Fitch Gives Nod to Indonesia’s New Consumer Financing Rules

By webadmin on 12:57 pm Jun 14, 2012
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Jakarta Globe

Fitch Ratings on Thursday said new consumer finance rules in Indonesia that cap the maximum loan-to-value on auto loans and mortgages are likely to improve underwriting quality and slow lending growth.

The consumer finance regulations — set to come into force on Friday — stipulate a minimum down payment for automobiles of 25 percent for loans from financing companies and 30 percent for loans from banks, Fitch said in a written statement. The requirements will apply to home loans as well.

Some finance companies were offering motorcycle loans with no down payment required, leading to an increase in delinquencies. As a result, the central bank and Finance Ministry are concerned that poor underwriting has resulted in a deterioration in asset quality at some finance companies.

The international ratings agency said the impact of the new rules would be felt mainly on non-bank finance companies, which are more active than banks in higher-risk lending.

It also said the rules are unlikely to trigger a drop in bank lending because most banks have already imposed maximum loan-to-value ratios of 70 percent to 80 percent. The finance industry has been growing at a compounded annual growth rate of more than 30 percent in the last three years and Fitch said it expected this to slow but remain high, at 20 percent to 25 percent.

Financing companies account for approximately 10 percent of total banking system assets. However, because 70 percent of their lending is to consumers, they have a significant effect on that market. The finance industry is also allowed to provide mortgages to consumers, but only a handful of finance companies offer these products.

The central bank, Bank Indonesia, has been proactive in issuing new regulations to prevent a deterioration in consumer-financing asset quality, and to curb inflation. In January, it set new rules for credit cards with the aim of reducing risk in that industry, where default rates have been increasing.