Mountain of Bad Loans Leaves Indonesian Banks Craving Stimulus

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Indonesian banks are looking to the government for additional stimulus measures to cope with a growing pile up of bad loans, as the coronavirus pandemic batters the economy.

The country’s lenders are poised to add at least 556.6 trillion rupiah ($36 billion) of non-performing loans this year amid the unprecedented headwinds from the Covid-19 pandemic, according to PT Bank UOB Indonesia. That will push their soured debt ratio above 5%, from 2.8% at the end of January, the bank estimates.

“The hit to the banking sector is going to be pretty significant,” said Enrico Tanuwidjaja, an economist at the bank. The government needs to announce additional stimulus measures to help the country’s lenders deal with the issue, he added.

President Joko Widodo has already unveiled stimulus packages worth $28 billion and scrapped a budget deficit cap to allow additional spending. While banks have been allowed extra leeway to restructure loans to Indonesian companies, they are still awaiting details of how 150 trillion rupiah from the packages will impact provisioning for bad loans. The government may issue a decree next week outlining interest relief for more than 48 million small borrowers.

With much of the economy coming to a halt as authorities enforce strict social distancing measures, companies have been forced to slash output and millions of employees have either been sacked or furloughed. Among the worst hit sectors are manufacturing, wholesale and retail trade, construction and mining, according to UOB.

S&P Global Ratings on Tuesday cut the outlook for the banking sector to negative from stable, predicting asset quality and profitability will deteriorate.

PT Bank Negara Indonesia is reviewing its exposure to sectors worst-hit by the pandemic and may revise its earnings and revenue guidance soon, Vice President Director Anggoro Eko Cahyo. PT Bank Central Asia, Southeast Asia’s largest lender by market value, sees net interest income shrinking this year, requiring the bank to make higher provisions for bad loans, President Director Jahja Setiaatmadja said.

State-owned PT Bank Mandiri has identified about 58 trillion rupiah of loans in its portfolio for restructuring out of a total of 151 trillion rupiah eligible for such concessions as of last week, according to an exchange filing.

Indonesian lenders were already battling slack credit demand even before the virus outbreak, with loan growth sliding to 5.48% in February, the lowest since 2002. With the pandemic halting fresh investments, credit growth will fall below 5% in the near term and into next year, Tanuwidjaja said.

“Even when demand for loans rebounds, we are unlikely to see it going back into double digits anytime soon,” Tanuwidjaja said. “The banks will be quite careful in extending credit and post-pandemic industries will be evolving into new animals, making lenders become more cautious.”

Mounting non-performing loans and the struggle for capital among medium and small-sized lenders may lead to some banking industry consolidation, Tanuwidjaja said. In order to cushion the blow to profits, the Financial Services Authority should consider allowing banks to delay the adoption of the new IFRS9 accounting standards that will require higher provisioning, he said. The standards became mandatory from this financial year.

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