COVID-19 exposes pitfalls in Indonesia's finance sector

NBFIs have been the main source of problematic defaults.

The pandemic has amplified governance weaknesses in the Indonesian financial industry and will likely be further magnified by the economic slump which could lead to bankruptcies and investor losses, a Fitch Ratings report warned.

Most of the failures have been traced back to non-bank financial institutions (NBFIs) which Fitch thinks is not as tightly regulated as the banking sector. High-yielding time deposits marked by insurance, cooperative and asset management companies have been the source of defaults, the report said, which usually bear returns notably above market interest rates.

Governance-related defaults have led to investor losses amounting to $3.5b since 2018, Fitch said, citing local media, with the most high-profile case being that of the state-owned insurer PT Asuransi Jiwasraya’s $1.2b default on deposits back in October 2018 due to allegations of kickbacks and market manipulations.

“ESG scores assigned to Indonesia’s state-owned banks include a relevance score of '4' for Governance Structure, reflecting the risk of the government using its majority ownership to exert undue influence on the banks' boards,” the report explained.

Smaller NBFIs are more at risk to governance lapses than their larger listed peers, but many of Fitch’s rated NBFIs are owned by stronger parents and are required to operate under their parents’ sturdier corporate governance and risk management frameworks.

Moreover, the large number of participants in the sector is a significant task for regulators to ensure adherence to governance practices. Industry consolidation could allow for more efficient allocation of regulatory resources, whilst demarcation can also create a barrier to effective supervision, the report concluded.

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