Although Deputy Governor of the central bank of Indonesia (Bank Indonesia), Halim Alamsyah, said that the non-performing loan (NPL) level in Indonesia’s banking sector is currently safe at 2.24 percent (well below the five percent threshold which is considered safe), the institution has been monitoring the high level of NPLs in four sectors: construction, trade, mining and social services. The bank will study why the ratio has been growing - whether it is a temporary phenomenon or not - and search the correct policy approach to address this issue.
Indonesian Sectors with Highest NPL Ratio:
|Sector|| July 2014
Source: Investor Daily
Indonesia’s recent economic slowdown (the country’s gross domestic product growth has been slowing since 2011) is the major reason why there has been an increase in ‘bad loans’ as consumers and corporations experience more financial troubles. The combined amount of NPLs at the three largest banks of Indonesia - Bank Central Asia, Bank Mandiri and Bank Rakyat Indonesia - was IDR 21 trillion (USD $1.8 billion) in the first half of 2014, a more than 30 percentage point increase from the same period last year. However, against the total loan portfolio of each bank, the NPL ratio is still safe (below 3 percent).
A characteristic of Indonesia’s banking system is that NPL ratios are higher at the regional development banks. A high NPL ratio in the country's trade sector is mainly caused by loans to the micro, small and medium sized enterprises.
A non-performing loan is when a borrower (debtor) does not pay scheduled interest payments nor repays the principal (for at least 90 days). The NPL ratio measures a bank’s NPLs against its total loan portfolio. Banks may sell NPLs in an effort to diminish the level of risky assets on their balance sheets but these sales require careful attention as they may have financial implications, such as impacting on the company's profit and loss, and tax situations.
A high ratio of NPLs has a negative impact on the economy as it can lead to a disintermediation of bank- system lending brought on by banks' reduced profitability, a stagnation of economic resources (including labour and capital) in fields with low productivity, and cautious behaviour of companies and consumers because of a decline in confidence in the country’s financial system.