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Restructured loans ‘ticking time bomb’ for banks
Restructuring loans saved Indonesian banks from high loan default rates last year but now, banks are coming to terms with the fact that they might need to restructure loans throughout 2022, chipping away at their profits along the way.
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ndonesian banks expect to face continued financial strain throughout 2022 as an eased loan restructuring policy, once lauded as a lifeline for banks, is now poised to chip away at their profit margins.
Bankers and banking experts have said that loan restructuring would dampen banks’ interest income over the coming months while interest expenses remain unchanged and provisioning costs remain high.
Their comments relate to the Financial Services Authority’s (OJK) decision to extend a regulation that has enabled lenders to more easily restructure loans. POJK No. 11/2020, which was initially slated to expire in March 2021, was extended by a year to March 2022.
Read also: Loan restructuring program extended until 2022
The experts also pointed to the rising possibility of higher-than-expected loan defaults this year as a recent COVID-19 surge threatens to hamper Indonesia’s economic recovery. Banks would have no choice but to continue restructuring loans despite the risks.
“As a result, the restructured loans are a ticking time bomb for banks,” said banking observer Paul Sutaryono, former assistant vice president of Bank Negara Indonesia (BNI), to The Jakarta Post on Tuesday.
The bankers and experts’ comments over restructured loans signal dimming optimism over the domestic banking industry’s outlook for this year.
The OJK’s decision to ease restructuring rules was meant to provide short-term relief but banks are coming to terms with the fact that they might need to restructure loans throughout 2022 as businesses are unlikely to fully recover this year.
Banks can restructure loans by lowering interest rates, extending repayment periods, reducing principal or interest arrears, adding loan facilities and converting loans into temporary equity participation schemes agreed upon by banks and their customers.
The latest OJK data shows that the industry’s average nonperforming loan (NPL) ratio rose 0.4 percentage points year-on-year (yoy) to 3.17 percent in March. Meanwhile, Bank Indonesia data shows bank loan disbursements had dipped 4.13 percent yoy to Rp 5.54 quadrillion as of March 2021. An NPL ratio above 5 percent is considered high risk.
Bank Mandiri president director Darmawan Junaidi said on June 15 that current NPL ratios were actually higher than reported due to legal window dressing after the OJK redefined NPLs to exclude loans restructured as a result of COVID-19.
“A 5 percent NPL is right before our eyes. Maybe not this year but maybe 2022,” he told lawmakers during a hearing with the House of Representatives.
“At some point, we will no longer cover potential losses on our downgraded assets.”
Mandiri, the country’s largest bank by asset value, saw its net profit decline 25.28 percent yoy to Rp 5.92 trillion in the first quarter as a result of higher loan provisioning.
Read also: Mandiri overtakes BRI to become country's largest bank
Meanwhile, Bank Rakyat Indonesia (BRI), the country’s second-largest bank by asset value, saw its profits drop by 45.65 percent year-on-year (yoy) to Rp 18.6 trillion in 2020 also because of higher loan provisioning.
BRI president director Sunarso said at the same House hearing that the bank’s profit would have reached between Rp 38 trillion and Rp 40 trillion if there were no pandemic, or in a business-as-usual scenario.
He added that BRI would keep provisioning high this year at Rp 73.11 trillion, 2.5 times its total NPL value, as the lender expects high loan defaults this year. Sunarso acknowledged that this would dampen profits but preferred to err on the side of safety.
“Right now, we are in survival mode and crisis mode,” he said.
Both Bank Mandiri and BRI have called on regulators to extend the relaxed loan restructuring period by another year to March 2023 should economic conditions deteriorate.
Read also: Top state-owned banks post record-low profits
Indonesian Banks Association (Perbanas) head of policy Aviliani said banks needed the extension because a sudden jump in NPLs would legally require lenders to raise loan provisions, which would further eat into their profit margins.
She added that the OJK was likely to extend the relaxed loan restructuring period and lenders were likely to use it as a recent COVID-19 surge hampers business recovery outlooks.
Economists have long warned that a COVID-19 resurgence would jeopardize Indonesia’s economic recovery, a concern that has become real as the country sees record-high COVID-19 cases over the past three days as a result of the Idul Fitri tradition of mudik (exodus) and the new Delta variant of the virus.
“It is unlikely that the business sector will revive in 2022,” said Aviliani to the Post on Monday.
