Government provides 25% discount for SME debts
The Jakarta Post, Jakarta
Small and medium-scale enterprises (SMEs) with bad debts owed to the banking sector can enjoy a 25 percent debt reduction if they make a one-time cash settlement, said State Minister of Cooperatives and Small and Medium Enterprises H. Alimarwan Hanan.
He said that the deal had been agreed on by Minister of Finance Boediono and State Minister of State Enterprises Laksamana Sukardi.
"It's been decided to grant a 25 percent haircut to SMEs who can afford to repay their debts in cash.
"But for those who cannot, they have two years to make payments at an interest rate of 9 percent per year," Ali said after a meeting with Vice President Hamzah Haz.
After years of political wrangling, President Megawati Soekarnoputri signed a special decree on the restructuring of SME debts. The decree does not stipulate the size of the haircut facility to be given to SMEs, but instead it assigned the two above ministers to make the decision.
The SMEs owe some Rp 39 trillion (about US$4.3 billion) in bad debts to the banking sector and to the Indonesian Bank Restructuring Agency (IBRA), which took over a huge amount of non-performing loans from the banking industry during the late 1990s financial crisis.
The offices of the State Minister of Cooperatives and SMES, with strong backing from Hamzah, initially proposed a haircut facility of more than 50 percent to help revive the SMEs.
But the proposal was strongly opposed by the banking industry, which is still struggling to survive the banking crisis. Reports said that the bankers made their lobby through the economics ministers.
Bankers argued that if they were forced to give too lenient debt-restructuring terms to SMEs, weak banks might suffer from more serious bleeding.
In addition, bankers said a huge debt haircut facility would also be seen as unfair to other SMEs, which have been conscientious in repaying their debts.
Experts said that by doing this, those who had not abandoned their obligation to repay their debts would probably ask for the same discount, which would eventually further threaten the bank's liquidity.
Joining the controversy were also those banks that said the debts to be restructured were not entirely owed by SMEs.
They said some were debts comprising consumer loans owed by the wealthy during the lending spree of the 1997 pre-crisis period.
To date, the government categorizes the debts belonging to SMEs by the definition that they are owed by individuals and amounting to less than Rp 5 billion.
Total debts, most of which are under the control of IBRA, amount to Rp 31.6 trillion.
Presidential Decree No. 56/2002 on the restructuring of SMEs will serve as the legal basis for the restructuring of those debts, which are owed by 414,700 SMEs.
It is widely recognized that debt restructuring will be crucial for SMEs to seek working capital to expand their businesses, which is critical given its ability to absorb a huge part of the work force.