BI plans to relax rulings to boost bank lending

JAKARTA (JP): Bank Indonesia (BI) plans to temporarily relax certain bank rulings in a bid to encourage banks to lend more money to the real sector (ie. industry, manufacturing, etc.), according to BI Director for Research and Regulation Djoko Sarwono.

Djoko said that despite completion of the government's costly bank recapitalization program, bank lending had been relatively small.

"We are preparing several measures to push banks to lend more money to the real sector," he told a news briefing on Friday.

He pointed out as an example that BI would relax the rigid criteria used in loan classification.

He said that currently, loan classification is based on three criteria: repayment ability, business prospects, and financial condition of the debtors.

But Djoko said that BI was planning to "lower the stringency" of the last two criteria "temporarily" to encourage new bank lending.

"This is one of the measures being prepared by BI. We'll issue a new ruling," he said.

Bank loans are classified as performing, special mention, sub- standard, doubtful and non-performing. Banks do not have to provide provision for performing loans, but do have to make huge provision for non-performing loans.

Banks have been discouraged from lending to the real sector partly due to concern that the loans could easily fall into the non-performing category under the rigid loan classification criteria. Amid the current economic problems, prospects for the business sector in general are not bright and the financial condition of many corporations is generally weak, due to slow progress in the corporate debt restructuring program.

Making provision for loans beneath the performing category could potentially erode the banks' capital adequacy ratio (CAR).

Banks must meet a minimum 8 percent CAR requirement by the end of this year or risk closure.

But with the temporary respite to be given by BI, banks are expected to resume new lending to the real sector to help accelerate the country's economic recovery.

Despite the completion of the government-sponsored Rp 430 trillion (US$40 billion) bank recapitalization program last year, banks have yet to resume significantly their intermediary function.

Djoko said that bank lending at the end of February increased only by Rp 6.4 trillion or 2 percent to Rp 328.6 trillion, from Rp 320.4 trillion at the end of last year.

He said that of the Rp 6.4 trillion growth, Rp 5.8 trillion was new lending.

"The Rp 6.4 trillion increase is really small compared with the more than Rp 721 trillion in third party funds," he said.

Djoko said that the central bank was also planning to automatically give performing status to bank loans channeled as working capital to indebted companies which had just completed a debt restructuring process.

"Without new working capital, the debt restructuring won't work," he said.

Djoko also said that the central bank could not fulfill the demand of the Indonesian Bank Restructuring Agency (IBRA) to automatically give performing status to bank non-performing loans which had been restructured by the agency.

Djoko said that the definition of restructuring was relatively loose, involving around 19 steps, starting from a memorandum of understanding to final credit agreement.

He said that the best BI could do was to give the restructured debtor a repayment "test period."

If the debtor can make three consecutive debt installments without disruption after the restructuring deal, BI would automatically give performing status to the loan.

IBRA has demanded the special favor as some banks have expressed interest in purchasing a huge amount of bank non- performing loans (NPLs) which had been restructured by the agency, as long as BI gives performing status to the loan.

Djoko said that BI would fulfill such a demand only if the government guarantees the restructured loan.

IBRA controls more than Rp 260 trillion worth of NPLs. The agency is mandated to restructure the loans in order to sell some of them back to the banking sector to raise cash that can help finance the state budget deficit.(rei)