Justice for debtors

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.