Loan forbearance extension clouds Indonesian banks’ asset quality for longer

The extension is a positive for their asset quality and profits, but credit costs will remain elevated.

The true state of Indonesian banks’ asset quality lives to be known at an even later date after local regulators extended forbearance for restructured loans until end-2023.

Whilst the extension will be a positive for banks’ asset quality and profitability, it also leaves the lenders’ true financial position clouded in uncertainty for longer and prolongs the recognition of impaired loans, Fitch Ratings said in a report.

Indonesia has decided to extend the regulatory forbearance for restructured loans in the wake of a second wave of coronavirus infections and fatalities. This lowers business prospects and raises asset quality and profitability risks for lenders, Fitch warned.

On the upside, the relaxed rules have tempered the impact of the pandemic on banks' asset quality, allowing them to classify loans restructured due to the pandemic as "current". This has reduced pressure on non-performing (NPL) and special-mention loan (SML) ratios but has clouded underlying asset quality.

“The extension provides banks with more time to deal with problem loans as the economy recovers and reduces the risk of a spike in NPLs in Q2 22. It is also a boon for profitability as it allows banks to spread the cost-of-credit impact over a further one-year period,” Fitch said.

As of the end of the first half, restructured loans at the 12 largest banks average around 20.6% of the total, lower than 21.5% during the end of March 2021. However, it is still considerably higher than in pre-pandemic levels, when it was just at 5.2%. About 15% of the banks' total loans were classified as current. 

Overall, Fitch expects credit costs for Indonesian banks to remain elevated in 2021, although not as high as last year, despite the additional flexibility afforded by the extension.