State-owned Bank Mandiri is facing strong pressure to improve the quality of its loan assets, but bashing its biggest debtors every few months will not resolve the mountains of non-performing loans (NPLs) in its portfolio. Instead, this tactic could jeopardize the relationships the bank has built up over decades with its main clients, and scare away potential new customers.
True, making public the names of its biggest debtors does not violate any provisions of bank secrecy regulations, which focus on banks' liabilities (private savings or deposits). In fact, this kind of disclosure should be welcomed as helping to improve transparency and accountability, especially in view of the bank's status as a publicly listed company.
However, publicly bashing its debtors every few months in an attempt to make them settle their debts, as Mandiri has done over the past two years, raises more questions. This is especially true because debt-restructuring negotiations are still under way with many of the bashed debtors.
Parties engaged either in diplomatic or business negotiations are usually bound by a code of ethics about what can be disclosed to the public while the negotiations are ongoing. This code does not allow either party to go to the public or the media and divulge information while the issues are still being ironed out.
But Bank Mandiri has resorted to publicly shaming its major debtors at least twice this year alone, threatening to bring to court those debtors it considers non-cooperative in settling their debts.
As if this bashing was not enough, Bank Mandiri's board of directors has also tried to turn its NPL problem into a political issue by asking for government approval to file lawsuits against the recalcitrant debtors.
There is not a single law that prohibits Mandiri from foreclosing on the assets of defaulted debtors, or bringing bad debtors to court if debt-settlement negotiations have been exhausted. Its loan agreements entitle the bank, as the creditor, to take legal action in case of default.
The question is why has Bank Mandiri not taken such legal measures as a last resort against debtors who, the bank claims, have shown no intention of resolving their debts.
Has Mandiri encountered strong political lobbying or intervention on behalf of particular major debtors? If that is the case, lawsuits are a good alternative because court proceedings will bring to light the real issues behind the bad debts. These issues may include whether the loan approvals were made according to all prudential lending procedures, why the loans turned sour, what kinds of debt-settlement negotiations were tried and who really owns the corporate debtors.
If Mandiri really has airtight legal cases against the bad debtors, as the bank likes to claim, it would be in a strong position to bring the debtors to court, where they could be prosecuted simultaneously under many laws, including the law on corruption, given the status of Bank Mandiri as a state asset.
The fact that Mandiri has refrained from taking legal action, instead trying to use public pressure against the debtors, raises numerous questions about the legitimacy of its allegations against the bashed debtors. Some analysts have even speculated that some of the bad debts might be the result of incompetence or bad banking practices on the part of the Bank Mandiri management. The bashing of the debtors, therefore, is seen as a subterfuge by Mandiri to shift the blame to the debtors.
Credit risk is certainly one of the biggest dangers inherent in banking operations, especially under the current tight monetary stance, as companies are exposed to higher risks of falling earnings. And Bank Mandiri, together with another state-owned bank, BNI, account for the bulk of NPLs in the banking industry.
Bank Mandiri therefore should improve its corporate governance and market discipline, and act firmly and quickly to resolve its huge NPLs, instead of resorting to periodically bashing its debtors. The debts of borrowers who show every intention of repaying the loans should be restructured, and debtors who do not show good faith should be brought to court.
But since almost all debt-workout deals require discounts or haircuts, either on the principal or interest payments, to make the debt sustainable, the government should accelerate the amendment of regulations to allow state banks to give discounts or offer partial write-offs in debt deals.
Bank Indonesia has eased its monetary policy since July, but the high rate of NPLs at state banks, notably Bank Mandiri, in view of its role as the largest bank in the country, could prolong the credit crunch and hinder economic expansion.
