BI warns of an increase in NPLs

Dadan Wijaksana, Jakarta

The central bank announced on Wednesday a decline in the banking sector's non-performing loans (NPLs) in March, but warned of a rise in months to come.

Bank Indonesia deputy governor Maman Sumantri said in March, the NPL level (gross) stood at 7.8 percent compared to February's 8.2 percent.

However, Maman said the NPL figure was likely to rise in the months ahead as some loans acquired by banks from the now-defunct Indonesian Bank Restructuring Agency (IBRA) had shown indications of turning sour.

"The indication is that the (number of) NPLs will rise. One of the reasons is the loans from the IBRA, some of which had yet to be fully restructured, which downgrade their quality," he said, adding the higher NPL would force the banks to set aside more previsionary funds.

During almost six years of operation, the recently closed IBRA sold trillions of rupiah worth of credits it took over from the banking sector during the banking crisis in the late 1990s, to offset the government's huge bank bail-out program.

The IBRA restructured the loan assets and sold them back to the banking industry.

However, some of the loans were not properly restructured, leaving the current creditors bearing the brunt of the non- performing debts.

Under banking regulations, a loan is considered non-performing if its interest payments are 90 days overdue.

Maman did not predict how high the NPLs would rise, as the bank was still gathering data on the loans.

"But, we'll keep a close eye on those banks holding such credits," he said.

A high ratio of NPLs will weigh in on a bank's financial showing, notably affecting its capital adequacy ratio (CAR), as it forces the bank to set aside previsionary funds, which in turn affect its capital condition.

CAR measures a bank's capital against risk-weighted assets, including loans.

Bank Indonesia requires banks to have a minimum CAR level of 8 percent.