State banks seek way out of bad debt trap

The Jakarta Post ,  Jakarta   |  Thu, 04/27/2006 10:55 AM  |  Business

Urip Hudiono, The Jakarta Post, Jakarta

State-owned lenders facing a recent rise in non-performing loans (NPLs) have reiterated their request for the government to quickly amend the relevant legislation to allow them to take whatever actions are needed to resolve the worrisome situation.

Bank Mandiri president Agus D. Martowardojo said that what the state-owned banks most needed now was to have their liabilities differentiated from other state liabilities, while at the same time keeping management responsibility for them intact.

""The definition of state liabilities under the State Treasury Law (No. 1/2004) should be overhauled so as to exclude the liabilities of state-owned banks,"" he said Wednesday during a banking seminar.

Such differentiation was essential, Agus explained, to allow the state-owned lenders to resort to common banking measures to resolve the NPL problem, even though these would not be permissible in the case of other state liabilities.

""We could then quickly take the necessary corporate actions to reschedule, restructure or recondition the debts,"" he said, adding that the measures could also include debt reductions, and selling the NPLs to a special purpose vehicle (SPV) or asset management company.

The legislation as it now stands has prevented state bank managers from employing such measures even though they are commonly resorted to by private sector banks.

""We cannot offer debt reduction arrangements that would make more debtors willing to pay up at least what they can, rather than nothing at all, thus reducing the possibility of more real bad debts in the end,"" said Bank Negara Indonesia (BNI) Sigit Pramono, who also spoke during the seminar.

Resolving the NPL problem in the state-owned banks is also crucial to enabling them to boost lending to help spur economic growth, and participate in the central bank's restructuring plan. Bank Indonesia has set a maximum net NPL ratio of 5 percent for anchor (major) banks that will lead a series of expected mergers and acquisitions in the industry.

Mandiri, the country's largest lender in terms of assets, had an NPL ratio of 26.5 percent as of the end of 2005, while BNI, the third largest lender, had an NPL ratio of 10.7 percent. The two banks together control 27 percent of the domestic banking market.

Commenting on the banks' request, Said Didu, the secretary of the State Ministry for State Enterprises, acknowledged the problematic definition of state liabilities, and said that his ministry would hold discussions with the chief economics minister and finance minister on the matter.

Coordinating Minister for the Economy Boediono had earlier said that a number of measures to resolve the NPL situation would be included in a new financial sector reform package, which was expected to be announced in June.

Meanwhile, the Finance Ministry's director general of the treasury, Mulia P. Nasution, said the ministry was currently in the process of revising a number of government regulations and ministerial decrees that would provide more room for the state-owned banks to resolve their NPL problems without the need to establish an SPV outside the Finance Ministry's auction office.

Agus acknowledged concerns that the establishment of an SPV could lead to irresponsible debt management, but said that the transfer of the NPLs to more specialized institutions was a reasonable option so as to allow the banks to focus on their core business -- extending loans.

""The management will continue to be responsible for any corporate actions they take. We are not looking for any changes to the State Assets Accountability Law (No. 17/2003),"" he said.

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