Banking sector improving, but lending remains weak

Banking sector improving, but lending remains weak

Dadan Wijaksana, The Jakarta Post, Jakarta

Six years after the crisis, the country's banks are now in better
shape, although analysts lament the fact the industry is yet to
significantly resume its lending activities.

"The level of CAR, NPLs and other indicators have improved,
which could mean the banking sector remains on the track toward
recovery," banking expert Elvyn G. Masassya said, referring to
capital adequacy ratio and non-performing loans, two of the main
indicators used to gauge the health of banks.

CAR is the ratio between capital and risk-weighted assets such
as loans. The higher the CAR the healthier a bank is.

The NPL ratio measures a bank's non-performing loans against
its total loans. Loans on which interest payments are 90 days
overdue are categorized as non-performing.

According to Bank Indonesia, the average CAR level of the
banking industry stood at 24 percent as of the end of March,
compared to 22 percent at the end of last year, and 20 percent
the year before. The CAR level is way above the central bank's
minimum requirement of 8 percent.

Banks have also gradually managed to cut down their NPLs from
12 percent two years ago to an average level of 8.15 percent in
March. Central bank officials said recently that most banks have
already reduced their NPLs to below the maximum 5 percent limit.

Moreover, there is also an improvement in banks net interest
margin incomes, from less than 3 percent in 2001 to around 4
percent by March 2003.

Analysts said that improving stability in the country's
macroeconomic indicators and tighter prudential rulings
introduced by Bank Indonesia have been instrumental in helping
banks become healthier.

The mid-1997 regional financial crisis had forced the
government to shut dozens of banks and spend around Rp 650
trillion (around US$79 billion) in public funds to bailout ailing
banks, in what is seen as one of the costliest bank bailouts in
world history.

The government has started to sell a number of acquired banks
(mostly to foreign investors) to help recover the cost and
accelerate the recovery of the industry. Last year, it sold a
majority ownership in Bank BCA, the country's largest bank. This
was followed by the sale of Bank Niaga and Bank Danamon earlier
this year.

The sale of a 20 percent stake in the giant state-owned Bank
Mandiri through an initial public offering process is still
underway.

The government is now planning to sell a majority stake in
Bank Lippo and Bank Internasional Indonesia later this year. The
privatization of state-owned Bank BRI is scheduled to take place
in November.

Economist Dradjad Wibowo said that the entry of foreign
investors was expected to further improve the condition of the
local banks through their expertise and strong capital and
network.

"Although it will take more time to be able to witness the
impact of those acquisitions, I think it shows that they are
capable of improving the banks' performance in the long term.

"That was exactly why the government is pushing with its
banking sale program, which aims to speed up the recovery in the
sector, thus restoring public confidence," he said.

But despite all the progress, banks are still being criticized
for impotency in reviving loans to the corporate sector.

The central bank has been aggressively cutting down its
benchmark interest rate during the past year, which now stands at
9.23 percent compared to more than 13 percent earlier in the
year, but banks still maintain lending rates at a high rate of
around 18 percent. Borrowers said that the ideal rate should be
13 percent to 14 percent.

"If the banking sector remains slow in cutting its lending
rate do not expect rising demand for loans from the private
sector, let alone its quick revival," a local businessman said.