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Financial Time Bombs

Translator

Editor

20 October 2016 17:06 WIB

TEMPO.CO, Jakarta - The Financial Services Authority (OJK) should be cautious when dealing with non-performing loans in the national banking system. There is the potential for moral hazard, especially in the implementation of the problematic debt restructuring policy. The OJK must learn from the experience of the Indonesian Bank Restructuring Agency (IBRA) from 1998 to 2004.

In the first eight months of this year, the non-performing loan rate has risen steadily. As of last August, it was at 3.22 percent, a rise of 72 basis points compared with those at the end of 2015. This is a worrying state of affairs because no signs of recovery are evident. Credit growth is slowing, but the NPL ratio is increasing. Experts believe it will continue to rise in the next few months.

At present, the biggest risk is in the mining sector. The NPL ratio as of July was 6.77 percent, above the safety level set by the regulator at around 5 percent. This is a result of the fall in the price of coal over the last five months. The price of exports in June was only half that of June 2012.The impact of this is that in September, there were 112 requests to renegotiate loan repayments and 45 companies were declared bankrupt.

The general belief is that the situation will not get better any time soon. The mining sector is still contracting and credit growth to this sector is also negative. There are hardly any mining companies that do not have non-performing loans. Several of them have negative assets. Although loans to the mining sector make up only 3 percent of total bank loans, as of June this year, the influence on the overall NPL ratio is significant.

The OJK has not been inactive. This year it has released several policies relaxing the rules for restructuring problem loans. These policies have made the banking system more flexible in its management of debtors who have cashflow or debt problems. One of them is granting banks of the authority to take over the ownership and management of non-performing loans with a maximum ownership of 20 percent for a period of up to two years.

Although this has made things easier for the banking sector, overall this policy has had little impact. For example, category five, the worst of the non-performing loans, still rose by 40 percent in April. Compare this with the growth of performing loans, which stood at only 6.5 percent. This shows that there are still many companies in Indonesia that are unable to escape from this protracted crisis.

Internally, many banks have formed special units like 'mini IBRAs' to handle their 'bad' loans. The OJK must oversee their implementation. And it must learn from the IBRA experience. There was much moral hazard at that time. For example, many major debtors eventually bought back their own restructured assets at a low rate, averaging 28 percent.

Almost none of these debtors faced any legal action, despite the fact that many of them broke banking regulations, manipulated the value of projects and assets and established fictitious companies. The public is still bearing the burden of the 1998-2004, bank crisis in the form of recapitulation. Moreover, there are still many assets belonging to former major debtors that cannot be sold, while their owners enjoy their freedom overseas.

The OJK should not repeat this dark period of history. (*)

Read the full story in this week's edition of Tempo English Edition



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