTRIAL AND FINANCIAL ENVIRONMENT 3.01 For information on the current economic situation and prospects, reference is invited to the latest Bank Economic Report "The Indonesian Economy: Recent Developments and Prospects for 1972-73" (EAP 27a November 30, 1971). Industrial problems and prospects were analyzed in an earlier Economic Report 1/ and in April/May 1971 an industrial sector mission visited Indonesia for further investigation. Its draft report, "Planning for Industrial Development in Indonesia" is being discussed with the Government. The following paragraphs summarize those aspects of the industrial and financial situation that are particularly relevant to BAPINDO's operations. Industrial Environment 3.02 Industrial structure. Manufacturing is not well developed in Indonesia; its share of GDP is estimated to be between 7% and 8%, against 10%-12% in developing countries of comparable size and per capita income. Statistical data are inadequate and there has been no industrial census since 1963. There appears still to be a proliferation of small establish- ments. In 1967 only 14% of employment in all branches of industry was in firms having on the average more than 50 workers and only 6% in establish- ments of over 100 workers. The Chinese community is important in providing entrepreneurship and capital (both of which are relatively scarce) for industrial development, although large establishments are mainly State or foreign enterprises. Domestic industrial firms are in general under- capitalized and rely excessively on very costly short-term bank credit. Within the manufacturing field, the group consisting of food, beverages and tobacco is the most important, contributing nearly 50% of value added, followed by industries based on rubber (about 20%) and textiles (below l/ "The Indonesian Economy: Development Trends and Foreign Aid Requirements, 1970-72", Vol. III, Chapter I, EAP-19a. - 3 - 10%). Industrialization has so far been directed largely to import substitution. Djakarta is the largest industrial center but manufacturing is fairly evenly distributed throughout Java. Outside Java, wood and rubber products are the only significant manufactures. 3.03 Before 1966, the previous Government emphasized industrial development through public sector enterprises, and also nationalized many foreign, particularly Dutch-owned, industrial operations. Although the present Government favors private sector industrial development, State enterprises still dominate production in a few industries, including fertilizer, cement, paper and spinning, and account for many of the largest plants. Accurate statistics on the relative importance of Government-owned and privately-controlled industries are not available. State enterprises accounted for about 15% of industrial employment and value added in 1963; the proportion now is likely to be even less, be- cause some have been returned to private ownership and growth of output has been mainly in the private sector. 3.04 Indonesia has an open economy with few foreign exchange restric- tions, but the structure of the tariff, the customs regulations and administration and the sales tax structure all present obstacles to effi- cient industrial growth. The Government is fully aware of the problems involved and has taken or is considering steps in each field to remove or reduce the problems. The tariff structure in particular has been substan- tially adjusted to reduce unrealistically high duties; further changes are planned. Because illegal trade is still prevalent, consumer goods industries often receive much less protection than nominal duty rates suggest, and are therefore exposed to substantial international competition. Import bans were important as a protective device until 1966 but are now in limited use. 3.05 Recent expansion. The political upheaval of the mid-sixties disrupted the economy. It is estimated that the industrial output of 1963 was not equaled until 1969. There is no index of industrial pro- duction but available data indicate that most industries achieved sub- stantial increases in output during 1970 and in the first half of 1971. In the most important manufacturing industry, textiles, yarn output rose by about 30% in 1970 and is estimated to have increased further by about 20% in 1971. The output of ready-made garments and knitted goods in- creased by 25% in 1970. Other industries, including paper, chemicals and cigarettes, have also shown considerable increases in production. Production of fertilizers and cement showed little increase in 1970-71 because exist- ing plants had been operating at or near full capacity; but significant increases should be achieved with the implementation of expansion programs currently under way. Crumb rubber production was expected to show a rise from 35,000 tons in 1970 to 100,000 tons in 1971. 3.06 Government incentives. The highly protectionist and heavily state-controlled system of the Sukarno era has been largely replaced since 1967 by a more liberal system of industrial incentives based on tax and tariff relief, which is stimulating industrial investment and growth. The investment climate has also been greatly improved by the success of the financial stabilization program in 1966-69, the removal of import, exchange and other controls and the evidence of strong support for the new economic policies in the form of project and program aid by member governments and institutions of the Inter-Governmental Group for Indonesia. Incentives are offered within the framework of the Foreign Investment Law of 1967 and the Domestic Investment Law of 1968. Both provide exemption from import duties on equipment and on the initial stock of raw materials, exemption from corporate income tax for periods of up to six years and from dividend tax for periods of up to two years, accelerated depreciation, free transferability of earnings, and the right to own land. Indonesia has been a member of International Centre for Settlement of Investment Disputes since October 1968. 3.07 Demand for investment. Private investment has accelerated since the enactment of the Foreign and Domestic Investment Laws. Investment in manufacturing has been growing consistently; that in other sectors, parti- cularly forestry and mining, reached a peak in 1969. From January 1967 to June 1971, 402 investment projects were approved by the Foreign Investment Board involving a total planned investment of US$1,495 million, of which US$428 million is in the manufacturing sector. From November 1968 to June 1971, 642 investment projects were approved by the Domestic Investment Board involving planned investment of about Rp. 262 billion (US$630 million equivalent) of which over one-half was in the manufacturing sector. Total investment expenditures for projects (manufacturing and other) approved under the two investment laws appear to have amounted to about $75 million equivalent in 1970. It is estimated that private manufacturing investment in 1971 may have reached about $130 million equivalent, with domestic enterprise accounting for up to one-half of that total. Tentative estimates suggests that private investment in manufacturing will grow annually by at least 25% between 1971 and 1975, and that the domestic component may expand even more rapidly, if funds are available. 3.08 Obstacles to industrial development. Significant improvements in industrial output and in the investment climate notwithstanding, important impediments to further growth include the following: (a) the geographical configuration of the archipelago and the lack of adequate transport and communications systems; the former results in considerable smuggling, the latter in high transport costs; (b) the scarcity of entrepreneurship, management and accounting skills and technical know-how; (c) administrative and bureaucratic obstacles which still cause investors considerable delays and difficulties in getting decisions and obtaining interpretation of laws; and (d) the scarcity of capital. Financial Environment 3.09 Present financial network. The existing banking network consists of Bank Indonesia (the central bank), the State commercial banks, the State development bank (BAPINDO), and a group of national private banks and branches of foreign banks. There are five State commercial banks which to some extent specialize in various sectors of the economy. 1/ Together they have about 600 branches in the country of which about half are those of the Bank Negara Indonesia 1946, the biggest commercial bank. Indonesian private banks number about 120, with some 250 offices. Their importance in the banking system has declined in comparison with the 3tate banks. They now account for less than 5% of total banking assets. There are eleven foreign bank branches, all of which are in the Djakarta area, but their total loans represented only about 3% of total outstanding bank loans as of December 31, 1971. 3.10 Total bank credit has been increasing rapidly in the past few years. The proportion going to the private sector has also increased. All banks in Indonesia make both short-term working capital loans and medium-term investment loans. Outstanding bank credit increased from Rp. 135 billion at the end of 1968 to Rp. 231 billion, Rp. 341 billion and Rp. 477 billion at the end of 1969, 1970 and 1971 respectively. At the end of 1971, Bank Indonesia supplied about 48% of the outstanding credit, but this proportion has declined. The largest gain was by the State commercial banks which now account for about 43% of the total. At the end of 1968 the public sector held two-thirds of the total; by the end of 1970 the private sector held over one-half of the total credit outstanding. (Similar data as at the end of 1971 are not available.) There has also been a dramatic increase in bank deposits during the past few years, stimulated by returning monetary stability and by high interest paid on deposits. At the end of 1967 total deposits amounted to Rp. 2.2 billion; at the end of 1970 total deposits amounted to more than Rp. 65 billion. The deposits increased further to Rp. 136 billion at the end of 1971. The increase in deposits started towards the end of 1968 when a new interest rate structure (substantially the same as at present, see paragraph 3.17) was introduced. For all practical pur- poses there is no capital market in Indonesia at the present time. However, studies are continuing, under the auspices of Bank Indonesia to develop both money and capital markets. At the request of GOI, an IFC mission visited Djakarta in late 1971 to review the work already done by Bank Indonesia's Money and Capital Markets Team, and to assess priorities for further actions by 001. In January 1972, the Team was dissolved and a Money and Capital Markets Development Board was established in order to carry out the prepara- tory work for the creation and regulation of money and capital markets. IFC is considering what technical assistance it can give 001 in fostering the development of money and capital markets in Indonesia. 