Tougher on debtors

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.