Government issues new debt restructuring policy

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)