Bad loans may rise next year: BI

Bad loans may rise next year: BI

Bloomberg, Jakarta

The central bank said lenders may report a jump in bad loans next year because rising interest rates are making it harder for borrowers to service debt.

Bank Indonesia has increased its benchmark interest rate by 2.5 percentage points since July 5 to curb inflation that it forecasts will accelerate to 12 percent by the end of 2005.

That may slow profit growth for banks as higher rates cause margins on loans to shrink, Muliaman Hadad, Bank Indonesia's director for research and banking regulation, said late on Monday in Jakarta.

"Pressure on non-performing loans typically begins showing in three to six months after price increases," Muliaman said.

Indonesia, which has 132 lenders, is coaxing banks to merge to strengthen a financial industry it rescued with a Rp 450 trillion (US$$44 billion) bailout after the 1997 Asian financial crisis. Lending rules were tightened earlier this year to help boost loan quality at the nation's banks.

Non-performing loans, or loans on which no principal or interest has been paid for at least 90 days, made up about 8.9 percent of total loans as of the end of August, he said, up from 7.9 percent in June and 5.6 percent in March, when the government increased fuel prices an average of 29 percent.

Indonesia's banks have enough capital to absorb the increase in bad loans, even if interest rates rise to more than 14 percent and the rupiah drops to 14,000 against the dollar, Hadad said.

Banks' capital adequacy ratio, which measures capital against risk-weighted assets and is a gauge of a lender's health, won't fall below the minimum 8 percent required by the central bank, Muliaman said, citing a central bank study.

He didn't say how many banks were involved in the survey. The capital adequacy ratio of Indonesia's banks stands at 19 percent.

The tripled kerosene prices and more than doubled diesel tariffs on Oct. 1 to cap energy subsidies and meet a budget deficit target of 0.9 percent of gross domestic product. Gasoline prices rose 87.5 percent.

Consumer prices rose 9.1 percent to a 33-month high in September because of higher energy costs.

Indonesian banks had combined profit of 14.9 trillion rupiah in 2004, according to the central bank. The average net interest margin for Indonesian banks fell to 5.6 percent in May from 6 percent in March and 6.2 percent in December, the central bank said on its Web site.

The rupiah has fallen 8.4 percent against the dollar in 2005, making it this year's second-worst performer after the Japanese yen among 15 Asia Pacific currencies tracked by Bloomberg.