The dilemma IBRA faces in resolving bad loans
The dilemma IBRA faces in resolving bad loans
Vincent Lingga
Senior Editor
The Jakarta Post
Jakarta
Raising revenues for the state budget is only one of the
objectives of the Indonesian Bank Restructuring Agency's (IBRA)
massive auction sale of Rp 135.4 trillion (US$15 billion) in bad
loans which began last month, and not the most important one for
that matter.
Releasing the thousands of corporate debtors from the bondage
of their bad debts and putting them in the care of bank creditors
that are capable of restructuring the dud loans and refinancing
and restoring the corporate debtors to sound operations is much
more important for economic recovery.
Still equally crucial is the need for improving banks'
intermediation through the expansion of their loan portfolios to
reduce their dependence on the interest revenues from government
bonds, which were issued in 1999 to recapitalize almost all the
largest national banks in the country.
Recapitalized banks were facilitated to acquire the bad loans
by allowing them to pay the distressed assets with government
bonds and to ally with non-bank finance companies to manage and
restructure the bad loans into current credits before they were
put into banks' loan books.
This way, the banks would not risk their capital adequacy
ratios falling below the minimum 8 percent level and, at the same
time, would allow the government to retire its bonds early,
thereby decreasing its debts and the amount of bond interest that
it has to pay annually.
Unfortunately, though, the objectives of reinvigorating
indebted corporations and creating sound businesses through
restructuring and refinancing, as well as early retirement of
sizable amount of government bonds could not fully be achieved.
Because only around 50 percent of the assets sold were bought
by banks and securities/investment companies that teamed up with
banks, while the rest were acquired by small investors, which
would most likely be incapable of restructuring the loan assets
and refinancing the debtors' businesses.
Only Rp 4.46 trillion of the Rp 23.1 trillion sale value was
paid in government bonds.
The auction succeeded in selling only 1,454 loans worth
(principals only) Rp 81.6 trillion out of the 2,582 loans with a
face value of Rp 135.4 trillion. It succeeded in raising Rp 23.1
trillion, or a recovery rate of just 28.3 percent.
That reflected a 71.7 percent loss or about equal to the 72
percent loss in the value of the rupiah in relation to U.S.
dollars.
This also meant the debtors got discounts averaging more than
70 percent of their debt principal or a total of Rp 58.5
trillion. This was part of the cost of the economic crisis that
the taxpayers now are burdened with.
The latest data shows that there is still more than Rp 189
trillion in bad loans at IBRA that have yet to be restructured or
sold off.
There were several reasons as to why the results of the
mammoth loan asset sale were way below expectations.
Chief among them was the inadequate information available on
the bad loans that made most bidders unable to reasonably assess
the commercial viability of the loan assets and to estimate the
return on their investment.
IBRA seemed unable to disseminate complete information on so
many loan assets, or it did not have, in the first place,
adequate information or proper legal documentation when those
debts were dumped into its hands at the height of the banking
crisis in 1998 and 1999.
On this information factor, Bank Mandiri, a new bank set up in
1999 as the result of the merger of four state banks, appeared to
have been in a very advantageous position because it was these
former banks that supplied around Rp 178 trillion of the Rp 292
trillion in bad loan assets taken over by IBRA from closed,
nationalized or recapitalized banks in 1998 and 1999.
Another reason, as disclosed by an informed source, was that
many of the corporate debtors were rotten businesses that did not
have any chance at all of surviving, even with generous
refinancing packages.
Still another factor was that many loans were not adequately
secured with collateral, which was not uncommon before 1997,
especially among state banks that were highly vulnerable to
political pressure and rife with corruption.
These rotten businesses were companies which had thrived only
because of the special privileges and facilities they got under
Soeharto's authoritarian rule that was notorious for collusive
practices between officials and particular businesspeople.
IBRA should have liquidated these corporate debtors in the
first place, using its extrajudicial powers, as stipulated in
Government Regulation No.17. 1999, instead of wasting its
resources trying to restructure them, let alone offering them to
other creditors or investors.
After all, IBRA's tasks are not only to restructure bad loans
and recover distressed assets. Equally important is the job of
consolidating the corporate sector, cleansing of all rotten
enterprises and unsound business practices.
Allowing these unfeasible corporate debtors to survive would
be unfair competition to sound companies which have worked hard
to settle their debts, especially if these bad debtors can get
discounts of up to 70 percent of their debts.
Another problem IBRA discovered, after being discouraged by
one defeat after another at the Jakarta bankruptcy court, was
that it was hopeless to deal with the largely incompetent and
corrupt court system.
IBRA is therefore faced with a dilemma. In view of its past
record of being able to restructure less than 100 debts a year,
IBRA may take more than a decade to work out the thousands of bad
loans still under its management, much longer than its mandate
which will expire in early 2004.
Moreover, the longer the bad loan assets stay under IBRA the
worse will be the quality of the assets.
Conducting another massive auction of both restructured and
un-restructured loans as it did last month would risk giving away
commercially viable and rotten businesses to unscrupulous debt
collectors and serious, yet under-capitalized investors which
would not have enough resources to restore corporate debtors with
promising businesses to sound operations.
High-level political resolve and decisions are required to
resolve the dilemma.
Instead of constantly criticizing IBRA as an incompetent and
corrupt institution, it is high time for the House of
Representatives to help the government further empower IBRA to
dispose of corporate debtors that no longer have business
prospects.
Quickly disposing of corporate debtors with rotten businesses
would not only clean up the economy of "zombie" enterprises but
also would enable IBRA to focus its attention on restructuring
loan assets backed by good business prospects and disposing them
at a reasonable recovery rate.
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Investment
Correction: The article, titled Investment, growth prospects
remain gloomy which appeared on this page on our Aug. 27 edition,
was published previously. We apologize for the error.
--Editor