Bad debt recovery crucial for bank restructuring

Bad debt recovery crucial for bank restructuring

JAKARTA (JP): Resolving bad debt problems is a crucial step
in restructuring Indonesia's ailing banks, an international
banking analyst has said.

The vice president of the Boston Consulting Group, Roland
Loehner, said here on Wednesday that unrecovered debts could lead
to bigger problems for the banks.

"The banks must act quickly to isolate and begin to recover
their bad debts," the Mexico-based Loehner told reporters at the
BCG office here during a visit to the country.

Seizing debtors assets by the banks would not necessarily
resolve the problems because the banks would unlikely benefit
from most of the seized assets, he said.

"Banks seize hotels or properties but could not manage them,
so the quality of the assets deteriorate. The worst thing is to
let the assets age," he said.

Loehner, who has been working as a management consultant for
Mexican banks since the 1994 crisis until presently, said banks
must separate the retail workouts in their bad debt collection
division from the corporate workouts.

This would enable each division to work on debt collection
more effectively, he said.

Relatively healthy banks must continuously monitor payment
activity to review risky accounts based on behavior scores and to
quickly restructure credits that need restructuring.

He said the banks must react before 60 days after the debt
repayment was due because the average successful collection rate
within 30 days is 75 percent, while after 60 days it drops to 40
percent.

The collectors must conduct personal visits and calls to
collect extremely risky cases, he said.

Loehner said banks must also redesign the credit processes
before they could resume lending. This would include repricing
the lending and imposing risk-adjusted profitability measures.

They must also begin stringent cost-cutting measures, which
includes streamlining the workforce and reducing their assets.

"The bank industry in Mexico had shrunk by almost a third of
its size prior to the 1994 crisis," he said.

But banks which can still afford to, could use the benefit of
undervalued assets to expand on operations by opening more
branches, he said.

By operating more branches, the banks could widen their market
segment and increase on the savings deposits that they badly
need, as they can no longer rely on corporate credits, he said.

The banks must also proactively seek international partners to
inject them with fresh capital or to begin a strategic alliance
with, he said.

However, Loehner contended that stability was important in
helping the banks regain the trust of their customers and to lure
investors.

He said the Mexican government worked rather quickly to help
the recovery of its bank sector during the 1994 crisis, before
the turmoil could trigger further social problems.

"They were very aggressive in pursuing a bailout deal because
they want to maintain stability," he said.

The Mexican government began the banking reform programs
before any bank closed down or went bankrupt, he said.

"The moment you start having bankruptcies, it has a tremendous
psychological impact," he said. (das)