Wed, 28 Aug 2002

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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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