Jakarta – Indonesia's central bank on Friday temporarily eased lending limits for banks to encourage them to boost economic activity through increased loans.

Bank Indonesia deputy governor Subarjo Joyosumarto said in a statement rules covering capital adequacy ratio (CAR) limits and divestment of bank equity in heavily-indebted companies would also be relaxed.

He said the calculation of banks' CAR has been revised to include the loan loss reserves under risk-weighted assets. "Banks with a larger amount of non-performing loans will enjoy a higher CAR of up to two to three percent with the new method," he said.

Indonesian banks until now have been reluctant to lend money because it may lower their CAR to below the minimum requirement of four percent, he added.

Joyosumarto, who is shortly scheduled to leave the bank, also said that currently commercial outstanding loans amounted to only 270 trillion rupiah compared to 800 trillion rupiah time deposits in commercial banks.

He said the central bank has extended the time given to banks to settle their legal lending limit problems until May 2001 from previous schedule of October 1999.

For banks which had reached debt restructuring agreements with their debtors through debt to equity swaps, Joyosumarto said they will be allowed to divest their stakes in indebted companies after five years or after these firms book cumulative profits. The statement did not explain how long the temporary relaxation of rules would last.

Indonesia's banking system collapsed under the onslaught of the regional financial crisis in 1997 and 1998, converting the country into a virtual cash economy.