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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