Top banker warns of risk in Indonesian banking industry

The Jakarta Post, Jakarta

Although the country's banks have recovered after the financial crisis as shown in the improvement of their capital adequacy ratio (CAR) and nonperforming loan (NPL) level, other problems could see the industry back in trouble, a senior banker warned.

Gunarni Soeworo of the National Private Banks Association (Perbanas) said the banking sector might see its CAR and NPLs -- key factors to measure a bank's health -- declining in times to come.

As for CAR, she went on, in line with the fact that the government's recapitalization bonds account for most banks' assets, the banks would likely face troubles once they replace the zero-risk bonds with the risk-inflicted credit portfolio.

"They have to do that once their intermediary role is being fully put in place, which as a result, their CARs will rapidly go down. This will then limit credit expansions in times to come," she said on the sidelines of an economic seminar here.

Another factor that has the potential to negatively affect CAR was, she added, the planned implementation of the Basel accord II principles as it would require banks to include various risks in calculating its capital including market and operational risks.

CAR is a comparison between a bank's capital and its risk- weighted assets, including loans.

Almost six years after the late 1990s financial crisis, the banking sector has been undertaking restructuring process, which had gradually improved banks regain some of their footings.

Currently, CAR stands at around 26 percent on average, far better than the 8 percent minimum requirement imposed by the central bank. By comparison, banks in the country suffered up to minus 15 percent CAR during the crisis.

Elsewhere, Gunarni also cautioned about NPLs, while also declining, could still increase again, especially because of credits extended to the corporate sector, whose restructuring program has been moving a much slower pace. Purchasing unrestructured bank loans from the Indonesian Bank Restructuring Agency (IBRA) will also create a risk of pushing up the NPL level of the banks.

"Both still carries risks, while the corporate sector has yet to fully stabilize, the restructuring of IBRA assets is yet to be finalized also," she said.

Her remarks confirmed earlier concerns from analysts that the restructuring process in the country's corporate sector has been slow, making them deemed as high risk business for banks.

Not only because the old corporate players are still restructuring their huge debts inherited from the crisis, the new ones remain hard to come by.

Purchasing loan assets from IBRA, which took the loans from troubled banks in the wake of the crisis, could not also be considered safe either. Analysts have repeatedly said that the agency has been focusing more on selling assets than restructuring them.