By Arwin Rasyid

The impact of the Covid-19 pandemic on business has been massive, simultaneous and indiscriminate, affecting not only micro, small and medium enterprises (MSMEs), but also large corporations and even state enterprises. A wave of layoffs has occurred and almost all sectors have experienced a decline in turnover, with many businesses facing temporary or permanent closure.

Objectively, the economic crisis caused by the pandemic has had an impact on all economic actors, whether individuals or businesses. Individuals who have been particularly badly affected include casual day laborers, online transportation drivers, street vendors, and outsourced workers. Businesses that have been affected include ultra-micro businesses; micro, small and medium enterprises (MSMEs) and large corporations and financial institutions (bank and non-bank). Millions of MSMEs have been affected. Likewise, hundreds or even thousands of non-MSMEs employing millions of workers have also been badly hit. A construction company building a skyscraper, for example, could employ up to 2,000 workers. A hotel with 400 rooms could employ 800-1000 staff. Just one textile or footwear factory can employ 3,000 or 4,000 workers.

The economic crisis precipitated by the pandemic is a global phenomenon. In the US, many listed corporations have applied to participate in the Paycheck Protection Program. According to CNN, 97% of businesses in the US employ less than 500 people. These companies can apply for liquidity assistance of up to USD 10 million for 2 years with low interest. In Singapore, the government provides soft loans to companies to subsidize 70% of their employees’ salaries, while the companies only have to pay 30% of their salaries during the crisis. The loans are to be repaid by the companies after the crisis is over. All of this liquidity assistance is designed to prevent layoffs.

In this article, I will focus on two government programs that are intended to safeguard the national economy by maintaining the stability of the financial sector. The first policy encourages banks to restructure ultra-micro and MSME loans by subsidizing the loan interest that would otherwise be received by the bank, while the second involves the channeling of government liquidity assistance by Participating Banks to Executing Banks (Book I, II and III banks) that institute loan restructuring programs.

The two policies are aimed at maintaining the liquidity of banks and other financial institutions. The question that obviously arises is how effective will they be in reducing financial-sector liquidity risks in Indonesia?

Restructuring and Bank Liquidity Management

The liquidity of a bank or other financial institution is an important issue that needs to be attended to on an almost daily basis through asset-liability management. This is because a bank’s liquidity is akin to its blood flow. Liquidity circulation in a bank involves the relationship between two components, namely, assets and liabilities. On the asset side, these mostly consist of loans, which are extended to a number of principal segments (MSME, consumer banking, commercial banking, corporate banking, and financial institutions – including, for example, short-term loans to rural banks (BPR) and finance companies). On the liabilities side, the main component is customer deposits, consisting of demand deposits, savings deposits and time deposits.

While lending is classified by segment, payments of loan interest and principal from all segments are managed by a single liquidity management unit in a bank. The smoother the flow of loan interest and principal payments across all segments, the better the bank’s liquidity (assuming, of course, that the liabilities side is well maintained). Conversely, if payments stall or stop performing, then overall bank liquidity will be adversely affected. If the amounts involved are significant enough, the bank will face a liquidity problem. If this happens, then it is a sign that the bank’s soundness level is deteriorating. In such a situation, a restructuring program for its NPLs is the first step that a bank needs to take to resolve the problem.

The government’s current MSME loan restructuring scheme that provides relaxation is subject to certain restrictions, including a loan ceiling of IDR 10 billion, likelihood of improvement in loan quality post restructuring, specific criteria as regards eligible borrowers and loan quality prior to the Covid-19 crisis. In short, the borrowers that are eligible to participate in the restructuring program must be MSMEs or individuals who are current in fulfilling their obligations prior to the outbreak of the pandemic.

