RETAIL BANKING | Staff Reporter, Indonesia

Is the worst finally over for Indonesian banks' NPL troubles?

NPL ratios will stabilise over the coming quarters.

The Indonesian banking sector faced a challenging operating environment in 2016, but BMI Research analysts believe that the worst is likely to be over, and the industry should start to turn the corner in the latter half of this year.

"We forecast a stronger economic growth of 5.3% in 2017, versus 5.0% in 2016, and this will likely slow the pace of non- performing loans (NPLs) growth and drive credit uptake over the coming quarters. Combined with a strong capital adequacy buffer in the banking sector, we see little risks to financial stability over the medium-term horizon."

Here's more from BMI Research:

We expect NPLs ratio (particularly from the corporate loan segment) to stabilise over the coming quarters, in line with the economic growth recovery. Over the last four years, the NPLs ratio had been on an uptrend, rising from 1.8% in December 2013 to 2.9% at end-2016, even though the government relaxed the loans' restructuring criteria in 2015.

This was due to the fact that many large Indonesian banks had (and continue to have) significant corporate loan exposure to the manufacturing, mining, and construction sectors which had been hard-hit by the tumble in commodity prices, the mining ban, and weak external demand by key trading partners.

Following a stabilisation of commodity prices and the easing of the mineral ore export ban, we expect external headwinds to gradually abate, which should help to arrest non-performing loans arising from mining sector.

Furthermore, the government's commitment to ease red tape and accelerate infrastructure development should also lead to the resumption of multiple delayed infrastructure projects, which will be cash-flow positive for many construction companies.

That said, we note that continued efforts by banks to restructure loans to delay recognition of these delinquent loans could obscure the true levels of NPLs within the banking sector.

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