Indonesian banks tackle bad loans amid lingering doubts

April 07, 2017.

JAKARTA -- Indonesian banks are stepping up efforts to tackle bad loans amid a pickup in lending activity. But as the economy struggles to break free of years of weak commodity prices and slow growth, challenges remain.

Written by WATARU SUZUKI, Nikkei staff - Originally published at this link.

Bank Mandiri, the country's largest state-owned lender, is beefing up its team of bankers that deals with clients who show early signs of financial distress. For corporate borrowers, extending the date when a loan comes due, for example, while helping the company sell off some of its assets, can help the bank ensure that its loans stay healthy.

"We are also upgrading our credit process to better identify loans with warning signals to enable us to take actions early," said Siddik Badruddin, director of risk management and compliance at Bank Mandiri.

The move follows a jump in the bank's bad loans to 4.0% of the total in 2016, up from 2.6% a year earlier. When an analyst asked which industries are seeing loans turn sour, President Kartika Wirjoatmodjo replied: "It's quite diverse. We have [borrowers] making spare parts for automotive [companies], steel, consumer goods ... there is no particular sector."

Bank Permata, a joint venture between London-based Standard Chartered Bank and local conglomerate Astra International, said in March that it is selling off 1.1 trillion rupiah ($82 million) in bad loans to a foreign investment vehicle. The announcement came after the bank said its share of nonperforming loans increased to 8.8% of the total in 2016, up from 2.7% a year earlier, pushing it into a 6.48 trillion rupiah net loss for the year.

"Troubled loans were divided quite evenly across sectors. ... It wasn't just in coal or palm oil," President Ridha Wirakusumah recently told reporters. "We are really proactively restructuring [loans]. Hopefully we won't have to sell NPL again."

Red today, green tomorrow

The remarks underscore the impact of a prolonged economic slowdown brought on by weak commodity prices, a turbulent currency market and weaker purchasing power. Bad loans stood at 133 trillion rupiah ($10 billion) or 3.09% of the total as of January, according to data from the Financial Services Authority, known locally as the OJK. While this is nowhere near the levels reached during the 1997-1998 Asian financial crisis, the figure has more than doubled over the past three years.

Credit ratings agency S&P Global estimates the true scale of "weak loans" -- which comprises NPLs, special-mention loans and restructured loans, is around 11% of total credit in Indonesia -- is among the highest in Asia. Ivan Tan, a Singapore-based analyst at S&P, forecasts "no turnaround in 2017," with improvement to come only in the following year.

Many banks are optimistic that better economic conditions will eventually ease pressure on credit quality. In 2016, economic growth accelerated for the first time in six years, helped by stable consumer spending. At a recent cabinet meeting, President Joko Widodo instructed his ministers to work toward achieving 5.6% growth in gross domestic product in 2017, up from this year's 5.1% target.

"NPL levels have pretty much peaked," said Eugene Keith Galbraith, deputy president at Bank Central Asia. The country's largest private bank saw its NPL ratio rise from 0.7% to 1.3% in 2016, but it is forecasting a decline this year. Bad loans "should be a concern when the economy is weak, but now the economy is getting better," Galbraith said. The bank is targeting loan growth of around 10% this year, compared with 7.9% in 2016.

The rise in problem debt is one reason why banks have been reluctant to respond to the government's pleas to slash loan interest rates and boost lending. However, in a sign that creditors are growing more confident, data from local brokerage Bahana Securities shows that loan growth among seven major lenders, including four state-owned banks, reached 10% in February, up from 8% a year earlier. Regulators have so far shown little indication they think credit quality might worsen. Nelson Tampubolon, the OJK's commissioner for banking supervision, told reporters on April 4 that bad loan levels are "still quite high ... but still manageable."

But with uncertainty over commodity prices and investment appetite lingering, some observers are skeptical of a pickup in growth in the near future.

"Five percent [growth] is the new equilibrium for Indonesia for years to come," Rosan Roeslani, chairman of the Indonesian Chamber of Commerce, recently told a business forum in Jakarta. "It is the growth that we have to accept."

Nikkei staff writer Erwida Maulia in Jakarta contributed to this report.