T

he country'€™s banking industry has seen a steady increase in non-performing loans (NPLs) as the domestic economy faces continuous pressure from the global slowdown, according to the financial regulator.

Irwan Lubis, deputy commissioner for banking supervision at the Financial Services Authority (OJK), said weak demand nationwide had negatively affected companies'€™ cash flow, leaving them unable to repay their loans to lenders.

The situation has triggered an increase in the number of bad loans or loans with a level two collectability.

'€œWe acknowledge there is pressure from the economic growth decline, which affects businesses'€™ condition. We should be aware of the NPL, because there are more loans of level two collectability,'€ Irwan said recently.

There are five loan-quality classifications, with the best quality described as '€œcollectability one'€ (pass), followed by collectability two (special mention), collectability three (substandard), collectability four (doubtful) and collectability five (loss).

The increase in the level of collectability in the domestic banking industry is also reflected in its NPL ratio, which rose gradually by 10 basis points (bps) or 0.1 percent each month between January and June, according to OJK data.

The data shows that banks'€™ gross NPL stood at 2.56 percent in June, an increased of 0.1 percent from 2.46 percent in May.

'€œHowever, the NPL decreased very slightly to 2.55 percent in July and we predict that the percentage in August will be not far from the current figure, perhaps at 2.58 percent at the most,'€ Irwan said.

As for individual banks, Irwan said some of them posted gross NPL of above 5 percent, while pointing out that '€œtheir loan-loss provisions are adequate, so that their capital adequacy ratio [CAR] are not affected and only impacted their profitability'€.

OJK data shows that CAR in the domestic banking industry increased to Rp 730 trillion as of June from Rp 600 trillion last year as lending growth dropped to 10.38 percent year-on-year (yoy), below the targeted 13 to 14 percent this year.

Based on an OJK simulation test, Irwan said bad debts could start crippling local banks when NPL skyrocketed up to 25 percent, which could happen if the economy dropped drastically.

In order to manage the situation, Irwan said the OJK had requested the management of banks to strengthen their loan-risk management and restructure loans that were at risk of becoming non-performing ones.

Irwan said that based on a OJK temporary measure banks were allowed to restructure loans of some institutional customers that had the possibility of becoming bad debts by changing a number of clauses in the contracts, after reviewing the companies'€™ cash flows that have been affected negatively by economic pressures.

'€œBanks can adjust terms and conditions in some loan contracts that have business potential. For instance, extending a loan period, allowing smaller installment amounts and negotiating interest rates,'€ Irwan said.

The OJK has introduced the temporary credit restructuring measure, which will last two years, as it is of the opinion that bank customers impacted by the economic slowdown would bounce back after two years.

'€œWe hope that this measure can help the banking industry maintain NPL below 3 percent by the end of the year,'€ Irwan said.

Separately, Bank Indonesia (BI) deputy governor Erwin Riyanto said the economic turmoil would be routinely monitored by a technical forum consisting of both supervisors from the central bank and the OJK on the micro-prudential side.

At higher levels, Erwin said BI'€™s board of governors and OJK'€™s board of commissioners would hold a meeting if there were potential threats to the banking and financial industry.

The meeting could be followed up by the Financial Sector Stability Coordination Forum (FKSSK) comprising BI, the OJK, the Finance Ministry and the Deposit Insurance Agency (LPS) as the highest decision-making forum if there was a possibility of larger shocks to the economy, he added.

'€œBanks are still OK based on NPL and CAR as the main indicators, while their profitability has decreased, which is normal when economic and loan growth declines. That'€™s why we hope there will be positive sentiment to improve the economy,'€ Erwin said.