Capital access is hurdle Indonesia's regional banks face

It's a challenge for loan growth.

Fitch Ratings says access to new capital and corporate governance continue to be the biggest challenges that Indonesia's regional banks face in supporting their rapid loan growth.

According to a release from Fitch Ratings, the financial positions of the regional governments in Indonesia, which are the major shareholders of the BPDs, are considered weak.

As a result, this limits the capital they can provide to the banks, Fitch said in a new special report.

Here's more from Fitch Ratings:

In addition, many regional development banks, known as Bank Pembangunan Daerah (BPDs), do not have appropriate corporate governance due mainly to weak internal controls, poor accounting practices and ineffective risk management.

Intervention from regional governments also makes it difficult for the banks' management teams to conduct business prudently.

There are 26 BPDs in 31 provinces in Indonesia. Although they have high market shares in their respective regions, their contribution to the overall banking system remains small, at about 8% of total banking assets as of end-2013.

Fitch's ratings on the banks reflect the potential support they may receive from the central government through the regional governments.

The BPDs are important to the central government, which use them to channel funds to pay civil servants and finance government special projects.

Their importance will grow as Indonesia's regions contribute to a larger share of national revenue.

The BPDs' financial performances are expected to come under pressure in the short term due to the weaker economic environment and rising interest rates, which will hurt the sector's margins and asset quality, which is already weaker than the average for the wider banking sector.

This compares with the recent past when profitability has been helped by rapid loan growth and wide margins.