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Unsecured-loan time bomb ticking amid pandemic
The banks need to be sensitive in a crisis like this. Especially in the case of customers who are acting in good faith
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Easy money: A craftsman completes a bamboo-made becak (pedicab) miniature in Cimangenteung village in Lebak, Banten, on July 8. Banks are offering unsecured loans for small-scale enterprises, among other customers. (Antara/Muhammad Bagus Khoirunas)
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nsecured Loans (KTA) are one of the mainstay products of the banking industry. As personal loans, they are extended to micro businesses, formal and informal-sector workers and self-employed professionals. All sorts of people avail of such loans, ranging from teachers and public servants to street hawkers, food vendors and motorcycle taxi drivers.
According to banking sector data, KTA lending currently accounts for some Rp 142 trillion (US$9.8 billion) of the Rp 1 quadrillion of outstanding loans in the SME sector, or a total of 14.2 percent. On average, the loans vary between Rp 10 million and Rp 15 million. However, if we assume that the average KTA loan is Rp 15 million, there are some 10 million KTA borrowers in Indonesia today.
KTA lending is a mainstay banking product that is very popular among lower-income people.
One of the characteristics of the KTA business is that borrowers are charged high interest rates. Some big banks (both foreign and domestic private) charge interest rates of a flat 1.6-1.9 percent per month. The setting of such high interest rates is predicated on the "high risk, high yield" paradigm. For the banks, charging high KTA interest rates forms part of their credit risk management policies.
The problem is that the banks often fail to properly communicate the reality of high KTA interest rates to their customers. Indeed, the situation is often deliberately obfuscated so that KTA borrowers can end up being misled.
When a bank provides a flat-rate KTA loan, the reality is that the interest rate may turn out to be much higher than anticipated by the customer. This is because KTA installments consist of two components: principal repayments and interest payments. Indeed, an installment could be made up of as much as 75 percent interest and 25 percent principal repayment.
That is what happened to Tikno (not his real name), my favorite fried-rice hawker. He is a KTA customer of a private bank whose story is instructive as to what is really happening on the ground amid the C0VID-19 pandemic.
