B

ank Indonesia (BI) announced recently the relaxation of the loan-to-value (LTV) ratio imposed on conventional banks and the financing-to-value (FTV) ratio imposed on sharia banks in a bid to maintain momentum in the country’s economic recovery.

The macroprudential policy, which was launched immediately after the central bank raised its benchmark interest rate by 50 basis points (bps) to 5.25 percent, is expected to stimulate the property sector, which currently has the potential to grow and have a significant multiplier effect on the national economy.

Moreover, one of the main objectives of the LTV and FTV regulatory relaxation is to provide first-time buyers with more opportunities to fulfill their housing needs through a housing loan.

The policy includes the adjustment of the LTV ratio for conventional banks’ property loans and the FTV ratio for sharia banks’ property financing. The LTV and FTV rates will be left to each bank’s risk management, which will deal with loan facilities for all types of houses and apartments for first-time buyers.

Furthermore, the difference between second loan facilities and subsequent ones will be eliminated, meaning that loan facilities will have the same LTV/FTV rates.

The new regulation also allows homebuyers to apply for mortgages for homes that are still under construction and allows buyers to take out up to five mortgages at a time.

The LTV and FTV relaxations will come into effect on Aug. 1, with exemptions for central or local government loans and financing programs.

As a part of the macroprudential policy, it is important to note that the LTV/FTV relaxation should also consider the prudential aspect. The policy includes the requirement that the LTV/FTV ratio for property credit and financing are the net ratio of non-performing loans (NPLs) to total credit — non-performing financing (NPF) to total financing must not exceed 5 percent — and the gross ratio of property NPLs to total property credit — property NPF to total financing must not exceed 5 percent.

Furthermore, banks must make sure that there is no loan transfer to another borrower at the same bank or different bank for tenors of less than a year. The requirements are valid for banks that disburse pre-order property loan/financing.

On this basis, the pre-order loans are valid only for banks that have policies that consider the repayment capacity of the debitor.

Banks also are required to comply with prudential principles when disbursing loans. In addition, gradual loan liquidation is only allowed for developers that comply with a bank’s risk management policy. Finally, banks are required to ensure that loans, including down payments, are distributed in transactions and that gradual liquidation be processed through the debitor and developer or seller’s bank account.

Given the aforementioned information, it will be interesting to see whether the LTV/FTV policy as a macroprudential tool boosts property credit and financing.

As the macroprudential policy is still in its development phase, there is much discussion and debate about the effectiveness of it in boosting credit growth.

During times of strong economic growth, such as during the property boom from 2012 to 2013, the macroprudential policy in Indonesia was quite successful. After property credit rose by 45 percent yoy in mid-2012, two more stringent LTV/FTV policies in 2012 and 2013 led to the decline of property credit growth to below 15 percent yoy in 2014.

At the same time, it is debatable how effective the macroprudential policy is during economic downturns. One empirical study conducted in 69 countries from 2002 to 2014 investigated the effectiveness of the macroprudential policy during the period’s financial downturn.

It focused on banks’ leverage cap as a macroprudential instrument. The study’s findings suggest that real credit growth rates in countries that had implemented the leverage cap prior to the crisis were considerably higher than the rate in countries that had not.

In Indonesia, as indicated by historical data, LTV/FTV policy relaxation has a positive correlation with credit growth, especially property credit. Following the implementation of the LTV relaxation in August 2016, mortgage loans grew by 12.75 percent yoy, more than the total loan growth of 10.26 percent yoy in May 2018.

In conclusion, the LTV/FTV policy relaxation is a way for the central bank to boost the property sector. Considering the macroprudential policy was recently issued, the effectiveness of it is to be determined.

The LTV/FTV policy is expected to allow banks to disburse funds through property loans or financing. Furthermore, the policy could also help millennials to purchase their first homes and attract property investors as the relaxation also eliminates the difference between loan facilities and allows for a maximum of five facilities.
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