Inflation, rates push bad debts up: BI

Inflation, rates push bad debts up: BI

Urip Hudiono, The Jakarta Post/Jakarta

The recent rise in inflation and interest rates have caused an
increase of bad loans, which are eating away at local banks'
capital, a report from the central bank shows.

The situation has prompted Bank Indonesia (BI) to keep a
closer eye on the unfavorable situation, although it remains
optimistic about the banks' ability to maintain sound performance
for this year.

In its latest assessment on the banking sector, BI noted an
increase in the level of non-performing loans (NPL) of banks
during this year's third quarter, particularly in loans for
investments to the manufacturing sector.

"Although the banks' level of liquidity and capital of banks
are still within safe levels, there is, nevertheless, an increase
in business risks that banks are facing, as reflected in the
declining quality of their loans," BI said in the report.

"Market risks are also on the rise, with the pick-up in
inflation and an ongoing tendency of a rupiah depreciation."

The level of gross NPL of banks from July to September has
reached an average of 8.9 percent, from 7.9 percent the previous
quarter, the central bank recorded, while their net NPL already
stood at 5 percent from 3.7 percent.

With the recent rise in NPL, banks have given up on more
failing loans, hurting their profits and causing their capital
adequacy ratio (CAR) to slump to 18.8 percent, from 19.5 percent
during the second quarter.

BI sets a maximum net NPL of 5 percent and a minimum CAR of 18
percent on all banks operating in the country.

Bad debts are loans that have been in arrears for 180 days,
according to a recently revised BI regulation, which also
requires banks to adopt a uniform, lowest-loan classification
category for debtors with multiple loans from multiple lenders.
The CAR, meanwhile, is a comparison between a bank's capital with
its risk-weighted assets, including loans.

Several major banks -- including Bank Negara Indonesia (BNI),
Bank Rakyat Indonesia (BRI) and Bank Internasional Indonesia
(BII) -- have reported a fall in profits in their third quarter
financial reports.

Bank Mandiri, meanwhile, also suffered in terms of profit as
its NPL rose sharply due to BI's new 180-day loan regulation.

Nevertheless, BI still maintains an upbeat view for the
sector, as bank lending in the first nine months reached Rp 702.2
trillion (US$69.59 billion), up 26.5 percent from Rp 555.1
trillion during the same period last year.

Third-party liabilities of the banks, meanwhile, rose nearly
13 percent to Rp 1.04 quadrillion from Rp 926.4 trillion during
last year's third quarter, putting the banks' collective loan-to-
deposit ratio (LDR) at a current 67.1 percent.

BI had previously estimated that this year's 22 percent
lending growth would be very difficult to achieve due to higher
inflation and interest rates.

Last year, bank loans grew by nearly 25 percent to Rp 595.1
trillion from Rp 477.2 trillion in 2003.

As an incentive for banks to lend more, the central bank said
it would raise its interest rates for the banks' minimum reserve
at BI to 6.5 percent by December, although it would maintain its
high key interest rate -- presently at 12.25 percent -- for the
sake of macroeconomic stability.