Mirza Adityaswara: Loan Restructuring and Liquidity
Nino Eka Putra ~ FEB UI Public Relations Officer
DEPOK – Jumat (3/7/2020) Kompas.id published an article written by Mirza Adityaswara, economist, President Director of the Indonesian Banking Development Institute (Lembaga Pengembangan Perbankan Indonesia, LPPI) and member of ILUNI FEB UI, in its Opinion page – Impacts of Pandemic – entitled Loan Restructuring and Liquidity. Below is the complete article.
Loan Restructuring and Liquidity
Economic recovery in the second semester of 2020 will depend largely on how Indonesia can prevent the risk of a second wave of Covid-19 infections. That’s why economic projections vary greatly. Bank Indonesia projected a strengthening of economic recovery in the third quarter of 2020 following the relaxation of the large-scale social restrictions in mid June 2020 and the policy stimulus package launched by the government.
The government predicted a growth of between minus 0.4 percent and 2.3 percent this year, but the Organization for Economic Co-operation and Development (OECD) predicted that Indonesia’s economy will contract to between minus 2.8 percent and minus 3.9 percent. Therefore, the government is accelerating the disbursement of the stimulus package to prevent a deeper contraction.
The International Monetary Fund (IMF) in its latest report, Global Financial Stability Update, revealed that asset prices in financial markets recovered in May-June thanks to the optimism resulting from the positive effects of monetary policy relaxation and fiscal aid packages. However, the real sector is still in a difficult condition. A plunge in economic activities has affected bank loan quality as debtors report declining sales. Car sales, for example, plunged from 80,000 units in January to around 3,500 units in May. It will take time for the real sector to recover as debtors need to have their debts restructured.
Loan restructuring potential
Although monetary interest rates have been reduced significantly, even debtors with a moderate loan ratio will still have problems paying off their debts as sales continue to fall drastically. In the end, bankers decided that loan restructuring is an alternative to avoid zero income. However, there is a limit to how long banks can bear the cost of loan restructuring. Excessive losses will reduce banks’ ability to support economic recovery. Maintaining a balance between helping debtors and injecting a breath of fresh air into banks is a focus for financial sector regulators in the current Covid-19 pandemic.
In early April, the US Central Bank (the Fed) urged banks to ease the terms of loan payments and disburse new loans, in addition to a more accommodative banking supervision. The IMF proposed that banks adopt the counter cyclical buffer and liquidity coverage ratio/LCR mechanisms. However, the US banking authority has warned that loan restructuring should be carried out with caution to prevent a moral hazard.
The IMF in its study, Banking Sector Regulatory and Supervisory Response to Deal with Coronovirus Impact, also stressed that loan restructuring should be done prudently and transparently. In the event that loan loss provisions have not been set aside, regulators should have accurate information about debtors whose debts were uncollectible before the pandemic and debtors who actually cannot pay off their debts but whose debts are classified as good debts because of the restructuring.
The Financial Services Authority (OJK) in March issued POJK Number 11 of 2020 on the relaxation of loan restructuring rules during the Covid-19 period. The relaxation is temporary, valid until the end of March 2021. Loans that meet restructuring requirements can be classified as good debts and do not require loan loss provisions.
However, according to the OJK, banks still have to apply the principles of prudence and risk management. Based on the figures released by the OJK, it seems that there is a significant amount of loan that could potentially be restructured.
On May 27, the OJK said that loan restructuring could reach Rp1,308 trillion. This is the equivalent of 23 percent of the total loans. Before the pandemic, non-performing loans in Indonesia were only 2.7 percent of the total loans. Of the amount, Rp552 trillion of MSME loans, or 52 percent of the total MSME loans, could be restructured.
Before the pandemic, bad MSME loans only accounted for around 4 percent of the total loans. That is why the government launched an interest subsidy program to support the restructuring of MSME debts. Hopefully, after the relaxation of the large-scale social restrictions (PSBB), MSMEs can start the recovery process and receive interest subsidies.
Indonesian banks have a high capital adequacy ratio (CAR), at 22 percent. In accordance with the guidelines of international regulators, the OJK has relaxed the regulations on bank capital components. Compliance with the “2.5 percent capital conservation buffer” has been postponed to March 2021.
However, despite the policy easing, a number of conservative banks maintain their prudent stance by setting aside loan loss provisions because it is possible that in March 2021, the problem of bad loans will recur even after the restructuring. Conservative banks will record interest income from restructured loans based on a cash basis, not on an accrual basis. Conservative banks opt for small but “real” profit this year rather than big but risky profit that risks a higher loan loss provision next year.
Liquidity easing
As loan restructuring could disrupt bank cash flows, the OJK has temporarily eased liquidity regulations. The minimum LCR and NSFR (net stable funding ratio) were lowered from 100 percent to 85 percent. Actually, national banking liquidity is in quite good condition as indicated by the ratio of liquid assets to third-party funds (LA/DPK), at 25 percent.
Usually, the AL/DPK is below 10 percent, which is considered risky. Money market liquidity is also reflected in the interbank overnight interest rate, which hovers at around the BI policy rate of 4.25 percent. BI provides rupiah liquidity through the term repo facility for banks that need liquidity, as long as they provide collateral in the form of government securities (SBN) or Bank Indonesia securities (SBI/ SDBI). Recently, the government has also injected Rp30 trillion into state-owned banks. A scheme for government fund placement in Regional Development Banks was also prepared.
If the national banking liquidity is sufficient, why are there news reports about banks having liquidity problems? Banks that have a liquidity problem in an economic crisis are usually banks that have already had problems of bad loans prior to the crisis. A prolonged problem of non-performing loans will erode the CAR, so it must be resolved by increasing the capital (equity) by existing shareholders or by finding new shareholders.
Therefore, these bank need liquidity and capital injection. This requires strong coordination between BI and the OJK. If the banks are still relatively healthy and are awaiting capital injection from new shareholders, while a lot of deposits have been withdrawn and the term repo facility has been used up, they may still qualify for BI’s short-term liquidity loan (PLJP) facility.
The PLJP facility is valid for a maximum of three months, with “good bank loans” as collateral. However, BI certainly needs accurate information from the OJK that the banks are solvent and will be able to pay off the PLJP. The central bank wants to send a message that banks must be managed prudently so that the PLJP is not easily accessible. However, banks have complained that the PLJP requirements are too tough. A solution is much needed.
If the requirements for PLJP are deemed too strict, they must be relaxed provided they do not create a moral hazard. BI’s function as the central bank of the last resort should not be transfered to state-owned banks or even to the government.
If shareholders fail to make ailing banks healthy, the OJK should not delay handing over the banks to the Deposit Insurance Corporation (LPS). However, the LPS should not be burderned with the task of disbursing liquidity when banks are still eligible for the PLJP. Articles in Law No. 2/2020 contain provisions for legal protection for the Financial System Stability Committee (KSSK) so that officials do not hesitate to carry out their obligations to maintain financial system stability. Of course, it is hoped that audit and legal apparatus will show empathy and provide advocacy to ensure a smooth run of the KSSK’s duties. Let’s protect Indonesia that is being hit by a Covid-19-triggered economic crisis. (hjtp)
Source: https://kompas.id/baca/opini/2020/07/03/restrukturisasi-kredit-dan-likuiditas/