3.11 Facilities for term financing. The bulk of long-term finance to the manufacturing sector is provided (mainly by Bank Indonesia) under the Joint Financing Scheme (paragraph 3.14) through the five State com- mercial banks, particularly Bank Negara Indonesia 1946. The only insti- tution other than BAPINDO specializing in providing long-term finance 1/ These are Bank Rakjat Indonesia (agriculture), Bank Exim Indonesia (export and estates), Bank Negara Indonesia 1946 (industry, trans- port, apiculture and export), Bank Bumi Daya (mining, export and estates), and Bank Dagang Negara (export and mining). In practice their activities often overlap. - 6 - is the Indonesian Development Finance Company (IDFC). The authorized share capital of IDFC is Rp. 4 billion (about US$9.6 million) of which Rp. 1.6 billion has been jointly subscribed by Bank Indonesia and the Netherlands Overseas Finance Corporation. For some time the owners of IDFC have hoped to make it a multinational company by obtaining official British, German and possibly Australian and New Zealand participation. 3.12 Preliminary discussions are also under way concerning establish- ment of a new, broadly-based private development bank, in which private entrepreneurs in Indonesia and private foreign investors would find it possible to participate. The Government supports the idea and is receiving Bank assistance in developing the project. 3.13 BAPINDO, IDFC and the proposed private development bank will thus constitute the specialized institutional sources of term finance for the industrial sector. The investment outlook appears to offer good scope for business for all the three institutions. 3.14 "Joint Financing Scheme". Until the JFS was started early in 1969, little institutional finance was available for even the medium-term needs of industry. Under this scheme, sub-borrowers are required to contribute 25% of project costs. The remaining 75% is provided by Budget funds, at no cost to the participating banks; by Bank Indonesia, which charges the participating banks 4% per annum; and by the participating banks themselves from their own resources. As of December 31, 1971, nearly 70% of funds dis- bursed under JFS had been provided by Bank Indonesia, about 10% by the Budget and 20% by the participating banks. Priority for financing is given to projects for rehabilitation, modernization and expansion, and the use of funds is restricted to financing fixed assets. Of the total funds disbursed up to June 30, 1971 (Rp. 58.7 billion), 42% have gone to the manufacturing sector, 29% to transport and tourism and 29% to agriculture. Slightly more than three-fourths of the total amount has been disbursed to the private sector, and about 60% has gone to finance imports. JFS disbursements in 1970 to the manufacturing sector were Rp. 15 billion,or about 50% of total manufacturing investment for the year. The cost of funds to the borrowers is 12%. Individual loans above Rp. 100 million require approval by Bank Indonesia. 3.15 "Development Loans Through the Banking System". To utilize capi- tal aid given on a government-to-government basis by foreign countries for the manufacturing sector, a new arrangement called Development Loans Through the Banking System (DLBS) has been introduced. Under this arrangement, foreign exchange loans will be made available to banks to relend to the industrial sector for periods of up to 12 years. The exchange risk is to be passed on to the borrowers. Other terms will be similar to those under the JFS, except that an interest rate of 9% per annum will be charged to the sub-borrower, who will bear the exchange risk. An initial loan of Y3.6 billion (about $10 million equivalent) by Japanese Overseas Economic Cooperation Fund (OECF) has been finalized but was not effective as of February 29, 1972. Procurement will be tied to purchases from Japan. Repayment by BOI to OECF will be according to a fixed repayment schedule. - 7 - The loans made by the participating banks under the DLBS arrangement will be subject to Bank Indonesia's approval; those above Y100 million (about $325,000) will also require prior approval by OECF. The five State com- mercial banks and BAPINDO will participate. 3.16 The JFS has been successful in providing much needed investment funds to the private sector. However, there are two main shortcomings in the present arrangements for term financing. The period of loans, five years, is too short for many projects, and there is no provision for the financing of permanent working capital. The DLBS scheme will remove the first shortcoming but its scope is limited in that it relates to loans tied to procurement in specific countries. It has been agreed with the Government that the proposed IDA credit, if approved, will be subject to neither of those shortcomings. Interest Rates 3.17 The interest rate structure applied by State commercial banks as well as BAPINDO is determined by Bank Indonesia, while private commercial banks are free to set their own interest rates. The range of interest rates is wide. The State banks charge from 12% per annum for medium-term investment loans to 30% for short-term working capital loans. The 12% rate for medium-term loans is a subsidized rate made possible by the fact tha*6 the bulk of the funds for medium-term lending is provided to the State banks by Bank Indonesia at 4% per annum, and from Budget funds at no cost. Interest rates charged by private banks vary widely from bank to bank and from borrower to borrower, ranging from 3% to 6% per month. Interest is paid by State banks on demand deposits at rates ranging from 6%-12% per annum depending on amount, and on time deposits from 12% on deposits for less than three months to 24% per annum on 12-month deposits. Interest received on deposits was until recently free of income tax. A 15% with- holding tax has now been introduced. 3.18 The interest rate structure has remained largely unchanged since January 1970, although the value of money has remained relatively stable throughout the period. The present rate structure has contributed, as noted in paragraph 3.10 above, to a remarkable increase in total deposits between 1967 and 1971. But it has obvious defects. Rates on short-term funds for working capital are high (30% per annum and upwards) while the cost of funds for medium-term loans to purchase capital equipment is a subsidized 12% per annum. Moreover, the medium-term rate of 12% is only one-half of the interest rate on 12-month deposits. Modifications of the current interest rate structure are under discussion. In particular the 12% rate for the JFS may be raised, to bring the strong and growing demand for investment funds more nearly into equilibrium with the supply. 3.19 Since the JFS was introduced in 1969, all BAPINDO's term-lending has been made under that scheme and BAPINDO has charged the rate of 12% per annum set by Bank Indonesia. That rate is expected to be applied to BAPINDO's on-lending of funds made available under the proposed credit. The Govern- ment has decided to bear the exchange risk on those funds. A rate of 12% per annum with no "maintenance of value" clause seems low in relation to the supply of and demand for industrial credit, but as noted in the preceding paragraph, the interest rate structure is under review. - 8 - IV. THE REORGANIZATION OF BAPINDO 4.01 Paragraphs 2.02 and 2.03 outline some of BAPINDD's main weaknesses as they existed in May 1970. This section discusses in more detail those weaknesses, measures agreed between the Government and the Association to remedy them and the progress made in taking those measures. The Act 4.02 BAPINDO's charter was originally established by Act No. 21 of 1960. The hyper-inflation of the next seven years, the monetary reform of 1965 (when the nominal value of the Rupiah was divided by one thousand), the passage in 1967 of a general Banking Act, No. 14, and in 1968 of the Bank Indonesia Act, No. 13 (both of which included provisions affecting BAPINDO, in common with other banking institutions), had by May 1970 com- bined to make it desirable that the BAPINDO Act be revised. The Govern- ment prepared a draft amending Act, which the Association commented on and discussed with the Government and BAPINDO. The draft is satisfactory. The amending legislation is expected to be introduced into the Legislature shortly, and the Government expects that legislative action will take some months to complete. However,since the draft BAPINDO Act closely follows the wording of the Acts governing the other State-owned banking institu- tions in Indonesia, the Government does not expect the amending legis- lation to be controversial. 4.03 The draft Act provides that term-lending will be BAPINDO's main activity. Other important features are that BAPINDO's authorized oapital will be increased from Rp. 60 million to Rp. 20 billion, and that the Supervisory Board (see paragraph 4.07), which presently consists only of the Minister of Finance and the Governor of Bank Indonesia, will in future consist of at least four members. Persons with experience in finance, industry and other sectors ought to be included. The Government has not yet decided on the composition of the expanded Supervisory Board. 