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NEWS UPDATES Asean Affairs        2  March 2011

Bank Indonesia’s loan push may spark defaults

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A new move by the central bank to spur bank lending and economic growth may cause an increase in bad loans and erode earnings, analysts have warned.

As of Tuesday, Bank Indonesia began penalizing banks with loan-to-deposit ratios below 78 percent. Bank Mandiri, the country’s largest lender by assets, boosted its ratio to 72 percent from 66 percent in June, according to a company spokesman.

Bank Central Asia raised its ratio to 55 percent from 51 percent, corporate secretary Raymon Yonarto said, while state-owned Bank Negara Indonesia has a ratio of 68 percent.

“With the 78 percent floor in place, asset quality is likely to deteriorate, leading to higher nonperforming loans,” said Eugene Leow, an analyst at research provider Business Monitor International in Singapore. “Profit margins will also take a hit as banks may have to lower lending rates to meet the minimum ratio, eroding their net interest margins.”

Rising consumer spending is driving expansion in Indonesia, increasing pressure on policy makers to restrain price gains and protect purchasing power. Last quarter, the economy grew the fastest in six years.

By setting a loan-to-deposit ratio threshold and stipulating the amount banks must hold as reserves, BI can bolster growth while keeping inflation on target, Governor Darmin Nasution said in September, when the new rules were first outlined. About 30 lenders had ratios below the required minimum at the time.

If banks are forced to boost lending, “it is quite easy to think they might relax their standards a little too much,” said Robert Prior-Wandesforde, head of Southeast Asia economics at Credit Suisse.

“I’ve also heard that Bank Indonesia wouldn’t mind higher amounts of leverage in the economy to make its interest rate tool more effective.”

Consumer loans in Indonesia climbed 22.7 percent last year compared to a 19 percent increase in 2009 and a 30 percent advance in 2008. Indonesian companies raised $10.8 billion from syndicated loans last year, little changed from 2009. They agreed to $119 million of loans in January, the slowest start to a year since 2006.

“Indonesia is a very under-banked country and there is clearly scope for loan growth,” said Aninda Mitra, Moody’s lead sovereign analyst for the country. “Any persuasion to increase lending needs to be handled carefully, though, given that inflationary pressures are becoming more evident.”

President Susilo Bambang Yudhoyono hopes to expand the country’s economy at an annual average rate of 6.6 percent and create 10.7 million jobs by the end of his second term in 2014. He has pledged to double infrastructure spending to $140 billion to improve and expand the nation’s roads, ports and power plants.

BI will impose a fine of 0.1 percent of a bank’s deposit base for every 1 percent shortfall in the loan-to-deposit ratio.

Raymon said it was “almost impossible” for BCA to meet the 78 percent target this month, so would pay a penalty of between Rp 6 trillion and Rp 7 trillion ($678 million to $791 million).

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