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."