4.04 An increase in authorized capital from Rp. 60 million is neces- sary to accommodate increases in BAPIND's paid-in capital that the Govern- ment has undertaken to make. The Association estimates that BAPINDD's paid-in capital is likely to have been increased to about Rp. 10 billion by April 1973. In view of the substantial role envisaged for BAPINDO in financing industrial development, further increases in paid-in capital after 1973 are likely to be necessary. The proposed figure of Rp. 20 billion for the new authorized capital appears reasonable. Pending the formal increase in the authorized capital, BAPINDO's paid-in capital in excess of the presently authorized amount of Rp. 60 million is being treated in its accounts as capital reserves. Policy Statement 4.05 BAPINDO'a Board of MAnaging Directors has adopted a comprehensive state- ment of policies which is expected shortly to be approved by its Supervisory Board. - 9 - The Statement (Amex I) states that BAPINDO will concentrate on development finance and will gradually curtail its commercial banking operations. Its principal role is envisaged as being to provide medium- and long-term loans to medium- and small-sized enterprises, mainly in the industrial and trans- portation fields, both for new projects and for the expansion and moderni- zation of existing enterprises. The Statement lays down guidelines to be observed by BAPINDO with regard to the scope of its activities, the invest- ment and financial criteria it will observe, relationships with enterprises financed, financial and portfolio management and the building of an effective organization and staff. Among other matters the Statement provides that BAPINDO will assist only enterprises that are soundly managed and that are judged to be viable after careful economic, financial, marketing and engineer- ing appraisal; will not incur indebtedness greater than three times its out- standing borrowings; and will protect itself against foreign exchange risk. 4.06 BAPINDO's Policy Statement is generally in line with those adopted by many of the development finance companies associated with the Bank Group. Since BAPINDO also engages in commercial banking, and its short-term liabi- lities are significant, the debt limitation (three times its equity) relates to total liabilities rather than to long-term borrowings only. The Policy Statement calls attention to the need to assure that the maturities of its assets will be appropriate to its liabilities. The proposed credit docu- ments provide that the Policy Statement cannot be changed by BAPINDO without prior approval of the Association. Supervisory Board 4.07 The Supervisory Board (see paragraph 4.03) has the right to be kept informed by the Board of Managing Directors and the duty to see to it that the management and affairs of BAPINDO are properly conducted. On paper, the Supervisory Board's control over the Board of Ynnaging Directors is of a negative rather than a positive nature. It is the Board of Managing Directors that determines BAPINDO's policies and is responsible directly to the Government 1/ (not through the Supervisory Board) for executing them. But the Board of Managing Directors has to submit annually to the Supervi- sory Board, for approval, what amounts to a financial and operational program and budget for the coming year. 4.08 In practice, however, it has been the Finance Minister and the Governor of Bank Indonesia, acting in their respective capacities, who have taken important decisions affecting BAPINDO. Mbreover, the Government's ability to influence BAPINDO's operations is reinforced by regulatory and advisory powers, conferred on Bank Indonesia by the general Banking Act and by the Bank Indonesia Act, which are applicable to all banking institutions in Indonesia. 1/ In effect, the Ministry of Finance. - 10 - 4.09 In the circumstances described, it is clear that the effective- ness of BAPINDO's operations must depend in great measure on the quality of its Board of Managing Directors, as well as on the degree of autonomy and support that the Government (specifically, the Minister of Finance and the Governor of Bank Indonesia) is willing to give it. Board of Managing Directors 4.10 In May 1970 the Government agreed with the Association that BAPINDO's management needed strengthening: by the appointment of at least one additional managing director; by the engagement of qualified advisors; and by the appointment as chief executive (BAPINDO's President) of a person of strong will and integrity, able to command the respect of the Government and business community. In pursuance of this agreement, the Government appointed, in January 1971, as BAPINDO's President Mr. Kuntoadji, an electrical engineer by training and a brigadier-general in the Indonesian Army. He had also been Dean of the Bandung Institute of Technology. There is already evidence that, with the assistance of his Advisors, Mr. Kuntoadji is providing the necessary leadership and drive to complete the transformation of BAPINDO. 4.11 Besides Mr. Kuntoadji, there are now three other managing directors: Mr. Priasmoro, Mr.Sardjono and Mr. Hendrobudijanto. The appointment of an additional managing director with responsibility for BAPINDO's proposed Maritime operations (see paragraph 6.03) is expected to be announced shortly. Mr. Priasmoro was promoted to his present posi- tion in 1968 and supervises BAPINDO's Research, Personnel, Planning and General Services Departments. Mr. SardJono, who was appointed to the Board of Managing Directors from outside BAPINDO late in 1970, supervises the Commercial Banking, Project Promotion, Finance and Accounting and Branch- office Supervision Departments. Mr. Hendrobudijanto, a senior official of the Ministry of Industries, joined BAPiDO as from February 1, 1972 and supervises the Credit and Follow-up, Legal and Collateral, Engineering and Collection Departments. 4.12 To strengthen BAPINDO's management still further, the Association, at the request of the Government and BAPINDO,, recommended four Advisors. They are Yz. Ichiro FVjita (formerly a senior officer of the Bank of Tokyo) as Advisor to BAPINDO's President; fr. Amal K. Bose (of the Bank staff) as Advisor on long-term financing; Mr. Ronald H. ELms (formerly with IFC and then with WHO) as Advisor on financial management and accounting; and &E. Melvin S. Lord (of the IFC staff) as Engineering Advisor. Messrs. Fujita and ELms took up their appointments with BAPINDO in July and August 1971 respectively. Both will remain with BAPINDO for a period of three years. Mr. Bose joined BAPINDO in May 1972 and Mr. Lord will join in June 1972, each for two years assignments. The Japanese and Australian Governments are bearing a part of the costs of Mr. Fujita and Mr. Elma respectively. 4.13 BAPINDD's management has been greatly strengthened in the past 12 months, and it is now capable of raising to an appreciable level BAPINDO's effectiveness within a reasonable period. - 11 - Organization and Procedures 4.14 BAPINDO's management faced and continues to face serious problems of reorganization. The change in emphasis from commercial banking to long- term financing will not be achieved easily. The retrenchment of several hundred surplus staff is likely in Indonesian conditions to be slow and difficult. Of BAPINDO's 18 existing branches (down 2 since 1969) about one-half are uneconomic; and BAPINDO, in consultation with Bank Indonesia, intends to find ways of shedding them. Some may be closed; some may be transferred, by negotiation, to other State-owned banks. 4.15 BAPIND's management, in consultation with the Advisors, has recently regrouped its activities among its departments, with sharper definition of responsibilities than applied heretofore, and in the process has created many new departments. The organization chart is shown in Annex II. The departments have been arranged in four groups, each super- vised by a Managing Director, with the Secretariat and Audit and General Inspection Departments reporting directly to the President. 4.16 Features of BAPINDO's reorganization scheme aret a Collection Department has been established; a Branch Supervision Department has been created to coordinate the work of, and connected with, the branches; a Project Promotion Department has been set up to work on new investment opportunities; and legal and engineering personnel has been concentrated in two new departments instead of, as previously, being spread throughout BAPINDO's organization. In course of time, BAPINDO intends to handle letters of credit and other foreign exchange transactions through its Commercial Banking Department. Selected staff to handle that business are receiving training from Bank Indonesia. 4.17 Internally, BAPINDO's procedures and controls have improved sub- stantially but still need further upgrading. (The need is particularly acute in accounting procedures, referred to below.) BAPINDO's new manage- ment has made a start on training staff for better appraisal and follow- up work, on the basis of recommendations made by P. E. Consultants, Ltd. following their 6-months study of BAPINDO in 1969/70. One group of 16 members has already completed the training. Procurement and disbursement procedures still need to be tightened up. It is expected that, with the appointment of two new managing directors and the recruitment of two additional advisors in 1972, the general level of BAPINDD's internal orga- nization and procedures will improve further and quickly. BAPINDO's appraisal, follow-up, procurement and disbursement procedures were spe- cifically discussed during negotiations for the proposed credit held in March, and satisfactory understandings were reached. Accounts 4.18 Through 1968, BAPINDD'a books and accounts did not undergo an audit by independent qualified accountants. On the Association's recoin- mendation, the Government arranged for such an independent audit of BAPINDO's - 12 - accounts for the year 1969, and subsequently. BAPINDO appointed as its auditors the firm of SyCip, Gorres, Velayo & Utomo (styled now Drs. Utomo, Mulia & Co.), an affiliate of SyCip, Gorres, Velayo of Manila, well known to the Association. 4.19 The auditors found that BAPINDO's books and records were not satisfactorily maintained and that internal controls were inadequate. The auditors were not in a position to state that all transactions affecting the financial position of BAPINDO as at December 31, 1969 and 1970, and the results of BAPINDD'a operations for those years respectively, were duly taken up in the accounts. In the judgment of the auditors, the matters referred to entered materially into the determination of BAPINDO's financial position and the results of its operations. The auditors did not, therefore, express an opinion on BAPINDO's accounts for the years 1969 and 1970. 