Banking and Non-Performing Loans

It has been a year and a half that economic growth in Indonesia has depended on the conditions of the Covid-19 pandemic. If Covid-19 transmission grows, for the sake of the public safety, mobility restrictions are imposed leading to the hampering of economic activity.

The acceleration of vaccinations and reducing transmission of Covid-19 are crucial factors in the recovery of the economy. The reduction or addition of stimulus from the fiscal, monetary and banking authorities also depend on the pandemic situation.

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We are grateful that in early September 2021, the average death rate from Covid-19 in Indonesia dropped to 500 people per day. The number of deaths due to Covid-19 in emerging markets such as Brazil and India have also shown a significant drop. However, we must remain alert and continue to be disciplined in implementing health protocols.

In July, this year, the International Monetary Fund (IMF) projected that the United States and China would grow at a high rate of 7 percent and 8.1 percent respectively, after contraction last year. Next year, the economic growth of both the US and China is projected to start declining to a normal level of 4.9 percent and 5.7 percent, respectively.

In Indonesia, due to the spread of the Delta variant of Covid-19, restrictions on public activities were reimposed in July to August, hampering economic activity. Mandiri Sekuritas has projected Indonesia\'s economy will grow 3.7 percent in 2021 and 5.2 percent in 2022. The recovery of the global economy is expected to drive the growth of export-oriented industries.

The banking condition is a reflection of the real sector. If the real sector slumps, non-performing loans increase and demand for credit declines. As mentioned above, the US economy is projected to grow 7 percent in 2021, and the growth of consumer credit (individuals) had already reached 4.2 percent in July. This means that the household purchasing power has recovered. According to consulting company PwC, fundraising in the US stock market has shown a significant increase, with at least 552 companies conducting initial public offerings (IPOs) during the first semester of 2021. This is the highest number of IPOs in the last 20 years.

Credit rating agency Standard & Poor\'s (S&P) lowered its forecast on Malaysia\'s economic growth in 2021 from 6.2 percent to 4.1 percent. S&P also lowered its estimate on the credit growth in Malaysia from 6 percent to 4 percent.

In Thailand, the credit growth grew to 3.7 percent in the second quarter as the country’s economic growth reached 7.5 percent, thanks to an increase in exports. However, the spread of Covid-19 in the third quarter disrupted economic growth again. Credit growth in Thailand is projected at only 1 percent this year. Malaysia also faces a similar situation. Credit rating agency Standard & Poor\'s (S&P) lowered its forecast on Malaysia\'s economic growth in 2021 from 6.2 percent to 4.1 percent. S&P also lowered its estimate on the credit growth in Malaysia from 6 percent to 4 percent.

ARSIP PT WASKITA KARYA (PERSERO) TBK

SOE Minister Ercik Thohir witnessed the signing of the loan restructuring agreement of PT Waskita Karya (Persero) Tbk with five banks in Jakarta, Friday (16/7/2021).

In Indonesia, the economy, which slowed in July-August, is expected to pick up again in September following the easing of restrictions on public activities. In July, the credit demand was still weak, growing only 0.3 percent compared to July last year. Investment loans even fell 0.4 percent, which means the business sector has not yet started investing.

Payment problems

The pandemic has made it difficult for debtors to pay their debt obligations. In 2020, household incomes, corporate and state revenues all dropped while non-performing loans grew. However, state expenditures, household spending and corporate operating costs remained high. Therefore, a special policy is needed to help companies and households, as well as banks, in dealing with non-performing loans (NPL).

The Financial Stability Board (FSB) as an association of central banks and financial sector regulators has expressed its support for the relaxation of prudential rules during the pandemic. There are a number of relaxations taking place, such as those related to credit restructuring rules, as well as relaxation on capital, in which banks are allowed to not meet the counter cyclical buffer (CCB). With relaxation, banks are expected to be able to continue providing loans to debtors affected by Covid-19.

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In Indonesia, the Financial Services Authority (OJK) has also relaxed a loan restructuring regulation to enable banks to restructure their credit. Although being restructured, these loans are still categorized as performing loans. That way, banks are not obliged to set aside loan loss provisions. Banks are also allowed to add new loans in restructuring debtors. OJK recently announced the relaxation of the restructuring rules would be extended for the second time, from March 2022 to March 2023.

The FSB stated that relaxation must be carried out wisely to ensure that banks remain prudent. This relaxation cannot be used to make the banks, which lack capital, look stronger. With the relaxation, information about NPL no longer reflects the actual credit quality.

Therefore, banking analysts no longer use NPL numbers to assess a bank’s performance. Instead, they use the loan at risk (LAR) figure, which comprises information about non-performing loans, plus special mention loans and restructured loans. As of June 2021, the NPL of the Indonesian banks was recorded at 3.24 percent. If added to the number of the restructured loans (during the Covid-19 period), which amounted to Rp 778 trillion, the LAR ratio reached 17.2 percent.

KOMPAS/RIZA FATHONI

Clothing traders at Binaan Warga Market in Jatibaru, Tanah Abang, Central Jakarta, await buyers on Monday, (1/6/2020) They have kept their shops open during large-scale social restrictions (PSBB) because of economic need.

As the restructured loans are categorized as performing loans, banks do not need to set aside provisions for bad debts. As a result, bank profits and the capital adequacy ratio (CAR) are often overestimated. At present, the CAR of the country’s banks is 24.3 percent.

However, a number of large banks have not taken the advantage of the new relaxation rules. They still stick to the existing prudential regulations. Several large banks continued to record an increase in NPL costs in 2020 and the first semester of 2021. Therefore, their profits in 2020 fell due to the increase in the NPL costs and the decline in net interest margin (NIM).

In fact, there are banks that transparently provide data on the categories of restructured loans, some with low, medium and high risk, as well as showing the many reserves for each category.

The banks felt the need to set aside loan loss provisions because some borrowers of restructured loans may not be able to meet the payment schedule. In fact, there are banks that transparently provide data on the categories of restructured loans, some with low, medium and high risk, as well as showing the many reserves for each category.

Due to an increase in the loan loss provisions, several large banks have announced their plans to inject fresh capital this year and next year. This additional capital is needed so that banks are ready to increase their loans in 2022.

Kompas

Mirza Adityaswara

MIRZA ADITYASWARA, the president director of the Indonesian Banking Development Institute (LPPI)

(This article was translated by Hendarsyah Tarmizi).