Bad credits increase

Bad credits increase

The quality of credit portfolios at all commercial banks, as reported by central bank governor Soedradjad Djiwandono to the House of Representatives on Tuesday, seemed to improve because the proportion of non-performing credits declined to 12.64 percent of total loans outstanding as of January from 13.06 percent last September.

That is a big number indeed. In absolute terms, the non- performing assets -- problem, doubtful and bad credits -- amounted to Rp 24 trillion (US$10 billion) or 30 percent of the total volume of the state budget for the coming fiscal year. These figures indicate that the banking industry is still suffering a great deal from the "go-go lending" practices from 1989 to 1991.

More worrisome is the increase in the proportion of bad credits to 3.97 percent in January from 3.88 percent last September. This equals about Rp 7.5 trillion. The amount of bad credits may continue to increase if banks do not improve the quality of the remaining $6.6 billion in problem and doubtful loans.

The central bank's report confirmed the public's concern about state banks. The bulk of the bad credits, Rp 6.1 trillion, belong to the seven state banks. The proportion of non-performing credits at state banks, 20.2 percent, was also much higher than the industry average of 12.64 percent.

Nonetheless, encouraging messages can also be gleaned from Soedradjad's disclosure. The central bank seems to have tightened its monitoring and assessment of banks' lending portfolios. As Bank Indonesia's Director Hendrobudiyanto explained at the hearing, the amount of bad credits surged by Rp 900 billion last December alone. The increase was not caused by the worsening of problem and doubtful loans, but due to a correction of previous data based on fresh findings from on-site examinations.

This correction, we think, should be welcomed because it resulted from a better supervision mechanism and is only the immediate impact of the improvement. Previously, Bank Indonesia's assessment of balance sheets and financial reports as well as on- site examinations were conducted by different teams. Now the same team is responsible for both audits at each bank.

Another encouraging message is the central bank's openness about bad credits. Such frankness and honesty about the figures is quite conducive in preventing wild rumors circulating about the banking industry. Given the systemic risks encountered by banks, timely, accurate, comprehensive and objective data is crucial to prevent unnecessary jitters among the public. How can an assessment of the health of the banking industry be carried out if the statistics are flawed, outdated or fiddled with?

The central bank's statistics quite obviously show that the banking industry, notably state banks, still have a long a way to go to consolidate internally. It is therefore imperative that the central bank continue to improve its supervision of banks to force all banks to fulfill all prudent regulations.

The fact that the bulk of bad credits belong to state banks is a strong reminder to the central bank to question why most bad bankers work at state banks.