BI delays 5% NPL ratio requirement

BI delays 5% NPL ratio requirement

The Jakarta Post, Jakarta

Bank Indonesia said on Wednesday it had delayed for six months a
ruling requiring banks to limit their nonperforming loan (NPL)
ratio to a maximum of 5 percent partly due to the impact of the
Bali bombings.

Sjahril Sabirin, the central bank governor, claimed that the
bombing incident had affected certain businesses, which in turn
increased the risk of bank loans turning sour.

"The application of the ruling is delayed for six months,"
Sjahril said as reported by Antara.

"We do not have the numbers, but we think many local banks
have been negatively affected because the Bali incident has had
an impact on plenty of customers (borrowers), including those
local banks," he said, adding that the highest risk would come
from loans related to the tourist sector.

Bali is the country's most famous tourist destination and its
economy is highly dependent on tourism.

This is the second delay since last year. The ruling was
initially scheduled to take effect before the end of last year,
but was then postponed to end of 2002 because of the country's
adverse economic situation at the time.

The NPL ratio measures a comparison between a bank's loans
that have turned bad with its total loans exposure. A loan is
declared nonperforming if the borrower fails to pay interest in
three successive months.

Currently, the NPL ratio among local banks averages 10.4
percent.

If a bank fails to cut down its NPL ratio to below 5 percent
by the deadline, the central bank will install its staff to
supervise the bank to reduce the NPL.

A high NPL, a legacy from the 1997 financial crisis, can be
lowered either by restructuring the bad loans and turning them
into performing loans, or by increasing the overall size of a
bank's loan portfolio.

A high NPL ratio in a bank would weigh in on its capital
adequacy ratio (CAR), a measure commonly used to gauge a bank's
financial health.

Banks must have a minimum CAR level of 8 percent. There are
plans to introduce a higher 12 percent minimum CAR requirement.