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)