FITCH : INDONESIA REGULATIONS TO TEMPER MULTI FINANCE RISKS

ENGL – 32160702nnn IQPlus, (13/05) – Fitch Ratings says that while Indonesia’s steady economy and low credit penetration may support the domestic multi-finance industry’s growth prospect and performance, challenges may be material under difficult operating conditions, especially when preceded by brisk lending and lax underwriting, alongside structural issues of limited funding and business diversity. Nonetheless, incremental progress in the regulatory framework and potential shareholder support for most major finance companies may help to partly mitigate such threats.nnProfitability and asset quality indicators of most multi-finance companies are at their cyclical best, reflecting benign operating conditions. Nonetheless, their performance can be volatile through credit cycles, considering their narrowly-focused business profiles in consumer loan products and/or equipment leasing, with end-borrowers generally sensitive to inflation and commodity prices. This indirectly inhibits the ability of most finance companies in diversifying their funding sources, which are mostly from banks. These characteristics are the main constraints to the ratings of independent players, even better established ones, in the ‘A(idn)’ rating category.nnIn comparison, higher National ratings for Fitch-rated entities reflect the impact of shareholder support in funding, liquidity and capital, as well as wide distribution channels of parent banks. One potentially positive industry-wide development is the plan to have a single regulator for both banks and finance companies in Indonesia, if it results in improvements in corporate governance, transparency, and prudential standards for finance companies. Finance companies – currently under the control of the Ministry of Finance – have been only moderately regulated, with the few notable regulations being the 10x cap on the debt/equity ratio and minimum down-payment rules on selected consumer loan products.nnThe report titled Indonesian Multi-Finance Industry; Regulation Could Partly Curb Volatile Growth and Risk Profiles is available at www.fitchratings.com or by clicking on the link above. (end)