As the OJK disclosed on May 5, loan receivables of multifinance companies in the country totaled Rp 435.53 trillion (US$29.5 billion) at the end of March after growing by 16.35 percent year-on-year (yoy).

The authority reminded those lenders to maintain their equity above the minimum requirement, as well as to conduct "stress tests" and "sensitivity analysis" periodically.

Multifinance players interpret the OJK's statement as a precautionary announcement and stress that the risks mentioned may not materialize in the near future. Nonetheless, analysts say there are external factors that need to be watched closely by those lending firms to prevent trouble.

According to Suwandi Wiratno, who chairs the Indonesian Financial Services Association (APPI), the growth of multifinance companies is tied to the country's economic growth. Statistics Indonesia (BPS) announced on May 5 that gross domestic product (GDP) in the first quarter was up by 5.03 percent yoy, beating a consensus estimate of 4.97 percent.

However, he noted the OJK was not wrong to be cautious and multifinance firms still needed to engage in proper risk management, especially in assessing new borrowers and focusing on collection efforts.

"In every economic cycle, there is a zero-sum game, meaning there are companies that benefit from the current trend while others face losses. So, in choosing new borrowers, we should consider that there are some people who work in a certain field and feel the positive impact, while the rest don't," Suwandi told The Jakarta Post on Wednesday.

Suwandi said nonperforming financing (NPF), the ratio of bad debt compared with total outstanding loans, at multifinance companies in the country was still at a healthy level, at 2.3 to 2.4 percent.

However, Center of Economic and Law Studies (CELIOS) director Bhima Yudhistira said the risks to the multifinance sector could not be assessed only on the basis of the NPF ratio. According to him, the connection between local players and foreign companies also needed to be considered, as there was a potential systemic impact from financial instability in other countries.

On top of that, there is a risk that El Nino weather phenomenon will affect the agricultural output of certain regions in the country, hampering the ability of people there to repay loans.

"We may not see the effect in the NPF in the short term, but the risk is there for the long-term period," Bhima told the Post on Wednesday.

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Nafan Aji Gusta Utama, an analyst at Mirae Asset Sekuritas, said the OJK's statement was aimed at demonstrating prudence in its management of the national multifinance business.

The agency expects multifinance companies to achieve loan growth of between 13 and 15 percent this year.

The lenders’ gearing ratio, which is the ratio between outstanding loans and equity, may continue to grow until the end of this year, according to Nafan.

However, the analyst highlighted continued global economic uncertainty, which may result in slower economic growth and affect borrowers' ability to make repayments.

CELIOS' Bhima pointed out that domestic consumer spending only grew 4.54 percent in the first quarter of this year, less than the overall GDP growth of 5.03 percent, so there was potential for "restraint" in the long term.

"Some people may prioritize meeting their basic needs over loan repayments," Bhima said.

He stated that vehicle loans, whether for personal or commercial use, accounted for a major chunk of multifinance companies’ loan growth but also noted that some firms were focusing on sectors that had yet to finish the process of restructuring so as to extricate themselves from bad debt accumulated at the peak of the pandemic.

"Thus, there are companies that still have a cautious stance in accepting new borrowers," Bhima said.

Not much room for diversification

Ogi Prastomiyono, the OJK's head of non-bank financial industry supervision, stated in the press briefing that the agency had pushed multifinance companies to diversify their sources of funds.

"[Multifinance companies] need to increase their capital amid the fast loan growth," Ogi said.

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According to Bhima, the option for multifinance firms to diversify their funding sources, for instance to rely more on banks, is quite open.

"However, those financing companies need to reassure banks that the credit risk level can be managed in the future," Bhima stated.

That said, the APPI's Suwandi explained that there was not much room for multifinance companies to spread their capital sources further. Some companies with a solid performance could start to issue bonds, but the rest would still depend on banks.

"Around 60 to 70 percent of our funds still come from banks, either domestic or foreign. That has been the case and will continue to be the case," Suwandi noted.