Indonesia has a problem with debt. At a national level, government debt amounts to 29% of gross domestic product - lower than neighbouring countries such as Malaysia and Thailand, but high enough to cause significant public concern. This debt has grown by 48% in the last five years, even as the value of the Indonesian rupiah continues to slide.
The country’s internal strategies to manage this debt, including cutting state fuel subsidies, have had knock-on effects at the business and personal level. Higher costs and weaker currencies mean more borrowing to make ends meet.
Private sector foreign debt remains high, sitting at $190.6bn at the end of 2018. Bank Indonesia attributes this to an unregulated market for corporate borrowing, and purchases of local corporate bonds by foreign investors.
At the personal level, Indonesia’s household debt stands around $100bn, in a slow decline since record highs in early 2018. Non-performing loans peaked in July 2006, when they made up 8.4% of debts in the country; as of Q4 2018, they represented 2.7% of debt in Indonesia. This modest-seeming figure is a major problem for Indonesia’s governments, banks, borrowers and lenders, because the country is ranked seventh in the world for collections complexity: collecting unpaid debts in Indonesia faces enormous challenges, none of which are easily solved.
The current retail banking climate in Indonesia
Rapid expansion of Indonesia’s banking capacity under the ‘New Order’ regime, which deregulated the financial industry in the 1980s to encourage further economic growth, saw 166 brick-and-mortar banks and over 9000 privately-owned lenders emerge in a decade. Those lenders, between them, had a collective $16bn in non-performing loans to handle. Since regulations were reintroduced in 2012, the figure has slowly declined, to the point where - on the whole - Indonesian retail banking is in fair shape.
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Research by Atradius suggests the immediate future for retail banking in Indonesia is medium risk: difficult, but not dangerous. A long credit cycle across the Asia-Pacific region and relative insulation from the 2008 financial crisis have created a generally robust banking climate. However, a combination of high debt and high asset prices are creating concerns about the long-term credit standing of Asia-Pacific banks. For Indonesia in particular, the depreciating value of the rupiah and a skittish market for government bonds around the 2019 presidential election are creating further short-term uncertainty.
The immediate future for Indonesia’s retail banking
Indonesia’s economic direction is, as might be expected, a major factor in the April 2019 election. Incumbent president Joko Widodo has overseen an investment-friendly, borrow-heavy culture that has yet to pay off to the planned extent; his chief rival, Prabowo Subianto, is an economic nationalist with a popular platform of self-sufficiency and reduced borrowing. In the event of a Prabowo win, economic protectionism is likely to be the order of the day.
Meanwhile, Euler Hermes’ global report on investment opportunities describes Indonesia, on the whole, as a low-risk investment environment - with the crucial exception of collections complexity. Payments and court proceedings are both rated high complexity - even insolvency proceedings are rated as ‘sensitive’, despite recent reforms to the decision-making process.
Euler Hermes describes legal action as “lengthy and costly, while the appeal process provides debtors with an opportunity to delay the proceedings further; therefore, conducting orchestrated debt collection efforts is the best option.” The responsibility for these collections falls to third-party agencies, as banks seek to cut costs and delegate responsibility - and this is where the trouble starts.
The debt collections landscape now
Debt collections in Indonesia are a tense and racially-charged field. Field agents are predominantly from Moluccan and Ambonese minorities, from a background of ethnic stereotypes that sees them perceived as “brave, tough, and terrifying”. For many of them, “debt collector” is the only job available: the stereotype under which they labour and the confrontational, unsavoury nature of field collections across Indonesia form a vicious circle.
Although Indonesian law forbids intimidation of debtors - either physical or verbal - there are loopholes and grey areas around embarrassment and harassment in public, and a tradition of using physically and psychologically intimidating people to collect according to the letter of the law. Ferry Lasatira, a veteran collector with thirty years’ experience in the field, asks “How can we come up to someone to collect on their debts if we are afraid?”
These direct, old-school debt collection techniques are seeing competition as Indonesia opens the doors to fintech companies. An influx of fintech-based lending platforms have extended credit capacity to private citizens and SMEs who are unable to access bank lending - but at a cost. Lending apps frequently demand access to borrowers’ phone contacts - when the borrower falls into debt, the app uses those contacts and calls debtors’ families, friends and employers, extending a web of harassment throughout the debtor’s online presence.
Efforts are, however, being taken. A complaint by the Jakarta Legal Aid Institute has seen 25 fintech lenders formally accused of unethical debt collection. Meanwhile, the OJK - Indonesia’s financial services authority - has cracked down on 635 operators in three years, working with central and commercial banks to block financial services to unregistered lenders, and with Google to block unknown lenders from putting apps on the Play Store.
Bloomberg’s Andy Mukherjee suggests Indonesia’s problem is not its level of debt, but the culture surrounding it. Mukherjee claims that an overall lack of leverage in the Indonesian financial sector is causing everyone from debtors to shareholders to lose out. Credit demands from large businesses are almost tapped out, and banks need to turn toward SMEs to grow their loan portfolios. And crucially, as he says, “Fintech firms are moving aggressively to profit from banks’ outdated payment systems” - but if they’re doubling down on the same cultural problems, they’re missing out on the potential.
Indonesia has promise as a market. Steady GDP growth, a focus on more secure local borrowing, and relatively stable political conditions are likely to bring about an economic boom, especially since Indonesia borrows to fund large-scale infrastructure, health and education projects. The 2019 election will be crucial, determining whether Indonesia doubles down on a borrowing-driven programme of modernisation and infrastructure investment, or turns from the global marketplace in pursuit of self-sufficiency that’s popular with its working voters.
However, debt collections remain a major priority for the country, whichever direction its economic policy takes. Poor regulation is certainly part of the problem, as is the existing culture of debt collections which treats debtors as perpetrators who need to be coerced into repayment.
The ideal solution is one which circumvents bad debts emerging in the first place - an extension of fintech into better credit scoring and risk prevention to avoid potential non-performing loans being issued, and a flexible approach to repayment which accepts “little and often, if not frequent” as a valid repayment strategy.
Interested to know more about the economic and debt picture in APAC? Check out our overview of the region’s various efforts.