4.20 The auditors, in the course of their audit of BAPINDD's accounts for the years 1969 and 1970, made many recommendation for improving BAPINDO's accounting methods and procedures. BAPINDO sought to act on the auditors' recommendations, and improvements were gradually brought about. The pace of improvement greatly quickened after the arrival in BAPINDO of the Accounting Advisor. The reality of those improvements has been confirmed by the fact that the auditors ha-e signed BAPINDO's Balance Sheet as at December 31, 1971. The Association has found the Auditors' Report acceptable. BAPINDO's accounts for the year-ended December 31, 1971 are the first ever to be certified by independent auditors. Financial Structure 4.21 In My 1970 the Government agreed that BAPINDD's financial struc- ture needed extensive change. The Government also agreed that these matters could not be completed until there had been a satisfactory audit of BAPINDO's accounts and its portfolio had been reviewed in detail. 4.22 Following the audit of BAPINDO's accounts for 1970 and a detailed review of BAPINDO's portfolio by an Association mission in November/December 1970, the Government undertook: (a) To remove from BAPINDO's portfolio and to relieve BAPINDO of all liability with respect to its loans to 19 state enterprises. The amount involved was about Rp. 5.6 billion. (b) To convert into equity Government funds amounting to about Rp. 2.6 billion. (c) To convert into equity Rp. 4 billion of the loans (which amounted to Rp. 6.9 billion subject to audit) outstanding from Bank Indonesia to BAPINDO. - 13 - (d) To increase BAPINDO's equity by an additional amount of Rp. 4 billion, in the form of budgetary allocations in cash of Rp. 2 billion in April 1972 and April 1973. (e) To make arrangements that would insure that the conversion of loans amounting to Rp. 4 billion from Bank Thdonesia referred to in (c) above was represented by cash payments to BAPINDO before the end of 1971. 1/ (f) To write off as uncollectible about 16% of BAPINDO's outstanding term-loans portfolio and about 14% of BAPINDO's short-term portfolio, both subject to later detailed review and the auditors' findings on the accounts for 1971. The Minister of Finance and Bank Indonesia, by directives to BAPINDO, gave effect to the actions noted in (a), (b), (c), (e), and (f) above as from April 1971. The amount written off as of April 30, 1971, pursuant to item (f) above, was about Ep. 2.5 billion. Following a detailed review of the portfolio, BAPINDO has now created a reserve for possible bad debts amounting to about Rp. 3 billion in place of the amount written off earlier. V. OPERATIONS, PORTFOLIO AND FINANCIAL POSITION Operations 5.01 Details of BAPINDO's recent loan operations are given in Annex III. The portfolio consists of the categories of loans listed below. 5.02 Medium-term loans. The total medium-term loans (up to 5 years) outstanding was Rp. 8.5 billion as at June 30, 1971. Details of approvals, commitments, etc. for such loans in recent years are given in Annex IV. About 23% of the medium-term portfolio consists of loans made for crumb rubber projects under a program whereby the necessary equipment was imported against bilateral credits from France and Britain. In February 1969, BAPINDD was appointed administrator for the program and by June 30, 1971, with approvals totaling Rp. 2.7 billion to 21 clients, the program had been completed. The medium-term loan portfolio also includes 6 loans made against a U.S. bilateral credit; the amount outstanding in this category was Rp. 22 million on June 30, 1971. 1/ BAPIND0 was to retain collections from its clients, and to the extent total collections fell short of Rp. 4 billion, Bank Indonesia was to pay cash to BAPINDO. - 14 - 5.03 Between October 1970 and December 1971, BAPINDO did not make any term loans to new clients, under instructions from Bank Indonesia. However, it did not make additional loans to its existing clients, amounting to Rp. 1.3 billion in 1971. Bank Indonesia's restriction on BAPINDO's term-lending was removed on December 10, 1971. 5.04 Annex V gives the breakdown of medium-term loans by size, geo- graphic sector, industry, maturity, etc. The average size of BAPINDO's medium-term loans has been Rp. 63 million (US$153,000 equivalent). Loans are somewhat concentrated in West Java (l1% by number and 49% by amount), reflecting the geographic concentration of Indonesian industry. Loans to the textile industry account for 23% of approvals; the rubber processing industry also accounts for 23%. Other sectors receiving BAPINDO's assist- ance are transportation, tourism (hotels), pharmaceutical, paper and chemicals. Although the JFS emphasized rehabilitation of existing projects, 46% of BAPINDO's approvals went to new projects. Most loans are for under 5 years, in compliance with Bank Indonesia regulations. A few loans are being repaid over more than 5 years because of rescheduling. 5.05 Short-term working capital loans. With additional budget funds no longer available after 1966, and having few other resources, BAPINDO was authorized in 1967 to accept deposits from the public and to engage in commercial banking. Its short-term loan portfolio increased to Rp.6.9 billion (1,309 clients) at December 31, 1970. On April 1, 1971, b18 short-term loans for Rp. 1,334 million were written off. Also, following the instruc- tions of the Ministry of Finance and Bank Indonesia, BAPINDO transferred to other State banks between April 1 and June 30, 1971 a number of short- term loans amounting to Rp. 235.7 million, with a view to reducing BAPINDO's commercial banking operations and improving its liquidity. BAPINDO's short-term portfolio as of June 30, 1971 consisted of 593 loans for Rp. 4.5 billion. Of this amount, Rp. 1.3 billion or 28% were loans to BAPINDO's medium-term loan clients. Sectoral distribution of BAPINDO's short-term loan portfolio since 1969 is given in Amex VI; the most important bene- ficiary has been the textile industry. 5.06 Short-term credits are made formally for periods not exceeding one year, but in practice they are often renewed. Most short-term loans are secured, not by stock and other movable assets, but by fixed assets. An estimated 90% of outstanding credits has gone to private firms. The interest rate charged by BAPINDO on short-term credits is 27% per annum. 5.07 According to its new policy orientation, BAPINDD will be cur- tailing its commercial banking operations in the future. The transfer of loans to other State banks, mentioned in paragraph 5.05, was a step in that direction. Eventually, BAPINDO will be making short-term loans only to its term borrowers. - 15 - 5.08 Short-term cotton loans. In 1967 BAPINDO was designated to administer a Government scheme for financing the industrial use of raw cotton imported under PL 480 agreements with the U.S.A.,for distribution to selected spinning mills at prices subsidized by the Government. The loan arrangements are part of a general program of subsidies to the textiles sector which may be modified and eventually eliminated. The spinning mills purchase the cotton on credit; the loans are made by BAPINDO using funds provided by Bank Didonesia for the full value of the cotton. BAPINDO lends its own funds for the local expenses. BAPINDO takes title to the cotton, but the risk of loss arising from a fall in price is practically nil as the contracts for sale of the cotton are signed before the shipment is effected. The loans are for 6 months from the date of raw cotton delivery, and are often renewed for an additional period of up to 6 months. BAPINDD pays 4% interest to Bank Indonesia, while interest charged by BAPINDO to borrowers is 12% per annum for the portion of the BAPINDD loan covering the cost of raw cottono (Interest is 27% per annum for the local currency part of the BAPINDO loan, which covers additional expenditures such as handling, stevedoring, insurance, etc.) Credits for cotton constitute a sizeable part of BAPINDO's portfolio. On the basis of the June 30, 1971 figures, these credits amounted to Rp. l1.2 billion or about 45% of the total portfolio. The number of clients is less than 15. Pending any change made in the cotton subsidy arrangement, BAPINDO assumes that these operations will continue at about the present level. Portfolio 5.09 As at December 31, 1971 BAPIND's partfolio consisted of Rp. 11.2 billion in medium-term loans, Rp. 4.1 billion in short-term working capital loans and Rp. 13.3 billion in loans for raw cotton. The amounts in arrears on the same date were as follows (Rp. million): Total Principal Interest Outstanding Overdue Overdue Total Medium-term loans 11,160 940 6ll 1,551 Short-term loans 4,083 3,184 1,293 4,,477 Loans for raw cotton 13,349 664 153 817 Thtal 28,592 4,788 2,057 6,845 5.10 Provisions for possible losses on account of bad debts, on a cumu- lative basis, amounted to Rp. 3.0 billion as at December 31, 1971. BAPINDO's management, on the basis of detailed review of individual loans, believes that the provision is adequate. The auditors in their report have not expressed an opinion on the adequacy of the provision. - 16 - 5.11 The large amounts of provisions and arrears reflect both the poor quality of BAPINDO's past appraisals and some important factors out- side BAPINDO's control. Such factors include the political pressures that put a number of bad loans on BAPINDO's books. They also reflect some restrictions imposed by the terms of the JFS. Under the JFS, loans may not be made for permanent working capital, the scarcity of which causes many defaults on short-term loans. Another requirement of the JFS is that term loans shall be for a period not exceeding five years. The debt ser- vice burden resulting from the short repayment term sometimes proves beyond the servicing capacity of the borrowers. In May 1970 the Govern- ment agreed that BAPINDO would be free to set the duration of loans it made from sources of finance other than the JFS in accordance with the nature of these resources. During negotiations for the proposed credit, in March 1972, the Government confirmed that BAPINDO would be free to set the terms of loans made from sources other than the JFS in accordance with project needs, and that BAPINDO would be free to use such other funds in making term loans to provide permanent working capital. 