Executives of state-owned banks have welcomed the recent Constitutional Court ruling that officially lifted a legally binding clause that forbade them to give credit haircut, a financial mechanism previously only enjoyed by privately-owned banks.
The ruling declares that state-owned banks will now be able to restructure or sell their non-performing loans, which means troubled consumers would pay less than their actual debts to clear the balance sheet.
State banks were previously forbidden to discount bad loans as the law classifies them as state receivables, which means the banks have an obligation to collect the loans, down to the last penny.
“It is inefficient for us to continue claiming the loans and monitoring collateral assets, such as their buildings and factories,” Sofyan Basir, the president director of the state-owned Bank Rakyat Indonesia ( BRI ), said in a recent interview with The Jakarta Post.
Sofyan explained that many state-owned banks, including BRI, had bad loans that had been stuck
for long time in their respective balance sheets, but unfortunately could not give a haircut according
to the law. The implementation of the ruling, therefore, would expedite the settlement of BRI’s bad debts.
Bad loans listed in the balance sheets of state-owned banks in Indonesia total US$9.5 billion, which is equivalent to 54 percent of the banks’ equity base, according to an estimation by Fitch Ratings.
The rating agency said that the ruling would have a positive impact and could raise state-owned banks’ capital adequacy ratio ( CAR ) by an average of 2 percent.
This [the ruling] could bolster their core capitalization to maintain rapid loan growth amid limited fresh capital,” Fitch wrote in a statement.
Competition between commercial and government-controlled banks is becoming fierce in Indonesia. Credit growth in the country has risen more than 23 percent over the last three years, among the highest in Asia, and only half of its 240 million people have access to banks and other financial services.
Southeast Asia’s largest bank, Singapore’s DBS Group Holdings Ltd., announced in April its plan
to buy a 99 percent stake in Indonesia’s six-biggest lender, Bank Danamon, in its bid to tap into the country’s lucrative banking business market.
Currently, three out of four of the largest banks in Indonesia are controlled by the government: Bank Mandiri, BRI, and Bank Negara Indonesia ( BNI ).
Shares of Bank Mandiri, BRI and BNI have risen since the announcement of the court ruling on debt restructuring on Sept. 25 that went in favor of state-owned banks. Stocks of Bank Mandiri and BRI, listed as BMRI and BBRI, have rallied by 100 basis points, while BBNI have surged 25 basis points.
Fitch Ratings says that the chief beneficiaries of the court ruling will be Bank Mandiri and BNI, which represent around 60 percent of total non-performing, off-balance sheet loans held by state-owned banks, according to Fitch Ratings.
BNI president Gatot Suwondo acknowledged that the ruling would be a financial boon for his bank amidst tighter competition with other commercial banks in the country, but argued that he needed more time to study the ruling before his bank could fully implement it.
“However, in overall the ruling is good for us. This is a sign that we will soon have an “level playing field’ with commercial banks”, said Gatot. ( sat )
Many state-owned banks, including BRI, had bad loans stuck for long time on their respective balance sheets.