Justice for debtors
In view of the provisional agreement given by the government last month to the extension by six years of the repayment period for almost Rp 140 trillion (US$13.3 billion) in bad debts owed by the former owners of private banks already liquidated or nationalized, it is only fair to provide the same treatment to small and mid-sized bad debtors.
Even though the rescheduling terms for the big debtors are being reviewed, as they are seen by most analysts as being too much in favor of the debtors, the principle of equal treatment has prompted the government to work out a new restructuring scheme for the almost Rp 40 trillion in bad debts owed by around 414,740 small and mid-sized debtors.
But it is not only the principle of justice that's at stake. Their number, the size of their workforces and their role in the national economy have made a viable debt workout for small and medium-size businesses vital to the effort to fuel a sustainable economic recovery.
Over the past three years, the government has tried several schemes to speed up the restructuring of small and mid-sized debtors to enable them to regain access to new credit lines and to resume full-capacity operations.
One scheme that will expire in April offers a relief of the whole amount of interest charges and penalties and a 25 percent reduction of the debt principals to debtors who can settle their liabilities with cash payment.
The Indonesian Bank Restructuring Agency, which manages the bulk of the bad debts, has also sold at big discounts thousands of small and mid-sized debts (totaling up to Rp 5 billion) to banks.
The rationale of this second scheme is that banks are considered more capable and resourceful to restructure those debts and by so doing they can expand their loan portfolio and broaden the source of their incomes. This will also enable IBRA to focus its resources on restructuring big debts.
However, similar to the big-debt workout schemes that have mostly failed to run according to schedule, not much has been accomplished under the two debt-settlement schemes.
Part of the problem was caused by the shoddy process of transferring the bad debts from banks to IBRA. Another reason seemed to be a weak credit culture that prompted many debtors to take the self-serving assumption that their debts had automatically been waived as soon as their banks were closed down or liquidated.
However, the biggest problem is the inadequate experience and capability of banks in the country to restructure bad loans. For before the 1997 economic crisis, there had hardly been any bad debts requiring complex restructuring negotiations, let alone of the number and amount seen over the last four years. Then, the nation had never before suffered such a severe and long-lasting economic crisis as the one gripping the country since mid-1997.
Under the new restructuring scheme being finalized, small and mid-sized debtors will be offered a relief of the whole amount of interest charges and penalty payments and reductions of debt principals ranging from 40 percent to 50 percent, depending on the percentage and the period of the debt repayment, and an annual interest rate of 9 percent.
That means that the terms of the scheme will not automatically be applied across the board and each debt workout will still have to be ironed out with the debtors. But the better incentives are expected to encourage more debtors to negotiate in good faith.
However, notwithstanding the principle of justice and the role of small and medium-scale businesses in the national economy, the government would be well advised to get tough on bad debtors who simply refuse to settle their debts despite their capability to pay. Leniency to this kind of debtors would not be conducive to nurturing a strong credit culture within the business community.
Many companies have survived only because they stopped servicing their debts. They are like living dead who capture businesses from healthier rivals. Far from promoting market competition, these corporate zombies are perpetuating market distortions.
The government, however, should work harder to assess the business feasibility of bad debtors who behave in good faith, helping to reduce their debts to a sustainable level to keep them growing. Officials in charge of debt restructuring should be patient and thorough in their efforts to search for gold beneath the seemingly grimy assets. They should look beneath the distressed debts to polish their business outlook.
Viable debt restructuring will not only fuel a stronger economic recovery. The government can then sell the restructured loans to the recapitalized banks to retire early a portion of the Rp 430 trillion recapitalization bonds, thereby reducing the fiscal burdens of interest payments and strengthening banks' financial intermediary role.