Indonesia considers reviewing microloan subsidy program to strengthen it

Indonesia is considering revising its microloan subsidy regime amid regulatory resistance to a proposed extension of loan restructuring. The review follows President Joko Widodo’s recent proposal to revive a COVID-19-era policy that allows banks to waive bad loan provisions, aiming to boost liquidity in the financial system during a period of capital outflows.

However, the country’s financial regulator, the Financial Services Authority (OJK), has suggested it is unlikely to support the move, arguing that the banking sector remains strong enough.

This changing situation has prompted a comprehensive review of the current regulations of the Kredit Usaha Rakyat (KUR) programme, which provides subsidised interest rates for small and micro loans, to adequately address the growing demand for credit protection and the potential for an increase in non-performing loans.

This article examines a potential review of Indonesia’s microloan subsidy regime, the debate over the revival of COVID-era loan restructuring policies, and their impact on microenterprises.

background

The COVID-19 pandemic, declared in Indonesia in March 2020, caused widespread disruptions across various sectors and significantly impacted both public health and economic activity. To curb the spread of the virus, the government implemented large-scale social restrictions (PSBB), which caused a significant economic downturn and contributed to the recession. According to an August 2020 report by Statistics Indonesia (BPS), the country’s economy contracted 5.32% year-on-year in the second quarter of 2020, with growth in the first quarter falling to 2.97% from 5.02% in the same period last year. This economic downturn was particularly severe for micro, small and medium-sized enterprises (MSMEs), many of which were forced to close or operate with significantly reduced sales.

In response to the economic challenges facing SMEs, the Indonesian government introduced several measures, including the Presidential Production Support Program for SMEs (BPUM). Launched on 14 July 2020, BPUM aimed to provide critical working capital support to SMEs. The initiative was part of the National Economic Recovery (PEN) Program, designed to support the most vulnerable businesses affected by the pandemic.

BPUM specifically targeted microenterprises that were not traditionally able to access bank loans or were not formally incorporated. The program aimed to support small family businesses and other informal sector operations to ensure they received the financial assistance they needed. BPUM aimed to support 9.1 million microenterprises by the end of its first phase with a total budget allocation of Rp 22.01 trillion, which was subsequently increased to Rp 28.8 trillion (US$1.7 billion) to benefit 12 million microenterprises.

The assistance provided under BPUM was a one-time cash transfer of 2.4 million rupiah (US$148) per eligible small entrepreneur. To be eligible, businesses had to meet several conditions, including being Indonesian citizens with a valid identity card number and owning a small business. Funds were paid directly into beneficiaries’ bank accounts, ensuring fast and efficient distribution.

Impact on small businesses if the policy is reinstated

There could be some significant implications for small and medium-sized enterprises if the Indonesian government reinstates its COVID-19 loan restructuring policy, which was initially introduced to mitigate the economic downturn during the pandemic by helping banks avoid having to make bad loan provisions and maintaining liquidity in the banking system.

On the bright side, there are some positive effects:

• Strengthening liquidity and credit accessRestoring the policy could help banks maintain liquidity and make it easier for small businesses to get credit. With more available capital, banks may be more willing to lend to small businesses that are often perceived as riskier.
• Financial StabilityFor small and medium-sized businesses struggling with existing loans, the restructuring policy could provide much-needed relief: it would enable them to renegotiate loan terms, lower monthly repayments or extend repayment periods, allowing them to manage their cash flows more efficiently.
• Business ContinuityBy relieving immediate financial pressures on small businesses, this policy could help many of them stay in business, preserve jobs, and sustain economic activity at the grassroots level.

At the same time, critics of the policy’s reinstatement argue that it could also have several negative effects, including:

• Potential moral hazardSome bankers argue that reinstating the policy could create moral hazard by incentivizing borrowers to take on riskier loans in the hope that they might be restructured again in the future. This could lead to irresponsible borrowing and lending practices.
• Diminished incentives for prudenceThis policy could reduce incentives for small businesses to manage their finances prudently if they believe loan restructuring is always an option, which could undermine their long-term financial stability and sustainability.
• Banks’ reluctance to lendDespite this policy, banks may be cautious about lending to SMEs due to the perceived higher risk of non-performing loans (NPLs), which could run counter to the policy’s intended expansion of credit.

Current situation and considerations

The data showed that gross non-performing loans in the banking sector had fallen to about 2.33% by April 2024, lower than the average during the pandemic. This suggests that the banking sector is more stable and that banks have sufficient provisions to cover potential losses.

Given this stability, some argue that the need for such policies is now less urgent and that the risks of moral hazard may outweigh the benefits.

Credit growth stood at 12.15% year-on-year in May 2024, above the central bank’s target, and liquidity in the banking sector is robust, suggesting that smaller businesses may already be benefiting from increased lending activity without needing an easing of restructuring rules.

Moreover, while some industry leaders, such as the CEO of Bank CIMB Niaga, believe that banks currently have sufficient liquidity, others, such as the secretary-general of the Indonesian Banking Association, have stressed the need to support struggling businesses even after the pandemic.

In conclusion, reinstating the COVID-19 era loan restructuring policy could provide immediate financial relief and improved access to credit for SMEs, helping them recover and continue operating. However, it also carries the risk of creating moral hazard and encouraging imprudent financial behavior. Balancing these benefits and risks will be important for the Indonesian government as it considers whether to reinstate the policy.