5.12 The arrears situation is expected to improve appreciably over the next few years. Better appraisal and follow-up work and improved accounting procedures, which BAPINDO's new management can be relied upon to introduce, and the setting up of the new Collection Department, should contribute to the reduction of arrears. The conversion into medium-term loans for the financing of permanent working capital (see paragraph 6.06) of short-term loans amounting to Rp. 1.5 billion each in 1972 and 1973 will reduce arrears in the short run and should further improve collec- tions in the long run. Mreover, BAPINDO's ability to finance the perma- nent element of working capital by medium- and long-term loans, and to make loans for capital expenditure for terms longer (if necessary) than the 5 years maximum set by the JFS, should further reduce the number of new loans falling into arrears. Financial Position 5.13 BAPINDO's Balance Sheets as of December 31, 1969 and 1970, March 31, 1971 and April 1, 1971, the last reflecting the adjustments referred to in paragraph 4.22 above, are given in Annex VII. That Annex also includes figures as of December 31, 1971, the first certified by independent auditors. As between December 31, 1970 and December 31, 1971, BAPINDO's equity increased from Rp. 1.9 billion to Rp. 7.4 billion, as a result of the adjustments, made in 1971, referred to in paragraph 4.22. The total debt to equity ratio declined from 15:1 at the end of 1970 to 3.3:1 at the and of 1971; the long-term debt to equity ratio declined from 8:1 to 1.2:1 during the same period. The liquidity position as of December 31, 1971 is also satisfactory. BAPINDO's total deposits amounted to Rp. 2.2 billion at the end of 1971 of which about half were time deposits. BAPINDO proposes to liquidate the time deposits before the end of 1972 and it does not plan to accept any more of them. - 17 - 5.14 It will be noted from the above paragraph that the total debt to equity ratio as at December 31, 1971 exceeded the 3:1 limit prescribed in the Policy Statement (which appears also in the proposed Project Agreement). The ratio will be within the limit as soon as the Government pays in the amount of Rp. 2 billion as additional capital for BAPINDO, for which budgetary appropriation has already been made. As noted earlier, the Government has agreed to make a further payment of Rp. 2 billion into BAPINDO's capital in April 1973. 5.15 Profitability. BAPINDO's Income Statements for the years 1969, 1970 and 1971 are given in Annex VIII. Only the btatement for 1971 has been certified by the auditors. The statements for 1969 and 1970 show profits although in fact BAPINDD had lost money as bad debts were not written off and provisions were not made. The statement for the year 1971 shoma loss of about Rp. 1 million, after making a provision for possible bad debts amounting to Rp. 2,4 billion. BAPINDO has enjoyed an average spread of about 12% on its borrowed-funds. Details of interest paid by BAPINDO on its borrowings, and of interest charged by it on its various loans are given in Annex IX. One thing is clear from the income statements: personnel and administrative expenses are extremely high (amounting to about 5% of average total assets in 1970) for the obvious reasons of surplus staff and the large number of uneconomic branches. - 18 - VI. PROSPECTS General Outlook 6.01 The prospects for further industrial development in Indonesia are good. Although private domestic investment in manufacturing, aided by the tax incentives provided under the Domestic Investment Law and by the funds made available through the JFS, has expanded rapidly, it is still a small part of the total investment in the economy. Government investment, investment by Government-owned enterprises and foreign private investment in the aggregate are far larger. There is evidence that the principal con- straint on the growth of private domestic investment is the limited amount of resources available, rather than a lack of enterprise or inadequate opportunities for investment in the private sector. Retained earnings of enterprises are limited, private savings which can be mobilized through the banking system, although they have been growing, are also limited, and cre- dit creation is of necessity restricted indirectly by balance of payments considerations. Such transfers as can be made to the banking system from Government savings need to be augmented by foreign aid and private inflows if domestic enterprise is to grow at a significant rate. BAPINDO is ex- pected to become the principal source of term finance for the private indus- trial sector. If it is endowed with adequate resources, it should not lack investment opportunities. It is seeking, by the re-organization described earlier in this report, to equip itself to take advantage of those opportunities. 6.02 In November 1971, the Indonesian Government selected BAPINDO as the intermediary to be used to channel a proposed IDA credit of US$8.5 million for the purpose of rehabilitating the existing Regular Liner Service fleet through loans to shipping companies. BAPINDO and the shipping companies would augment these funds with local currency loans. The credit would be part of a much larger program for the rehabilitation of Indonesia's mari- time sector carried out through bilateral assistance and facilitated by institutional reforms effected by the Government in consultation with the Association. It is expected that BAPINDO would begin lending operations under the proposed IDA credit for shipping towards the end of September 1972. 6.03 A new Department is being set up within BAPINDO exclusively for maritime operations. An additional Managing Director for shipping is to be appointed from the Indonesian shipping community. The Association has asked the UNDP to finance three Maritime experts as advisors, and UNDP is considering the request. The new department willdcaw on existing BAPINDO staff for personnel to the extent possible. 6.04 The discussion of BAPINDO's future estimates of business, operating results and financial condition in the following paragraphs does not include maritime operations. Estimates made for the maritime project indicate that its calls on BAPINDO's Rupiah resources during 1972 and 1973 are not likely to exceed Rp. 2 billion. - 19 - Business Forecasts 6.05 At this time, the difficulties of quantifying estimates of total private investment in manufacturing during the next few years in Indonesia are great. The Association has tentatively estimated that total private investment in manufacturing could amount to about $1,200 million in the five-year period 1971-75. Of this amount private foreign investment is estimated at about $500 million (about 42%) and domestic investment at about $700 million. However, in the Association's opinion, these figures could be exceeded by a wide margin. BAPINDO has used these figures as a guide to forecasting its own operations during the next few years. (For BAPINDO, at least in the next few years, processing capacity is more likely to be a con- straint on its.volume of operations than either lack of resources or lack of business opportunities.) BAPINDO's forecasts of its operations, shown in Annexes X through XIII, can therefore be regarded only as indicating BAPINDO's present view of the operations it can and should handle during the 1972-75 period. 6.06 BAPINDO has estimated the amount of long-term loans in the total estimated investments for the whole period 1971-75 at about Rp. 140 billion. BAPINDO assumes that, during 1972-75 period, it will provide about 25% 1/ of the total long-term loan financing, or about 13% of gross private manu- facturing investment. The aggregate figure is finally broken down into yearly forecasts on the basis of past trends in domestic and foreign invest- ments and on the basis of the Association's estimates of yearly increases in total investment. BAPINDO's forecast of yearly commitments is as follows (in Rp. billion): Short-Term Medium- and Long-Term Loans Loans Total Total Domestic Currenc Foreign Currency Domestic Commitment.- 1972 6.5 4.7 2/ 1.8 0.8 7.3 1973 9.0 6.1 2/ 2.9 0.8 9.8 1974 10.0 5.7 4.3 0.5 10.5 1975 12.5 6.6 Q±.9 0 13.0 28.20 ?2.1 ..* 2.6 . 6 The medium- and long-term domestic currency loan commitments include loans for permanent working capital. BAPINDO estimates that such loans (for financing permanent working capital) will amount to 25% of the loans for fixed assets. l/ This is ambitious, but given BAPINDO's strong management and the absence of other active specialized long-term lending institutions, it may not prove unrealistic. 2/ Includes Rp. 1.51 billion of conversion of existing short-term workint capital loans into medium-term loans for permanent working capital. - 20 - 'he reason for projecting medium-term loans for financing working capital .s that enterprises in Indonesia have, in the past, usually financed total Torking capital requirements (including that part which remains in the busi- iess permanently) on a short-term basis, which results in heavy pressure >n liquidity and frequent defaults. BAPINDO will need to be particularly arefil in each case in estimating that part of the working capital require- ient which it will finance on a medium-term basis. The relationships between ;he current long- and medium-term, short-term and deposit rates of interest Lre such as to encourage the diversion of money borrowed at long-term rates ;o short-term users. During negotiations, the Association reviewed with APINDO the criteria BAPINDO will follow in financing permanent working -apital requirements by medium-term loans and satisfactory understandings were eached. BAPINDO estimates that the foreign currency component of the total :ost of manufacturing projects in Indonesia over the next few years is likely ;o be of the order of 60%. Since BAPINDO will only be financing a part of Lproject's cost, conceivably almost all its lending could be directed to- rard financing imports. However, having in view the important need for loans ;o be made in Rupiah to finance permanent working capital requirements and Llso the availability of Rupiah resources (which are convertible) BAPINDO ,xpects that, over the next two years, its foreign currency commitments will >e Rp. 4.7 billion equivalent and will represent only