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.