Central Bank set to ease credit limit for infrastructure projects

Urip Hudiono, The Jakarta Post/Jakarta

To support the government's plan of reviving the economy through massive infrastructure projects, the central bank will issue a new set of banking rulings for the purposes, including an easing of the legal lending limit requirements.

BI governor Burhanuddin Abdullah said on Friday that the new credit limit regulation will relax the maximum allowable lending for banks for one particular project or sector; up to 30 percent of its capital, from the current 20 percent.

"Such leniency will be given to those banks -- particularly state-owned ones -- that channel their credit into infrastructure development projects, or any other government project intended to spur the economy," he said.

"The credit limit for such banks will be raised to between 25 percent and 30 percent, depending on their classification as specified later in the regulations."

The regulations would serve only as a stimulant and not as a way to burden banks to participate in the infrastructure projects.

Burhanuddin said he was hopeful that the new regulations would be able to increase bank lending by more than Rp 100 trillion (US$11 billion) this year.

Indonesia is preparing itself for massive infrastructure projects over the next five years in order to boost average economic growth to at least 6 percent.

Many large banks such Bank Mandiri and Bank Negara Indonesia (BNI), have expressed their interest in the projects. BNI, for instance, has said that it plans to allocate Rp 23 trillion (US$2.5 billion) for infrastructure project loans over the next five years.

Elsewhere, Burhanuddin said that the new regulation package, to be issued later this month, will also provide a more flexible credit assessment procedure, but without putting protection measures for customers at risk.

Neither would the slackening of credit limits jeopardize the hard-earned stability of the banking sector, as the central bank would accordingly tighten supervisory mechanisms on each bank's credit disbursement procedures.

Burhanuddin cited a number of measures that are already in place to gauge a bank's health, in terms of financial and lending performance.

"There is a strict requirement in terms of minimum capital and bad credits, as well as others, all designed to preserve the level of credits at a healthy level," he added.

The central bank has set a minimum capital adequacy ratio (CAR) of 8 percent and a maximum non-performing loans (NPL) ratio of 5 percent of total credit. CAR measures a bank's capital with its risk-weighted assets including loans, while loans are classified as non-performing after interest payments are 90 days overdue.

During the 1997-1998 Asian financial crisis, Indonesia's economy was hit hard by the collapse of many banks that had failed to implement prudent banking practices in their operations.

Seven years after the crisis, the nation's banking sector has improved and become relatively more prudent compared to the pre- crisis situation.

Still, flaws remain in the industry, attributable to a combination of bad banking practices and weak supervision on the part of the central bank.

Over the past two years alone, the country has seen at least three bank closures -- the latest being Bank Global, which was closed down on Thursday.