Perbanas warns of rise in bank NPLs

Berni K. Moestafa, The Jakarta Post, Jakarta

Bank non-performing loan (NPL) ratios are likely to rise towards the end of this year, as the sharp downturn in the global economy starts taking its toll on local industries, according to a banking association.

Chairman of the Association of Private National Banks (Perbanas) Gunarni Soeworo said on Thursday the economic fallout from the global slump had yet to hit banks' performance here.

"Because of a slowing economy and the resulting higher risks, we might see a rise in NPLs again," Gunarni told reporters on the sidelines of a seminar on national debt management.

The current average NPL level of major banks is around 15 percent.

A rise in NPL could spell trouble for banks scrambling to meet Bank Indonesia's year-end target of 5 percent.

A greater NPL ratio could also create new risk for banks struggling to meet the central bank's 8 percent minimum capital adequacy ratio (CAR) requirement. Banks must meet this requirement by the end of this year or risk closure.

The CAR is the ratio between a bank's capital and its risk- weighted assets including loans, and is deemed to be a vital ingredient to gauge its financial health.

A rise in a bank's NPL ratio implies it faces a higher risk, which could translate into a lower CAR level if the bank fails to offset the new risks with additional capital.

Analysts said that capital was still difficult to come by, a situation that was forcing many banks to restrict new lending.

But existing loans could also turn sour, as the already slow global economy has taken an unexpected turn for the worse.

Gunarni said most local banks had allocated a large portion of their credit portfolio to export-oriented businesses.

A sharp cut in export demands could strike a blow to banks' NPL ratios, and force them to reduce their exposure to export- oriented firms.

She said banks would therefore likely change their loan strategy to finance firms boasting a sizable domestic market.

"Foreign and local businesses are reviewing their business plans, consequently banks must do the same," she explained.

But in the near future, Gunarni added, banks were likely to become more selective in extending new loans.