BI defends property loan ban

JAKARTA (JP): Central bank Governor Soedradjad Djiwandono yesterday defended a ban on new loans for land acquisition and development, saying that moral suasion had not curbed a rapid increase in property loans.

Speaking to House of Representatives Commission VII for finance and trade, Soedradjad said Bank Indonesia (BI), the central bank, had tried a moral suasion policy with banks for three years to stop them from giving property loans.

"But at that time people didn't take us seriously," he said.

Last year, BI required banks to submit annual planning reports, which included the amount banks were planning to disburse in loans that year.

"Some people may think this has been ineffective, but the fact is, things could be worse had we not made this stipulation," he said.

He said many banks were still disbursing loans at a rate which exceeded the allowable 20 percent growth a year.

"Our decision to curb property loans is not an unexpected move. Moral suasion just hasn't worked," he said.

BI on Monday issued a decree banning new loans for land acquisition and development by property companies. The ruling, which does not apply to cheap housing projects, is to control the rapid rise in lending to the property sector.

Soedradjad said that at present more than 90 percent of loans to the property sector were well-performing.

"Thus, compared to total loans, property loans performed better," he said.

He said a rapid increase in property loans could endanger banking and monetary stability because the sector was vulnerable to economic change.

He said property sector financing was long-term in nature, but funds were absorbed in the short term.

"Liquidity and market risks faced by the banks providing these loans are relatively high," he said.

He said property loans as a percentage of total loans rose to 19.61 percent in April 1997, from 12.2 percent in December 1992, with commercial private banks posting the highest growth.

Official figures show that bad debts in the property sector rose 39.2 percent to Rp 4.66 trillion (US$1.9 billion) in the first quarter of 1997, over those of last December.

The property sector's cumulative debts as a proportion of total banking credit increased from 18.8 percent at the end of last year to 19.6 percent in the first quarter of 1997.

Bad debts

Cumulative bad debt in the construction sector rose 12.3 percent to Rp 2.35 trillion, while bad debt in the housing sector rose 27.8 percent to Rp 634 billion during that period.

Soedradjad said total bank bad debts as of April were Rp 10.23 trillion, or 2.93 percent of total outstanding loans which stood at Rp 349.77 trillion.

This was higher than the bad debt level recorded in December last year, which was Rp 9.5 trillion or 2.87 percent of the total Rp 331.29 trillion.

"As a percentage of total credits outstanding (2.93 percent), bad debts were fairly small," he said.

Soedradjad said that of the 2,068 big bad debtors to state banks whose cases were being handled by a central bank special credit team, 277 had repaid their debts, 51 were acquired by their creditors, 351 were rescued through loan rescheduling, restructuring and reconditioning, 45 were taken to the State Receivership and 85 were written off.

On BI's monetary policies, Soedradjad said the central bank would continue to act prudently this (1997/1998) fiscal year, despite the fact that inflation rates during the previous fiscal year were kept down to 5.17 percent -- the lowest since 1985/1986.

"This fiscal year, the monetary authorities will maintain monetary aggregates at a level that does not have an upward push on prices and the current account," he said.

He said BI would continue to use open-market operations and moral persuasion as the main instruments to reach the desired level of money supply in broad terms and bank lendings. (pwn)

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