State banks' subterfuge

Even in this supposed reform era, Indonesian state banks, notoriously known for corrupt and collusive lending practices, are never short of tricks to defend the vested interests of their managements and crony customers, many of whom have powerful political connections. With negative capital, all are now technically bankrupt, and are only able to remain open with an injection of funds guaranteed by the government. Despite this support, the banks have aggressively lobbied to take back more than Rp 100 trillion (US$12.5 billion) worth of bad assets or nonperforming loans (NPLs) already transferred to the asset management unit of the Indonesian Bank Restructuring Agency (IBRA) in return for recapitalization funds from the government.

For now, the state banks have only succeeded in taking back a small portion of their NPLs from IBRA. However, this may only be the first step in a larger scheme. This clumsy approach only reinforces the public's lingering suspicion that the government is not serious about pursuing the large debtors who are partly responsible for bankrupting the state banks.

Widigdo Sukarman, president of publicly listed Bank BNI, one of the seven state banks, claimed, to the disgust of most analysts, that state bank managements were better able to recover the bad credits, because they knew their customers. Widigdo, chairman of the Consultative Forum of State Banks, even went as far to indirectly blame the central bank for most of the NPLs. He argued that many of the NPLs would not have ended up in the category had it not been for the punitively high interest rates.

High interest rates, especially since April, 1998, have added to the woes of businesses, and contributed in part to devolving the viability of loans. But this point oversimplifies the problem. It has long been common knowledge that state banks have been squeezed by those in power as cash cows for their business interests. Conglomerates willing to share the spoils with bank managements, easily obtained big loans without proper assessment of their businesses and collateral put up as security for their debts. The list of the 50 biggest debtors of state banks speaks volumes about the widespread, politically directed and collusive lending sprees.

Therefore, nobody is fooled by the state bankers' subterfuge to conceal their corrupt and collusive practices. Bankers want to take back the NPLs from IBRA, but not in good faith to recover the debts. They are simply bent on continuing their collusions and hiding issues of malpractice behind the NPLs. The state bankers know that IBRA -- which is managed mostly by highly reputable professionals and foreign consultants, under the close supervision of the International Monetary Fund -- cannot easily be compromised with regard to the management of the bad debtors. IBRA also is subject to more stringent transparency provisions than state banks, which often try to hide their crimes behind banking secrecy provisions.

Minister of Finance Bambang Subianto who, as the director general for banking and financial institutions in the early 1990s must have known the inside operations of state banks, clearly stated on Thursday that NPLs of the state banks would remain under IBRA. But IBRA deputy chairman Eko S. Budianto said later on Friday that individual NPLs of less than Rp 25 billion would be transferred back to the management of state banks.

The backtrack is very discouraging. The government must have known that the unloading of bad assets from ailing banks to an asset management company -- in this case IBRA -- aims primarily to enable the banks being restructured to focus their resources on managing good assets which, given the inimical macroeconomic conditions, could easily slip into bad credits.

Handling of bad loans requires skills that are usually not provided in a bank. Personnel involved in such activities include real estate specialists, liquidation experts and people with insights into various industrial sectors. The debt recovery process is quite complex, and involves the conversion of the bad loans into assets, real or financial, then the restructuring of these assets into easily sellable forms, and finally the selling process to maximize the net sales value.

Since managing bad assets would interfere with the daily running of a bank, one could easily suspect that important decisions regarding bad assets would receive lower priority than incoming new business. If not separated, the bank's management and board of directors would have to use scarce time to discuss matters relating to bad assets instead of focusing on current business and strategy planning.

IBRA is in a stronger position to pursue debtors, as this agency is vested with extrajudicial power to foreclose on assets and sell them, cutting through the red tape to maximize credit recovery.

Although state bankers succeeded in securing from IBRA only individual NPLs of less than Rp 25 billion, it could be only part of a bigger deception that might eventually subvert the recovery of state banks' credits and consequently kill public trust in the whole bank restructuring program.