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.