Sat, 30 Nov 2002

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.