Indonesian banks are looking to increase their exposure to small businesses through avenues other than lending as part of the central bank’s latest move to facilitate access to finance for the struggling segment of the economy.
Central bank Bank Indonesia has asked national banks to increase their exposure to micro, small and medium enterprises to at least 30% of their loan portfolio by 2024, from a current industry average of around 18%. In addition to direct loans to MSMEs, banks are allowed to achieve the goal by purchasing government bonds or asset-backed securities that support lending to small businesses, as well as providing wholesale financing to lenders. non-banking targeting this segment of the economy.
Indonesian banks have been reluctant to lend to small businesses more aggressively or affordably, forcing some small businesses to turn to fintech platforms, peer-to-peer lenders, or even loan sharks. Lenders are concerned about credit risk while maintaining their net interest margins, which are among the highest in Asia-Pacific, analysts say.
“The 2024 target will be quite ambitious in a way, but banks will find ways to invest it in government bonds,” Enrico Tanuwidjaja, economist at UOB Indonesia, said in an interview. “In other words, they don’t want NPLs to increase if they give [credit] to MSMEs. “
The ongoing pandemic has shut down nearly half of the country’s MSMEs, which are the largest sources of employment and economic output in Southeast Asia’s largest economy, the Indonesian MSME Association told local media on March 26. MSMEs contribute more than 60% of Indonesia’s GDP, the finance ministry announced on April 21.
The new loan target, announced on August 31, will be implemented in phases. Banks need to increase their MSME exposure to 20% by 2022, 25% by 2023 and possibly 30% by 2024.
Lenders across the archipelago benefit from some of the highest NIMs in the region. Indonesian banks generated an average of 4.32% of net interest income from credit products such as loans and other interest-bearing assets in 2020, compared to 2.13% on average for the region, according to S&P Capital IQ Pro. Meanwhile, Indonesian banks have a slightly higher NPL ratio for 2020, at 4.05%, compared to 3.56% in Asia-Pacific.
Concerns about risk
Sharing or transferring credit risk is likely a major concern when Indonesian banks decide how to meet the lending target, analysts say.
“In my opinion, the central bank tries to be flexible … Banks that choose to funnel funds and buy securities are probably due to the lack of resources, appetite and expertise in the MSME segment “said Yulinda Hartanto, analyst at Brokerage PT. CGS-CIMB Sekuritas Indonesia.
“The channeling and purchasing of [government-issued certificates of deposit that back MSME loans] should be less risky, â€Hartanto said.
Banks would also opt to finance from non-bank or fintech lenders, instead of lending directly to MSMEs, Hartanto said.
â€œThe MSME segments will offer a higher margin and profitability in the first disbursements because they have a much higher return on assets, around 15% to 30% compared to companies at 5% to 8%,â€ Hartanto said. Return on assets refers to interest and other income, such as dividend and commission income, earned on loans and investments as a percentage of average earning assets.
But Hartanto added that loans to MSMEs also carry higher credit risk. “By moving towards fintechs, they will rather bear the risk, such as having to buy back part of the bad debts.”
“We do not expect [the MSME lending requirement to have a] A significant impact on earnings given the ability to buy securities, â€said Rahmi Marina, equity analyst at Maybank Sekuritas Indonesia. Buying securities that have underlying assets or funding commitments included would prevent banks’ NPL rates from rising, Marina said.
Reluctance to lend
The state-owned PT Bank Rakyat Indonesia (Persero) Tbk is mandated by the government to provide loans to MSMEs. 54.2% of its Indonesian rupiah loans are currently in the micro segment as of June 30, according to PT CGS-CIMB Sekuritas Indonesia. The lender also recently acquired two other state-owned microcredit companies.
The BIS is determined to continue growing the MSME portfolio and will aim to increase the share of loans to small businesses to 85% by 2025, the company said.
Meanwhile, PT Bank Negara Indonesia (Persero) Tbk has distributed 21.1% of its loans to MSMEs. PT Bank Central Asia Tbk, the only private sector bank in the top four in terms of assets, and PT Bank Mandiri (Persero) Tbk were below the 20% requirement at mid-year.
BCA supports government policy but did not say how they would choose to fill the quota, a spokesperson told Market Intelligence. BNI has also declared its support for the policy and is awaiting further guidance from the central bank regarding which securities may qualify to meet the quota, and will perform subsequent calculations when more information becomes available.
“The appetite of the big banks, ex-BIS, has never been in the MSME segments due to limitations in human resources, credit rating, network and finally management appetite,” said Hartanto.
As of October 15, US $ 1 was equivalent to 14,070 Indonesian rupees.