TEMPO.CO, Jakarta - The banking industry needs to put its house in order, given the recent rise in the number of non-performing loans. This trend should also serve as an early warning for the government to reassess the huge infrastructure projects initiated by President Joko Widodo.

The increase in problem loans can be traced to at least two conditions. Firstly, there is the fall in the prices of several commodities, especially coal. For years, with the price of this 'black gold' remaining high, mining companies were prima donnas. Banks paid out loans for new mining permits here, there and everywhere. Consumer credit for purchases such as luxury cars also flowed freely to welcome the emergence of the nouveau riche mining companies.

When the price of coal began its steady fall in 2014, reaching its lowest at the end of last year, many mining companies went bust. As a result, they were unable to repay their loans. Others asked for their debts to be restructured. Before the price of coal rose again at the start of this year, the numbers of non-performing loans had risen significantly. In the first half of 2016, six of the 10 largest banks recorded a rise in problem loans.

The second reason is, ironically, the infrastructure projects that are the flagship of President Jokowi's government. When he took office in October 2014, he accelerated projects in many regions. There were quite a few stone-laying ceremonies around the country. State-owned companies were mobilized to build toll roads, fast rail links, power stations and ports.

The wheels of the economy turned. State-owned enterprises looked to private companies to supply them. Banks saw this as a huge opportunity, and credit flowed to private companies involved in these profitable projects.

There is no avoiding the fact that some of these projects were rushed ahead without proper calculation. For example, work began on the Jakarta-Bogor light rail before the funding scheme was finalized, and construction of the Sumatra toll road started before the economic costs had been calculated. As a result, both projects ground to a halt before completion.

Payments to private companies by state-owned enterprises began to dry up. For example, cement suppliers were not paid for months. These companies then had problems repaying their bank credit. And the number of problem loans began to rise. According to the Financial Services Agency (OJK), the ratio of gross non-performing loans now stands at 3.1 percent--an increase over the 2.7 percent at the same time last year.

This figure may well rise because the repayment of loans has slowed as a result of the difficult economic condition. There is no alternative: the banks must immediately put things right. Bank managers need to show extra caution when approving loan applications. It needs to be said that the banks were not careful when calculating the risks, as they competed to extend credit to fund mining and infrastructure projects.

Bank managers also need to be cautious when approving the debt restructuring that debtors have asked for. It is important that they avoid the problem of moral hazard, as occurred in the run up to the 1998 crisis, which led Bank Indonesia to have to pay out trillions of rupiah in liquidity assistance. At the time, large amounts of credit were affiliated with problem banks. The OJK needs to be smarter in its oversight.

To stop the ratio of problem loans from rising further, the government needs to be more realistic. We know that the government has played a major part in the rise of non-performing loans. The government's over-ambitious plan in pushing infrastructure projects before the funds were available has led to these projects grinding to a halt. As a result, companies have been unable to pay their suppliers. Therefore, the government needs to reassess a number of projects. The drive to bring about new economic growth through infrastructure projects should be supported by rational calculations.

Loud alarm bells from the surge in non-performing loans should compel everyone to undertake reforms. Otherwise, the danger of a prolonged economic crisis looms before us. (*)

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