T

he domestic banking industry should keep cautious next year as the risk of rising bad loans still remains despite a slightly improved outlook in the country'€™s economy, regulators and analysts have said.

Financial Services Authority (OJK) chairman Muliaman D. Hadad said the agency had requested lenders to set aside more funds to cover potential losses on loans in 2016.

'€œWe have asked them to increase their loan-loss provision for this year and for 2016 as well, so that they can absorb risks,'€ Muliaman said, acknowledging that their profitability might still be under pressure next year due to an increase in provisions.

Despite the looming risk of rising bad loans, Muliaman said the OJK was convinced that the average gross of non-performing loan (NPL) ratio in the country'€™s banking industry could still be managed well at the current level of around 2.6 to 2.7 percent. Such a figure was one of the lowest compared to those in neighboring countries.

According to Muliaman, this optimism was based on the OJK'€™s assessment that domestic banks had already implemented a '€œfine'€ level of risk management and capital adequacy ratio (CAR).

'€œThe domestic banking industry'€™s provision for loan-loss coverage ratio against non-performing loans is currently above 100 percent,'€ he said late last week.

A plunge in global commodity prices and the country'€™s weak economic growth has generated a risk of bad loans in the domestic banking industry for nearly a year. Gross NPLs stood at 2.7 percent as of September, OJK'€™s data show.

The percentage was slightly lower than the 2.8 percent recorded in August after rising from 2.2 percent at the end of last year, with gradual increases to 2.46 percent, 2.56 percent and 2.7 percent in May, June and July, respectively.

The growth in gross domestic product (GDP) in Southeast Asia'€™s largest economy stood at 4.73 percent for the July to September period, a slight increase from the 4.67 percent posted in the second quarter and the 4.72 percent recorded in the first three months of the year.

However, despite the slight uptick from the second quarter, the figure was still lower than the 4.92 percent year-on-year growth booked in the third quarter of 2014.

Indonesian Economists Association (ISEI) analyst Destry Damayanti expressed a similar view that the domestic banking industry should remain cautious next year as the country'€™s economy was still in a recovery process and there was a lingering risk of rising NPLs.

Destry, who is also a commissioner at the Indonesian Deposit Insurance (LPS), said banks would be better off working on internal consolidation and the management of their portfolios, adding that '€œcurrency volatility is still looming large due to the US Federal Reserves'€™ more hawkish stance and its plan to hike its fund rate.'€

'€œBanks have to keep watchful in their loan allocations for next year by carefully separating those sectors still vulnerable from other sectors able to be pushed further,'€ Destry said, pointing out that high risks remained for commodity-related firms amid the pressure on commodity prices.

The latest report published in early November by Moody'€™s ratings agency showed that the asset quality of Indonesian banks would come under pressure over the next 18 months due to a combination of declining economic growth and weakening currency and commodity prices.

However, Srikanth Vadlamani, vice president and senior credit officer at Moody'€™s, said the current profiles of Indonesian banks were robust and could withstand a material deterioration in the country'€™s macroeconomic outlook due to their strong profitability as well as high levels of capital and loan-loss coverage.