Indonesian banks expect to face continued financial strain throughout 2022 as an eased loan restructuring policy, once lauded as a lifeline for banks, is now poised to chip away at their profit margins.
Bankers and banking experts have said that loan restructuring would dampen banks’ interest income over the coming months while interest expenses remain unchanged and provisioning costs remain high.
Their comments relate to the Financial Services Authority’s (OJK) decision to extend a regulation that has enabled lenders to more easily restructure loans. POJK No 11/2020, which was initially slated to expire in March, was extended by a year to March 2022.
The experts also pointed to the rising possibility of higher-than-expected loan defaults this year as a recent Covid-19 surge threatens to hamper Indonesia’s economic recovery. Banks would have no choice but to continue restructuring loans despite the risks.
“As a result, the restructured loans are a ticking time bomb for banks,” said banking observer Paul Sutaryono, former assistant vice-president of Bank Negara Indonesia (BNI), to The Jakarta Post on June 22.
The bankers and experts’ comments over restructured loans signal dimming optimism over the domestic banking industry’s outlook for this year.
The OJK’s decision to ease restructuring rules was meant to provide short-term relief but banks are coming to terms with the fact that they might need to restructure loans throughout 2022 as businesses are unlikely to fully recover this year.
Banks can restructure loans by lowering interest rates, extending repayment periods, reducing principal or interest arrears, adding loan facilities and converting loans into temporary equity participation schemes agreed upon by banks and their customers.
The latest OJK data shows that the industry’s average nonperforming loan (NPL) ratio rose 0.4 percentage points year-on-year to 3.17 per cent in March. Meanwhile, Bank Indonesia data shows bank loan disbursements had dipped 4.13 per cent year-on-year to 5.54 quadrillion rupiah ($380 billion) as of March. An NPL ratio above five per cent is considered high risk.
Bank Mandiri president director Darmawan Junaidi on June 15 said current NPL ratios were actually higher than reported due to legal window dressing after the OJK redefined NPLs to exclude loans restructured as a result of Covid-19.
“A five per cent NPL is right before our eyes. Maybe not this year but maybe 2022,” he told lawmakers during a hearing with the House of Representatives. “At some point, we will no longer cover potential losses on our downgraded assets.”
Mandiri, the country’s largest bank by asset value, saw its net profit decline 25.28 per cent year-on-year to 5.92 trillion rupiah in the first quarter as a result of higher loan provisioning.
Meanwhile, Bank Rakyat Indonesia (BRI), the country’s second-largest bank by asset value, saw its profits drop by 45.65 per cent year-on-year to 18.6 trillion rupiah last year also because of higher loan provisioning.
BRI president director Sunarso said at the same House hearing that the bank’s profit would have reached between 38 and 40 trillion rupiah if there were no pandemic, or in a business-as-usual scenario.
He added that BRI would keep provisioning high this year at 73.11 trillion rupiah, 2.5 times its total NPL value, as the lender expects high loan defaults this year. Sunarso acknowledged that this would dampen profits but preferred to err on the side of safety.
“Right now, we are in survival mode and crisis mode,” he said.
Bank Mandiri and BRI have called on regulators to extend the relaxed loan restructuring period by another year to March 2023 should economic conditions deteriorate.
Indonesian Banks Association (Perbanas) head of policy Aviliani said banks needed the extension because a sudden jump in NPLs would legally require lenders to raise loan provisions, which would further eat into their profit margins.
She added that the OJK was likely to extend the relaxed loan restructuring period and lenders were likely to use it as a recent Covid-19 surge hampers business recovery outlooks.
Economists have long warned that a Covid-19 resurgence would jeopardise Indonesia’s economic recovery, a concern that has become real as the country sees record-high Covid-19 cases over the past three days as a result of the Idul Fitri tradition of mudik (exodus) and the new Delta variant of the virus.
Aviliani told The Jakarta Post on June 21: “It is unlikely that the business sector will revive in 2022.”
THE JAKARTA POST/ASIA NEWS NETWORK