Central Bank upbeat about banks' showing

Central Bank upbeat about banks' showing

Urip Hudiono, The Jakarta Post/Jakarta

Though its stricter bad-loan criteria have had a negative effect
on the banking sector recently, as reflected in the latest
financial performances of several major banks, the central bank
is upbeat this trend will be short-lived and diminish over time
as the economy improves.

Bank Indonesia (BI) director for bank supervision Rusli
Simanjuntak said on Friday the current surge of nonperforming
loans (NPLs) at several banks was just an initial "shock
response" to the central bank's implementation of its new
regulation on bad loans.

"The trend of rising NPLs will hopefully ease within the next
six months, after the banks have adjusted their operations and
administration according to the regulation," he said.

Bad loans at several banks rose significantly after the
central bank issued Bank Indonesia Regulation No. 7/2005 on bad-
loan criteria last month.

Under the regulation, BI has reduced the period that loans can
go without any principal or interest payments before being
classified as nonperforming from nine months to six months.

The central bank's new "one-debtor concept", meanwhile,
stipulates that all loans to borrowers owing money to two or more
banks will be classified as bad should any one of the loans go
into default. It also requires banks to set aside larger reserves
as a safeguard against possible loan defaults, which will likely
eat into profits.

State Bank Mandiri, Indonesia's largest lender by assets,
became the first "victim" of the regulation when it posted a 70
percent fall in profit to Rp 519 billion (some US$53 million)
during this year's first quarter, as its net NPLs jumped to 10.3
percent, far above BI's 5 percent limit.

State Bank Negara Indonesia (BNI) and Bank Rakyat Indonesia
(BRI), the country's third and fourth largest lenders,
respectively, also saw rising NPLs affecting their profits during
the first six months of the year.

BNI's profit fell to Rp 921 billion from Rp 1.55 trillion a
year earlier, as its bad loans rose to 12.98 percent from 6
percent last year -- Rp 5.3 trillion of a total of Rp 7.9
trillion in bad loans resulting from the implementation of BI's
regulation.

BRI similarly had to downgrade Rp 865 billion of its loans,
although its profit still increased slightly.

Rusli said the banking sector's NPL rate would eventually
depend more on the country's economic condition, which would
affect demand for credits and the repayment of loans.

"If the economy is good, the NPL rate will usually be low," he
said. "Likewise, if the economy begins to stutter, so will the
repayment of loans, resulting in higher NPLs."

Indeed, several other banks continued to reap sizable profits
as Indonesia's chugging economy boosted demand for credits.

Bank Danamon, Indonesia's fifth largest lender, posted a net
interest income in the first six months of the year of Rp 2.43
trillion, up from Rp 2.15 trillion in the same period last year.

Similarly, Bank International Indonesia (BII) saw its net
interest income rise to Rp 1.12 trillion from Rp 843.8 billion
last year.