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How Indonesian banks have prepared for risks
Provisions, liquidity and capital are the three key areas that determine a bank's survivability in a crisis.
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Skyscrapers pierce the skies above Jakarta’s financial district, as seen on Aug. 27, 2021 from Gelora Bung Karno Stadium in Senayan. (AFP/Bay Ismoyo)
T
he recent global dynamics have exposed the many risks to various sectors of the economy, including the banking industry. The Financial System Stability Committee (KSSK) meeting on the fourth quarter of 2021, held on Jan. 28, 2022, explored the potential risks that need to be heeded, both domestically and globally.
The potential domestic risks mainly relate to an increase in COVID-19 cases, while the potential global risks include increased inflationary pressures, rising energy prices, the United States Federal Reserve accelerating its normalization policy, as well as increased geopolitical tensions in the Baltic region.
Current conditions show that the pandemic risk is under control, but the other risks are on an escalating trend. These potential risks will inevitably hit national banks, especially through the credit and liquidity channels. Nonperforming loans (NPLs) will increase and ultimately depress liquidity and erode bank capital. For this reason, banks need to be prepared by taking various prudential steps to survive in the face of various risks.
First, banks should make provisions for anticipating gradual credit losses in the future while their profits are still in good condition. In general, many banks are currently booking profits with fairly high growth compared to the same period last year. This needs to be utilized by allocating profit for making provisions. In fact, these provisions will improve banks’ ability to absorb shocks from financial and economic stress, thus reducing the spillover risk from the banking sector to the real economy.
In addition to the above conditions, the end of the credit restructuring relaxation policy in March 2023 should be considered. Although the number of restructured loans is on a declining trend, it is estimated that some loans can no longer be saved and will become NPLs. Many banks estimate that 2-3 percent of their restructured loan portfolios will become NPLs.
The second step is to keep liquidity at a safe level. Liquidity is life for a bank, and facing liquidity risks is inseparable from a bank's activities because banks disburse the short-term third-party funds (DPK) they receive as long-term credits. Fortunately, domestic banking is still flooded with liquidity at present. This is reflected by above- threshold bank liquidity ratios, with the ratio of liquid assets to DPK reaching 32.11 percent in March 2022.
The high liquidity is in line with the acquisition of DPK in excess of credit disbursements, so banks are placing those funds not disbursed as loans in several types of liquid assets, such as government bonds (SBN) and Bank Indonesia's monetary policy instruments, like the deposit facility. This has been going on since the 2020 pandemic until now. Moreover, bank funds are sourced not only from DPK, but also from bond issuance and foreign loans.
