www.theindonesiatoday.com - JAKARTA, Indonesia Today - 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, says Fitch Ratings.
The impact will be felt mainly on non-bank finance companies, which are more active than banks in higher-risk lending.
The consumer finance regulation - set to come into force on June 15 -
stipulates a minimum downpayment for motorcycles and cars of 25% for
loans from financing companies and 30% for loans from banks. Some
finance companies were offering motorcycle loans with zero downpayments,
and this has led to an increase in delinquencies. As a result, the
regulator is concerned that poor underwriting has resulted in a
deterioration in asset quality at some finance companies. (source)
The rules are unlikely to trigger a drop in bank lending because most banks have already imposed maximum LTVs of 70%-80%.
The finance industry has been growing at a compounded annual growth
rate of over 30% in the last three years. We expect this to slow down,
but to remain high at 20%-25%.
Financing companies account for approximately 10% of total banking
system assets. However, because 70% 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 has been proactive in issuing new regulations to
curb excessive deterioration in consumer-financing asset quality, and to
curb inflation. In January, Bank Indonesia
set new rules for credit cards, with the aim of reducing risk in that
industry where default rates have been increasing. (Indonesia Today)