about 31% of total :ommitments. The proportion is projected to rise in later years. ).07 BAPINDO's projections of short-term lending reflect the policy of iaking such loans to its term loan clients only. In order to finance perma- tent working capital on a medium-term basis, BAPINDO forecasts that it will )e justified in converting about Rp. 3 billion of its outstanding short-tern .oans as at December 31, 1971 (Rp. 4.1 billion) into long-term loans to xisting clients during 1972-73. It estimates its new short-term loans to mount to 50% of its loans for permanent working capital in the years .972-75. tesource Requirements .08 BAPINDO will need about Rp. 40.6 billion equivalent to meet its stimated commitments in the 1972-75 period. This includes short-term lend- .ng, which will be financed out of deposits and rediscount facilities. For ;he first two years, its commitments for medium- and long-term loans will Lmount to about Rp. 15.5 billion, of which Rp. 3 billion relates to existing ;hort-term loans which will be converted into long-term loans (paragraph 6.07). .hus Rp. 12.5 billion of eapital is needed to cover 1972 and 1973 commit- ients. As noted in the table in paragraph 6.06, the foreign procurement element of the Rp. 15.5 billion is estimated to be about Rp. 4.7 billion quivalent. ).09 BAPINDO had about Rp. 1 billion in uncommitted resources at the >eginning of 1972. During 1972 and 1973, it expects to receive an addi- ional Rp. 4.0 billion in the form of contributions to equity from the lovernment, about Rp. 3.0 billion from the liquidation of its present ;hort-term portfolio (taking into account the expected reduction in deposits) Lnd about Rp. 3.0 billion in internal cash generation. BAPINDO's forecasts - 21 - reflect its plans to draw from Bank Indonesia under JFS about Rp. 5 billion in the two years. However, as mentioned in paragraph 6.01 above, credit creation is restricted, and the amount Bank Indonesia is able to make avail- able through the JFS during that period may not permit BAPINDO to draw as much as Rp. 5 billion. BAPINDO will also need Rupiah resources to meet its requirements for the maritime operations (see paragraph 6.04). Some of the available resources are restricted in use: country-tied in the case of DLBS; 5-year maximum in the case of JFS; for fixed assets only in the case of JFS. In summary, however, BAPINDO's local currency resource base will be adequate to cover its commitments over the next two years and also to provide a good liquidity base for operations in subsequent years. 6.10 For the full period of the projections, 1972-75, BAPINDO's needs for foreign exchange resources are estimated on a commitment basis at Rp. 14.9 billion or about $36.6 million equivalent. For the first two years, BAPINDO will need about $11.5 million. Although the amount BAPINDO will use under the DLBS scheme is not known, it is unlikely to be more than $2 million equivalent as five other banks also participate. BAPINDO's need for foreign exchange to finance imports, on a commitment basis, will there- fore be of the order of $10 million for a two-year period, all of which douldbe met by the proposed IDA credit. Future Financial Results and Position 6.11 Profitability. Based on the assumptions that (i) the existing interest rate structure in Indonesia will remain largely unchanged in the 1972-75 period,1/ (ii) the interest payable on foreign exchange loans will be 76, (iii) salaries and other personnel expenses will remain constant, 2/ (iv) administrative expenses will actually decline slightly in the last two years of the forecast, and (v) the volume of raw cotton business will remain at the level of about Rp. 10 billion, BAPINDM's profitability is estimated as follows (for details see Annex XI): Rp. in million 1972 1973 1974 1975 Total income 3,216 3,026 3,636 4,587 Total expenses 1,988 2,021 2,253 2,426 Income before tax 1,228 1,005 1,383 2,161 Net income after tax 1,191 553 761 1,189 Earnings before interest and tax/average total assets 6% 5% 6% 7% Net income after tax as percentage of average equity 13.2% 4.7% 5.6% 8.2% 1/ As mentioned in paragraph 3.18, this is unlikely; but it is impossible to predict what changes will be made. 2/ The savings obtained as a result of staff reduction mentioned in para- graph 4-.14, will be applied towards improving compensation to the re- maining staff so that, according to BAPINDO, total expense will remain the same. - 22 - Total income for 1973 is less than that for 1972 because of the planned reduction of the short-term loan portfolio and because of the lower income assumed on loans for raw cotton. Net income after tax and the return on equity are lower in 1973, 1974 and 1975 than in 1972 because in 1972 BAPINDO pays very little tax as a result of the accumulated loss charged against that year's profit. BAPINDO will be only moderately profitable, mainly because of high operating expenses and low leverage. These profit figures are in fact over-stated; BAPINDO has included no new provisions (for bad and doubtful debts) for the 1972-75 period, and such provisions will in fact be necessary. As an offset, BAPINDO has assumed that it will earn interest on temporarily surplus funds only at an average rate of 9% per annum. Its liquidity should in fact enable it to earn a higher average rate. 6.12 Financial position. The projected Balance Sheets as at December 31, 1972 through 197 show that BAPINDO's financial position will remain sound throughout the period of the forecasts (Annex III). Total assets are expected to grow at an average annual rate of about 15%. The long-term debt to equity ratio will remain low, being 0.9:1 as at December 31, 1972 and 1973, in- creasing to 1.2:1 and 1.5:1 at the end of 1974 and 1975 respectively. The over-all debt/equity ratio is forecast to remain low, rising to 2.3 by the end of the period. Credit covenants would provide for a maximum debt/equity ratio of 3:1. Reserves and provisions as a percentage of total portfolio will decline as the portfolio rises, but will still be 25.9% at the end of 1975. 6.13 BAPINDO has short-term, in addition to long-term, liabilities. The greater part of its short-term liabilities relatesto its financing of raw cotton. The liabilities incurred are to Bank Indonesia, and the terms on which Bank Indonesia makes finance available are tailored to the needs of the operation. The use of the funds is regulated by Bank Indonesia. The other important element in BAFINDOts short-term liabilities consists of deposits. They form a relatively small proportion of total liabilities, and BAPINDO plans to reduce them as it curtails its commercial banking activities. BAPINDO's short-term operations are thus not expected to create any pressures on BAPINDO's liquidity. Nevertheless, the use of a total debt limitation (paragraph 6.12) and the presence of a provision in BAPINDO's Policy Statement that BAPINDO will assure that the maturities of its assets are appropriate to those of its liabilities, will give added protection. In these circumstances no specific liquidity covenant appears to be needed. 6.14 The debt-service cover for term debt during the four years of the forecast period will remain satisfactory. On the basis of the forecast, interest and principal payments will be covered 1.6 times in 1972, 1.5 times in 1973 and 1974, 1.8 in 1975, and will remain satisfactory throughout the life of the Government's loan to BAPINDO from the proceeds of the proposed credit. - 23 - 6.15 For short-term loans, collections will far exceed new disburse- ments in 1972 and 1973 as the existing short-term portfolio is reduced (see paragraph 6.07). In 1974 and 1975, new disbursements will be more or less covered by deposits and Bank Indonesia refinancing. Projected cash flow statements are given in Annex XIII. Schedule of Estimated Disbursements 6.16 Attached as Annex XIV is a schedule of estimated disbursements of the proposed credit. VII. ONCLUSIONS AND RECOMENDATIONS 7.01 The demand for investment credit in Indonesia is large and growing. For the private sector, the shortage of loanable funds appears to be the main impediment to more rapid growth of private domestic investment. Trans- fers made to the banking system from Government savings need to be augmented by foreign aid and private inflows if domestic enterprise is to grow at a significant rate. A creditworthy, well-managed BAPINDO, as the largest Indonesian financial institution specializing in term-lending, would be a suitable instrument for making available term finance, from both domestic and foreign sources, to the industrial sector. 7.02 When the Association first examined BAPINDO in December 1969, BAPINDO was in poor condition in all its aspects. It was not creditworthy. On the basis of recommendations made by the Association, the Government agreed in June 1970 on a plan for strengthening and reorganizing BAPINDO. The reorganization called for a re-orientation of BAPINDO's policies and operations, its recapitalization, retraining and reduction of staff, improve- ment of its organization and procedures, changes in its charter, and, above all, the strengthening of its management. 7.03 Satisfactory progress along the agreed lines has been made. Most importantly, BAPINDO's management has been strengthened by the Government's appointment in January 1971 of a new President and two new managing directors and by the secondment of four Advisors to management from the Bank's staff. BAPINDO's financial structure is now sound. A start has been made on re- orienting BAPINDO's operations, on improving its procedures, on training its staff and on bringing order into its accounts and accounting controls. BAPINDO's accounts for 1971 are its first certified by independent qualified accountants. There should in time be further improvements in all aspects. 7.0 Although BAPINDO's overall resource position appears satisfactory for the two-year period 1972-73, some of its resources are restricted in use and, moreover, it needs to build up its liquidity and lay a basis for - 24~ operations in the period thereafter. A credit of US$10 million would not only serve those purposes but would also enable BAPINDO to meet financing requirements for imports during the period. A credit to BAPINDO of that amount is recommended. 