Sturdy rupiah: Adrenalin rush for ailing banks

Bernie K. Moestofa, The Jakarta Post, Jakarta

Perhaps, it's just a start. For cynics, it remains uncertain. Either way, it's a sign that good things could be on the horizon.

The strengthening rupiah over the past six months already offers hope that could pull local banks out of their five-year depression.

A 13 percent rise in the rupiah and a nearly 2 percentage point decrease in Bank Indonesia's interest rates have already provided room for new loans.

"We're seeing improvements in the rupiah affecting the banking sector," said banking analyst Ryan Kiryanto of the Bank Negara Indonesia (BNI).

Bank Indonesia, the central bank, has said that an overall better economy would spur loan growth this year to Rp 62.12 trillion (about US$7.1 billion) from Rp 47.7 trillion in new loans last year.

As yet, however, its first quarter report of the banking sector points to some of the same illnesses that banks have been suffering from year after year.

At the top of the list is a vulnerable capital adequacy (CAR) ratio, which measures capital against total loans. Banks were required to obtain a minimum CAR of 8 percent by the end of last year as per a central bank decree, which many barely met.

Stumbling over the CAR prerequisite, Unibank got the axe while five others, among them Bank Bali, were asked to merge.

Those banks lost out despite the government's Rp 630 trillion recapitalization program to halt banks' falling CAR.

In the first six months, most banks did not show improvement in earning new money.

Research done by Investor magazine last month showed that 24 out of 136 banks booked losses amounting to Rp 465.36 billion. In the same period last year, 22 of 138 banks booked losses amounting to Rp 492.80 billion.

The Indonesian Bank Restructuring Agency (IBRA) was supposed to expedite bank recovery, but its work has been painstakingly slow.

Analysts blamed banks' poor performance partly on an adverse economy throughout 2001. Political instability has kept the rupiah low and volatile for most of the year, and central bank rates expensively high for loan seekers.

President Megawati Soekarnoputri's relatively peaceful rise to power in July 2001 drove the rupiah up only to fall again in the aftermath of the Sept. 11 terrorist strike in the U.S.

Abroad, the world's leading economies languished in near recession led by a slump in the U.S. -- the world's largest economy and Indonesia's biggest export market.

With these conditions facing the banking sector, few analysts in late 2001 believed an upturn this year was forthcoming.

Six months later, there is reason to hope. A combination of macroeconomic stability and signs of a U.S. recovery have the potential to improve the banking sector, or at least deter a second bank crisis as many had warned about months ago.

BNI's Ryan said the outlook had turned from bleak to positive. "I'd say banks are resuming their lending role."

As yet, banks' intermediary role in an economy, which is to channel loans to the private sector, remains inadequate. Evidence of this is to be found in banks' low Loan to Deposit (LDR) ratio.

According to Ryan, the average bank LDR, which measures a bank's total loans to deposits, stands at about 45 percent. A healthy banking sector can sum up an LDR of around 90 percent and more.

But several banks only began significant new lending last year, after being given clearance from Bank Indonesia's loan restriction policy for banks with low CAR levels, he said.

While those banks continue to increase their savings deposits, the inability to pass the funds over as loans, dragged down banks' LDR levels.

BNI was one example, Ryan said. The state-owned bank's 2001 LDR level was a meager 35 percent after it resumed lending in that year.

The strengthening of the rupiah should help banks increase their LDR, he said, explaining that Bank Indonesia's subsequent lower benchmark rates made loans more affordable to the private sector.

Still, Bank Indonesia's first quarter report showed lending remained sluggish.

"Banks are ready to lend, but the question is whether companies are ready to seek new loans," Ryan said.

He said banks' traditional clients, large corporations, were still in the process of restructuring their debts and were unfit for new loans.

These debts are remnants of the 1997 economic crisis, which drove up the cost of debt servicing after the rupiah plunged in value. The rupiah's fall created many non-performing loans and led to the near collapse of the banking sector.

As the once fat market has gone dry, banks turn to the less profitable small and medium size enterprises or the consumer sector for lending.

Most however stash their funds into Bank Indonesia promissory notes which although earn lower interest rates than loans, are relatively risk free.

Switching back to large corporations was too risky for now, said analyst Baradita Katoppo of the independent research body IBAS. Yet a stronger rupiah not only made loans cheaper, it also served as an incentive to settle foreign debts.

"Companies' debt restructuring plans pegged the rupiah at 10,000 against the dollar," Baradita said.

At current levels of around 8,700 to the dollar, settling foreign debts would effectively yield a 13 percent discount.

Baradita said companies that took the responsibility and paid their outstanding foreign debts should be back in the market for new loans.

Whether this is happening remains to be seen. The economic environment may have improved and banks may also be in better shape to raise lending, but old problems in the banking sector persist.

A weak CAR across the sector is putting a strain on banks to extend fresh loans. There is concern that the shaky recovery of the private sector may cause new defaults and yank banks' CAR levels below the required 8 percent.

It also explains bank reluctance to cut back their dependence on recapitalization bonds.

According to Bank Indonesia, some 44 percent of banks' revenue come from the state-funded bonds which earned them less money than if they had invested in loans.

Banks also earn less from Bank Indonesia's promissory notes after the stronger rupiah caused benchmark rates to fall.

Still, if the rupiah maintains its strength, the currency may lift the banking sector out of the doldrums after sending it there five years ago.