Local banks report better performance

JAKARTA (JP): The condition of Indonesia's banking industry continues to improve, with most banks reporting better performances in March, according to Bank Indonesia.

Djoko Sarwono, the director for banking research and regulation at the central bank, said here on Wednesday that most of the country's banks booked wider positive spreads and a larger pretax profit during the month.

The improvement of the country's banking sector was also reflected by the fall in their non-performing loans (NPLs) and the increased net equity positions.

"But the amount of new loans was still very small," Djoko added.

Djoko said interest spreads in domestic banks increased to 14 percent in March from 8 percent in February, a good step towards a return to profitability.

Spread is the difference between net interest income and net interest expense.

"The better performance was paralleled by improved public confidence in the domestic banking sector," Djoko told a press conference.

The improved public confidence, Djoko said, was reflected in the increase in third party deposits at domestic banks to Rp 705.7 trillion (US$87 billion) as of March 31, compared to Rp 690.8 trillion in the previous month.

In the same period, pretax profit increased to Rp 2.2 trillion from Rp 700 billion.

With such performance, domestic banks managed to improve their net equity positions to negative Rp 32.8 trillion in March from negative Rp 38.9 trillion the previous month.

Djoko warned that although the banks continued to improve, their loan portfolios were still not expanding.

"New loans reached only Rp 258 billion during March, compared to Rp 280.3 billion in February," he said.

Total outstanding loans were actually down to Rp 268.7 trillion in March from Rp 280.3 trillion.

Bank Indonesia reports showed that bank funds parked in Bank Indonesia's debt papers (certificates) rose to Rp 91.8 trillion in March from Rp 90.7 trillion in February.

The decrease in the outstanding loans was attributed mainly to writing-off of some loans from banks in the restructuring program of the Indonesian Bank Restructuring Agency (IBRA).

The slow growth of new loans was partly because many banks are still consolidating, thus, being very careful in extending new loans.

"Domestic banks preferred to lend to other banks and invest in government short term certificates of deposit (SBI's) rather than to the real sector," he said.

In the interbank money market, the overnight interbank rate rose slightly to 9.6 percent from 9.5 percent as Bank Indonesia absorbed Rp 17 trillion in one-month Sertifikat Bank Indonesia notes at higher rates of 10.91 percent, as against 10.88 percent last week.

Bank Indonesia said it also auctioned Rp 8 trillion in three- month SBI notes, above its target of Rp 7 trillion, at a rate of 10.91 percent, down slightly from 10.93 percent last week.

Debt restructuring

Besides, he said, vast amounts of domestic debts are not yet restructured, making the real sector, in general, unprepared to receive loans.

"Debt restructuring is the key to the full recovery of the real sector," he said.

He said that because of such unsolved problems, the intermediary role of domestic banks was not functioning well.

BI has worked in a joint force with IBRA, the Indonesian Debt Restructuring Agency (INDRA) and Jakarta Initiative Task Force (JITF) to intensify domestic debt restructuring efforts.

"The joint force will soon sign debt restructuring agreements with four corporations worth a total of US$1.5 billion," he said.

In the face of this good news, the rupiah has continued its recent declines. After hitting an intraday high of IDR 8,210, the dollar was trading at IDR 8,185, compared with its close Tuesday at IDR 8,070. Regarding the stumbling rupiah, BI's senior deputy governor Anwar Nasution said BI would intervene in the market to support the local currency.

"It is not right that BI do nothing to defend the rupiah's fall. We will intervene; BI is capable financially," he said.

"We have ample foreign exchange reserves. We will do it (intervening) accordingly," he added.

However, Anwar said the rupiah would strengthen by early June when Indonesia signed the next Letter of Intent (LoI) with the International Monetary Fund (IMF).

Signing of the LoI will effect release of the suspended IMF loans to the country and fulfill the conditions set by the Paris Club lender countries for Indonesia's debt rescheduling.

The Paris Club agreed last month to reschedule $5.8 billion in Indonesia's sovereign debt, subject to IMF endorsement.

Anwar said the rescheduling would reduce the demand for dollars in the domestic market, giving a positive impact to the rupiah against the U.S. dollar.

However, Anwar declined to forecast the level of the rupiah against the greenback during the period following the signing of the LoI. (udi)