OJK data reveals that as of 18 March 2020, 95 banks were implementing MSME loan restructuring programs, accounting for Rp 225.1 trillion of the domestic banking sector’s total outstanding MSME exposure of Rp 1,039 trillion per end of February 2020. This means that only 21.7% of MSME loans are being, or have been, restructured. What about the other 78.3%? What about the non-MSME segment and loans worth more than Rp 10 billion, where the banking sector’s exposure stands at  some Rp 4,500 trillion?

In my view, one of the reasons for the low level of MSME loan restructuring that is eligible for relaxation is the requirement that such loans were categorized as current or performing prior to Covid-19. In reality, a borrower may have gone through a loan restructuring prior to Covid-19, will be likely to have trouble or difficulty again in making interest or principal payments.

From a bank liquidity management perspective, if 50% of total outstanding loans (both MSMEs and non-MSMEs) in the banking sector must be restructured, this would amount to some Rp 2,770 trillion. This means that liquidity from interest income over a period of 6 months from May 2020 will be disrupted or lost to the tune of Rp 166.2 trillion (assuming interest of 1% per month).

Consequently, it is easy to envisage the lack of impact the government’s loan-interest subsidy for restructured MSME loans has on bank liquidity given that the interest subsidy policy has only been worth Rp 34.2 trillion to date. This means that it will only account for 20.6% of the banking sector’s liquidity needs over the next 6 months.

Government Liquidity Assistance

The government’s efforts to support the banking-sector through subsidized loan interest and providing liquidity assistance are welcome. As regards government liquidity assistance, this is channeled through what are termed Participating Banks and Executing Banks. Participating Banks are banks appointed by the OJK based on the following criteria: 51% or more owned by Indonesian shareholders, sound financially and listed as being one of the country’s 15 largest banks.

An Executing Bank is a bank that receives liquidity. To be eligible, the Bank should submit a request for liquidity assistance to a Participating Bank based on the loan restructurings it has carried out, the amount of liquidity assistance needed, the tenor and terms of the liquidity assistance, and the bank’s securities position. To ensure accountability, the management and controlling shareholder of the Executing Bank must be willing to guarantee the accuracy of the information contained in the liquidity assistance request.

Because a Participating Bank channels government funds that are placements from Bank Indonesia based on the prevailing repo rate, the Participating Bank reviews the Executing Bank’s proposal so as reduce risk— if necessary, using an SPV (Special Purpose Vehicle) for such purpose. This review should cover such aspects as collateral and its administration, and collection arrangements in the case the loan becomes NPLs.

Furthermore, for an Executing Bank to secure liquidity assistance, it will need to have healthiness level of minimum healthy, notwithstanding that from the perspective of liquidity management, when a bank submits an application for liquidity assistance, it means that the bank’s healthiness level has already deteriorated.

By way of illustration, total loans at Executing Banks amounted to Rp 2331.1 trillion, according to OJK data per February 2020. If 50% of these loans were restructured based on 1% interest per month, then the liquidity needs of Executing Banks arising from loss of interest income over the next 6 months would amount to Rp 70 trillion. Then if there is a need for Executing Banks to provide additional working capital, which we assume will amount to 10% of the value of the restructured loans, gives a figure of Rp 116.7 trillion. Consequently, the liquidity needs of Executing Banks over the next 6 months will amount to an estimated Rp 186.7 trillion, with the government stepping in to assist only the Executing Banks that satisfies the healthiness level criteria.

What about the liquidity needs of banks that introduce loan restructuring programs but do not satisfy the healthiness criteria, as prescribed by the OJK? If their needs are also taken into account, the amount the government will need to inject in liquidity assistance will be even greater. I hope that the government and OJK have already prepared something to respond to the liquidity needs of banks that are below healthy level.

