Tougher on debtors

The much tougher stance taken by the government on large domestic bank debtors came as a soothing piece of good news after last week's alarming verdict by the United States credit rating agency, Standard & Poor's, that the banking crisis in Indonesia was the world's worst since the 1970s with an estimated up-front fiscal cost as high as US$87 billion.

Since early this month, the Indonesian Bank Restructuring Agency (IBRA) has been much more aggressive and forceful on large debtors, many of which still boast powerful political connections. One week after the agency disclosed the names of the 200 biggest corporate debtors through one-page advertisements in several newspapers, it went public with more details on the amount of liabilities and the names of individual debtors. Apparently shamed by the public announcements and scared by IBRA's warning "negotiate in good faith or be liquidated", the large debtors, who have simply stopped paying debts since last year, dutifully met with the finance minister and IBRA executives on Saturday and committed themselves to immediately start serious talks about ways of resolving liabilities.

The increasing transparency and forcefulness by which the huge domestic bank bad debts, estimated at over Rp 300 trillion (US$38.5 billion), are being resolved under clearly-set deadlines, go a long way in assuaging people's concerns that the government would quietly let the debtors laugh all the way to the bank.

After all, the debt resolution, though crucial for kick starting the economy on to a recovery path, is not merely an economic matter. Of no less importance is what the public sees as the principle of justice. The bad loans have been cleaned from state and private banks' balance sheets in return for government fund injection (taxpayers' money) either to recapitalize banks or reimburse the depositors and creditors of the insolvent banks which were closed down. Treating the big debtors leniently amid widespread misery among people is like rubbing salt into the wound, especially because many of the debtors are themselves former owners of the closed banks.

Proper and prompt debt resolution, either through restructuring, liquidation and other litigation proceedings, is a big test case for the government's commitment to law enforcement, which is one of the most crucial determinants of the government's credibility and the country's viability as a good place for investment. The fact is a good portion of the loans, especially those from state banks, turned sour not because of the currency crisis, but because the money was lent through collusive practices and other unscrupulous manners in flagrant violation of prudential banking regulations. Recent audits made in preparation for the government-sponsored bank recapitalization program uncovered a large number of cases where loans were misappropriated and the value of loan securities was a lot lower than the credit.

Loan recovery is also quite crucial for preventing a potential explosion of a huge fiscal deficit resulting from the flotation this year of over Rp 400 trillion in government bonds to recapitalize banks and finance the deposit guarantee scheme. IBRA deputy chairman Eko S. Budianto estimated that at least Rp 60 trillion of the bad loans has to be recovered annually to supplement government revenues.

Moreover, the hard-won steady decrease of interest rates to as low as 23.48 percent last week from as high as 70 percent last October will be rendered ineffective to reinvigorate the economy unless the debt overhang is settled, as most indebted companies will remain deprived of access to new credit lines. Without new working capital loans, companies will be unable to resume operations or increase rates of production. Worse still, the recapitalized banks will remain moribund, unable to execute their financial intermediation function properly because there will hardly be any large and medium-scale businesses viable for new credit. This condition is obviously poisonous to the banks' survival, putting the huge sum of taxpayers' money already invested in them at a great risk of being wasted.

Nonetheless the letters of commitment to entering debt negotiations is merely the first step of the long, difficult process of debt restructuring which has to be completed by the end of August. Unfortunately, time is not on the government's side. Though IBRA has to tread carefully and opt for liquidation only as a last resort action, given the important economic role of many indebted companies, drastic measures should be taken immediately against debtors who show no good faith or whose businesses have no future prospects.