Problem loans declining

Problem loans declining

JAKARTA (JP): Indonesia's banking system has successfully survived the recent financial stress brought on by high levels of non-performing loans, according to a report by Standard & Poor's.

However, the Australian-based rating agency said yesterday that Indonesia's banking industry is underpinned by a potentially volatile developing economy.

The Indonesian banking industry, therefore, continues to have higher risks attached to it than those in more developed economies, the agency says in its latest Asia-Pacific Banking Profiles report.

"Problem loans have peaked and are slowly declining, while many banks have recapitalized and the number of participants is stable," it says.

Despite such improvements, Standard & Poor's remains concerned about the residual burden of non-performing assets at certain banks, loan concentration towards affiliates and large borrowers.

The agency also expresses concern over a high exposure to office and condominium projects, undercapitalization of small banks, the potential threat of finance companies and over-rapid growth of certain private banks.

Local analysts have also given similar warnings to the country's banking industry.

Laksamana Sukardi, a former banker, said that the high exposure to the textile-based industry could also cause problems for the banking industry, given the unfavorable condition in the world textile market.

He said that merging between undercapitalized banks is needed to strengthen the competitiveness of the country's crowded banking industry. But he warned that mergers between small banks would not be an appropriate solution because such a move could only result in the accumulation of bad debt problems.

Non-performing

The total banking sector's non-performing loan level decreased to 11.6 percent of the total loans as of June 30 this year from the peak of 14.2 percent in late 1993.

The progress, Standard & Poor's said, is attributable to several factors, including strong economic growth, better focus of bank management and the imposition of stricter prudential requirements by Bank Indonesia (the central bank).

The burden of the non-performing loans has not fallen evenly. State-owned banks, which make up almost a half of the industry, had problem assets amounting to 16.2 percent of their loans as of June 30.

In particular, state-owned Bank Pembangunan Indonesia (Bapindo) has a substantial number of problem loans which, if excluded, would improve the industry's non-performing loan average by roughly a fifth to 9.3 percent of total loans.

"Most major private banks appear to have evaded this plight through tighter credit control," the agency said in a statement.

Standard & Poor's said that Bank Indonesia's tighter banking supervision, supported by a firmer regulatory and accounting framework, has improved the integrity and transparency of financial information from banks, although the positive impact will not be fully felt for two or three years.

Despite the improvements in overall banking activities, the agency gives a "vulnerable" assessment to the country's nine major private banks.

Those banks are Bank Bali, Bank Central Asia, Bank Dagang Nasional Indonesia, Bank Danamon, Bank Internasional Indonesia, Bank Niaga, Bank Umum Nasional, Bank Lippo and Pan Indonesia Bank (Panin Bank).

The "vulnerable" label means that the capacity of those banks to meet deposit and other financial obligations on a timely basis is vulnerable to adverse economic conditions.

Five state-owned banks -- Bank Bumi Daya, Bank Dagang Negara, Bank Ekspor Impor Indonesia, Bank Negara Indonesia 45 and Bank Rakyat Indonesia -- receive the adjective "adequate".

"Adequate" indicates that the banks have an adequate capacity to meet deposit and other financial obligations on a timely basis, but protection levels appear to be more susceptible to adverse economic conditions.

The rating agency calls the soundest banks "strong" and "satisfactory", while the least sound banks are referred to as "inadequate". (hen)