Panic recovery of credits

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.