Indonesian banks are seeking to increase their exposure to small businesses through nonlending routes amid the central bank's latest push to ease funding access for the struggling segment of the economy.
The country's central bank, Bank Indonesia, has asked domestic banks to increase their exposure to micro, small and medium-sized enterprises, or MSMEs, to at least 30% of their loan book by 2024, from the current sector average of about 18%. In addition to direct loans to MSMEs, banks are allowed to meet the target by buying government bonds or asset-backed securities that back lending to small businesses, as well as by providing wholesale funding to nonbank lenders targeting that segment of the economy.
Banks in Indonesia have been reluctant to lend to small businesses more aggressively or affordably, which has forced some of the small businesses to turn to financial technology 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 said.
"The 2024 goal will be quite ambitious in a way, but banks will find ways to put it into government bonds," Enrico Tanuwidjaja, an economist at UOB Indonesia, said in an interview. "In other words, they do not want to see rising nonperforming loans if they give [credit] to MSMEs."
The ongoing pandemic has shut down nearly half of the nation's MSMEs, which are the biggest sources of jobs and economic output of the largest economy in Southeast Asia, the Indonesian MSME Association told local media March 26. MSMEs contribute to over 60% of Indonesia's GDP, the Ministry of Finance said April 21.
The new lending target, announced Aug. 31, will be implemented in phases. Banks must increase their exposure to MSMEs to 20% by 2022, 25% by 2023 and eventually 30% by 2024.
Lenders in the archipelago enjoy some of the highest net interest margins in the region. Indonesian banks on average generated 4.32% of net interest income from credit products such as loans and other interest-bearing assets in 2020, compared with the region's average of 2.13%, according to S&P Global Market Intelligence. Meanwhile, Indonesian banks have a slightly higher NPL ratio for 2020 at 4.05% compared with the 3.56% in Asia-Pacific.
Concerns on risk
Credit risk sharing or transfer is likely of top concern when Indonesian banks decide how to meet the lending target, analysts say.
"In my view, the central bank tries to be flexible. ... Banks that choose channeling funds and by purchasing securities are likely due to lack of resources, appetites, and expertise in the MSME segment," said Yulinda Hartanto, analyst at brokerage PT CGS-CIMB Sekuritas Indonesia. "The channeling and purchase of [government-issued certificates of deposit that back MSME loans] should be less risky."
Banks would also opt for funding nonbanks or fintech lenders, instead of lending directly to MSMEs, Hartanto said.
"MSME segments will give higher margin and profitability in early disbursements as they have much higher asset yield, around 15% to 30% compared with corporate at 5% to 8%," Hartanto said. Asset yield refers to interest and other income, such as dividend and fee income, earned on loans and investments as a percentage of average earning assets.
But Hartanto added that MSME loans also carry higher credit risk. "By channeling into fintechs, they will instead bear the risk, such as having to buy back some of the bad loans."
"We don't expect [the MSME lending requirement to have a] significant impact on profit given the option to purchase securities," said Rahmi Marina, equity analyst at Maybank Sekuritas Indonesia. Purchasing securities that have underlying assets or commitments to inclusive financing would keep banks' nonperforming loan rates from rising, Marina said.
Reluctance to lend
State-owned PT Bank Rakyat Indonesia (Persero) Tbk, or BRI, is mandated by the government to provide loans for MSMEs. As at June 30, 54.2% of its Indonesian loans are in the micro segment, according to PT CGS-CIMB Sekuritas Indonesia. The lender also recently acquired two other state-owned microlending firms.
BRI is determined to continue to increase the MSME portfolio, and will aim to increase the portion of lending to small business up to 85% by 2025, the company said.
Meanwhile, PT Bank Negara Indonesia (Persero) Tbk, or BNI, has distributed 21.1% of its loans to MSMEs. PT Bank Central Asia Tbk, or BCA, the only private-sector bank amongst the top four by assets, and PT Bank Mandiri (Persero) Tbk were below the 20% requirement by the half-year mark.
"The appetite of big banks, [excluding] BRI, have never been in the MSME segments due to the limitations in human resources, credit scoring, network, and lastly, management appetite," Hartanto said.
As of Oct. 15, US$1 was equivalent to 14,070 Indonesian rupiah.