Inflation, rates push bad debts up: BI<\/p>\n
Urip Hudiono, The Jakarta Post\/Jakarta<\/p>\n
The recent rise in inflation and interest rates have caused an
\nincrease of bad loans, which are eating away at local banks'
\ncapital, a report from the central bank shows.<\/p>\n
The situation has prompted Bank Indonesia (BI) to keep a
\ncloser eye on the unfavorable situation, although it remains
\noptimistic about the banks' ability to maintain sound performance
\nfor this year.<\/p>\n
In its latest assessment on the banking sector, BI noted an
\nincrease in the level of non-performing loans (NPL) of banks
\nduring this year's third quarter, particularly in loans for
\ninvestments to the manufacturing sector.<\/p>\n
\"Although the banks' level of liquidity and capital of banks
\nare still within safe levels, there is, nevertheless, an increase
\nin business risks that banks are facing, as reflected in the
\ndeclining quality of their loans,\" BI said in the report.<\/p>\n
\"Market risks are also on the rise, with the pick-up in
\ninflation and an ongoing tendency of a rupiah depreciation.\"<\/p>\n
The level of gross NPL of banks from July to September has
\nreached an average of 8.9 percent, from 7.9 percent the previous
\nquarter, the central bank recorded, while their net NPL already
\nstood at 5 percent from 3.7 percent.<\/p>\n
With the recent rise in NPL, banks have given up on more
\nfailing loans, hurting their profits and causing their capital
\nadequacy ratio (CAR) to slump to 18.8 percent, from 19.5 percent
\nduring the second quarter.<\/p>\n
BI sets a maximum net NPL of 5 percent and a minimum CAR of 18
\npercent on all banks operating in the country.<\/p>\n
Bad debts are loans that have been in arrears for 180 days,
\naccording to a recently revised BI regulation, which also
\nrequires banks to adopt a uniform, lowest-loan classification
\ncategory for debtors with multiple loans from multiple lenders.
\nThe CAR, meanwhile, is a comparison between a bank's capital with
\nits risk-weighted assets, including loans.<\/p>\n
Several major banks -- including Bank Negara Indonesia (BNI),
\nBank Rakyat Indonesia (BRI) and Bank Internasional Indonesia
\n(BII) -- have reported a fall in profits in their third quarter
\nfinancial reports.<\/p>\n
Bank Mandiri, meanwhile, also suffered in terms of profit as
\nits NPL rose sharply due to BI's new 180-day loan regulation.<\/p>\n
Nevertheless, BI still maintains an upbeat view for the
\nsector, as bank lending in the first nine months reached Rp 702.2
\ntrillion (US$69.59 billion), up 26.5 percent from Rp 555.1
\ntrillion during the same period last year.<\/p>\n
Third-party liabilities of the banks, meanwhile, rose nearly
\n13 percent to Rp 1.04 quadrillion from Rp 926.4 trillion during
\nlast year's third quarter, putting the banks' collective loan-to-
\ndeposit ratio (LDR) at a current 67.1 percent.<\/p>\n
BI had previously estimated that this year's 22 percent
\nlending growth would be very difficult to achieve due to higher
\ninflation and interest rates.<\/p>\n
Last year, bank loans grew by nearly 25 percent to Rp 595.1
\ntrillion from Rp 477.2 trillion in 2003.<\/p>\n
As an incentive for banks to lend more, the central bank said
\nit would raise its interest rates for the banks' minimum reserve
\nat BI to 6.5 percent by December, although it would maintain its
\nhigh key interest rate -- presently at 12.25 percent -- for the
\nsake of macroeconomic stability.<\/p>",
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