Jakarta. Indonesia's banking system remains strong enough to weather slow economic growth and rising bad loans, thanks to healthy capital levels and strong profitability at local banks and improvements in the supervisory regime, the International Monetary Fund said in a report on Monday (12/06).
"Under severe stress test scenarios, banks experience sizable credit losses, particularly from corporate exposures, but high capital and strong profitability help to absorb most of these losses and the resulting capital shortfalls are modest," the report said.
"Many [mostly smaller] banks may not have sufficient liquidity to meet potential deposit outflows but reassuringly, the test shows that the needed amounts, including in foreign currency, are manageable."
The report said the capital adequacy ratio in the banking system was 20.6 percent in the third quarter last year, far above the regulatory requirement of 8 percent.
The report noted that the banks' profitability is high with returns on assets averaging 2.7 percent over the past decade.
"Indonesian banks are very profitable compared with banks in other emerging markets," it said.
That should help banks counter the impact of nonperforming loans that almost doubled to around 3 percent in late 2016 from 1.7 percent in 2013, mainly due to debts in the manufacturing and commodity-related sectors.
The report also pointed out that besides the banks' resilience, the local authorities have also been pursuing an agenda to strengthen financial oversight and crisis management.
The government made an "important change" in the supervisory architecture through the new framework for crisis management and safety nets in the Prevention and Resolution of Financial System Crisis Law (PPKSK Law).
Still, the Indonesian authority needs to enhance the rule's effectiveness by including emergency liquidity assistance framework and clearly defining the roles of the president and the Financial System Stability Committee (KSSK) in crisis management as well as allowing public funding under limited circumstances with appropriate safeguards.
"[The IMF directors] look forward to continued efforts to address remaining deficiencies and align the framework with the revised Financial Action Task Force standard," it said.
The report is based on the Financial Sector Assessment Program mission led by Ulric Eriksson von Allmen of the IMF and Erik Feyen of the World Bank, who visited Indonesia in September and October last year and again in February this year. The executive board of the IMF discussed Indonesia's financial system stability assessment on May 24 and approved the assessment on Monday.
Better Banking Outlook
Global debt rating agency Moody's Investors Service changed its outlook on the country's banking system to positive from stable on the back of expected improvements in banks' operating environment, asset quality and the government's capacity to extend support when necessary.
"Indonesian banks will benefit from an improving operating environment in the coming 12 to 18 months, as economic growth picks up due to supporting macroeconomic policies and a stronger market for the country's key commodities," Srikanth Vadlamani, vice president and senior credit officer at Moody's, said in a statement on Tuesday.
Moody's baseline scenario assumes Indonesia's gross domestic product growth at 5.2 percent this year and 5.3 percent next year, compared with 5 percent in 2016.
According to Moody's assessment, the Indonesian banking sector will see an improvement in asset quality driven by a recovery in corporate revenues. Both funding and liquidity will be stable in the banking system and pressure from faster loan growth will be "modest" as bank deposits will be growing at a similar pace.
Moody's rated nine Indonesian banks that accounted for 64 percent of the total system assets as of the end of March this year.