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)