Any relief on debt payments must prioritize the principle of caution. There must be a cordon to keep out thieves.
THE restructuring of loans held by debtors affected by Covid-19 must be protected from stowaways. The Financial Services Authority (OJK) must learn from the banking restructuring following the 1998 crisis. This crisis led to the closure of almost a hundred banks in a period of only two years. Hundreds of debtors still have huge loans outstanding, and only a few of them have gone bankrupt. Hardly any small-scale debtors were affected by the crisis.
Now things are different. As of May 10, according to the OJK, the banks have restructured the loans of 3.9 million debtors with total credit of Rp336.97 trillion, half of them micro, small and medium-sized businesses with total credit of Rp167.1 trillion. Non-bank financial institutions have already provided debt relief to 1.3 million debtors with loans of Rp43.18 trillion. Most of them are also small and medium-sized enterprises.
However, restructuring must go ahead. The Covid-19 pandemic has afflicted almost all business sectors, from huge corporations to microbusinesses. Tourism, hotels, transportation and commerce are the sectors that have suffered most from this pandemic. Debt relief will give these struggling entrepreneurs and businesses some breathing space. Companies that collapse will trigger another crisis, namely unemployment.
In order to ensure the success of the restructuring program, the banks and loan institutions need to carefully select from among the debtors who request debt restructuring. The assistance offered must not turn into a vehicle for businesspeople unaffected by the pandemic, but who simply wants to avoid their obligations to repay their debts.
Therefore, before it is too late, the government should establish a verification agency. This agency would assess and classify the status of each debtor. One aspect assessed would be whether the business in question has been cooperative in settling its debts, including providing assets as collateral, and its business prospects for the future. Companies could request restructuring if it there is proof that repayment of the principle or the interest has never been in arrears.
Given that the restructuring scheme for each debtor would be different, there should be an in-depth case by case evaluation, in line with the financial situation they find themselves in. However, the banks and loan institutions must not be reluctant to refuse a request if the debtor does not fulfill the requirements. This is to prevent this facility being offered turning into a boomerang for the banking sector. The banks could be dragged down and collapse, while the debtors continue to enjoy success.
This debt restructuring facility has the potential to create moral hazard. The OJK must learn from the experience of the Indonesian Bank Restructuring Agency from 1998 to 2004. Many of those who embezzled loans have been untouched by the law despite the fact they manipulated the value of assets and violated banking regulations. More than a few of them subsequently repurchased their restructured assets at low prices. The people are still paying the price for the banking rescue in the form of recapitalization bonds totaling Rp600 trillion.
It is not impossible that that this dark history will be repeated. As a result of limited liquidity, a number of banks did not have sufficient reserves to cover bad loans. To prevent loans from debtors unable to pay turning into non-performing loans, they accepted restructuring requests from debtors who did not meet the requirements to receive debt relief. Eventually this resulted in those debts turning into bad loans.
Banks collapsed and the Deposit Insurance Corporation was forced to intervene. It is not impossible that as in 1998, the government will have shoulder the burden of this moral hazard. Therefore, the OJK must place a cordon to prevent potential thieves participating in the restructuring program. It must also keep a very close eye on bank management, so they prioritize the principle of caution.