Panic recovery of credits

The capricious manner in which the finance ministry has sought to recover the more than Rp 140 trillion (US$18.6 billion) in liquidity support given to 14 troubled banks which were taken over or suspended in August is the hallmark of a government in panic, feeling the constant criticism of suspecting people.

The enormous pressure on the government to recover the funding as quickly as possible is understandable not only in terms of its budget needs but, most importantly, out of the sense of justice for the taxpayers. The public outcry over the pumping of such a huge sum of taxpayers' money into troubled banks at a time when more than 80 million people are living in absolute poverty is entirely understandable. After all, most of the distressed banks are owned by the conglomerates who already owe billions of dollars to state banks.

But the government's blitzkrieg effort to recoup the huge loans generated little more than media headlines for almost three weeks in September when once-powerful tycoons, mostly ethnic Chinese, were seen rushing to appointments with special prosecutors at the Attorney General's Office. The panic even turned into a mini-drama when some nationalist politicians within President B.J. Habibie's cabinet wanted to seize the opportunity to quickly redistribute assets to cooperatives and native businesspeople. This hidden agenda might have prompted the country's most important economic advisor, International Monetary Fund Director for the Asia and Pacific region Hubert Neiss, to intervene.

The finance ministry, through the Indonesian Bank Restructuring Agency (IBRA), initially set the deadline for the repayment of the huge loans as Sept. 21, threatening bank owners who failed to meet the deadline with criminal charges. To show that it was really serious about its warning, the bank owners, who included the country's most prominent tycoons, were summoned to the Attorney General's Office to complete the legal details.

While most banks failed to meet the deadline, IBRA found itself being "inundated" with assets, mostly in the form of shares in more than 120 enterprises which were ceded by the owners of three banks -- the Salim and Gajah Tunggal groups and businessman Sudwikatmono. Another backtrack set Oct. 31 as the new deadline by which all bank owners would have to produce concrete programs to repay their debts in cash within one year.

However, just like the first, the second deadline was doomed to fail given the cash-strapped condition of almost all enterprises in the crisis-ridden country. Minister of Finance Bambang Subianto confirmed on Friday that the terms of the debt repayment were being renegotiated, possibly resulting in easier conditions over a longer period of time.

Whether or not the change was prompted by Neiss, who reportedly advised Habibie through an Oct. 18 letter against insisting on debt repayments in cash within one year, a more effective debt recovery program is warranted to prevent a more devastating backlash on the depressed economy.

After all, the problem should also be blamed partly on the lack of both technical competence and political autonomy on the part of the central bank (Bank Indonesia) which in the first place made the panic injection of liquidity assistance to troubled banks irrespective of whether they were simply illiquid or already insolvent. Things were made even more complex after the government decided to dump all distressed banks and their liabilities onto IBRA. But this was set up only in February and therefore completely in the dark about the past track records of the ailing banks.

It would indeed be counter-productive for the government to vindictively force the debtors to sell their domestic assets (enterprises) as quickly as possible under the presently depressed market conditions. Such a fire sale would not only generate small returns but also severely disrupt the operations of the companies. The resulting impact on the whole economy would be devastating, especially since many of the surrendered companies operate in vital sectors such as food.

A better solution seems to be more thorough renegotiations with the bank owners to allow for a better evaluation of the assets and their cash-flow prospects on which repayment terms are reset. As the economy stabilizes and recovery starts, IBRA can then unload the assets through private placement to strategic partners or public offerings to accelerate repayment. This should, however, be followed immediately by more vigorous efforts to collect the credits of the troubled banks.

Most importantly, the liquidity support fund should remain subject to penalty interest rates and debtors who negotiate in bad faith should immediately face the full force of the law.