NPL Ruling to be Implemented in June
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.