Jakarta – Indonesia is considering modifications to its government program subsidizing micro loans, according to a senior minister on Thursday. This follows the banking regulator’s indication that it would reject the government’s request to ease loan restructuring rules.
Last month, President Joko Widodo proposed extending a COVID-era loan restructuring policy until 2025. This policy had previously allowed banks to forgo making provisions for bad loans, thereby supporting liquidity in the banking sector during times of capital outflows.
Airlangga Hartarto, the chief economic affairs minister under Widodo, stated on Thursday that the proposal was made in response to increased demand for credit protection insurance, which could lead to a rise in bad loans.
The restructuring policy, managed by the Financial Services Authority (OJK), expired in March. However, the OJK recently affirmed that Indonesian banks are well-positioned with sufficient buffers to handle global risks and maintain liquidity, signaling a likely rejection of the president’s proposal.
“We are conducting studies on alternative measures and reviewing the rules for KUR (a government program),” said Airlangga, addressing the OJK’s remarks.
KUR is a program designed to subsidize interest rates on micro and small loans up to 500 million rupiah (US$30,883).
Airlangga did not provide further specifics.
Earlier this week, OJK Chief Mahendra Siregar commented on the resilience of the banking sector.
“The banking industry overall is performing well, bolstered by high capital levels,” Mahendra said. He noted that loan growth surpassed 12 percent year-on-year in May, and the gross non-performing loan (NPL) ratio was 2.34 percent, below the 5 percent threshold deemed unhealthy by the OJK.
Banks have also set aside provisions for bad loans with a coverage ratio of 33.84 percent, which Mahendra described as “very adequate.”
Despite this, OJK data showed that the gross NPL ratio for loans to micro, small, and medium enterprises increased to 4.27 percent in May from 3.65 percent in March.
Some bankers have expressed concerns that Widodo’s proposal might create a moral hazard for debtors, despite the consistently low NPL ratio.
