Last week's bold move by Indonesia's largest bank to unveil a list of its largest unco-operative debtors shows just how serious the problem of non-performing loans (NPLs) has become for Indonesia's state-owned lenders.
President Director Agus Martowardojo of state-owned Bank Mandiri, Indonesia's largest bank in terms of assets, announced a list of 30 corporate debtors with the biggest NPLs, all exceeding IDR1 trillion ($107.4m) each.
This unprecedented move is a direct consequence of the rising NPL ratio in the Indonesian banking sector. According to the central bank, this amounted to more than 9% of all loans in March of this year.
Martowardojo did offer assistance to debtors who demonstrated good faith in settling their debts, such as softer repayment terms. However, he also threatened litigation against those who did not show good will.
The financial and economic crisis that hit south-east Asia in the late 1990s meant the Indonesian banking sector faced plunging capital levels and a dramatic increase in NPLs. This resulted in the closure of some banks, and a major restructuring of the whole sector.
Banks that were unable to cope with the enormous amounts of bad debt were transferred to an ad hoc institution called the Indonesian Banking Restructuring Agency (IBRA).
This governmental institution then recapitalised these banks and restructured their non-performing portfolios. The IBRA managed to recover an estimated 28% of some IDR650 trillion ($69.8bn) targeted, before the remaining assets were transferred to another body called the Asset Management Company (PPA), in early 2004.
In its first two years of operation, the PPA contributed IDR11.47 trillion ($1.23bn) to the state budget by asset restructuring, collection of receivables and divestment of assets under its control. Currently, the PPA is still holding assets in six banks.
As a continuation of the restructuring of the sector that was started under the IBRA, the central bank launched a new Indonesian banking architecture, determining the direction, outline, and working structures for the banking industry over the next 5 to 10 years.
In its guidelines and procedures, this architecture foresees the implementation of the Basel II accord and a maximum NPL ratio of 5%. These steps are aimed at further consolidation and strengthening of the sector, stage by stage, with this process due to be completed in 2012.
Earlier this month, the PPA appointed PT Bahana Securities and PT Deutsche Securities Indonesia as financial advisors for the divestment of its remaining shares in Permata Bank (26,16%) and Bank Internasional Indonesia (BII, 5.52%) - moves planned for later this year.
Strong inflationary pressure due to a heavy increase in fuel prices in 2005 has increased the credit risks for banks in the wake of rising interest rates.
Most privately owned banks have been able to keep NPL ratios under control, partly by taking a haircut or by writing off bad debts. State-owned banks, however, are not in the position to make such moves because of the anti-corruption law. Any debt haircut or write-off would mean a financial loss to the state, and therefore make bankers vulnerable to corruption charges.
Partly due to this, the NPL ratio in some state-owned banks has risen far above the 5% limit set under the new banking architecture, which the central bank is currently implementing.
In March 2006, the state-owned Bank Nasional Indonesia (BNI) had an NPL ratio of 15.9%. The publicly listed Bank Mandiri, owned 69.1% by the government, saw its NPL ratio rise to 27.66%. The two banks together control 27% of the domestic banking market.
Because of the high level of dubious debts and the significance of the two banks for the economy, the central bank has put both banks under special supervision until their NPL ratio reaches the obligatory level of 5%.
Bank Mandiri's Martowardojo had already been pleading for the establishment of a special purpose vehicle (SPV) to facilitate the resolution of its bad debts. He has now stepped up these efforts by what the Jakarta Post characterised in its editorial of 20 June as the "public shaming of its bad debtors".
While highly unusual in the normally more discrete Indonesian banking world, it is not illegal for Bank Mandiri to disclose the names of its lenders. The principle of secrecy refers to the liabilities of a bank, such as private savings or deposits, not loans. It remains to be seen, however, if the move will indeed help to decrease the size of Bank Mandiri's bad debt, or whether it will prove counterproductive, scaring potential new clients away rather than forcing existing ones to pay up.
But help is on the way. Before the annual meeting of the Consultative Group on Indonesia (CGI), IMF Senior Resident Representative Stephen Swartz expressed the expectation that state-owned banks will be provided with "the authority to grant discounts [haircuts] in the debt restructuring process, which would put them on a level playing field with private banks". This would be part of a forthcoming package of financial sector measures, to be announced at the end of June.