The Financial Services Authority (OJK) is finalizing several measures to improve lending and will introduce them in the third quarter, a high-ranking official has said.
According to OJK chairman Muliaman D. Hadad, the measures will include leniency for banks to restructure potentially troubled loans and the reduction of the risk-weighted asset (RWA) ratio for insured-credit programs.
"The credit restructuring measures will only be implemented temporarily for two years because we think that banking customers that are currently impacted by economic slowdown will have bounced back after two years," he said recently. The measures will enable banks to expedite the restructuring of their customers' loans by only taking into account their ability to repay the debts.
In a normal situation, any restructuring takes into account three factors, namely repayment ability, business prospects and the financial situation of the customer.
"However, the last two [factors] can be waived temporarily. It will be enough if the customers demonstrate an ability to repay the debts and banks can immediately proceed with the restructuring," Muliaman said.
He added that such a move would prevent the loans from being classified lower than collectability level two in terms of quality and from triggering higher bad debts or non-performing loans (NPL).
There are five loan-quality classifications at the moment, with the best quality set under collectability one, or pass, followed by collectability two, or special mention, collectability three, or substandard, collectability four, or doubtful, and collectability five, or loss.
The latest banking statistics show that there has been a significant increase in the amount of loans under collectability level two, which has been attributed by many as the result of the cooling economy.
The loans reached Rp 197.96 trillion (US$14.85 billion) in April, a 35.4 percent annual increase from the same period in 2014. When compared to December 2014, the loans under collectability level two had risen by 30 percent within just the first four months of the year.
Combined with slower lending disbursement, the decline in the overall credit quality eventually led to a gross NPL ratio of 2.5 percent in April, higher than the 2.1 percent recorded in April 2014 and the 2.2 percent reported in December 2014.
Muliaman said that the OJK also planned to stretch the upper limit of credit to be restructured to exceed Rp 20 billion per debtor.
"Now the amount of credit that can be restructured ranges from Rp 1 billion to Rp 20 billion, but we want to increase the ceiling to cover more customers. The figure is not final yet," he said.
The upcoming measures will be applicable for all economic sectors and loan segments, but only banks with "strong" risk management status will be eligible to implement them, according to Muliaman.
Meanwhile, the OJK is seeking to slash the RWA ratio for insured-credit programs as well, to push higher lending disbursement. "The aim is to take some pressure off banks, so that they are more attracted to venture into insured-credit programs, such as the KUR [people's business credit]," Muliaman said.
In the upcoming regulation, the OJK will require the presence of an insurer — such as state insurance company Perum Jamkrindo or other insurers owned by regional administrations — to allow a certain credit program to enjoy the lower ratio.
A lower RWA ratio will mean lower risk perception, which will lead to lower loan provision by banks.