New rules, price caps to push more mergers amongst Indonesia’s P2P lenders

The regulations will raise compliance costs, but price caps will make it hard to offset them.

Indonesia’s recent introduction of additional underwriting checks and pricing caps for peer-to-peer (P2P) lending platforms will weigh on profits and accelerate consolidation in the industry.

Amongst changes include additional underwriting checks and limits for P2P platforms. This follows after reports of poor asset quality of loans originated by some of the platforms, which resulted in losses to funding providers, Fitch Ratings stated in a report.

Notably, Indonesia’s P2P platforms are not allowed to retain credit risk on their balance sheets. Their funding providers assume the credit risk of those borrowing via the platforms.

The regulation further sets a maximum debt repayment ratio for borrowers, limits the number of P2P platforms that can lend to a borrower at any one time, and strengthens know-your-customer procedures. 

Despite these new regulations, P2P platforms’ asset quality will still hinge on each platform’s credit scoring frameworks, Fitch Ratings said. The non-performing loan ratio was stable at 2.8% as of September 2023, similar to 2022 levels. However, some of the platforms’ have significantly weaker performances compared to their peers, Fitch noted.

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Borrower rejection rates are sighted to rise, and industry growth will slow, with the introduction of the new regulations, the ratings agency said.

Competition will also weigh on the P2P lenders. 

“Banks have become the dominant lenders to the sector, although we believe overall banking sector's exposure to P2P borrowers will remain small as lending appetite is largely limited to the narrow niche of digital banks and rural banks,” Fitch Ratings said.

Increased underwriting requirements will raise compliance costs, but P2P lenders will not be able to offset the higher costs to new borrowers due to the stated pricing caps.

As a result, Fitch is expecting the smaller platforms and P2P lenders to explore mergers.