Wiping out past mistakes

Wiping out past mistakes

For the past several years, many Indonesian banks have been
struggling to collect debts that have turned sour, or what the
industry terms as nonperforming loans. They have not been
successful. The total amount is not only staggering, it has also
been growing: Rp 30.39 trillion in April, compared to Rp 27.88
trillion last December, and Rp 26.16 trillion in December 1994.
The size of these nonperforming loans amounts to about a third of
the envisaged government spending of Rp 90.62 trillion for the
current fiscal year.

The problem loans, which average about 10 percent of the
banks' total outstanding lendings, have been saddling the balance
sheets of many banks and have proved a major obstacle to number
of giant state-banks which plan to go public.

Some relief is finally on the way. Bank Indonesia Governor J.
Soedradjad Djiwandono announced last week that the central bank
is drafting a new rule to help banks write off their bad loans,
with tax relief as one measure. The ability of any bank to write
off its bad debts, however, is contingent upon the existence of a
loan loss reserve account. Unless a bank has built up sufficient
reserves, it is unable to write them off.

The new measure will chiefly benefit the seven government-
owned banks -- Bank Rakyat, Bank Negara Indonesia, Bank Tabungan
Negara, Bank Dagang Negara, Bank Ekspor Impor Indonesia, Bank
Pembangunan Indonesia (Bapindo) and Bank Bumi Daya. These seven
banks have not only had to fight off the problems of bad debts,
they have also had to fight off fierce competition from private
banks. Competition has seen their roles in the industry shrink
from 80 percent of the country's total banking assets, funds and
credits in the early 1980s to below 40 percent.

With the new measure, state banks will immediately be able to
write off Rp 6.38 trillion in bad debts from their books,
representing 2.2 percent of outstanding loans as of last April.
In contrast, private banks' bad loans were put at 0.55 percent of
their outstanding loans in April 1996.

The immediate impact of the policy will be an improvement in
the balance sheets of these banks. Writing off bad debts is
normal in modern banking elsewhere in the world, and there is no
reason why the practice should be discouraged here. On the other
hand, allowing bad debts to remain on the banks' books for ever
could eventually undermine public confidence. It is commonly
known that some banks have created window dressing to conceal the
size of their problem loans, including extending fresh loans to
its debtors to pay off the nonperforming loans. The new policy
will at least encourage these banks to come clean and spare them
from having to deceive the public and their shareholders.

But while the new facility is welcome, this is no pretext to
abandon the policy of prudent lending, which is always a
temptation when the going gets rough. At a glance, writing off
bad loans may seem as merely the transferal of a debt from one
account to another, but it eventually comes off profit that would
otherwise go to shareholders, which in the case of state-owned
banks is the government and the people it represents.

The sheer size of the nonperforming loans not only reflects
past mistakes committed by banks, but also poor supervision by
Bank Indonesia during the period of rapid credit expansion of the
last several years. It would be easy to blame past policies for
the present trouble, but the fact that the size of nonperforming
loans has been increasing in absolute terms means that banks,
particularly state banks, have not fully come to terms with the
problem to this day. So while they're writing off their past
mistakes, we have yet to be convinced that they will not make the
same mistakes again.