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Indonesia: Court Decision Changes Banking Rule

(Oct. 1, 2012) On September 25, 2012, the Constitutional Court of Indonesia (Mahkamah Konstitusi Republik Indonesia) ruled on a case affecting banking rules for state-owned banking institutions. (Case 82/PUU-IX2011, Pengujian UU No. 10 Tahun 1998 tentang Perbankan [Reviewing Law No. 10 of 1998 Concerning Banking], Constitutional Court website (last visited Oct. 1, 2012).)

The decision ended a restriction that was contained in a 1998 banking law that had banned state-owned banks in Indonesia from using a financial mechanism, known as the “credit haircut,” that privately owned banks could employ. All banks will now be able to restructure or sell non-performing loans, and borrowers will be able to arrange to repay less than their full debt. (State Banks Welcome Equal Treatment with Private Competitors, THE JAKARTA POST (Oct. 1, 2012).

Under the 1998 law, state banks could not discount bad loans; such loans were considered state receivables, and the Finance Ministry’s State Receivables Affairs Committee attempted to fully collect them. (Id.; Grace Dwitiya Amianti, Bank Mandiri May Restructure Rp 32t in Loans, THE JAKARTA GLOBE (Oct. 1, 2012); Undang-Undang Republik Indonesia Nomor 10 Tahun 1998 Tentang Perbankan [Law of the Republic of Indonesia Number 10, Year 1998, Concerning Banking], Information Commission of the Republic of Indonesia website.)

The decision overturning the ban puts state banks on the same ground as privately owned financial institutions. Sofyan Basir, the President Director of Bank Rakyat Indonesia (BRI), a state-owned bank, said about the issue that “[i]t is inefficient for us to continue claiming the loans and monitoring collateral assets, such as their buildings and factories.” (State Banks Welcome Equal Treatment with Private Competitors, supra.) Basir added that many state-owned banks had been saddled with long-standing bad loans. By one estimate, bad loans on the balance sheets of state-owned banks amount to the equivalent of US$9.5 billion, which represents more than half of those banks’ equity base. (Id.)

The bad loans of state financial institution Bank Mandiri alone have reached US$3.3 billion. According to that bank’s President Director, Zulkifli Zaini, a large number of uncollected loans were acquired by the bank from predecessor institutions, when Bank Mandiri was formed in 1999 from four separate banks. That merger happened a year after the Asian financial crisis of 1998, when many banks were liquidated. (Amianti, supra.) Three of the four biggest banks in the country, Bank Mandiri, BRI, and Bank Negara Indonesia, are government-run. (State Banks Welcome Equal Treatment with Private Competitors, supra.)