UPDATE 1-Indonesia to extend loan restructuring incentives for banks to March 2022

* Incentives originally set to expire in March 2021

* Aggregate NPL level below healthy threshold

* Bankers see move as “helpful” (Adds details, economist, bankers’ comments)

JAKARTA, Oct 23 (Reuters) - Indonesia’s Financial Services Authority (OJK) will extend loan restructuring incentives for some banks until March 2022, it said on Friday, to prevent a spike in bad loans as a result of economic fallout from the coronavirus pandemic.

Such an extension allows banks to avoid making provisions for souring loans for a year longer than originally set, among other measures to help the industry, which saw loan growth of 0.12% in September, Indonesia’s weakest in more than a decade.

The incentives have helped keep non-performing loan (NPL) ratios below the regulator’s healthy threshold of 5%.

It said loan restructuring had reached 904.3 trillion rupiah ($62 billion) for 7.5 million debtors by Sept. 28, with NPL levels at 3.15% by the end of September, a slight drop from a month earlier.

“The extension is an anticipation measure to buffer a decline in the quality of debts under restructuring,” the regulator’s chairman, Wimboh Santoso, said.

“But the extension of restructuring policy would be handed out selectively based on assessment of banks to prevent moral hazard,” he added in a statement, saying he also wanted to encourage debtors to “adapt” to the pandemic.

The regulator did not elaborate, but said it was finalising a regulation to back up the extension, and would also extend a relaxation of capital conservation buffer rules while delaying adoption of Basel-III regulations.

The move was “really helpful” for the banking industry, said Jahja Setiaatmadja, chief executive of Bank Central Asia , Indonesia’s largest lender by market value.

Loan restructuring requests have plateaued, but the pandemic’s economic woes persist, said Aquarius Rudianto, director of retail banking at state lender Bank Mandiri, who welcomed the move.

Aquarius added, however, that his bank’s internal strategy was to continue building up provisions to be prudent.

Without the extension, NPL could shoot up to 4% as weak economic activity could still pressure business, said Josua Pardede, chief economist at Bank Permata.

“The hope is, with the extension, NPL could decline further, credit growth could pick up,” Josua added. ($1=14,640.0000 rupiah) (Reporting by Tabita Diela and Maikel Jefriando; Writing by Gayatri Suroyo; Editing by Jacqueline Wong and Clarence Fernandez)