Some Important Notes

Based on the above description, it is clear that there continues to be a gap between the loan restructuring programs instituted by Indonesia’s banks and the loan-interest subsidy provided by the government. Further, there continues to be a gap between government liquidity assistance provided to Participating Banks for channeling to Executing Banks and the liquidity requirements of both Executing Banks and banks that fail to satisfy the criteria to be treated as Executing Banks. It is probable that these gaps are due to the government’s focus on loan restructuring in the MSME segment, plus the requirement that Executing Banks must be healthy instead of concentrating on overall bank liquidity management. By contrast, the purpose of loan-restructuring assistance and government-liquidity assistance (according to Perppu No. 1 2020) is to provide breathing space through economic relaxation to borrowers in the real sector and the financial-services industry. That means that relaxation needs to be afforded to all economic actors — formal and informal, MSME and non-MSME, bank and non-bank – in line with their objective circumstances.

Having served in the Indonesian Bank Restructuring Agency (IBRA) during the 1998-2000 crisis, I would like to make some suggestions for closing these gaps.

First, I believe it to be essential that a thorough analysis of the factual liquidity needs of all financial institutions be conducted given that (a) during the pandemic, both banks and non-bank financial institutions have restructured loans across all classes of borrowers and all business segments (MSME and non-MSME); (b) banks actually have a category of borrowers that are “under special mention,” namely, borrowers whose loans are not eligible for restructuring as they have yet to deteriorate further which are likely to happen  if the pandemic continues; (c) some borrowers that benefitted from loan restructurings prior to the pandemic, are now likely to require further restructuring; (d) based on my experience of the liabilities side in a crisis, the liquidity of small banks (Book I, II or III) can be affected as depositors shift their funds to stronger banks (Book IV), something that is known as the “flight to quality.” Provided that a comprehensive analysis of factual liquidity needs is conducted, it is to be hoped that government liquidity assistance will be better targeted and thus have the desired impact on economic recovery. Such study must identify “the whole problem as a whole …” In this way, the government should be able to not only minimize the damage but also solve the problem.

Second, liquidity assistance should also be provided to financial institutions that fail to satisfy the healthy level criteria, rather than only to those that satisfy such criteria. This means that a financial institution that applies for liquidity assistance but which shows indications of underlying health problems should still be eligible to act as an Executing Bank and receive liquidity assistance from the government as long as it has implemented a loan restructuring program and submitted a proposal for liquidity assistance to a Participating Bank.

Third, the government liquidity assistance program should be used as an opportunity by the government and OJK to comprehensively evaluate the general conditions of banks and other financial institutions. If this finds that there are banks or other financial institutions that are experiencing liquidity problems due to mismanagement – for example, due to violations of legal lending limits – I believe that the Government and OJK must act decisively to encourage consolidation by way of merger, takeover, acquisition or other rescue measure.

Fourth, although total lending at financial institutions like rural banks (BPR) amounts to “only” Rp 110 trillion and at finance companies to “only” Rp 452 trillion (relatively small compared to total bank lending), I believe the government and OJK must also provide these financial institutions with support. Should BPRs and finance companies be required to apply to Executing Banks for liquidity assistance, I believe that this would not work given that the Executing Banks themselves are facing liquidity problems, thus undermining the effectiveness of the channeling arrangement and increasing the cost of liquidity funds. Consequently, consideration should be given to allowing BPRs and finance companies to access government liquidity assistance directly from Participating Banks.

This crisis is different to that of 1998, which started out as a banking and corporate crisis but then expanded into an economic crisis and ultimately a full-blown political crisis. This time around, the problem started as a health crisis, which then turned into an economic crisis that affects individual economic actors, MSMEs and non-MSMEs. If attention continues to be focused solely on the MSME sector, then the response to the crisis will be inadequate and the contagion will eventually give rise to a financial and banking crisis, the cost of which would be enormous (if our experience of the 1998 crisis is anything to go by). Consequently, the loan-restructuring scheme should be aimed at all business segments (MSME and non-MSME), while government liquidity assistance must go to the banks and other financial institutions that really need it. As the so-called “New Normal” is rolled out, I truly hope that these policies will help to bring about a sustained recovery and strengthening of the national economy in the months ahead.

*The writer, a former banker, is the founder and chairman of TEZ Capital Group