Dealing with big debtors

Corruption, collusion and weak law enforcement are central to the hugely controversial way in which the government has been dealing with former bank shareholders who signed agreements in 1998 to settle over Rp 141 trillion (US$15.6 billion) in debts to the state.

Even though almost all the shareholder settlement agreements are already in default and the value of the assets they ceded turned out to be way below their debts, almost none of them has been brought to justice.

Further insulting the public's sense of justice are the allegations by several businesspeople that many of these recalcitrant debtors, who had robbed their own banks and state banks through collusive borrowing, have succeeded in acquiring their former assets at throw-away prices with new loans from state banks.

Rubbing yet more salt into the wound is the government announcement, after a Cabinet meeting on Monday, that two former bank shareholders have been acquitted of all criminal charges related to violations of connected-party lending limits and seventeen others could obtain similar discharge after settling their debts.

How could these tycoons, who were found by the Supreme Audit Agency to have misused a large portion of the liquidity credits in currency speculation, get such favorable treatment?

The problem dates back to 1998 when the B.J. Habibie administration, afraid that the debtors might strip their assets, hurriedly concluded agreements with the owners of closed and nationalized banks to settle Rp 141 trillion in emergency liquidity credits they received from the central bank during the height of the banking crisis. Under the settlement agreements they surrendered assets supposed to be equal in value to their liabilities.

Even though the agreements were processed by high-caliber, domestic and international lawyers and consultants under the supervision of the International Monetary Fund, the deals turned out to be greatly in favor of the debtors as the assets they ceded were not subjected to independent financial due diligence.

Worse still, the government trapped itself with a clause in each of the agreements that automatically releases and discharges the former bank shareholders of all criminal charges related to their violations of legal lending limits.

A legal advisory team assigned by the government in March to review the shareholder debt-settlement agreements recommended in July that the agreements could be declared null and void as the debtors were proved to have signed the deals in bad faith.

The government is, however, faced with a dilemma. Bringing the debtors to court would jeopardize the legal status of their assets that had been sold by the Indonesian Bank Restructuring Agency (IBRA) to new investors and this, in turn, could sabotage the whole asset recovery process.

Moreover, even though IBRA is vested with quasi-judicial powers that confer the authority of court orders on its legal actions, this agency seems to have been rendered impotent to exercise its legal authority, as most of its decisions or legal claims have been rejected by either notoriously corrupt or incompetent judges, who are not familiar with complex corporate transactions.

Given this dilemma, out-of-court settlement seems to be the most realistic way of enforcing most of the debt-settlement agreements to achieve optimal debt collection while maintaining the sanctity of contracts the government has signed. The greatest challenge though is to ensure that this policy fully meets the public's sense of economic justice and effectively forces the former bank owners to repay their debts.

The public's sense of justice would be served only if the debt settlements were transparent and credible, in that the government could collect as much debt as possible without having to drop legal enforcement against corruption and collusion.

The government should come out with detailed explanations about each deal it will conclude with the debtors. Its assessment of each debtor should be highly accountable, providing credible arguments to justify the deal it will finally conclude with each of the former bank owners.

Most important is that this policy should not rule out the option of bringing uncooperative debtors to court. Jailing two or three tycoons would be a deterrent to similar corporate fraud in the future. After all, corrupt businesspeople who colluded with senior government officials have been partly responsible for the economic ruin the nation now faces.

However, out-of-court debt settlement that is too much in favor of the debtors would only plant a time bomb that could detonate another economic crisis in the future.

Yet more damaging is that a settlement that failed to meet the public's sense of justice would burden tycoons with the heavy baggage of negative public perception, which would create a hostile social environment for the future development of big business in the country.