Resolving bad loans
Resolving bad loans
Its dual function as a bank support authority and debt-
resolution agency has made the Indonesian Bank Restructuring
Agency (IBRA) both the largest holding company in the country and
the most powerful institution in the banking industry. As the
state agency in charge of restructuring ailing banks, it now
oversees and manages almost all of the largest banks.
IBRA's asset management unit (AMU) now holds more than Rp 200
trillion (US$23 billion) in bad loans and assets taken over from
liquidated and nationalized banks, including the Rp 100 trillion
it took over from the seven state banks last week. Its asset
holdings will further increase soon when it takes over bad
credits from nine major private banks eligible to take part in
the government-sponsored recapitalization program.
The debt-resolution task will surely prove to be the most
challenging assignment for the 13-month-old IBRA, especially
since its AMU was set up only last December and about 50 percent
of banks' total credits have gone sour due to either unsound
lending practices or the rupiah meltdown and the economic
depression. Though AMU appears to be a dumping ground for bad
assets from the banking industry, its role is no doubt quite
important. Its performance is crucial in determining how much of
the hundreds of trillions of rupiah the central bank has invested
to support the banking industry can eventually be recovered.
The debt-recovery task actually consists of two formidable
jobs -- managing bad loans and selling the fixed assets of
liquidated banks. Both jobs certainly require a wide range of
analysts, such as real estate specialists and experts on
liquidation and on other various industries and the necessary
power to cut through the bureaucratic labyrinth in pursuing
debtors.
No wonder, Government Regulation No.17/1999 of Feb. 27 vests
IBRA with overarching power, including the authority to seize
property in distress and other assets from debtors, sell assets,
investigate debtors.
The job of managing bad loans is a very complex process,
involving the assessment of the viability of debtors' businesses,
negotiations with debtors -- many of whom are politically well-
connected -- debt restructuring and, as a last resort,
liquidation of businesses or collateral. Put another way, AMU
needs the qualifications of both a good liquidator and company
doctor because debt restructuring also means business
restructuring to ensure debt repayment.
Given the extensive practices of imprudent lending in the
banking industry, notably in state banks, which account for more
than 70 percent of bad loans, one can imagine how difficult it is
for AMU to sort out the wide range of bad loans and clarify and
document the various assets used to secure the credits.
The recently published list of the biggest borrowers from
state banks shows how politically well connected businesspeople
encroached upon the banks. Likewise, the excessive connected
lendings at private banks, as uncovered by independent audits
conducted over the past few months in preparation for the bank
restructuring program, testify to how greedy conglomerates had
robbed their own banks. But these facts also mean that most big
businesses -- bad debtors -- are now practically under IBRA's
direct or indirect control.
We wonder though why the government has not, right from the
outset, required high standards of transparency and
accountability from IBRA, given the complexity, political
sensitivity and vulnerability of the debt recovery process to
corruption and collusion between AMU executives and debtors.
Thus far we know very little about IBRA's activities, despite
its vast power and the huge amount of assets already put in its
trust, except for its widely publicized recent auction of
automobiles that were taken over from liquidated banks and the
current auction of paintings. The agency, set up in late January,
1998, has yet to issue a financial report.
The government's letter of intent to the International
Monetary Fund in mid-November regarding reform measures did
mention that an independent review committee had been established
to enhance the transparency and credibility of IBRA operations.
But no further details were given as to the members of the
committee or how and which agency audits IBRA's operations.
Without a high degree of transparency and accountability it
would be rather impossible for IBRA to establish credibility. It
would instead remain highly vulnerable not only to corruption but
also to misguided politics by some senior officials obsessively
bent on redistributing assets outside the market mechanism.