November 6, 2017 / 4:22 AM / 4 months ago

Fitch: Lower Down Payments Pose Risks for Indonesian Finance Cos

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Indonesian Multi-Finance Industry here JAKARTA/SINGAPORE, November 05 (Fitch) Some Indonesian multi-finance companies are accepting lower down payments on loans in response to a lowering of minimum requirements since mid-2015. The relaxed standards are likely to continue to support near-term industry growth, but lower down payments could eventually lead to weaker asset quality, particularly among the smaller players that have responded most aggressively to the regulatory changes and which tend to have weaker risk management capabilities, says Fitch Ratings. Minimum down payment requirements on finance company loans have been lowered twice in recent years - first in June 2015 and again in December 2016 - and are now as low as 5% for some finance companies. The authorities have tended to use adjustments to down payment requirements as a tool to regulate industry growth. Tightening in 2012, for example, helped to cool rapid financing growth. Larger finance companies have generally continued to require down payments well above the regulatory minimum to protect asset quality and contain credit costs. These companies also fund a significant proportion of their financing through joint facilities with banks, which usually means that banks' higher regulatory minimum down payment applies - this is 20% for motorcycles and commercial cars and 25% for passenger cars. Nevertheless, the proportion of loans with down payments of less than 20% rose from an average of just below 10% in 2015 to above 15% in 1Q17 among Fitch-rated entities, most of which are large finance companies. Smaller finance companies are likely to remain more willing to take advantage of the relaxed requirement, where they are eligible, as they pursue faster growth and attempt to be more competitive with the larger companies. The trend towards lower down payments could lead to an eventual decline in asset quality and a rise in credit costs, particularly to the extent that it results in companies providing finance to lower quality borrowers. The regulator is attempting to contain these risks by requiring higher down payments at finance companies with weaker track records on underwriting and risk management. For example, only finance companies with a non-performing financing (NPF) ratio of less than 1% are allowed to accept down payments of as low as 5%, while companies with NPF ratios of more than 5% must continue to secure down payments of 20%-25%. This approach should help guard against systemic asset quality problems, but is unlikely to prevent at least some deterioration in lending standards. Relaxed down payment regulation is likely to continue to encourage receivables growth in the short term. The multi-finance industry is also recovering from a slowdown in 2014-15, when a slump in commodity prices and a cooling of the economy hit vehicle and heavy equipment sales. Financing growth picked up from 0.4% in 2015 to 7.7% in 2016. Sales of new cars are now rising again, albeit slowly, while motorcycle sales have shown signs of stabilisation. Consumer auto financing dominates the portfolios of most finance companies, but heavy equipment financing is rebounding strongly on the back of the mining recovery, and is likely to be a driver of finance company growth over the next year or so. Indonesia's favourable economic prospects, expanding middle class, and low credit penetration rates should support finance company growth in the longer term. Car financing has more potential for growth than motorcycle financing, given that only around 5% of the population owns a car, compared with 40% that own a motorcycle. Further detailed information can be found in Fitch's "Indonesian Multi-Finance Industry" report, which can be accessed on or through the link above. Contact: Priscilla Tjitra Associate Director Financial Institutions +62 21 2988 6809 PT Fitch Ratings Indonesia DBS Bank Tower 24th Floor, Suite 2403 Jl. Prof. Dr. Satrio Kav 3-5 Jakarta, Indonesia 12940 Gary Hanniffy, CFA Director Financial Institutions +62 21 2988 6808 Dan Martin Senior Analyst Fitch Wire +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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