Bad loans 'an obstacle to bank restructuring'

JAKARTA (JP): Non-performing loans (NPLs) are estimated to have reached a value equivalent to 50 percent of the total credit extended by the country's commercial banks, an official said yesterday.

Farid Harianto, a senior Indonesian Bank Restructuring Agency (IBRA) executive, noted that bad loans were now a major obstacle to restructuring the ailing banking sector.

"This will certainly exact a huge cost on the government, and ultimately the taxpayer," Farid told a seminar on the private sector overseas debt restructuring program.

Latest Bank Indonesia's figures showed that commercial banks' credits extended as of June totaled Rp 626.5 trillion.

Farid said that a total of Rp 376 trillion (US$33.2 billion) -- equivalent to 48 percent of the country's gross domestic product (GDP) -- would be needed to cover the losses caused by non-performing loans.

"This estimate of (the magnitude of non-performing loans) is quite realistic. It is certainly not an exaggeration," he said citing the bleak performance of various sectors in the economy.

He said bank owners should be able to cover 25 percent (of the losses) with cash and assets, that 20 percent of the non- performing loans would eventually be repaid and that a further 8 percent could be recovered through the sale of liquidated banks' assets.

Farid explained that if these assumptions proved to be correct then IBRA would be left to meet a shortfall of Rp 187 trillion in the funds required to cover losses resulting from non-performing loans, a sum equivalent to 20.8 percent of GDP.

"Somebody has to plug the hole, but we at IBRA are unsure how this will be done because the government has committed an enormous amount of funds to subsidizing basic commodities " he said.

IBRA is a government-sponsored agency which was established in January to restructure ailing banks and recover Bank Indonesia liquidity support which had reached approximately Rp 140 trillion as of last week.

The agency's asset management unit (AMU) is expected to absorb non-performing loans.

Farid, who heads the unit, said that recovering bad loans would not be easy because of conflicting interests in the government and legal impediments to the sale of troubled banks' assets.

"Confiscating and selling somebody else's assets is not easy," he said, pointing out that in many cases several competing claims were placed on the assets of failing businesses.

"Converting Bank Indonesia (BI) liquidity support to government equity in the troubled banks is also not an easy process because of legal constraints," he said.

"IBRA needs legal power," he added.

The government last week suspended the operation of three commercial banks and nationalized four others, including Bank BCA and Bank Danamon -- two of the country's largest private banks.

Latest figures put BI liquidity support owed by the seven banks at around Rp 97 trillion.

Farid warned that plans to strengthen the banking sector might be hampered by a negative spread in the banking industry. A negative spread arises when bank time deposit interest rates rise above lending rates. The country's commercial banks are currently facing a negative spread of between 12-20 percent.

"An average negative spread of 15 percent will eat up the equity of most banks within six months. If that happens they will need to be recapitalized again," he said.

He explained that the central bank may find itself bound to maintain interest rates at a high level for quite some time in order to curb inflation and stabilize the rupiah exchange rate.

"This (high interest regime) makes BI's job easier but at the expense of the banking industry," he said.

BI director Miranda Gultom told the same seminar yesterday that high interest rates would be maintained until the economy stabilized.

"The negative spread is part of the bitter pill that we have to take," she told the seminar but she questioned Farid's figure on the NPLs. (rei)