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loan-easing program launched last year by the Financial Services Authority (OJK) to help borrowers hit by the economic slowdown could backfire, an analyst at the Deposit Insurance Corporation (LPS) has warned.

According to a recent assessment of banking system stability in the fourth quarter of 2015 conducted by the LPS, the OJK'€™s stimulus last year to hold back declining credit quality has born fruit.

LPS analyst Seno Agung Kuncoro added, however, that banks would need to stay aware of moral hazard arising from the stimulus, despite it lasting just two years.

'€œThere will be knock-on effects on the financial performance of banks if it is not timed right,'€ Seno said in the report, which was published on Friday.

As of October, the national non-performing loans (NPL) ratio stood at 2.68 percent, dropping from 2.71 percent a month earlier, as the amount of loans in the category of collectability level 4 or doubtful, which had been on the rise for a year, has begun to decline again.

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

According to the LPS report, the construction sector posted NPL of 4.79 percent in October, leading to a decline in overall credit quality, while bad loans in trading and manufacture remain on the rise.

The LPS also found in its assessment that overall NPL would keep rising, making it essential for banks to avoid reliance on regulatory policy and loan growth, and instead focus on asset quality and liquidity.

'€œThe government and financial regulator have an important role to play in improving market confidence, boosting economic growth and raising purchasing power, which has been declining since last year,'€ Seno said.

The OJK introduced last year a credit relaxation program lasting two years, as it is of the opinion that bank customers impacted by the economic slowdown will be in a better position after two years.

The temporary relaxation allows banks to restructure the loans of some institutional customers that risk becoming bad debts by changing a number of clauses in the contracts, after reviewing the cash flows of companies hit by economic woes.

'€œBanks can adjust terms and conditions in some loan contracts that have business potential. For instance, by extending loan periods, allowing smaller installment amounts and negotiating interest rates,'€ said OJK deputy commissioner for banking supervision Irwan Lubis.

The OJK has also allowed banks to inject capital into a special purpose vehicle (SPV), also known as an asset management unit (AMU), which will take over and restructure their bad assets, helping them to redress their balance sheets.

At least three banks '€” private banks CIMB Niaga and JTrust Indonesia as well as state-owned lender Bank Tabungan Negara (BTN) '€” have already set up SPVs.

CIMB Niaga strategy and finance director Wan Razly Abdullah said the bank had sold off assets worth US$200 million to its SPV, an affiliated company of CIMB Group.

JTrust Indonesia president director Ahmad Fajar said his bank had similarly sold off bad assets worth Rp 844 billion ($60.6 million) to its SPV, JTrust Investment.

Meanwhile, BTN president director Maryono has indicated he will inject capital into an SPV that will take over BTN'€™s bad loans in the second half of this year.