How will looser mortgage rules weigh down on Indonesian banks?

The central bank earlier scrapped the 15% required downpayment for first-time home buyers.

Indonesian banks should remain cautious in offering downpayments of less than 15% to home buyers in order to maintain stable asset quality levels following the relaxation of mortgage rules, according to credit rating agency Fitch. 

The central bank earlier scrapped the 15% required downpayment for first-time home buyers in an effort to offset the economic impact of higher interest rates as the rupiah flounders. 

Also read: Can Indonesian banks weather severe currency depreciation?

“Asset-quality risks from the relaxed restrictions could increase over the medium term, as market conditions improve and the larger banks become less cautious,” the credit rating agency said.

However, banks eager to grow their client base and market share should maintain caution in loosening underwriting standards especially smaller players which are at the most at risk since they could start accepting lower downpayments as soon as regulation permits them to, Fitch warns.

“Banks may be tempted to loosen underwriting standards, given that loan growth has hovered around just 8% since the commodity price downturn in 2014-2015, which is low by previous standards and has constrained earnings growth,” Fitch said in a statement.

Also read: Indonesian loan growth will recive little boost from lower LTV regulation

Under the new regulations set by the central bank, lenders will disburse 30% of the payment for a new property when a mortgage is signed, 20% when foundations are completed, and 40% when the project is topped off. Developers had previously received nothing until foundations were completed.