Corruption eradication, banking and state banks

The Jakarta Post , Jakarta | Tue, 05/16/2006 12:31 PM | Opinion

Petrus F.T.P. Tampubolon, Jakarta

Corruption eradication has become a central issue in Indonesia, especially after President Susilo Bambang Yudhoyono's administration came to power, vowing to stamp out corruption.

It is now common to see or read in the media about retired or active officials, police officers, judges, prosecutors and executives at state companies, including state banks, being questioned, detained or tried on charges of corruption.

However, the campaign against corruption seems to have had a backlash on the extension of new credits by state banks, because most credit officers at state banks are now concerned that they might go to jail if the loans they approve eventually turn bad.

The credit crunch at state banks, such as the high level of non-performing loans (NPLs) and the negative growth in credit outstanding as of March, could be partly blamed on the inordinate fear among credit officers of facing criminal charges if their loans turn sour even because of normal business risks. The other factor is the high interest rate and the increased cost of fuel.

Businesses are now facing bigger risks, meaning that the risks of their debts turning bad are also increasing due to the combination of weaker consumer demand and higher interest rates. The recent 25 basis point decrease in the central bank's benchmark interest rate (BI rate) to 12.50 percent is not likely to greatly improve conditions for new lending.

There is a tendency today to immediately blame credit officers for any NPLs. People seem do not care about the reasons behind the credit failures, whether they were the result of normal business risks or criminal reasons. The immediate allegation is that credit officers have enriched themselves and their borrowers.

Good proposals for loans or comprehensive credit analyses are often ignored in investigations into bad credits because the law enforcers (police, prosecutors and judges) tend to conclude that bad loans are caused by collusion or corrupt credit officers.

Law enforcers often do not realize that many loans can become sour because business conditions have worsened. They simply conclude that since bad credits at state banks cause losses to the state, they should be classified as corruption.

We must remember that bankers, especially those working for credit or treasury units, must act as businessmen. Bankers are doing business to make a profit, meaning that bankers face risks in their day-to-day activities.

Lending is a process of managing and minimizing risk. But no one can say with certainty that credits will not become bad within a few months after their extension.

Of the greatest importance for banks and credit officers is that credit approval has followed standard procedures for loan extensions.

The concerted campaign against corruption should not change the principle that as long as standard credit assessment procedures have been followed properly, no credit officers are liable for criminal charges even if some of the credits they approved eventually became bad.

However, in the excitement of the corruption fight the basic principle that credits, like other business activities, always face risks is sometimes overlooked.

If bad credits are immediately blamed on corruption, no credit officers will be willing to take the risk of extending credits, the lifeblood for businesses. This will in turn worsen the credit crunch and impair banks' intermediary function.

I think this is one of main factors behind the negative growth of credits outstanding as of March 2006, besides the high interest rate and the fuel price hikes. Hence, the corruption campaign is having both positive and negative impacts. Hopefully, the negative impact is only a temporary excess during this period of transition.

The inordinate fear of extending credits also prevails among state bank officials in charge of loan restructuring. Bank Indonesia, as the central bank, has ruled that for reasons of objectivity, the credit officers who initially processed credits that later became become NPLs are prohibited from restructuring the NPLs.

While the spirit of the regulation seems good, it has not translated at state banks. Bank officials assigned to NPL restructuring are mostly hesitant to decide on debt rescheduling or interest charge discounts or new working capital loans, which are usually needed to help distressed borrowers salvage their businesses.

Officials in charge of loan restructuring are not willing to face the legal consequences if the restructured loans again became bad due to higher-than-estimated business risks. Most credit officers at state banks now prefer to be safety players, thereby killing the very initiative that is so badly needed to bolster businesses.

This situation has further increased NPLs at state banks because as distressed borrowers do not get proper treatment through loan restructuring, their financial situation worsens. This would not occur if bank officials dared to make fast and firm decisions.

Given this confusing situation, careers at state banks are becoming less and less attractive. It is now more difficult for state banks to recruit bright university graduates, who instead prefer to work at private banks which offer not only a better professional career but also higher remuneration packages.

If this continues, the future state bankers will come from the second or even lower tiers of job seekers. There will be a lack of qualified human resources. Will state banks be able to compete with foreign or private banks with such mediocre human resources?

The writer works for Bank BNI in Jakarta and is currently studying for his PhD from Bogor Agricultural University, majoring in the management of natural resources and the environment. This article represents the author's personal views. He can be reached at pftpt@telkom.net.

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