Banking sector still risky: S&P

Leony Aurora , The Jakarta Post, Jakarta

Despite improvements in recent years, the country's banking system remains risky by international standards, says global rating agency Standard and Poor's.

In a statement released on Monday, S&P said that the industry faced the risks of sizable non-performing assets, sluggish loan growth to the real sector, regulatory problems and residual economic uncertainty resulting from terrorist bombings over the last couple of years.

"The level of capitalization in the overall banking system has improved with gradually rising investor confidence following several completed privatization programs and, partially, improved political stability," said S&P credit analyst Adrian Chee.

However, the country's banks had yet to resume their intermediation role and, instead, relied heavily on interest income from government securities.

Eight years after Indonesia's monetary crisis sent the banking sector tumbling into a financial abyss in 1997, the loan-to- deposit ratio remains stubbornly low at about 50 percent, with banks in general finding it more lucrative and less risky to finance consumer spending rather than the expansion of the real sector.

Most banks also prefer to invest their funds in zero-risk Bank Indonesia one-month and three-month promissory notes rather the lending to businesses.

According to figures from Bank Indonesia, the total value of the loans extended by the country's banks reached Rp 526.5 trillion (US$57.23 billion) last year, up from Rp 440 trillion in 2003.

Fitch Ratings, another international ratings agency, raised the ratings of 10 major lenders in Indonesia a week ago on positive changes in the banking sector and recent upgrades in the country's sovereign rating.

The long-term foreign currency ratings of Bank Mandiri, Bank Central Asia (BCA), Bank Rakyat Indonesia (BRI), Bank Negara Indonesia (BNI), Bank Danamon, Bank NISP, Bank Buana and Bank International Indonesia (BII) were upgraded one notch from B+ to BB-, which is three levels away from the lowest investment grade, with a positive outlook.

Two months ago, S&P raised Indonesia's long-term foreign currency rating one step to a B+ from a B, while the local currency rating was upgraded two levels to BB from B+.

Along with the improvement in the country's ratings, S&P upgraded the long-term foreign currency credit ratings on Bank Mandiri, Bank Danamon and BNI to B-plus from B.