BI may again postpone 5% NPL requirement

BI may again postpone 5% NPL requirement

The Jakarta Post, Jakarta

Bank Indonesia said on Friday it was considering delaying for
a second time a ruling restricting the ratio of local banks'
nonperforming loans (NPL) to a maximum of 5 percent by the end of
this year, citing a prolonged slump in the banking sector.

BI Governor Sjahril Sabirin said the central bank was
reviewing the ruling, and suggested that a delay was likely as
most banks had yet to meet the NPL target.

"We're thinking about it. There will soon be an official
announcement about this," Sjahril said.

The NPL ratio measures a bank's nonperforming loans against
its total loan portfolio. Nonperforming loans are loans on which
interest payments are late by more than 90 days. Currently, the
NPL ratio among local banks averages 10.4 percent.

Last September, Sjahril said he told banks to lower their NPL
ratio to 5 percent by the end of this year or face "measures",
which he did not elaborate on.

This would be the second delay of the ruling since last year.
Banks were told to achieve a 5 percent NPL ratio by the end of
2001, but Bank Indonesia issued a postponement because of the
adverse economic situation.

Political instability in the months ahead of former president
Abdurrahman Wahid's ouster and the Sept. 11 terrorist strikes in
the United States cast a pall over the local banking sector last
year.

Bank Indonesia considering a second delay of the plan
underscores the continued adverse conditions in which banks here
are operating.

Local banks took up the bad loans mainly during the 1997
economic crisis. Most of these bad loans were transferred to the
Indonesian Bank Restructuring Agency (IBRA) and replaced with
government bonds, known as recapitalization bonds. They amounted
to some Rp 430 trillion (about US$47 billion).

Still, a large cache of nonperforming loans were left on the
banks' balance sheets, while other loans turned bad in the
ensuing years.

The NPL ratio can be lowered either by restructuring bad loans
and turning them into performing loans, or by increasing the
overall size of a bank's loan portfolio.

But restructuring talks are progressing slowly. And some
analysts have warned of "cosmetic" debt restructuring deals that
focus on rescheduling payments or adjusting interest rates
without dealing with the management problems that made companies
vulnerable to default in the first place.

On the lending side, banking analysts have noted a slight
upturn in banks' lending activities as borrowers take advantage
of lower interest rates.

With tighter credit policies since the economic crisis, this
uptick in lending sparked hope banks could lower their NPL ratios
by increasing the size of their loan portfolios.

However, the central bank noted that the rise in loans was
marginal, indicating that the private sector was not yet ready to
take up new loans.

Sjahril said the possibility of delaying the 5 percent NPL
ratio target arose after the Oct. 12 Bali bombing further eroded
what was left of the country's fragile business confidence.

He said the incident had heightened the risk of loans turning
bad, particularly loans related to the tourist sector.

But Sjahril did say the banking industry was improving, albeit
slowly. He said several local banks, with certain conditions
taken into account, had managed to lower their NPL ratios to
below 5 percent.

The central bank has also issued a new ruling restricting the
amount of non-restructured loans banks can purchase under IBRA's
massive asset sales program.