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.