BI changes rules on bank ratings
JAKARTA (JP): Bank Indonesia, the central bank, has modified bank rating rules to improve the soundness of the country's 139 commercial banks.
The new rules, issued on April 30, 1997, focus on capital, assets quality, management, earning and liquidity -- better known as CAMEL ratios -- as well as legal lending limits and net open position on foreign exchange.
But the rules no longer list credit to small businesses or export credit as bank health indicators.
The central bank also introduced a separate rule listing penalties for banks that do not meet the minimum export credit and small business credit requirements.
The new rules on bank soundness, signed by Bank Indonesia's directors Mansjurdin Nurdin and Heru Supraptomo, stipulate that banks that meet all the CAMEL requirements will be given 100 points.
The central bank rates a bank either sound, moderately sound, less sound and unsound or unhealthy.
But the regulation says a bank rated sound, moderately sound or less sound can be downgraded into the unhealthy category if it is found to have serious internal bickering, external intervention, window dressing in its financial reports or financial difficulties.
A bank is classified sound if the central bank gives it 81 points to 100 points. A bank is rated moderately sound if it gets between 66 to 80, less sound 51 to 65 and unsound, or unhealthy, at nil to 50 points.
The overall weighting of a bank's soundness remains unchanged, with capital requirement accounting for 25 percent, asset quality 30 percent, management quality 25 percent, earnings 10 percent and liquidity 10 percent.
The central bank said the new rules require banks to have a capital adequacy ratio (CAR) of eight percent or they will be classified less sound.
Banks were given 65 to 79 points in the past if they had a CAR of between 6.5 percent and 7.9 percent. The new rules say a CAR of 7.9 percent will be given only 65 points and rated less sound.
Banks get 81 points for 8 percent CAR and another one point for every additional 0.1 CAR percentage point.
The central bank said it also modified one of the two ratios to rate asset quality with the focus now on the bad loans allowance.
It said management assessment indicators were reduced from 250 to 100 for foreign exchange banks and 85 for non-foreign exchange banks, switching the focus to general and risk management from capital, assets, earnings and liquidity.
Risk management includes efforts to contain liquidity, markets, credit, operational and legal risks, ownership and management risks.
To rate earnings, the central bank looks at two earning ratios, the ratio of before-tax profits to revenue and operational costs to operating income.
It said it had also tightened liquidity ratios, including the call money obligation to current asset ratio of not more than 100 percent and credit to loan deposit ratio of not more than 115 percent to obtain full points.
Besides CAMEL ratios, the central bank included legal lending limits and net open position on foreign exchange as bank soundness indicators.
It said it would deduct five points to 10 points from banks that violated legal lending limits, and deduct up to five points from banks that violated the net open position requirement. (rid)