Modified soundness rules to boost prudence banking

JAKARTA (JP): The newly introduced banking soundness rating system will not disrupt most commercial banks' performance but will encourage them to practice prudent banking, experts said.

Mirza Adityaswara from BZW Niaga Securities and Al Njoo of publicly listed Bank Papan Sejahtera said the new regulation would not negatively affect most listed banks.

They said most listed banks met all the soundness criteria set by the central bank.

"The change in the loan to deposit ratio (LDR) criteria, however, will have a slight affect on some of the smaller listed banks," Mirza said.

Bank Indonesia, the central bank, recently modified bank soundness rating rules in a bid to improve the health of the country's 239 commercial banks.

The rules focus on capital adequacy ratio (CAR, 25 percent weighting), asset quality ratio (30 percent weighting), management (25 percent weighting), earnings (10 percent weighting) and liquidity (10 percent weighting), these are better known as CAMEL ratios. The rules also consider legal lending limits and net open position on foreign exchange.

Banks that meet all the CAMEL requirements will be given 100 points. And each CAMEL ratio is a maximum 100 points. Each CAMEL ratio score is then multiplied by its weighting to arrive at the total CAMEL score.

Some points may be deducted should a bank violate legal lending limits and net open position.

A bank which achieves 81 points to 100 points is classified sound, while those which achieve 66 points to 80 points, 51 points to 65 points and nil to 50 points are classified moderately sound, less sound and unsound or unhealthy respectively.

Al Njoo said most listed banks would have no problems with the central bank's tighter rules on CAR, 8 percent now and 12 percent by year 2000.

"I don't see any difficulties for listed banks in terms of CAR," Al Njoo said. He said Bank Papan had recorded CAR of just over 12 percent.

Mirza said all the listed banks had a CAR of above 9 percent.

Some of them had even recorded CAR of over 12 percent; they are state-owned Bank Negara Indonesia 1946 (12.2 percent), Bank International Indonesia (14.8 percent), BDNI (13.3 percent), Bank Lippo (13.3 percent), Bank Bali (12.1 percent), Bank Panin (14.5 percent) and Bank Bira (14.3 percent).

The new rules stipulate that banks must have CAR of 8 percent or they will be classified less sound in the capital requirements section of the rules.

Banks were given 65 to 79 points in the past if they had a CAR of between 6.5 percent and 7.9 percent. The new rules say a CAR of 7.9 percent will be given only 65 points.

On asset quality ratio, Mirza said he was disappointed by the change in the allowance for loan losses to total non performing loans (NPL) because the required allowance was not made public.

"Furthermore, an outsider's attempt to accurately calculate the allowance is fraught with difficulty, particularly if the value of collateral continues to be used in its calculation," Mirza said.

The new rules still use two ratios to score asset quality. They are total NPL to earning assets (25 percent weighting) and allowance for loan losses to total NPL (5 percent weighting).

However, the central bank did not make any change to the tolerable limits for determining how many points are awarded under the total NPL to earning assets.

Banks with NPL of one percent or less will continue to get 100 points while those with NPL of 15.5 percent or more will not get any points.

"We consider 15.5 percent too lax," Mirza said.

In terms of liquidity ratio, Mirza said most banks would have no problem achieving an LDR of 90 percent to get full points. Only smaller banks would have to adjust third party funds lending.

But he said banks should not force themselves to comply with the LDR at the expense of worsening profitability because LDR is only weighted 5 percent.

Generally, a bank with a high LDR will have relatively little in the way of liquid assets. Such a bank will generally have higher profit as it places most of its earning assets in loans which typically produce a higher yield than liquid assets.

International LDR, established by the Bank of International Settlement, is calculated by using straight loans divided by third party deposits (demand, savings and time deposits).

In Indonesia, however, the central bank allows banks to include shareholders' and borrowed funds with a maturity of beyond three months in the denominator of the LDR calculation. Listed banks will have no difficulty achieving the statutory LDR of 90 percent. (rid)

Table: Basic statistics of Listed Banks

Banks CAR LDR

(March 97) (March 97) ------------------------------ BNI 12.2 83.7 Danamon 9.5 81.4 BII 14.8 n.a. BDNI 13.3 86.8 Lippo 13.3 76.0 Bali 12.1 n.a. Niaga 11.5 89.5 Panin 14.5 64.9 Bira 14.3 90.2 Modern 12.0 85.5 Tiara 11.1 96.4

Source: PT BZW Niaga Securities