NPL Ruling to be Implemented in June
Dadan Wijaksana, The Jakarta Post, Jakarta
Bank Indonesia said on Friday it would move ahead with its plans to implement a regulation, starting next month, that requires banks to reduce their non-performing loans (NPLs) to a maximum of 5 percent of outstanding liabilities.
Sjahril Sabirin, the central bank governor, told reporters he was optimistic that banks could meet the new requirement.
"The progress is okay so far. There are some banks that will have difficulties, but I think most banks can make it (the requirement)," said Sjahril, adding that on a net basis, many banks had managed to lower their NPL ratio to below the 5 percent level.
The NPL ratio measures a bank's non-performing loans, those which are more than 90 days in arrears, against its total amount of loans outstanding.
Currently, the banking industry still has a huge amount of bad debt, widely regarded as a legacy from the late 1990s financial crisis.
As of last year, NPLs at domestic banks averaged around 10 percent of all loans.
The central bank has said the ruling -- which has been delayed twice due to the banking sector's weak condition -- would aim to make banks more sound and prudent in managing their loan exposures, thus preventing similar mistakes that it made in the past.
The absence of a proper credit-risk assessment was believed to have contributed to the collapse of the banking industry in 1997- 1998, as local banks channeled most of their funds to affiliated businesses, or parties with strong political connections.
On the other side, however, there are worries that the ruling will be too tough on the banks.
The current unfavorable investment climate in the country has increased business risks, which will eventually make more of the loans vulnerable to default.
In his response, while conceding that not all banks would be able to follow the new ruling, Sjahril said that the central bank would guide the failed banks to follow suit under certain steps.
He said that under the central bank's standard operating procedures, banks which fail to meet the new NPL ruling requirement would be subject to intensive supervision which could be followed up by applying other steps such as placing central bank staff within the particular bank.
"After those steps, we expect the failed banks will achieve the requirements," Sjahril added.
A high ratio of non-performing loans will weigh on a bank's capital adequacy ratio (CAR), another indicator to determine a bank's financial health which compares a bank's capital to its risk-weighted assets, including loans.