Checking debt favors

Checking debt favors

Minister of Finance Boediono's decision to grant small and
medium-scale enterprise (SME) debtors a discount of up to 50
percent on the principals of their bad loans, and total amnesty
on interests and surcharges is an example of a good policy move
that has unnecessarily raised questions and caused controversy.

First of all, the timing of the decision seemed to be wrong,
because it was made by an outgoing government. Then, the policy
that was disclosed to the public only last week is retroactive to
May. What made things even murkier was that explanations about
the policy were so brief, that many questions arose as to the
real motives behind the granting of the facility and its actual
beneficiaries.

The new facility reminds us of a similarly controversial
ruling by President Megawati Soekarnoputri in August 2002, which
granted SME debtors a 25 percent discount on the principals of
their bad debts and a full waiver on their interests and
surcharges, on the condition that all debts should be resolved by
the end of January 2003 at the latest.

No one would question the good intentions and objectives of
the latest measure, especially as it was taken by a minister with
an impeccable record of integrity. Quickly resolving bad loans
owed by SMEs is indeed crucial to strengthening economic
recovery, given their abundance and the size of their combined
workforce.

The move was made especially to speed up the settlement of bad
SME debts -- loans of up to Rp 10 billion (US$1.16 million) --
that are now the responsibility of a Special Resolution Team, set
up in early March to take over distressed assets left unresolved
by the now defunct Indonesian Bank Restructuring Agency (IBRA).

This team was to have completed its task in August, but its
mandate was extended to the end of January 2005 because it has
yet to restructure and dispose of the distressed assets. The
discounts and amnesty on interest charges were offered to push
debtors to settle their debts before the Jan. 27, 2005, expiry
date of the team's mandate.

The question, though, is why has the government been so
inordinately generous with SME debtors, who had once been
accorded leniency to settle their debts in 2002. If they refused
to have their debts resolved under a similar facility back then,
it would seem to indicate that they simply do not have the good
faith to settle their debts or that their businesses are
completely beyond repair.

The Special Resolution Team, which is chaired by Boediono
himself, may have thought it would still be better to recover
even a fraction of the bad loans rather than writing them off
entirely at the expense of taxpayers.

The team may also have argued that since the government had
given discounts of more than 70 percent to big debtors with
billions of dollars in bad loans, why shouldn't SME debtors also
deserve minimal cuts of an equal amount.

Moreover, resolving the SME debt overhang would help restore
these businesses to more profitable conditions, increase their
production rate and hence, their employment rate.

However, such a positive scenario will occur only for debts
that were used for production or commercial businesses and not
for consumption, let alone the consumption of luxury goods.

Therefore, the debt principal discounts and amnesty on
interest should not be granted to all SME debtors, but only to
those used for productive activities -- that is, businesses -- or
to mortgages for low-cost houses.

Past experience from the resolution of SME debts in 2002 shows
how quite a number of the debts were actually consumer loans for
buying luxury cars, upmarket houses or paying overdue credit card
bills.

The Rp 10 billion debt principal ceiling used to determine
eligibility to the facility could also be misleading. Since
almost all SME debts were extended before the November 1997
banking crisis -- when the rupiah exchange rate was still around
Rp 2,500 to the greenback -- quite a large portion of them were
actually not SME loans by Indonesian standards.

In view of the go-go lending practices that were common among
banks before 1997, many of the SME loans might also have been
extended to well-connected businesspeople who used the loans for
consumptive spending, such as purchasing luxury cars or overseas
property.

These are the main factors that must be considered in granting
this debt relief facility, to ensure that the policy will create
fairness and achieve its real objective.

Effecting the populist measure indiscriminately to all SME
debtors may only damage efforts to nurture a credit culture among
the business community and discourage banks from further lending
to SMEs.

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