Nonperforming loans soar to 25%

Nonperforming loans soar to 25%

JAKARTA (JP): Banks' nonperforming loans at the end of April
jumped to 25 percent of outstanding credit from 10 percent at the
end of April last year due to the monetary crisis, Bank Indonesia
Governor Sjahril Sabirin said yesterday.

"The credit collectibility declined significantly compared to
the level in the previous years," he told House of
Representatives (DPR) Commission VIII for finance, the budget and
research and technology at a hearing on the central bank's
monetary policy to cope with the current crisis.

He said that bad debts as of April this year were 3 percent of
the outstanding loans, compared to 2.93 percent of outstanding
loans of Rp 349.77 trillion in the same period in 1997.

Doubtful loans were 4 percent, under-performing credits 7
percent and specially mentioned credits 11 percent, he added.

He said the low rate of credit collectibility might further
decline due to the deteriorating economic situation, meaning that
nonperforming loans would soar further.

"BI has yet to make a further investigation into nonperforming
loans."

He explained that a preliminary survey of 60 commercial banks
showed there were some which had a low level of collectibility
and several others which had an above-average level.

He explained that loans with a poor collectibility rate were
caused by the lack of prudential lending practices and huge
foreign exchange losses.

The lower credit collectibility was also caused by the central
bank's new nonperforming loan categories, which since March had
been broadened to five categories.

Indonesia's banking sector is currently mired in its worst
ever crisis, with confidence at its lowest ebb. This has forced
the central bank to inject more than Rp 130 trillion in liquidity
support into banks whose depositors have panicked and rushed for
their savings.

Guarantee

Sjahril stressed the government's blanket guarantee on
depositor money would be maintained.

He also ruled out the possibility of stopping liquidity
injections into troubled banks as this would be a disaster for
the overall banking system amid the crisis of confidence in the
banking industry.

He, however, stressed that the liquidity facility was linked
to punitively high interest rates, pointing out that credits to
cover up banks' depleting minimum reserve requirement were
subject to an interest rate of 150 percent of the average Jakarta
Interbank Offering Rate (JIBOR) overnight rates on the first day,
and 500 percent of the JIBOR rates on the following days.

"The higher rates will discourage banks from using the credit
for expanding their business and encourage them to find
alternative sources before coming to BI for new funds," he said.

He also said that because the facility was an ordinary credit
it was secured with the bank's assets as collateral and the
owner's personal guarantee.

He said the central bank's main priority was to curb inflation
and stabilize the rupiah's exchange rate against the U.S. dollar
by maintaining its high interest rate policy.

"I'm certain that if the interest rate is reduced now, the
rupiah will fall further," he said.

BI director Miranda Gultom said that in view of the stronger
pressures from an expansionary fiscal policy, the country's
monetary side must be tightened to fight inflation and stabilize
the rupiah.

The government has promised to continue subsidies for fuel,
electricity, rice, soybeans and wheatflour to prevent social
unrest amid most people's collapsing purchasing power.

"Given the expectation of high inflation, people will rush to
buy goods and dollars to hedge their money, if the interest rates
are reduced. This is not good for both inflation and the rupiah,"
Miranda said.

Despite the explanation, the central bank failed to get House
support for its high interest rate policy.

In a meeting with banking associations on Monday, the DPR
agreed to their call for a reduction in the central bank's
benchmark interest rates which are currently as high as 58
percent.

"We persist with our demand for lower interest rates," said
legislator Indra Bambang Utoyo, who chaired yesterday's meeting.

The DPR argued that the high interest rate policy was no
longer effective in stabilizing the rupiah but was instead
killing the retail sector, driving more businesses into
bankruptcy and creating more unemployment.

The rupiah closed yesterday at about Rp 15,000 to the dollar,
compared to Rp 2,450 in July before the crisis started. (rei)