Resolving SME bad loans<\/p>\n
The government will most likely resist strong political
\npressure to take populist measures against restructuring bad
\nsmall and medium enterprise (SME) loans, thereby refusing to
\nunilaterally set across-the-board discounts on debt principals
\nand interest.<\/p>\n
The final draft of the presidential decree that will be issued
\nsoon and will serve as the legal framework for the restructuring
\nof more than 414,700 SME debts worth about Rp 39 trillion (US$4.3
\nbillion) demonstrates a strong policy consistency and will
\nenhance credit culture among the business community.<\/p>\n
The presidential decree will outline only the basic principles
\non restructuring SME debts, defined as loans below Rp 5 billion,
\nand set the timeframe in which the debt workout process has to be
\ncompleted. It will authorize the ministers of finance and state
\ncompanies to iron out the technical guidelines for banks and the
\nIndonesian Bank Restructuring Agency (IBRA) on how they should go
\nabout resolving bad loans.<\/p>\n
Had the government succumbed to political lobbying to
\nunilaterally set big discounts on the debts and apply them
\nacross-the-board for all SME debtors, the policy would have
\nboomeranged on the SMEs, because banks would refrain from
\nextending new loans to them.<\/p>\n
That would have also amounted to excessive intervention into
\nbanks, which would be in contravention of the November 1998
\ndirective of the central bank's board of governors on the basic
\nguidelines for loan restructuring.<\/p>\n
Such a populist measure would have also damaged credit culture
\namong the business community and dispirited other SME borrowers
\nwho have worked hard to meet their obligations.<\/p>\n
Yet more damaging is the fact that automatic and across-the-
\nboard haircuts on debt principals and interest payments would not
\nbe fair to taxpayers, who would have to bear the losses resulting
\nfrom such a discount policy because quite a number of the bad
\ndebts are consumer loans owed by rich debtors.<\/p>\n
In fact, since almost all of the SME debts were extended
\nbefore the November 1997 banking crisis when the rupiah exchange
\nrate was still around Rp 2,400 to the U.S. dollar, quite a
\nportion of them were not SME loans by Indonesian standards.
\nMoreover, in view of the go-go lending practices that were quite
\ncommon among the banks before the banking crisis, many of the SME
\nloans presumably went to well-connected businesspeople who used
\nthem for such consumptive spending as buying luxury cars or
\nproperty overseas.<\/p>\n
For example, Bank Danamon and Bank Artha Graha, which bought
\nSME debts worth Rp 4 trillion through an auction by IBRA in 2000,
\nfound that many of the debts were consumer loans related to
\ncredit card billings.<\/p>\n
Having said all that, we do not mean to argue against
\ngranting big discounts on SME debts, nor to belittle the urgency
\nand importance of restructuring SME debts.<\/p>\n
On the contrary, quickly resolving the bad loans is crucial
\nto strengthening economic recovery, given the large number and
\nsize of the SME workforce.<\/p>\n
It is entirely unfair to let them bear the full cost of the
\npolitical and economic crises that caused bank interest rates to
\nastronomically skyrocket to as high as 80 percent and depreciate
\nthe rupiah exchange rate to as low as Rp 15,000 to the dollar in
\n1998.<\/p>\n
Moreover, since IBRA has disposed of hundreds of trillions of
\nrupiah in large bad debts with discounts of more than 70 percent,
\nthere is no reason whatsoever why SME debtors do not also deserve
\nhaircuts of at least an equal amount.<\/p>\n
The key issue here -- and this is the responsibility of the
\nministers of finance and state companies who will issue technical
\nguidelines within one month for SME debt restructuring -- is to
\nensure that only SME loans that were used for productive business
\nactivities and mortgages for low-cost houses will be entitled to
\ndiscounts, lower interest rates and longer maturities and, if
\nnecessary, refinancing facilities.<\/p>\n
Restructuring SME debts into new loans with lower interest
\nrates and longer maturities and refinancing viable SMEs with new
\nworking capital loans will help restore these businesses to more
\nprofitable operations, increase their production rate and hence
\nspur employment, and consequently empower them to service their
\ndebts.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/resolving-sme-bad-loans-1447893297",
"image": ""
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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