COVID-19 spells trouble for Indonesian non-bank finance firms

It will complicate domestic consumption and cash collections, analysts said.

The efforts to contain the coronavirus will weigh on Indonesia’s non-bank financial institutions (NBFIs) as social distancing measures will gravely impact domestic consumption, according to Fitch Ratings.

The finance sector is facing significant pressure on near-term demand, profitability and asset quality. Nimble consumer spending will severely affect discretionary spending, including purchases of automobiles, with automotive-related financing comprising 74% of industry receivables as of end-2019, said analysts Roy Purnomo, Gary Hanniffy and Elaine Koh.

Lower incomes will impact borrower repayment capacity as the Financial Services Authority of Indonesia has dissuaded collateral repossession in favour of restructuring delinquent receivables. Social distancing is expected to complicate collection efforts in an industry where many companies still depend on manual cash collections, they said.

“These issues will raise credit costs and hurt profitability. Elevated risk aversion in the banking and capital markets may also weaken access to funding, especially from offshore, although Fitch expects less funding disruption for large finance companies, especially those owned by large banks or corporates. Fitch-rated finance companies' asset and liability maturity profiles are generally well matched,” analysts wrote.

To reduce the economic impact of the pandemic, authorities have announced a stimulus worth up to $7.4b (IDR120t), including tax breaks for the manufacturing and tourism sectors. The central bank has cut interest rates and implemented liquidity-support measures.

The Financial Services Authority is finalising new regulation similar to that announced for banks, which will allow financing that is restructured to be classified as "current", rather than "non-performing". This will help limit the deterioration in reported asset-quality ratios, but not the sector's underlying asset quality, the report concluded.

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