Decree on SME restructuring a risk to banks

Decree on SME restructuring a risk to banks

A'an Suryana, The Jakarta Post, Semarang

The plan to issue a presidential decree on the restructuring of
bad debts owed by small and medium enterprises (SMEs) could
create serious problems for banks, according to experts.

They said that if the government forced banks to offer hefty
discounts and lenient restructuring terms to bad debtors, SMEs
that had been diligent in repaying their loans would also ask for
similar facilities, which in turn could undermine the financial
condition of the banks.

"Good SME customers will feel that they are being treated
unfairly by the government. They struggle to pay off their loans,
but at the same time delinquent SMEs may receive reductions,"
Hari Rahardjo Slamet, vice president for credit restructuring at
state Bank Mandiri, told participants at a media gathering on
Wednesday in Semarang, Central Java.

Earlier reports said that President Megawati Soekarnoputri was
close to signing the decree, which has been revised dozens of
times due to difficulties in reconciling interests among
consenting parties.

Initially, the Office of the State Minister of Cooperatives
and Small and Medium Enterprises proposed that SME debtors be
offered a 50 percent discount for a one-time cash settlement and
40 percent if they paid off their loans by installment within one
year.

The proposal was supported by Vice President Hamzah Haz. The
policy was expected to resolve the Rp 39.6 trillion in
outstanding bad debts owed by SMEs.

But the plan was strongly protested by bankers, who lobbied
the Office of the Coordinating Minister for the Economy to reject
the proposal.

After nearly a year of wrangling, government sources say the
final draft of the presidential decree would not specify the size
of discount to be given to indebted SMEs, and it would be up to
individual banks to design the restructuring terms for the
debtors. This seems to be the result of the successful lobbying
by the banks.

According to Hari, even before details of the presidential
decree had been made public, some good SME debtors had already
started to ask for special restructuring terms for their debts.

Meanwhile, Frans Mardi Hartanto, a former commissioner for
Bank Danamon, concurred with Hari, saying that overly lenient
restructuring terms would pose a serious threat to banks' balance
sheets.

"Such a policy would create huge financial burdens for the
banks," he said, adding that a deterioration in the financial
condition of banks would jeopardize the government's costly bank
bailout program.

"The banking sector does not need a general policy ... Each
SME needs different treatment. Let the banks manage this by
themselves," he said.