Banking industry sees improvement despite losses

Banking industry sees improvement despite losses

JAKARTA (JP): The condition of Indonesian banks have started
to improve in 1999 as indicated by rising profitability amid
better banking environment, according to Bank Indonesia.

But the central bank said that overall the industry was still
in the red particularly due to the huge financial losses incurred
in the previous period.

"The banks were still in the red last year ... But the loss
tends to be smaller with the decline in domestic interest rate,"
Bank Indonesia said in its 1999 annual report.

The central bank said that the cumulative loss before tax last
year was Rp 91.7 trillion (US$12.31 billion), but this was 48.68
percent lower compared to Rp 178.7 trillion in 1998.

BI said that the financial loss was particularly due to the
negative net interest spread problem, high loan provision, and
the high merger cost of the giant state Bank Mandiri.

A negative spread problem arises as interest rate expense is
larger than interest revenue.

The government merged last year four state banks including
Bank Bumi Daya (BBD), Bank Dagang Negara (BDN), Bank Ekspor Impor
Indonesia (Exim), and Bank Pembangunan Indonesia (Bapindo) into a
new Bank Mandiri, which also caused massive layoffs and forced
the government to provide huge compensation package.

BI said that the continuing decline in the interest rate of
Bank Indonesia SBI promissory notes which was followed by a fall
in the interest rate of time deposits had allowed banks to start
enjoying positive spread in June last year.

"This condition shows that banks have been able to start to
lower its cost of funding, while the interest rate for its funds
is still relatively high," BI said.

BI also said that the capital condition of the banking sector
started to improve in the middle of last year, although it was
still in the negative territory.

The central bank pointed out that the capital condition per
December 1998 was minus Rp 129.7 trillion, but it "improved" to
minus Rp 41.2 trillion as of the end of last year.

BI said that the sector was still plagued by a negative
capital condition because the bank recapitalization program had
yet to be completed.

The government recapitalized seven private banks last year by
injecting bonds into the banks.

BI said that the recapitalized banks also enjoyed additional
revenue from the interest rate of the bonds they held.

BI also said that domestic banks started to regain public
confidence last year as reflected from the increase in third
party funds to Rp 678.9 trillion at the end of 1999 from Rp 625.3
trillion late in 1998.

It said that there was a tendency of bank customers to shift
their money into savings from time deposits because of the
relatively better liquidity of the former type.

BI also said that this was partly due to the smaller interest
rate gap between savings and time deposits.

The central bank also said that the quality of the banking
industry's productive assets had started to improve, pointing out
that non-performing loans (NPLs) level dropped to 32.8 percent
last year from around 50 percent in the previous year.

BI said this development is encouraging after the banking
sector was badly hit by the economic crisis that started in the
middle of 1997, but it admitted that the banks had not yet
performed its intermediary role as expected.

BI said that banks were still reluctant to channel lending to
the real sector.

It pointed out that credit volume dropped by 49.2 percent to
Rp 277.3 trillion last year.

BI said that investment credit volume plunged by 52.8 percent
to Rp 154.5 trillion, working capital loan fell by 48.9 percent
to Rp 95.7 trillion, and consumption loan declined by 12.6
percent to 31 trillion.

BI said that the plunge in the volume of bank credit was
primarily due to the closing down of 39 private banks last year
and the transfer of massive amount of bad loans to the Indonesian
Bank Restructuring Agency (IBRA) from recapitalized banks,
nationalized banks, and closed down banks.

BI said that lending activity was still dominated by state-
owned banks which contributed around half of the industry's total
credit volume.

The central bank said that several banks only started to
slowly expand its credit activity during the first half of last
year.

It added that the manufacturing sector received around 35
percent of the bank lending.

"According to the business plans of the banks, they will
resume lending in 2000," BI said.

BI said that the still relatively high amount of NPLs was one
primary reason why banks still declined to resume lending to the
real sector.

It added that the slow progress of the bank recapitalization
program was another reason.

BI said that restructuring the NPLs and completing the
recapitalizaiton of the banking industry was key to allow a
resumption in lending activity.

It added that a recovery in the intermediary role of the
banking sector was essential in the efforts to create an
effective macroeconomic policy. (rei)