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)