Indonesia’s scores of peer-to-peer (P2P) lending firms are bracing for a brutal cull as the COVID-19 pandemic afflicts the crowded sector with rising defaults, wary lenders and a crippled micro-business segment.
“The market will consolidate, but it will not be driven by acquisitions,” said Aidil Zulkifli, chief executive and co-founder of UangTeman, one of the oldest P2P players in the market. “A natural process will take place. Companies will go bust as they can no longer shoulder costs.”
The prospect of consolidation among P2P platforms will mark a sharp shift for Indonesia’s P2P scene, which has exploded over the past few years with 161 companies now registered with the Financial Services Authority (OJK). Of those, 25 have permanent licences, including UangTeman, which is backed by ACA Investments, Pegasus Tech Ventures, KDDI Corp and Draper Associates.
Indonesia’s reported P2P default rate has been climbing over the past year, and February’s non-performing rate was already at 3.9 per cent. That was up from 3.2 per cent a year ago and only slightly better than the 4 per cent in January. The market now anxiously awaits March figures, which are expected to reflect a larger impact from the pandemic. Indonesia only confirmed its first COVID-19 case on March 2, which has since led to a fast-growing number of cases and the onset of social distancing measures.
What is concerning is that the reported default rates tend to under-represent the true non-performing rate among borrowers, because over the past two years many P2P firms have partnered with credit insurance companies such as Simas Insurtech, Askrindo and Asei Indonesia on the advice of OJK to protect lenders from bad loans. Defaulted loans that are covered by insurance do not raise the reported default rate, which explains how some P2P platforms such as AsetKu and Danamas manage to record zero to near-zero default rate.
The popularisation of lenders’ insurance demonstrates how an increase in defaults is likely to spill over from P2P platforms and lenders into what has become a broader P2P ecosystem. There is no official data on the exposure of the insurance industry to P2P lending, but credit insurance contributed 18.4 per cent to the total premium raised by the general insurance industry last year, according to General Insurance Association of Indonesia (AAUI). The credit insurance industry raised 14.6 trillion rupiah ($926 million) in premiums last year, up 86.2 per cent year-on-year, partly due to the rising demand from P2P lenders.
The great lockdown
The early signs are enough to give players pause. UangTeman’s Zulkifli said his firm has temporarily shelved its Philippines expansion plans to focus on protecting existing employees, investors and customers by strengthening risk management measures.
“Loan applications already increased by 30 to 40 per cent in March, relatively to February. I told my team, ‘No’,” said Zulkifli, who expects the crisis to last the next six months. “We need to be far more careful now in approving loans.”
A number of uncertainties cloud the outlook.
On a fundamental public health front, critics argue that Indonesia has been slow to identify the sick and to contain the virus. As of April 9, only 52 out of 1 million people had been tested for COVID-19 in Indonesia, far below neighbouring countries such as Singapore, with 11,000 per million people, and Malaysia, with 1,799 per million people. With 240 dead so far, Indonesia’s fatality rate — relative to positive patients — ranks the highest in Southeast Asia, and suggests either poorer healthcare or less effective detection, or both.
Timely containment is critical. Indonesia’s government has slashed its GDP growth projection from 5.3 per cent to 2.3 per cent, and Finance Minister Sri Mulyani has said that the economy could shrink by 0.4 per cent if the pandemic continues to disrupt economic and social activities until the second half of the year.
The World Bank is far more bearish on Indonesia’s outlook, setting a baseline projection of 2.1 per cent GDP growth and a 3.5 per cent contraction under a worst-case scenario. Around one-third of Indonesia’s 270 million population is still at risk of falling into poverty due to economic shocks, while 35 per cent are still poor or vulnerable, according to World Bank estimates.
“The virus is not something that economic policy or financial industry re-structuring can solve. Smart social and life choices like social distancing will flatten the curve, and hopefully bring the pandemic under control, but with so many variables, nothing is for sure,” said Zennon Kapron of financial services market research and consulting services provider KapronAsia.
Social distancing may flatten the viral infection curve, but it also curbs household consumption and disrupts supply chains. The growing consensus among economists is that the pandemic, unlike the financial crises of 1998 and 2008, will be particularly harsh on Indonesia’s main economic engine and a key P2P borrower segment: Micro, small and medium-sized enterprises (MSMEs).
