Govt urged to take firm action against bad debtors

JAKARTA (JP): Senior economist M. Sadli called on the government on Thursday to take stern legal sanctions against recalcitrant debtors and award the cooperative ones with possible debt reduction.

Speaking at a seminar on Indonesia's economic recovery prospects, Sadli said the government should not hesitate to prosecute those who allegedly use Bank Indonesia's emergency liquidity credits for their banks and did not show good faith to pay the debts.

"One or two of the culprits in the banking breakdown should be hanged to give the other bad debtors a lesson," he said.

On the other hand, Sadli said, the government should give more leeway for indebted companies with good prospects, which were cooperative in settling their debts with the Indonesian Bank Restructuring Agency (IBRA), to help them restart their currently struggling businesses.

Debt relief could be granted to indebted but prospective firms through various schemes, including debt to equity swaps, rescheduling of their maturity or granting lower interest rates, he said.

He added that a debt to equity swap scheme would likely be a better and fairer option for IBRA in resolving corporate debt overhang.

But he noted that the government must ensure that its debt reduction facility for indebted companies under IBRA's control is done in a fair and transparent way.

He warned over possible outcries if the government mistakenly gives its facility to debtors who actually contributed to the economic crisis.

"People will be angry if they know that the haircut facility is given to some particular debtors who are actually the culprits in the banking breakdown. That is not fair and not educating at all," he said.

In order to accelerate the restructuring of the lifeless corporate sector, the government recently announced its decision to allow IBRA to provide a debt haircut facility to indebted companies.

The government said debt reduction would only be given under certain conditions, including if it was commercially deemed as the best option for IBRA as a creditor; if there was no proof of crime or fraud committed by the debtor; and if the debtor was cooperative in settling its debts.

According to IBRA, a haircut on overdue interest payments ranges between 25 percent and 100 percent and would be provided to debtors with outstanding debts of Rp 5 billion (US$666,660) or less, if the latter repaid their outstanding debts between Jan. 20 and Feb. 21.

IBRA currently controls some Rp 250 trillion worth of nonperforming loans (NPLs) transferred by the country's ailing banking sector. Some Rp 26 trillion in NPLs has so far been restructured by the agency.

A large part of the bad loans are owed by major businesses linked to influential businessmen.

The government was previously determined not to provide a debt haircut facility, despite strong calls from the business sector.

As a result, IBRA was strongly criticized for being too slow in restructuring and recovering the massive bad debts under its management.

Arnold Harberger, an economist from the University of California in Los Angeles, agreed to the idea of debt relief for prospective businesses to help jump-start economic activities.

"You have to immediately reactivate business activities to help accelerate the economic recovery. Indonesia has hit the bottom, but very slow growth has taken place this year," he said.

Harberger said the slow recovery was partly due to the fact that the Indonesian economic system was immature and undisciplined, and its leaders lacked a strong sense of crisis. (cst)