Many ailing banks may soon be in the black

Many ailing banks may soon be in the black

JAKARTA (JP): Bank Indonesia director Subarjo Joyosumarto
estimated on Monday that most of the country's ailing banks would
be back in the black by the end of this month in line with the
declining trend in interest rates.

Subarjo said the decline in interest rates on time deposits
would allow banks to charge higher rates on their loans, putting
their lending operations back in the black.

He said lending rates charged by local banks were previously
much lower than those offered to depositors, leading most of them
to financial problems.

"We expect banks will have a positive spread again by the end
of this month," he told reporters on the sidelines of a seminar
on the country's economic prospects.

Subarjo projected time deposit rates would decrease to below
30 percent by the end of this month from the current level of
more than 31 percent.

He said that at present most of the country's banks suffered a
negative spread in their lending operations because the current
lending rate of 30 percent was still lower than that charged to
borrowers.

The country's banking industry has suffered since early 1998
from negative spread, which contributed to the deterioration of
banks' capital conditions.

The government closed down in March 38 banks which had capital
adequacy ratios (CARs) of below minus 25 percent or those which
failed to join the government bank recapitalization program.

Solving the negative spread problem was important to ensuring
the success of the costly bank recapitalization program to
prevent further deterioration in the CARs of recapitalized banks.

The central bank has allowed domestic interest rates to go
down without threatening the rupiah's exchange rate, particularly
on the back of the declining trend in inflation.

The benchmark interest rate of Bank Indonesia one-month
promissory notes (SBIs) is currently at 31.47 percent compared to
36.50 percent in January and as high as 70 percent last year.

Subarjo expected interest rates go below 30 percent this month
and to be about 20 percent to 25 percent toward the end of this
year.

Experts and bankers, however, doubt that there will be a turn
around in the banking industry despite the anticipated lower
interest rate environment.

Senior banker Rijanto Sastroatmodjo, however, said that
although time deposit rates may continue to decline, banks could
not enjoy any gains because lending rates were still too high for
most companies in the real sector.

"If banks can get half of the interest rate revenue, we'll be
happy. But we have to be realistic," he said, pointing out that
the level of nonperforming loans would remain high until a
restructuring solution had been reached and the macroeconomy
stabilizes.

Subarjo was optimistic that the recent signs of improvement in
macroeconomic indicators would provide a strong basis for the
rupiah to stabilize at 6,500 to 7,000 to the U.S. dollar. The
rupiah was quoted at 7,780 for one American dollar. on Monday

Tony Prasetiantono, an economist from Gadjah Mada University,
however, said the recent strengthening of economic indicators and
the local currency was artificial in nature.

"A two-month positive development (in economic indicators)
isn't enough," he said.

"I think many are still in a wait-and-see position," he said,
pointing out that people were still looking at developments with
the government bank recapitalization program, private sector
domestic and overseas debt workout, and the general election.

He also said the recent inflow of foreign funds was not a
definite indication that confidence had returned as most of the
funds entered indirect investment through the stock market, which
was very volatile.

"This (stock market investment) is artificial. A more
fundamental approach would be if we could attract more foreign
direct investments," he said. (rei)