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)