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.