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Bank credit stress recedes

Even though the assessment consensus among most analysts and the Financial Services Authority (OJK) concluded that the credit stresses in the banking industry peaked last year with industry-wide gross non-performing loans (NPL) hovering at 3

The Jakarta Post
Mon, February 20, 2017

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Bank credit stress recedes

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ven though the assessment consensus among most analysts and the Financial Services Authority (OJK) concluded that the credit stresses in the banking industry peaked last year with industry-wide gross non-performing loans (NPL) hovering at 3.2 percent, the quality of earning assets should remain under strict scrutiny as uncertainty still lingers over the global economy.

The latest data from both Bank Indonesia and the OJK did show significant improvement in the macroeconomic condition in the fourth quarter of 2016, which raised last year’s gross domestic product growth to about 5 percent from 4.8 percent in 2015. The developments so far point to another bout of robust expansion this year, especially on the back of recovery in the commodities sector, notably mining and plantations.

It is encouraging to note that most banks, notably those listed on the stock exchange, have been quite transparent and careful in regard to the quality of their assets’ earnings. For example, Bank Mandiri, the country’s largest bank, whose ratio of bad debts to total loans doubled to 4 percent last year, also doubled its loan-loss provisions.

At Bank Permata, the fifth largest, its NPLs more than tripled to 8.83 percent, way above the safe level of 5 percent. Most of the 10 largest banks also took similar prudential measures. The banks’ capacity in loan restructuring was also severely tested last year, especially in the mining and plantation sectors.

Even though the large provisions cut deeply into their net profits, these banks will be highly resilient in coping with any worsening economic conditions due to either domestic or external factors.

No wonder most international credit rating agencies still maintained their stable outlook on Indonesia’s banking industry, given its sound capitalization and liquidity. Sound capital levels and adequate liquidity will provide a strong buffer against downside risks.

More imperative though is for the OJK to strengthen its micro prudential supervision to ensure that medium and small banks, which are not traded on the stock exchange, provide adequate provisions for their NPLs strictly according to their true credit rating (special mention, substandard, doubtful and loss).

As most medium and small banks have increased their exposure to the micro, small and medium enterprises segment, which is most vulnerable to high interest rates and slow economic growth, their supervision should be tightened. This again is a tough test for the OJK’s supervision capacity in view of the large number of city-based banks (around 120) and thousands of secondary/rural banks. A series of measures by the central bank and the OJK to push for a higher pace of banking consolidation have failed miserably.

We share the OJK’s view that new NPL formation would slow this year as economic growth picks up and the commodity market recovery would remove heavy stress on corporate balance sheets.

But the pace of credit growth should be raised only gradually to avoid sudden shocks from possible capital outflows after the US Federal Reserve’s decision last month to again raise its benchmark short-term interest rate sooner this year than previously anticipated.

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