BI requires bank NPL ratio of 5% by year-end

The Jakarta Post, Jakarta

Bank Indonesia has required all banks to reduce their nonperforming loan (NPL) ratio to at least 5 percent by the end of this year, central bank Governor Sjahril Sabirin said on Friday.

"The net NPL target for banks is a maximum 5 percent by the end of this year," he told reporters.

He said that for those that could not meet the requirement, the central bank would take certain "measures." He declined to elaborate.

He explained that on a net basis, many domestic banks had managed to lower their NPL ratio to below the 5 percent level.

The local banking industry had been plagued by a huge amount of bad debts following the late 1990s financial crisis. The surge in the size of NPLs was due either to the sharp plunge in the value of the rupiah against the U.S. dollar or bad lending practices.

The depreciation of the rupiah inflated the rupiah value of dollar-based loans.

But experts have said that the massive NPL problem was mainly due to poor lending practices. It has been revealed that top local banks channeled most of their money to affiliated businesses or companies with strong political connections, without applying any proper credit risk assessment.

Although the government, via the Indonesian Bank Restructuring Agency (IBRA), took over most of the bad debts in the wake of the crisis, the remaining loans held by the banks turned sour and become nonperforming, as the overall state of the economy remained in a crisis.

Banks must speed up measures to restructure these loans so that their NPL levels may be lowered. Another step is to establish cash provisions in the event of loan repayment default.

The NPL problem is one of the few remaining vestiges of the 1997-98 Asian financial crisis, which crippled banking system in the country.

A high NPL ratio could create new risk for banks struggling to maintain the central bank's 8 percent minimum capital adequacy ratio (CAR) requirement.

The CAR is the ratio between a bank's capital and its risk- weighted assets including loans, and is deemed to be a vital ingredient to gauge its financial health.

A rise in a bank's NPL ratio implies it faces a higher risk, which could translate into a lower CAR level if the bank fails to offset the new risks with additional capital.