The prominent default of a financing firm in 2018 hit bank confidence.
Banks in Indonesia are holding back loans for small financing companies that are already facing a worsening capital crunch, according to Fitch Ratings.
Debt funding from domestic banks, comprising loans and non-recourse joint-financing, accounted for 66% of finance company funding at end-2018. Indonesian finance companies are also not allowed to accept deposits and have become reliant on wholesale funding.
"Local banks' reduced appetite for lending to independent finance companies (mostly non-bank-owned or manufacturing affiliates) should help boost the market share of top-tier players, which have more diversified sources of funding," Roy Purnomo, analyst at Fitch Ratings said in a report.
In 2018, a local mid-sized financing company defaulted amidst allegations of fraud and double-pledging of collateral. The situation mimics that in India where Infrastructure Leasing and Financial Services defaulted which prompted banks to reduce exposure to the local non-bank financial institution sector.
"The reluctance by banks to extend local currency loans to finance companies has had the effect of larger finance companies boosting offshore capital market issuance and borrowings over the last year. We expect this trend to continue," Purnomo added.
In response to tight liquidity conditions, the Association of Financing Companies in Indonesia (APPI) introduced a new asset registry database to prevent the practice of double-pledging collateral. "This is currently being rolled out to finance companies and banks and may help to restore banks' trust in the sector," he added.
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