Rumors on bad debtors

Rumors on bad debtors

We were encouraged by the central bank's (Bank Indonesia)
announcement last April that it was conducting special
examinations of problem banks and of companies suspected of being
in trouble with servicing their debts. We welcomed the special
auditing as quite an essential measure to ascertain the exact
size of non-performing assets at state banks and to accurately
diagnose the problems behind the bad credits. The central bank's
move left us assured that the potential damage from the spate of
bad loans would be contained.

However, recent developments are causing us the great concern
that the problems of non-performing assets at state banks have
not been brought under control. Instead, rumors are flying that
several major bad loans will soon be exploding into public view.

A case in point is the recent disclosure of the estimated Rp
500 billion (US$229 million) in bad debts owed by Robby
Tjahjadi's Kanindo Group to two state banks -- the Development
Bank of Indonesia (Bapindo) and Bank Bumi Daya. We had reckoned
that the Kanindo Group would be included among the corporate
debtors under special examination by the central bank, especially
because the ex-convict Robby had been publicly charged with
having defaulted on his debts by a member of the House of
Representatives in February.

But as recent developments have shown, the central bank and
the monetary authority seem to have been caught off guard by
Kanindo's liquidity crisis. That raises the question as to how
the central bank's examiners could not have foreseen Robby's
financial problems early this year. The question becomes even
more puzzling because the list of suspected bad debtors that
circulated as early as the middle of last year included Robby and
his business group.

The Kanindo case is causing us major apprehension due to the
fact that the central bank's special examinations of the 50
largest borrowers from state banks seemed unable to clear away
the questions about problem loans. That is discouraging because
the special auditing work was originally expected to help the
monetary authority to prepare rescue operations.

We don't expect an easy and immediate solution to any of this.
But the central bank should have prepared adequate measures to
contain the damage from bad loans and to prevent doubtful credit
from degenerating into bad debts.

Our apprehension should not, however, be mistaken for distrust
in the technical competence of the central bank's auditors.
Instead, our concern is related more to the non-technical
barriers the auditors might have encountered in exercising their
sound, professional judgment with regard to the findings of their
auditing work. As the US$620 million loan scandal of Eddy
Tansil's Golden Key Group has shown, "political power games"
rather than the technical incompetence of bankers can make credit
fraud possible.

We get the impression that the credit fraud of both the Golden
Key and Kanindo groups was publicly disclosed only after their
owners ran out of luck in the sense that they apparently fell out
of favor with their political connections.

The question now is who will be next among the big corporate
debtors to lose the protection of their politically-well
connected associates and, therefore, become vulnerable to having
their bad debts exposed to the public.

An indication of who this may be has already emerged. New
rumors began circulating early this week that another textile
group, PT Detta Marina, allegedly obtained hundreds of billions
of rupiah in credit from Bapindo on the basis of bogus export
documents. It so happens that this same business group was
reported in the latter part of the 1980s to be in default on its
debts to Bapindo. But as in the case of the House member's
disclosure of Robby's bad debts last February, the issue of Detta
Marina's alleged bad debts in the 1980s soon died down due to
unclear reasons.

This uncertainty about the overall solution to the problem of
bad debts provides fertile ground for all kinds of wild rumors.
That will not help the efforts to restore the public's trust in
the banking industry and in the monetary authority's capability
to cope with the huge sums of bad loans. And such uncertainty may
also be exploited by irresponsible parties to wipe out their
market competitors.

It is, therefore, more imperative now than ever before for the
monetary authority to clear away once and for all the questions
surrounding the big corporate debtors. Using the clause on
banking secrecy to keep the problem from public scrutiny could
easily be seen simply as an attempt to protect politically-well
connected borrowers.