BI to accelerate loan cleanup

BI to accelerate loan cleanup

Soraya Permatasari and Arijit Ghosh, Bloomberg/Jakarta

Indonesia's central bank will inspect the nation's commercial
lenders to ensure they address their bad loans, accelerating a
cleanup of the US$132 billion industry.

PT Bank Mandiri, the biggest lender, reclassified its loans
after the regulator conducted an audit, central bank spokesman
Halim Alamsyah said on June 7. The bank's bad-loan ratio surged
more than twofold and provisions tripled.

"We will also do that to other banks," the spokesman said. "We
can conduct on-site inspections to see if they have complied with
the regulations." Alamsyah declined to specify a date for the
start of the drive because the central bank wants to retain an
element of surprise about the inspections.

Indonesia is tightening lending rules as it tries to improve
transparency and sell bank stakes to recoup Rp 450 trillion
($47 billion) spent to bail out lenders after the 1997 Asian
financial crisis. This may drive up bad-loan ratios and force
banks to increase provisions, halting an earnings rebound,
analysts such as Made Aditya Wardhana said.

"This will result in some banks slashing their earnings." said
Wardhana, an analyst at G.K. Goh Stockbroker Pte in Jakarta.
Banks may have to cut their lending targets as a result, he said.

Bank Indonesia is requiring banks to classify as a loan loss
any loan on which no principal or interest has been paid for 180
days, reducing the period from 270 days, central bank Deputy
Governor Maman Somantri said.

Loans to a borrower owing money to two or more banks will all
be considered bad should just one go into default, Somantri said
in a June 3 interview. Bad loans made up about 7.3 percent of
total bank credits in Indonesia as of May, an increase from 5.7
percent in April, Alamsyah said.

Indonesia is establishing a database to allow banks to share
credit information about customers. The system will be expanded
into a credit bureau similar to TransUnion LLC and Equifax Inc.
in the U.S., Somantri said.

At PT Bank Negara, Indonesia's No. 3 lender, the bad-loan
ratio may rise to more than 6 percent from 5.5 percent, President
Sigit Pramono said. The bank needs to reclassify as non-
performing a loan to pulp and paper maker Raja Garuda Mas Group,
which defaulted on a payment to another bank, he said.

At PT Bank Niaga, the eighth-largest lender, the net non-
performing loan ratio, which excludes the value of collateral
pledged against bad assets, may rise to more than 5 percent from
2.2 percent, President Peter B. Stok said.

The central bank's tougher stance comes after Indonesian banks
set higher lending targets for 2005 because of an improving
economy. The nation's $258 billion economy is forecast to expand
6 percent, the most in nine years, spurred by investment and
consumer spending.

Bank earnings rebounded last year together with the economy.
Indonesian banks had a combined profit of Rp 14.9 trillion in
2004, compared with a loss of Rp 2.4 trillion in 2000.

"Theoretically, asset quality should be improving at this
stage of the economic cycle but it is clouded by new regulatory
requirements," said Alan Richardson, who helps manage $2.8
billion at Baring Asset Management in Hong Kong.

Bank Mandiri's bad loans surged to 17.8 percent of total
lending in the three months ended March 31 from 7.1 percent at
the end of December. The surge reflected the central bank "audit
and qualitative adjustments," Jonathan Zax, head of investor
relations at the lender, said.

Mandiri said May 30 first-quarter profit plunged 70 percent to
Rp 519 billion. Bad-loan provisions tripled to Rp 763 billion
from a year earlier.

The Attorney-General's Office is probing more than Rp 1
trillion of loans at Mandiri, where the net bad-loan ratio is
almost 11 percent, more than twice the 5 percent limit stipulated
by the central bank.

Mandiri shares declined 22 percent this year, compared with a
10 percent gain in the benchmark Jakarta Composite Index. Bank
Negara, which has risen 1.5 percent this year, fell 1.7 percent
to Rp 1,700 at the close of trading in Jakarta today. Bank Niaga
fell 1.1 percent to Rp 455.

"Investors may as well stay away from the sector for now,"
said Ferry Yosia Hartoyo, an analyst at DBS Vickers Securities in
Jakarta.

Indonesia has been trying to catch up with Southeast Asian
countries such as Thailand and Malaysia, which acted faster to
fix their banks, encouraging mergers and acquisitions to help
them gain size and strength.

Indonesia has 133 banks. In Malaysia, 54 banks combined into
10 after the Asian crisis and in Thailand the number of lenders
fell to 12 from 16.

With the tightening of loan-quality rules, "banks in Indonesia
are reporting under a harsher regime than banks in Thailand or
Malaysia," said Peter Tebbutt, a senior director for bank ratings
at Fitch. With more banks to regulate, "the quality of
supervision and strictness of enforcement is not as good as in
Malaysia and Thailand."