Government issues new debt restructuring policy

JAKARTA (JP): The Financial Sector Policy Committee (FSPC) has issued a new ruling that will provide the legal basis for creditors regarding concessions that can be granted to debtors in a bid to accelerate debt restructuring process.

The new ruling stipulates that creditors are allowed to slash interest rates to as low as 18 percent for debts recorded in rupiah and 10 percent for debts in U.S. dollars.

The FSPC said in a press statement issued late last week that the interest rate could be reduced even lower than the above levels only if the majority of the creditors agreed, and the executive of the creditors' steering committee gave its approval.

The FSPC, which includes several senior economic ministers, has the final say on the country's major debt restructuring program.

The committee's poorly worded press statement did not provide a clear explanation of the new debt restructuring policy.

Many debtors have stalled paying interest on their debts partly because of the high interest rate level. This has become one of the stumbling blocks in efforts to reach a debt restructuring deal.

But creditors, particularly the Indonesian Bank Restructuring Agency (IBRA) and state-owned banks, have been reluctant to reduce interest rate levels fearing that they might be accused of giving special treatment to the debtors, particularly conglomerates who had thrived through bad business practices during the era of former authoritarian president Soeharto.

The FSPC and IBRA have been under fire over recent debt restructuring deals they made with certain conglomerates, which appeared tantamount to a government bailout.

IBRA manages around Rp 260 trillion (US$27 billion) worth of bad debts transferred from either liquidated or recapitalized banks. Domestic banks are also being burdened by non-performing loans.

Restructuring or recovering the loans is crucial to the recovery of the overall economy, particularly to reopen credit lines for the real sector. But the progress so far has been very slow.

The new ruling also stipulates that the cash settlement of debts worth equal to or less than Rp 50 billion can be given an "interest rate discount of up to 100 percent," while for debts worth more than Rp 50 billion a maximum interest discount of 75 percent can be provided.

The FSPC said that no interest rate discount would be given unless the debtors were willing to settle the debts fully in cash, without installments.

The committee added, however, that debtors can install the interest payment during the first half of the new maturity period of any rescheduled debt.

FSPC said that IBRA could use the exchange rate level assumed in the state budget if the debtors were willing to pay debt fully in cash or via final asset settlement.

But the prevailing exchange rate level must be used in the case of debts being restructured.

However, FSPC said that if the exchange rate loss suffered by the debtors was an advantage to IBRA, the agency could consider halving the prevailing exchange rate level or even the rate level when the debt transaction was first made.

Many debtors have been unable to repay dollar-based debts because the rupiah has tumbled from around Rp 2,400 per dollar, before the crisis started in the middle of 1997, to the current level of around Rp 9,500 per dollar. The government assumes an exchange rate of Rp 7,800 to the dollar in its 2001 state budget.

The new ruling also opens the possibility of providing a discount on the principal of debt less than Rp 5 billion owed by individual debtors. But this only applies if the individual debtors are either permanently ill or have passed away.

Under the new ruling, restructured debts can be refinanced by a bank or investors without having to go through a bidding process as long as the recovery rate of the debt is more than 70 percent of the initial amount of the debt principal. The FSPC said that this was decided to minimize the cost of bidding processes and save time.

IBRA is also allowed to write off debt in cases which have been executed through the court, even if the recovery rate of the debt is lower than the principal, as long as the agency justifies that optimum recovery has been achieved. (rei)