Mobility around retail and recreation areas in the country dropped by 47 per cent from baseline levels on Sunday, March 29, according to Google’s Covid19 Community Mobility Report, while mobility to and from grocery stores and pharmacies dropped 27 per cent.
“Many MSMEs provide critical services like food and basic daily needs, so these will always survive as long as the population is still there to spend. The wrinkle this time is that much of the spending is moving online. If MSMEs aren’t digital, they may suffer,” said Kapron.
Only 8 per cent of Indonesia’s more than 60 million MSMEs, which contribute roughly 60 per cent to annual GDP, are doing business online, according to a government estimate.
Even being online is no panacea. Hilda Lumongga, a 37-year-old housewife who lives in the West Java capital city of Bandung, has lost about a third of her income from retailing goods online despite making a switch from fashion goods to sanitisers, food supplements and other health products that have seen better demand amid the pandemic.
Hilda, who in the past took P2P loans to finance her business, said she’s reluctant to borrow now. “I’m just not sure whether I can turn a profit under this situation,” she said.
The impact in Indonesia will also be widespread. Bhima Yudhistira, an economist for Indonesia’s leading think tank Institute for Development of Economics and Finance (Indef), said that rapid infrastructure development in the past five years has better integrated rural and urban economies in the country and enabled faster transmission of the virus’s impact. That will make the hit on rural areas comparable to cities.
“We will see the number of P2P players shrinking as default rise and finding fresh funds from retail lenders becomes hard,” he said.
Yudhistira argued that P2P platforms that rely on institutional lenders are likely to have a better chance in weathering the crisis, explaining that institutional lenders have more flexibility than retail lenders to restructure bad loans.
Adrian Gunadi, co-founder and CEO of Investree, said that as lending platforms, P2P companies could facilitate but not initiate debt restructuring. Having strong institutional backers greatly improves the ability of lenders to pursue that recourse.
“At times like these, we need strong partners,” said Gunadi, whose company announced its $23.5 million Series C funding round earlier this week from a group of investors co-led by Mitsubishi UFJ Financial Group Innovation Partners (MUIP) and BRI Ventures, the newly minted corporate VC arm of state-owned bank BRI.
What doesn’t kill you
But long-term forecasts for P2P lending remain rosy for Indonesia, and for P2P platforms that survive the pandemic, one of the big prizes will be the chance to play the long game.
DealStreetAsia spoke with a dozen retail lenders, and most of them expect that economic pressure will peak within the next six months, with a recovery in sight in the fourth quarter of this year.
Ten out of 12 believe that the industry will be able to weather the storm. Five said they even expect to ramp up their exposure to P2P lending in the next three months, while two plan to hold and another five said they would reduce their exposure.
“To me, COVID-19 is temporary,” said Andreas Paskalis, whose Telegram channel has more than 800 retail lenders as its members. “The long-term outlook for the next five to 10 years is still immense. The reason is simple. Financial access to the banking sector is still very hard for many Indonesians. P2P is still much easier.”
Consider the fundamentals. MSMEs need financing of about 1,700 trillion rupiah ($107 billion) annually, of which the formal banking sector can only provide 40 per cent, according to the OJK. A report by Oliver Wyman, a banking and financial consultancy, said this lack of access to financing curtails Indonesia’s economic output by approximately $130 billion, or about 14 per cent of its GDP. P2P lending is seen as the key to unlocking this massive economic potential.
Debt levels among Indonesian households are also relatively low. The country’s household debt to GDP ratio stood at 17 per cent as of September 2019, much lower than other emerging economies such as Thailand (69 per cent), Malaysia (68 per cent) and China (54 per cent). Indonesia’s household debt has ample room to rise as millions more enter the middle class in the coming decade.
Indeed, the 2020s are expected to be a golden period for Indonesia. While other economies in the region are facing an ageing population, Indonesia’s productive population, namely those aged between 16 and 65, continues to rise and is expected to peak by 2030. The World Bank’s Aspiring Indonesia report suggests that more than 100 million Indonesians could join the middle class if proper economic reforms are in place.
“It’s important for P2P players to navigate this difficult time and ensure proper risk management. If they can survive, then there will be better times ahead,” UangTeman’s Zulkifli said.