Indonesian Regulator Allows More Risk for Banks to Boost Economy

Indonesia’s financial regulator is allowing banks to take higher risks when disbursing loans, seeking to stimulate growth in Southeast Asia’s largest economy from a more-than five-year low.

The Financial Services Authority will relax risk-weighted asset rules for bank lending to consumers, Chairman Muliaman Hadad said in a briefing in Jakarta Friday. It’s also loosening a non-performing-loans rule for financing companies, and will develop a regional bond market to support government infrastructure development.

Indonesia is grappling with faltering credit expansion among lenders. Loan growth is now forecast to reach 13 percent to 15 percent this year, compared with a previous estimate of 16 percent to 17 percent, Hadad said, citing business plans submitted by 108 banks.

“These policies have been issued so the financial industry can be a locomotive to pull the carriages of the national economy faster and in a more stable way,” Hadad said.

Loans secured by residential homes will get a risk weighting of 35 percent, regardless of their loan-to-value ratio, from a range of 35 percent to 45 percent previously, he said. Credit for public housing programs will get a weighting of 20 percent, regardless of LTV ratio, from a prior range of 35 percent to 45 percent.

Small Boost

By easing the risk weightings, Indonesia will free up capital set aside by the banks for new loans to companies and individuals. Under the Basel III framework, banks are required to set aside capital according to the risk of each loan as part of measures intended to curb risk-taking and prevent a repeat of the global financial crisis.

“The new measures can potentially boost consumer loan growth, but in the grander scheme of things, consumer loans make up for a smaller percentage of loans at commercial banks,” Ivan Tan, a credit analyst at Standard & Poor’s in Singapore said by phone. “A real boost for loan growth would have to address the corporate and SME sectors. We are not seeing a boost on these ends yet.”

In November, Bank Indonesia allowed financial institutions to count their debt issues when calculating their loan-to-deposit ratios, another measure intended to free up more lending by banks.