7.05 The terms of the proposed credit include an initial "free limit" of US$100,000, with an aggregate limit of US$2.5 million. The Association would thus reserve to itself prior approval of projects accounting for about 75% of the proposed credit by amount, and about 50% by number of pro- jects. Total indebtedness (including deposits) would be limited to three times net worth. The Government would relend the proceeds of the credit to BAPINDO at 74%, the Bank's current lending rate, or at such higher rate as would leave BAPINDO a "spread" of not more than 4%. BAPINDO's repayments to the Government would conform to BAPINDO's collections from its own borrowers in respect of each loan. Other terms and conditions would be similar to those in recent Bank loans to development finance companies including the standard commitment fee. DFCD May 8, 1972 Annex I Page 1 BANK PEMBANGUNAN IDONESIA Draft Policy Statement The Board of Managing Directors of BAPINDO, with the approval of the Supervisory Board adopts the following policies and guidelines to be observed by BAPINDO in its operational activities. 1. Basic Policy BAPINDO is established as a development finance institution to provide, within the framework of the Government's general policy, financial and related assistance to enterprises in Indonesia which, by their acti- vities, are expected to make a positive contribution to the economic development of Indonesia. In order to achieve this objective, BAPINDO will conform with the following guidelines: a) BAPINDO itself will build up a sound financial structure to enable it to carry on its activities and will acquire the necessary funds, mainly long- and medium-term, with which to provide the development assistance required. It will assure that the maturities of its assets are appropriate to those of its liabilities. b) BAPINDO will build up a sound organizational structure and the high level of expertise which will be required to carry out its duties efficiently. c) BAPINDO will give particular attention to the necessity of fostering a 3trong and healthy entrepreneurship and capital market in Indonesia. d) BAPINDO's assistance will take as wide a form as necessary for the fulfillment of its duties, con- sistent with BAPINDO's role as a development finance institution. e) In order to enhance its effectiveness as a develop- ment finance institution, BAPINDO will seek to establish firm and growing relationships with other financial and allied institutions, both domestic and foreign. 2. Field and Scope of Activities a) BAPINDO will assist in the promotion, establishment, rehabilitation, expansion and modernization of enterprises, especielly in the fields of industry, tourism and transportation. Annex I Page 2 -2- b) The main emphasis in BAPINDO's operations will be on medium- and long-term loans. The proceeds of such loans may be used for financing of permanent working capital. 3. Basis for Investment Decisions a) BAPINDO will make its decisions to assist only on the basis of sound investment criteria and will set the terms of its loans according to the needs of the projects financed. Therefore BAPINDO will give assistance only to enter- prises which are soundly managed and organized and which are judged to be viable after careful economic, financial, marketing and engineering appraisal. b) Subject to 3 a)above BAPINDO will select pro- jects on as broad a geographical basis as possible. c) BAPINDO will maintain continuous contact with enterprises to which assistance has been given and will endeavour to provide any advice or guidance it feels necessary and take whatever action which may be required under particular circumstances. 4. Financial Guidelines BAPINDO's financial commitments will normally not exceed the following guidelines: a) BAPINDO's total outstanding debts, including deposits and guarantees, will not exceed 3 times BAPINDO's net worth. b) BAPINDO's participation in equities will not exceed, in total, BAPINDO's net worth. c) BAPINDO's equity participation in any single enterprise will not exceed 10% of BAPINDO's net worth. d) BAPINI's financial commitments (in whatever form) to any single enterprise will not ex- ceed 20% of BAPINDO's net worth. Annex I Page 3 -3- 6. Relationship with Enterprise a) BAPINDO shall not have a controlling interest in an enterprise which would result in giving it primary/single responsibility for management of the enterprise. Therefore, it will not normally participate in more than 25% of the share capital of any single enterprise. b) To safeguard BAPINDO's interests and/or the interests of the economy, in case of jeopardy and notwithstanding 5 a)above, BAPINDO will take effective measures for providing adequate supervision and guidance for the enterprise. It may seek representa- tion on the managing body of the enterprise concerned. c) It is recognized that as a result of its underwriting of share issues of enterprises BAPINDO may hold issued share capital of an enterprise in a ratio greater than that as mentioned in a)above. In such cases, BAPINDO will dispose of the excess porion of the share capital as soon as possible following the guidelines of 6 below. 6. Portfolio Management a) BAPINDO will conduct its operations in such a manner as to assist in the growth of a sound capital market in Indonesia. b) BAPINDO will endeavour to diversify the hold- ing of securities in its portfolio, and to revolve the contents of its portfolio whenever possible on aatisfactory terms. c) In revolving its portfolio, BAFINDO will pay due regard not only to its own inte.ests, but also to market conditions, and to the interests of other holders of the securiies and of the enterprise concerned. 7. Risks and Profitability a) Although BAPINDO's decisions to give financial assistaace will be based upon its judgment of the overall prospective profitability of the enterprise, BAPINDO will obtain and secure in accordance with sound business practice, ade- quate security for the financial assistance it provides. Annex I Page 4 b) BAPINDO will not carry the foreign exchange risk attendant upon its borrowing and lend- ing activities. The risk will be passed on to its clients or covered by other suitable means. c) In order to finance its activities BAPINDO will endeavour to acquire sufficient funds of a stable nature, on as reasonable terms as possible, to be able to give financial assis- tance to its clients on terms which will allow a healthy growth in the economy. d) In carrying out its activities, BAPINDO will adopt level of charges which will allow it a satisfactory return, after meeting all expenses, including the necessary provisions. This should also allow BAPINDO to build and maintain re- serves consistent with sound financial practice and adequate legal reserves for strengthening its equity. 8. Organization and Staff BAPINDO will rapidly build an effective organization and develop an adequate well-trained staff in the fields of financial, marketing, economic, engineering, accounting and legal services in order to discharge effectively its duties and to enable it to assist its clients in the formulation and implementation of their projects. 9. Revision of Policies This Policy Statement will be amended when necessary to secure BAPINDO's successful operations, and to give flexibility in its activities. 10. Transitional Policies The reduction in BAPINDO's commercial banking will be carried out gradually with as little disruption as possible to either BAPINDO or its clients. DFCD May 8, 1972 BANK PEMBANGUNAN INDONESIA ORGANIZATION CHART Supervisory Board ZII Board of Managing Directors +11I President Audit and Secretariat Insection (Managing Director 1) (Managing Director II) (Managing Director Il) (Managing Director IV) _I_Maritim 1 General Services Credit arid Finance and Sector Follow-up Accounting Operation Research Collection promet Commercial Planning Engineering Banking Personnel 18 Branch Offices l ad SuBrson Worid Banik-6730 Annex III BANK PEMBANGUNAN INDONESIA Loan Operations, 1968-1971 (In Rp. million) June 30, December 31, 1?68 1269 210 ____1 M Medium-Term Loans A. Joint Financing Scheme Approvals - 3,915 7,534 1,32)9 N.A. Outstanding (at end of period) - 1,242 8,296 8,533 11,160 B. Government Capital Paricipation Fund and Budget Funds Approvals 5,543 1,362 - - Outstanding 2.653 5,435 5,354 C. Other Loans Approvals 83 Outstanding - - Total Medium-Tem loans 6 6.677 j outstanding IJ* Short-Term Working Capital Loans Outstanding 3,155 8 9 4 49L ivyn P.L. h80 Raw Cotton Loans Outstanding 1 j_q72 11208 2 Total Loan Portfolio Outstanding 1O.68. 16,80 21 -60 29$9 1/ Not available. DFCD May 8, 1972 Annex IV BANK PMMBANGURAN INDONSA Landing Operations Under Joint Financing Scheme kin Rp. million) 1969 1970 1971 (January-June) I. APPROVALS 3,615 7,227 1,329 II. 0OMMITMENTS 3,064 7,233 1,874 III. DISBURSEMTS 1,660 7,282 1,890 IV. REPAIMETS DUE 238 1,022 V. COLLECTIONS - 16 401 VI. OUTSTANDING AT ED PERIOD 1,242 8,296 8o555 1/ Including Rp. 252 million on account of 4 loans transferred to other state banks. 