Indonesia considers changing rules on micro loans

JAKARTA (Reuters) - Indonesia is reviewing rules in a government programme to subsidise micro loans, a senior minister said on Thursday, after the country's banking regulator signalled it would turn down the government's request to relax rules on loan restructuring.

President Joko Widodo last month proposed reinstating until 2025 a COVID-era loan restructuring policy, which allowed banks to avoid making provisions for bad loans, to help shore up liquidity in the banking system amid capital outflows.

Airlangga Hartarto, Widodo's chief economic affairs minister, said on Thursday the president made the proposal amid a rising demand for credit protection insurance, which could translate to higher bad loans.

The restructuring policy, overseen by the Financial Services Authority (OJK), had lapsed in March. But the OJK this week said Indonesian banks have adequate buffers to face global risks and ample liquidity to expand their lending, indicating it would reject the president's proposal.

"We are conducting studies on what else to do, and we're reviewing rules for KUR (a government programme)," Airlangga said, responding to comments by the OJK.

KUR refers to a programme to subsidise interests on micro and small loans under 500 million rupiah ($30,883).

Airlangga did not disclose further details.

OJK Chief Mahendra Siregar said earlier this week that the banking sector was resilient to face potential headwinds.

"The banking industry in general has good performance, supported by high capital levels," Mahendra said, noting loan growth exceeded 12% on an annual basis in May and gross non-performing loan (NPL) ratio stood at 2.34%, below the 5% threshold the OJK considers unhealthy.

Banks have also set aside provisions against bad loans with a coverage ratio of 33.84%, Mahendra said, describing this as "very adequate".

Still, the gross NPL ratio for loans to micro, small and medium business rose to 4.27% in May, compared with 3.65% in March, OJK data showed.

Several bankers have said Widodo's proposal could create a moral hazard for debtors, while also noting the NPL ratio has been persistently low.

($1 = 16,190.0000 rupiah)

(Reporting by Gayatri Suroyo, Stefanno Sulaiman; Editing by Sherry Jacob-Phillips)