Worsening credit quality last year is expected to ease in 2017 as bad loans are seen as already bottoming out amid better purchasing power, according to the Deposit Insurance Corporation (LPS).

The non-performing loans (NPLs) ratio will decline to below 3 percent this year, lower than the current average of 3.1 percent to 3.2 percent, as consumer confidence index and retail sales have improved, the agency says.

“Economic growth will be better this year, thus will improve consumers’ purchasing power and market confidence, while banks start their restructuring program,” LPS executive director for guarantees and risk management Didik Madiyono said at a press conference on Thursday.

Pressures in loan quality, he added, had started to recede due to a slight recovery in several global commodity prices. Stable consumption has also been seen lately on the back of benign inflation.

As of last October, banks’ NPL ratio stood at 3.22 percent, which was mostly contributed to by the category of “losses” or the final level of collectibility.

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

A rising trend in bad loans that battered domestic banks in late 2015 and for several months in 2016 also had a bad affect toward several rural banks with weak management.

Ten rural lenders had their operational permits revoked by the Financial Services Authority (OJK) and entered a resolution program carried out by the LPS. It was higher than the three rural banks in the LPS resolution program a year earlier.

LPS executive director for claim and bank resolution Ferdinan D. Purba said the agency had paid claims worth Rp 168.5 billion (US$12.69 million) for more than 36,000 accounts at 10 liquidated banks last year.

“On the other hand, there are 2,033 accounts considered not eligible for claim payments because customers were implicated in bad loans, while 16 accounts could not be paid because of high rates given above the LPS guaranteed rate,” he said.

The LPS does not guarantee banks’ savings accounts and time deposits that provide interest rates above LPS’ standard, which is now at 6.25 percent for commercial banks and 8.75 percent in rural banks for rupiah-denominated accounts.

Eight of the 10 liquidated banks last year were conventional lenders, while the remaining two were sharia-based. They were located in East Java, West Java, Yogyakarta, West Sumatra, South Sulawesi and Southeast Sulawesi.

Accumulatively, the LPS completed 75 bank resolutions between 2005 and 2016, including the controversial bailout of Bank Century, which was transformed into then-Bank Mutiara and later acquired by Japanese financial company J Trust Co and renamed Bank J-Trust.

The agency paid claims worth more than Rp 1.17 trillion for 152,883 bank accounts between 2005, when it was first launched, and the end of last year. It charges banks twice a year with a 0.2 percent premium rate of a lender’s total third-party funds and has collected Rp 60 trillion from the industry as of now.

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