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OJK plans cap on micro credit, banks on alert
The Financial Services Authority (OJK) plans to set a cap on micro credit rates this year, a move that would put domestic lenders on alert as micro lending has been seen as the most profitable credit segment
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he Financial Services Authority (OJK) plans to set a cap on micro credit rates this year, a move that would put domestic lenders on alert as micro lending has been seen as the most profitable credit segment.
OJK chairman Muliaman D. Hadad said recently that his agency was working on coming up with a limit on the rate, which it deems is already too high. 'The margin that is generated by micro loans is very high and this is something that is widespread among banks, big and small,' he said recently.
The cap, Muliaman added, would be similar to an existing cap applied in the credit card segment by Bank Indonesia (BI) to protect customers from high interest rates. At the moment, the maximum rate for credit cards is set at 2.95 percent per year.
'A high rate is burdensome for bank customers. So we are going to summon lenders to discuss this matter,' he said, adding that the implementation of the upper limit would be imposed before year-end.
Compared to other loan segments, such as corporate, retail and mortgage, micro loans are indeed the segment with the highest interest rates, which eventually produces the highest profit margin for banks.
Data compiled from BI and commercial banks shows that the highest annual rate for micro entrepreneurs now stands at 22.52 percent, which is offered by private lender Bank Pundi. Bank of China, on the other hand, offers the lowest rate with 6.07 percent.
However, the definition and standards of a micro business differ from one bank to another, even though the Cooperatives and Small and Medium Enterprises Ministry classifies the business as those with a maximum net worth of Rp 50 million (US$4,171) or a maximum annual turnover of Rp 300 million.
According to the July 2014 banking statistics from the OJK and BI, the loans channeled to the micro sector amounted to Rp 133.31 trillion, equal to a tiny 3.8 percent of the banking industry's outstanding loans portfolio.
State-owned banks are listed as the lenders that disburse the biggest chunk of loans at present, followed by foreign exchange commercial banks and regional development banks.
When contacted, Djarot Kusumayakti, the director of micro, small and medium enterprises at state-run Bank Rakyat Indonesia (BRI), said that the lender would welcome the new rule as long as it was applied equally among all lenders.
'We are worried that it would create a price disparity if it was implemented unequally,' he said on Sunday. BRI is widely known as the lender with the widest micro-lending coverage with around 6.9 million micro-lending customers.
- Domestic banks see micro lending as most profitable segment
- Rate for micro credit considered too high
- Rate cap aims to protect costumers
Djarot argued that banks normally set a higher rate for micro loans to anticipate risks that might arise in the segment.
'It [the rate] is also meant to cover operational costs in micro. It's more expensive to disburse loans to micro customers, who generally live in rural and remote areas,' he said.
Meanwhile, Bank Danamon president director Henry Ho said that the OJK and banks should have an open dialogue to avoid unintended consequences from the cap.
'If the cap is within range of market clearance rates and it has built-in mechanisms for market-driven adjustments, it should be workable,' he said in an email.
'The concern is if the cap is artificially marked at a lower-than-market rate, then the micro customers in this segment would be the most adversely affected as access to credit facilities would be cut off,' Ho added.
Separately, Bank Mandiri micro and retail director Hery Gunardi acknowledged that banks' finances would be affected if the limit was set much lower than the rates currently offered.
