JAKARTA: The Indonesian government is planning to revive a lockdown-era loan restructuring programme to protect small and medium enterprise (SME) borrowers from default, especially on loans disbursed through the state-led subsidised microloan programme (KUR).

Coordinating Economic Minister Airlangga Hartarto announced plans for the programme’s resumption on June 24, citing a request from President Joko Widodo. The programme was previously extended three times before expiring at the end of March of this year.

It allows banks to reclassify loans that have deteriorated as a result of the economic crisis caused by the pandemic lockdowns. Loans that would normally be considered “non-performing” can instead be registered as “loans at risk”, which helps banks keep their non-performing loan (NPL) ratios artificially low.

“It would reduce the burden on local banks that need to make provisions for rising bad loans, especially due to the KUR,” Airlangga said at the State Palace.

Etikah Karyani Suwondo, a senior researcher at the Centre of Reform on Economics, said that many SMEs were struggling to repay their loans because of limited market access after the pandemic and high interest rates.

She noted that in April, the NPL rate for SME loans increased to 4.26%, up from 3.98% in the previous month, when the programme was still in place.

“The extension is necessary to reduce local banks’ burden in covering non-performing KUR loans,” she said in an online interview on June 26.

However, she warned that the extension could lead to moral hazard, especially as it had been extended multiple times.

This was due to concerns that businesses could be less willing to make real improvements to their financial condition as they would expect the government to continue relaxing the payment requirements.

Doddy Ariefianto, a banking industry analyst at Binus University, said another extension of the loan restructuring programme could create the false impression that some struggling small businesses had healthy operations.

“If businesses still cannot repay their loans, they may be out of business or have a really fundamental problem. Is it necessary to continue restructuring their loans?” Doddy said on Monday.

He also suggested that the decision was more a political effort by the government to maintain the support of local SMEs, which employ more than 90% of the country’s workforce.

However, M. Amin Nurdin, a senior faculty member at the Indonesian Banking Development Institute, said the chance of moral hazard could still be mitigated if authorities focused on borrowers who actually needed the reprieve.

“Obviously, we should not do it evenly across all borrowers. There could be a negative impact, but I see that possibility as quite small,” Amin said.

 - ANN