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Banks cautious over rising bad debts
Banks are taking a more cautious approach in providing new loans amid fears that the worse-than-expected economic conditions will cause an increase in bad debts
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span>Banks are taking a more cautious approach in providing new loans amid fears that the worse-than-expected economic conditions will cause an increase in bad debts.
State-owned lender Bank Tabungan Negara (BTN), for example, is reducing its loans for high-rise commercial buildings this year as a result of a rising nonperforming loan (NPL) ratio in the sector.
The bank’s president director, Pahala Mansury, said the cautious step was taken because of the rising trend in NPLs in the commercial building sector, such as apartments. According to him, NPLs in the commercial buildings sector significantly increased to 18 percent of the total loans disbursed in the sector, amounting to Rp 21.66 trillion (US$1.6 billion) caused by sluggish apartment sales
As a result, BTN’s gross NPL ratio skyrocketed from 2.8 percent in 2018 to 4.78 percent last year, nearing the unhealthy 5 percent level.
Although the bank had already written off some of its bad loans in 2019, it would further reduce NPLs by reducing loan disbursement for apartment projects.
“For commercial buildings, we will only disburse loans to transit-oriented development [TOD] apartment projects and projects owned by state-owned enterprises [SOEs],” he said. This way, the bank could maintain its credit quality and reduce its NPL ratio to 3 to 3.5 percent this year.
The cautious measure is also meant to reduce the loan loss provision BTN has to set aside at the start of the lending period as stipulated in the new accounting standard of PSAK 71, he said.
Bank Mandiri finance director Silvano Rumantir said on Wednesday that the company would be more careful in disbursing its loans to sectors that would be directly affected by the outbreak of the novel coronavirus that causes COVID-19.
The virus epidemic has severely affected the airline and tourism sectors as a result of massive travel cancelations by Chinese tourists, who account for 12 percent of Indonesia’s foreign tourist arrivals.
The virus outbreak is also expected to hit manufacturing as the disruption of supplies of raw materials will affect production. Many factories in China have shut down their activities as workers are encouraged to stay at home to avoid being infected by the virus. This disrupts the supply of raw materials to many countries including Indonesia
Indonesia’s economic growth rate, which hit a three-year low of 4.97 percent in the fourth quarter of 2019, is projected to reach 5.3 percent this year. But analysts say that the coronavirus epidemic could drag down the growth estimate to 4.97 percent this year.
Private lender Bank Permata would also apply the same strategy in disbursing its loans this year.
“We won’t limit specific sectors in giving out loans, but we will rather look at the quality of each individual [lender],” finance director Lea Kusumawijaya said on Feb.19.
BCA economist David Sumual wrote in a research note on Jan. 29 that credit risk is becoming a particular concern for banks this year not only due to the PSAK 71, which requires banks to set aside bigger loan loss provisions, but also the threat of growing NPL ratios.
The decline in the global trade caused by the trade war between the United States and China prompted a spike in bad loan ratios last year. According to data provided by the Financial Services Authority (OJK), the NPL ratio of the country’s banks rose to 2.77 percent as of November 2019 from 2.67 percent in the same month, 2018.
The growth of special mention loans (potentially weak loans) also showed no signs of slowing in the second semester of last year, defying the usual cyclical pattern in which special mention loans usually spike during the first half before coming down in the second half.
“This indicates an actual increase in credit risk,” David said, adding that he expected banks to be more cautious in disbursing loans to offset the risks of rising bad loan ratios.
Speaking to The Jakarta Post, he said he was still optimistic that loan disbursement would fare better this year despite of the threats, thanks to the omnibus bill that could boost loan for investments. (ydp)
