Indonesia Seeks to Enhance Micro Loan Subsidy Program

As Indonesia faces resistance to proposals for loan restructuring extensions, there is a rising consideration of revising its microloan subsidy program. It is related mainly to Indonesia’s president’s suggestion to revive the pandemic-era policy of boosting financial liquidity.

The changing situation warrants a complete examination of the Kredit Usaha Rakyat (KUR) program’s rules, which provide subsidised interest rates for micro and small loans in order to meet rising credit protection requirements and probable default loan growth.

The rules governing the Kredit Usaha Rakyat (KUR) program are under review in Indonesia, and changes are being considered for its micro-loan subsidies. The main aim is to bring down high-risk borrowing and provide them with credit security. Besides, reintroducing a loan restructuring strategy from the days of COVID-19 will even help small businesses since it helps banks stay liquid without necessarily having to write any bad debts, thus stabilising the financial system.

The COVID-era policy offered significant financial assistance by qualifying micro-entrepreneurs one-time cash grants of 2.4 million rupiahs (US$148). Companies that satisfied specific requirements—like possessing a microenterprise and having a legitimate identity—got money straight into their bank accounts.

Evaluating MSME Loan Restructuring Risks

Reintroducing this policy will significantly affect MSMEs since it will preserve the banking system’s liquidity and promote economic stability during recessions, just like it did during the epidemic. However, should MSMEs take advantage of the policy, banks and financial institutions are bothered by the possibilities of increased non-performing loans (NPL).

According to data, the banking sector’s NPL ratio decreased to approximately 2.33 per cent in April 2024, which is lower than the average during the pandemic. This shows that banks have sufficient reserves to cover future losses and that the banking industry is more stable overall.

The banking industry has abundant liquidity, as evidenced by loan growth that exceeded the central bank’s target in May 2024, growing at a rate of 12.5% annually. The situation implies that current lending activities may already be helping microenterprises, negating the need for loosened restructuring regulations.

Reinstating the COVID-era loan restructuring policy could provide immediate financial relief and better credit access for micro-enterprises, supporting their recovery. But, it risks creating moral hazards and encouraging imprudent financial behaviour. The Indonesian government must carefully weigh these benefits and risks when considering reinstating the policy.

Streamline Your Micro-Loan With 3E Accounting

Stay ahead of Indonesia’s evolving financial landscape! As the Kredit Usaha Rakyat (KUR) program and loan restructuring policies are under review, ensure your business is prepared for potential changes. 3E Accounting can help you navigate these updates, manage financial risks, and optimize your microloan strategies.