President Prabowo Subianto’s ambitious plan to launch a government-backed credit program featuring a maximum annual interest rate of five percent has triggered immediate concern among capital market analysts. Harry Su, Managing Director of Research at Samuel Sekuritas Indonesia, has issued a stark warning regarding the potential risks this mandate poses to state-owned banks tasked with its implementation.
“This is bad news for state-owned banks. We have identified five significant risks,” Harry told Katadata on Friday (May 1).
The primary concern cited is a decline in revenue resulting from compressed net interest margins. Secondly, there is an increased risk of a rise in non-performing loans (NPLs) due to more lenient credit policies. Thirdly, the banks will face a substantial increase in loan-loss provisions, which will inevitably erode profitability.
Furthermore, these pressures are expected to negatively impact the return on equity (ROE), reducing the companies’ ability to generate profit from their capital. Ultimately, this leads to a decline in corporate valuation. “The Price to Book Value will be discounted,” Harry added.
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President Prabowo unveiled the low-interest credit initiative during his address at the International Workers’ Day commemoration held at the National Monument (Monas) in Jakarta on May 1. During his speech, he highlighted the financial burdens faced by the lower-income population.
“Brothers and sisters, for years, the interest rates that the common people have had to pay when borrowing money have been insanely high. Isn’t that right? Small borrowers have faced rates as high as 70 percent per year. Correct?” the President stated.
Prabowo revealed that he has already issued instructions to state-owned banks to begin distributing credit with these significantly lower interest rates. “Soon, we will roll out credit for the people with a maximum interest rate of five percent per year,” he promised.
While details on how state-owned banks plan to accommodate this mandate remain unclear, the government has previously criticized these institutions regarding their utilization of hundreds of trillions of rupiah in government-placed funds. Observers are now questioning whether this new directive is intended to serve as a mandatory program to circulate those specific funds.
Summary
President Prabowo Subianto has announced a new government-backed credit program for the public with a maximum annual interest rate of five percent. The initiative aims to alleviate the financial burden on low-income individuals who have historically faced exorbitant borrowing costs from informal lenders.
However, capital market analysts warn that this mandate could significantly harm the financial stability of state-owned banks. Experts highlight risks such as compressed net interest margins, increased non-performing loans, and reduced profitability, which may ultimately lead to lower corporate valuations and a decline in return on equity.