Restructuring loans

Petrus F.T.P. Tampubolon ,  Jakarta   |  Tue, 06/03/2008 10:29 AM  |  Opinion

Following its decision to increase fuel oil prices, the government had to adjust some economic indicator targets for 2008. The economic growth target has been revised down from between 6.4 and 6.8 percent to 6 percent, which is lower than the 2007 economic growth of 6.3 percent.

The inflation rate for 2008 is projected to reach 8.5 to 9.5 percent, which is higher than the 2007 rate of 6.6 percent. The ministry of industry has also revised down the country's industrial growth target to between 4.5 and 5 percent in response to the government's plan to increase fuel prices.

As of December 2007, banks have extended Rp 524,175 trillion to small and medium enterprises (SMEs) in Indonesia. This is 51.22 percent of the total credit extended, with a 3.68 percent nonperforming loan (NPL) rate. From a credit quality point of view, the NPL rate of SMEs is quite good. It is better than the NPL rate of non-SMEs -- 4.28 percent.

Data shows that in 2006 there were 48.93 million SMEs in Indonesia. They employed 85.7 million people and contributed Rp 1,778.75 trillion to the gross domestic product (GDP), with a Rp 369.82 trillion investment value.

From the supply side, fuel price hikes and the increasing of the BI rate will definitely affect the real sector in Indonesia, not only big-scale but also SMEs. From the demand side, the customers' purchasing power is weakening.

Under these conditions, industries will face very difficult situations. Production and overhead costs will automatically increase. Industries which are mostly dependent on fuel may be the ones most severely impacted. Industries' sales volume and profit margin will decrease. Some industries may even stop their operations to prevent further losses. Those with loans will have to work harder to repay the loan.

It is unfair to let the industries bear all these hardships. Banks can play a significant role to help ease the situation. Let us focus on SMEs. Even though SMEs are said to be more adaptive and resilient to economic fluctuations, they actually need big help. One thing banks can do is to restructure SME loans.

Loan restructuring, i.e. rescheduling and reconditioning, is a common banking practice. BI also regulates the restructuring policy. It is mostly intended for prospective customers who have repayment capability. BI recommends that a restructuring proposal should be submitted by bank officers who are not getting involved in initial credit process extensions.

In practice, loan restructuring is not an easy task, especially for state bankers. At times, loan restructuring means doing something beyond normal business practices, such as: offering an interest rates discount, prolonging credit terms and even injecting additional loans in order to stabilize the customers' repayment capacity.

All these aim at preventing the customers' economic condition from getting worse and lowering banks' NPL rate. Although loan restructuring does not always succeed, by attempting it, banks will have a chance to prevent bigger losses.

The problem exists when state bankers are reluctant to propose loan restructuring for in-need customers. It seems that state bankers are haunted by some of these questions: Does an interest rate discount mean causing the state financial loss even though it helps customers improve their repayment capacities? How about the extension of credit terms when customers ultimately fail to fulfill their obligations?

Is it fair to say that injecting additional loans merely exacerbates banks' losses when finally the restructuring scheme fails? Why do some people say that state bankers committed a white collar crime when loan restructuring fails? How can bankers predict that macroeconomic and uncontrollable factors will prevail for such a short or long-term period?

On one hand, loan restructuring always deals with making cash-flow projections, while on the other hand, no one knows what will exactly happen in the future. For this reason, we sometimes need a sixth sense to conduct loan restructuring.

To anticipate the impact of fuel price increases, especially for SMEs, it is better for state bankers and other related parties, i.e. BI and law enforcers, to reformulate and rebuild an understanding of how to properly restructure loans. This is part of the implementation of prudence, transparency and equality before the law.

The healthy SMEs will contribute much to our economy. They help reduce the economic impact of fuel price increases, both for society and for the banks.

The writer works for Bank BNI head office, Small Business Division, in Jakarta, and is completing his PhD in natural resources management at Bogor Agricultural University. This article represents his personal views. He can be reached at pftpt@telkom.net

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