2/ After deducting 28 loans written off for Rp. 1,313 million. DFCD May 8, 1972 Annex V BANK PEMBANGUNAN INDONESIA Analysis of Medium-Term LoansCommitted under Joint Financing Scheme up to June 30, 1971 (Amounts in Rp. Million) Number Amount % A. Size of Loan (Rp. million) Below Rp. 20 million 58 644 5.3 Rp. 20 to 40 million 34 916 7.5 Rp. 40 to 75 million 33 1,782 14.5 Rp. 75 to 120 million 36 3,334 27.0 Rp. 120 to 150 million 13 1,707 13.9 Above Rp. 150 million 16 3,788 31.8 Total 190 12,171 100.0 B. Geographical Spread North Sumatra 29 1,675 14.0 South Sumatra 17 1,066 9.0 West Java 77 6,064 48.8 Central Java 20 901 7.2 East Java 8 697 6.2 Kaliwantam 17 1,174 9.8 Julawesi 14 380 3.1 Nusatanggara 8 214 1.9 Total 190 12,171 100.0 C. Duration of Loans Up to 2 years 23 410 3.6 2 to 3 years 53 1,803 15.5 3 to 4 years 81 6,359 51.5 4 to 5 years 28 2,634 22.0 Over 5 years 5 965 7.4 Total 190 12,171 100.0 D. Nature of Project projects 54 5,539 45.5 Rehabilitation or Expansion 136 6,632 Total 190 12,171 100.0 E. Industrial Category Pulp, paper, printing 8 220 1.8 Textile 26 2,803 23.2 Metal products 8 909 6.9 Chemical 6 779 6.1 Pharmaceutical 6 210 1.7 Light industries 50 1,975 16.3 Transportation 45 1,219 10.0 Hotel industry 19 1,325 11.1 Rubber processing 22 2,731 22.9 Total 190 12,171 100.0 DFCD May 8, 1972 Annex VI BANK PEMBANGUNAN INDONESIA Sectoral Distribution of Short-Term Portfolio Outstanding Amounts in Rp. Million December 31, December 31, June 30, 1969 1970 1971 Manufacturing Textile 1,633 2,.9647 2$075 Food 1/ 1,359 969 h56 Export Commodities 212 278 250 Other Industries 1,323 1,716 1,019 Buildings, Construction 121 552 339 Other (including hotels, transport) 640 750 358 288 6 12 497 1/ logging, rubber, edible oil DFCD May 8, 1972 Annex VII BANK PEMBANGUNAN INDONESIA Balance Sheets, December 31, 1969-1970, March 31, April 1 and December 31, 1971 (Rp. million) 1/ 2/ 2/ 2/ Dec. 31, Dec. 31, March 31, April 1, Dec. 31, 1969 1970 1971 1971 1971 Assets Current: Cash on hand and due from banks 590 1,574 1,121 1,121 497 Due from Central Bank 2,706 1,365 1,220 1,220 2,571 Short-term working capital loans 5,288 6,912 6,294 4,960 4,084 Short-term loans for raw cotton 4,615 5,072 2,737 2,687 13,349 Interest receivables 7W3 2,109 2,489 916 2,818 Other current assets 587 329 329 1,,3 17,619 1J,19O 11,233 23, 2 Term loans: Joint Financing Sdheme 1,242 8,296 9,215 7,916 10,790 Government projects 5,435 5,354 4,709 - 370 Others - 83 22 22 - =,677 13,733 13,946 7=38 1,160 Fixed assets: Bank premises and equipment 399 541 2 52462 Total assets 21 611 660 Liabilities and Equity Current: Demand deposits 2,276 2,186 2,440 2,441 1,171 Time deposits 1,809 2,419 2,418 2,535 1,067 Central Bank refinancing 1,650 1,844 1,138 1,137 ( Short-term obligationmfor raw otton 4,506 4,797 2,455 2,455 (12,621 Short-term loans from Central Bank - 905 975 975 ( Other current liabilities 594 930 440 741 691 10,535 13, 1 9,t6b 10,007 15,550 Term debts: Lovernment loans 5,375 8,253 7,432 - 610 Central Bank loans 3,754 6,893 7,227 3,227 81485 State cormmercial bank loans 102 102 102 102 102 Bonds 7 5 4 4 3 9,237 15,253 3,333 9,200 Provisions: Provision for bad debts 1,053 1,663 1,753 67 3,016 Equity: Paid-in capital 60 60 60 60 60 Capital by conversion - - - 4,000 (6,21 Capital surplus - - 2,422 ( Retained earnings - - - - - Undivided profits: Previous years 163 427 1,796 1,796 816 For the year 1,369 579 (1,990) 87 1,856 2,135 &,288 7,397 Total liabilities 212611 311893 2866 1 9,164 1/ audited but not certified by auditors 2/ unaudited 2/ audited and certified DFCD May 8, 1972 Annex VIII BANK PEMBANGUNAN INDONESIA Income Statements for the Years Ended December 31, 1969, 1970 and 1971 (Rp. million) 19691/ 1970?/ 19712/ Income Interest on deposits 58 81 Interest on long-term loans 378 2,100 1,626 Interest on short-term loans 1,684 1,520 1,559 Interest on short-term loans for raw cotton 300 491 497 Others 411 1,009 672 Total. 25,261 Bpenses Interest on deposits 608 814 550 Interest on Central Bank refinancing 227 389 126 Interest on Central Bank term loans - 112 315 Salaries and other personnel expenses 5k 642 743 Administrative and general expenses 427 611 282 Depreciation 64 70 80 Provision for bad debts 697 1,253 2,577 Write-off of bad debts - - 209 Profit (loss) before tax 264 1,369 (28) audited but not certified by auditors unaudited audited and certified by auditors included in "Others" DFCD My 8, 1972 Annex IX BANK PEMBANGUNAN INDONESIA Current Interest Rates - Received and Paid (Annual Rates) Interest Received Interest Paid BAPINDO's Sources of Funds by BAPINDO by BAPINDO Margin Deposits from public a. Demand deposits Between 6% & 12% b. Time deposits (between 3 and 12 months) 12% - 245? c. Average total deposits Average 9% Joint Financing Scheme a. Bank Indonesia funds 12% 140 8% b. Budget funds 12% Oa 12% Short-term working capital loans a. Refinancing by Bank Indonesia (i) priority industries and textiles 24% 13.5% 10.5% (ii) other industries and transport 30 15% 151' b. Bank Indonesia Special Loan 30% 12% 18% Raw Cotton loans a. Cost of Cotton 12% 6% 6% b. Freight 27% 13.5% 13.5% c. Local expenses (BAPINDO funds) 27% 9.0% - 16.0l 1/ On the assumption that BAPINDO makes these loans using the funds it obtains as deposits; the average interest paid by BAPINDO on both time and current deposits has been 9.0%. IPCD May 8, 1972 Annexx BANK PEMBANGUNAN INDONESIA Forecast of Operations, 1972 - 1975 (Rp. in million) s ending 1972 1973 1974 1975 ovals mestic currency For equipment, etc. 3,143 3,061 3,963 4,204 For permanent working capital 1,429 1530 2,202 2,627 4,572 42591 6,165 6,831 reign currency 2,571 3,061 4,843 6,307 Total 7j143 7,652 11,008 13,138 itments mestic currency 70% of the yearts approvals 3,200 3,214 4,315 4,782 30% of the previous year's approvals - 1372 1,377 1,850 3,200 4,586 5,692 6,632 reign currency 70% of the year's approvals 1,800 2,143 3,390 4,415 30% of the previous year's approvals 771 918 1,453 1,800 2.914 _ 5,868 Total 5,000 7,500 10,000 12L500 ursements mestic currency 60% of the year's commitment 1,920 2,751 3,415 3,979 3D% of the previous year's commitment - 960 1,376 1,707 10% of commitments of two years ago - - 320 459 1,920 371 5,111 6,145 reign currency 50% of the year's commitment 900 1,457 2,154 2,934 35% of previous year's commitment - 630 1,020 1,508 15% of commitments of two years ago . - 270 437 900 2,087 3,444 -4879 Total disbursements of long-term loans 25,798 8,555 11,24 3bursement of short-term working capital Loan _oc _2L_50 535 D 8, 1972 Annex XI BANK PEMBANGUNAN INDONESIA Projected Income Statements, 1972 - 1975 (Rp. million) Year ending 1972 1973 1974 1975 Income Interest on deposits 250 433 502 484 Interest on short-term working capital loans 892 496 474 611 Interest on short-term loans for raw cotton 585 221 221 221 Interest on medium-tem loans 1,320 1,707 2,270 3,102 Other income 169 169 169 169 Total 3,216 3,026 3,636 4,587 Expenses Interest on deposits 226 169 192 214 Interest on Central Bank Refinancing 55 38 60 77 Interest on Central Bank term loans 344 338 357 427 Interest on foreign loans 33 141 334 393 Salaries and other personnel expenses 800 800 800 800 Administrative expenses 450 450 420 420 Depreciation 80 85 90 95 Total 1,988 2,021 2,253 2,426 Income before tax 1,228 1,005 1,383 2,161 Less loss carried forward 1,145 83 1,005 1,383 2,161 Tax calculated at 45% 37 452 622 972 Income after taxes 1191 553 761 1 Gross earnings before interest, tax and prdvisions as % of average total assets 6.4% 5.1% 6.1% 7.2% Profit before tax and provisions as % of average total assets 3.7% 3.0% 3.6% 4.8% Profit before tax and provisions as % of average net worth 13.6% 8.5% 10.2% 14.9% Profit after tax and provisions as % of average net worth 13.2% 4.7% 5.6% 8.2% Profit after tax and provisions as % of year- end share capital 13.9% 5.2% 7.2% 10.6% DFCD May 8, 1972 Annex XII BANK PENBANGUNAN IND0HESIA Projected Balance Sheets Year-End 1972-1975 (Hp. million) Year ending 1972 1973 1974 1975 ASSETS Current: Cash and due from banks 5,419 7,799 7,346 6,642 Short-term working capital loans 1,819 1,154 1,654 2,189 Short-term loans for raw cotton 10,130 10,130 10,130 10,130 Others (including accrued interest) 9 1,0 10 1,0 Total current assets 19,563 20,633 20, o 20,511 Term Loans: Local currency 12,820 14,611 16,887 21,070 Foreign currency 900 2 987 6,236 10 393 Total ten loans 13,720 17,598 23,123 31,6 Less provisions 3,016 3,016 3016 3,016 10,704 14,582 20,107 28,447 Fixed Assets: 444 384 319 249 Total assets 3&99 4927 LIABILITIES Current: Deposits 1,351 1,601 1,851 2,101 Central Bank refinancing (for short-term working capital loans and raw cotton loans) 8,961 9,151 9,276 9,10 Others 485 485 485 485 Total current liabilities 10,797 11,237 11,61 L5 Term debts: Central Bank Joint Financing Funds 8,425 8,233 9,355 11,726 IDA Credit - 779 2,679 3,595 Others 900 2,208 3,557 6,798 Total term debts 9,325 11,220 15,591 22,119 aiin capital 60 60 60 60 Capital surplus 8,521 10,521 10,521 10,521 Undivided profits 2 008 2 561 3,322 4 511 Total equity -1;2,7 T-1U 13,9 Total liabilities 30,711 35A99 41,126 Current ratio 1.8 l.8 1.7 1.7 Total debt/equity 2.0 1.8 2.0 2.3 Long-term debt/equity 0.9 0.9 1.2 1.5 Undivided profit and provisions as % of year-end portfolio 36.6% 31.7% 27.4% 25.9% DFCD May 8, 1972 Annex XIII BANK PEMBANGUNAN INDONESIA Projected Source and Application of Funds, 1972-1975 (Rp. million) Years ending 1972 1973 1974 1975 Source Long-term Local currency: Equity paid-in capital 2,000 2,000 - - Loans from Central Bank-Joint Financing Scheme 2,484 2,552 3,4 3,9 Foreign currency: IDA Credit - 779 1,965 1,038 Others 900 1,308 1 3,841 goo 2,087 3,444 4,879 Short-term Demand deposits 180 250 250 250 Central Bank Refinancing 190 190 125 _13 370 4_40 375 384 Others Collection of short-term working capital loans 3,020 1,420 - - Collection of raw cotton loans 3,219 - - - Collection of long-/medium-term loans 3,180 3,430 3,030 2,684 Collection of interest out- standing, 12/31/71 846 645 - - 10,265 5,1495 3,030 2,684 Income before taxes 1,228 1,005 1,838 2,161 Depreciation 80 85 90 95 Total 17L327 I3.66 11,722 142143 Application Disbursements on Short-term working capital loans 755 755 500 535 Long-/medium-term loans - domestic 4,840 5,221 5,111 6,145 Long-/medium-term loans - foreign 900 2,087 3,444 4,879 Time deposits 1,067 - - - Repayments on Long-/medium-term borrowings - Central Bank 2,544 2,744 2,278 1,569 Central Bank Refinancing - short-term loans 3,850 - - - Others 715 - - - Long-term foreign exchange loans - - 195 722 Increase in fixed assets 62 25 25 25 Income tax 243 452 622 972 Total 14,976 11,284 12,175 142847 Cash and bank balances, beginning of year 3,068 5,419 7,799 7,346 Add (less) cash surplus (deficit) for the year 2,351 2,380 (453) (704) Cash on hand at the end of the year 5,419 7,799 7,346 6,642 DFCD May 8, 1972 Annex XIV Bank Pembangunan Indonesia Schedule of Estimated Disbursements of the Proposed IDA Credit 1973 April - June 312,500 July - September 625,500 October - December 938,000 January - March 938,000 April - June 1,250,000 July - September 1,250,000 October - December 1,250,000 1975 January - March 937,500 April - June 625,500 July - September 625,500 October - December 312,500 1976 January - March 312,500 April - June 312,500 July - September 210,000 October - December 100,000 DFCD May 8, 1972 iio` i20° iзо° iча° тнпi Эг+о," ... _ ., . , т_. . , ,. „ . . ,r . ,. . ., ., . , , ,.. �, ,. н, . , . _, . ,,. ,_г. а. � . ,. ..., . ., г .. .. ,5 . � :�гг:: 3г�� � г �-<<� ,. .,., ' ,. - ' ' i гд i: �_� гд Е� i 4 1 "_ �__ зr�J � ' - �" "н ` BANK PEMBANGUNAN 1NDONESIA , :,: ,г �, -'вГ �� ,. .. ,,. . 1' . 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