Local banks may face huge derivative losses

Local banks may face huge derivative losses

JAKARTA (JP): The sharp plunge in the rupiah's value
represents a "time bomb" for Indonesia's banking sector which is
bloated by a much larger overseas obligation than what has
officially been reported, according to Bank Niaga director Arwin
Rasyid.

In addition to the government figure of US$14.23 billion in
financial obligations to overseas institutions, banks are
believed to be engaged in $20 billion worth of forward contracts.

"This could be a time bomb," Arwin told a seminar on foreign
exchange management at Mercu Buana University yesterday.

Arwin said the official figure of financial institutions'
offshore debts might only account for trade-related financing and
not include other types of overseas obligations including
derivatives and syndicated loans.

A central bank deputy director, Hartadi A. Sarwono, who also
spoke at the seminar, declined to either confirm or deny Arwin's
statement.

Arwin said the sharp plunge in the rupiah to an unexpected and
unbelievable level of between 7,000 and 17,000 to the U.S. dollar
had created large foreign exchange losses for banks which sold
forward dollars at much lower levels.

He did not detail which banks had entered into forward
contracts, at what maturity or level.

However, some chief bank dealers said several large banks,
especially state banks, with backing from Bank Indonesia, had
entered into forward contracts in August, September and October
in an effort to arrest the fall of the rupiah.

Bank Indonesia once acknowledged that the central bank
intervened not only in the spot market but also in the swap and
forward market to influence the direction of the rupiah's
exchange rate.

The dealers said some banks had even sold one-month to three-
month forward dollars at below 3,000 levels.

Early last month, the banking community was shocked by an
acknowledgement from state Bank Ekspor Impor Indonesia (Bank
Exim) that it was facing large potential losses from its forward
foreign exchange deals, in which the bank had contracted to sell
a total of $2.2 billion at an exchange rate of Rp 2,725.

Since July the rupiah has been on a roller-coaster ride,
plunging to its lowest level of Rp 17,000 to the dollar and is
currently hovering between Rp 9,000 and Rp 8,000, compared to Rp
2,450 in July.

Arwin said the sharp plunge in the rupiah had not only created
large foreign exchange losses, but also pushed down banks' net-
interest income and fee-based income.

"This will eventually send all the CAMEL components into
negative territory," he said, adding that it would only be a
matter of time before all domestic banks were categorized as not
healthy.

CAMEL is an acronym for capital, assets, management, earnings,
and liquidity, which are the criteria for assessing the condition
of banks.

Besides the plunging rupiah, Arwin said banks were also
penalized by the soaring interest rates.

The high interest rate environment which began in August when
Bank Indonesia raised its short-term promissory notes (SBI) rates
to as high as 30 percent had cut down net-interest income as
banking credit became expensive and less attractive, he said.

The further upward movement in SBI rates to as high as 45
percent, introduced last month, had only increased funding costs
for the banks as they stopped all kinds of credits since late
last year.

The weakening rupiah and soaring rates have also increased
banks' bad loans. Corporations, especially those with foreign
debts, suffered serious cash-flow problems and, therefore, they
could no longer service their debts even to local banks.

Increasing bad loans have cut into banks' capital.

Banks which could not get fresh funds from their non-
performing debtors had to allocate more provisions for the
multiplying bad loans.

"Total bad loans for the banking sector could be about 10 to
15 percent of outstanding credit," he said, adding that many
debtors have started neglecting their obligations since December,
when rupiah started to cross the 5,000 level.

The value of loans, especially dollar-denominated loans, have
expanded in rupiah terms because of the strengthening dollar.
This has only added to the amount of bad debts and decreased the
value of the banks' assets.

"All these factors have drained the banks liquidity," Arwin
said. (08)