Strengthening Indonesia’s Credit Industry Ecosystem through Solidifying Relationship between Financial Institutions and Private Credit Bureau

The credit industry ecosystem is dynamic and requires multi-stakeholder cooperation, resource integration, information sharing, model innovation, and updating credit scores to meet the demands of the rapidly developing industry. Generally, the financial industry ecosystem comprises stakeholders such as Banks, investors, regulators, and technology providers. Specifically, the credit industry ecosystem has similar stakeholders, including the presence of licensed Private Credit Bureaus (PCBs).

In Indonesia, financial institutions such as Banks are under increasing government demand to expand their loan portfolios, especially among MSMEs and unbanked populations. For example, Banks are given a target for credit distribution to MSMEs of 30% by the end of 2024, whereas, as of June 2024, the portion of Bank’s credit distribution to MSMEs has just reached 18.71% of total loans.

To achieve the government’s credit distribution target stated above, Banks then deployed various strategies, including channeling schemes where Banks partner with Fintech companies. However, the hurdle within credit distribution to MSMEs also comes from the non-performing loan (NPL) risks that make Banks more cautious. Data from the Financial Services Authority (OJK) shows that as of June 2024, gross MSME NPLs reached a level of 4.04%, close to the 5% threshold.

Read also: Leveraging Private Credit Bureau to Enhance Efficiency in Indonesia’s Credit Industry

The government has also made a good initiative to save the productive sector from the high NPL rate, for example, in credit restructuring policy during the pandemic in March 2020. Credit restructuring is a credit adjustment for debtors with good credit performance but experiencing deterioration due to the impact of the COVID-19 pandemic. The 75 percent of total debtors receiving this credit restructuring stimulus are MSMEs or 4.96 million debtors with a total outstanding IDR 348.8 trillion. However, this credit restructuring policy was ended by OJK on 31 March 2024, in line with the revocation of the COVID-19 pandemic status. Still, there is a possibility that this policy will be extended until 2025 at the government’s request.

The dynamic within the credit ecosystem makes Banks need to be more agile.

Most importantly, how do Banks manage to remain in control of their cash liquidity and impairment loss reserves (CKPN) while making an effort to make credit more accessible?

According to President Director PT CRIF Lembaga Informasi Keuangan (CLIK) Leonardo Lapalorcia, financial institutions like Banks should consider building an advanced credit risk mitigation strategy that involves a third-party partner like Private Credit Bureaus (PCBs). This strategy involves leveraging the expertise and data analytics capabilities of PCBs and aims to enhance the accuracy of credit risk assessment when making decisions, thereby reducing the risk of non-performing loans (NPLs) and ensuring the sustainability of credit distribution.

The Business Relationship Among Banks and Private Credit Bureaus

CLIK sees Banks as the first-choice loan providers for when Indonesia’s MSMEs need capital for their business. Banks need to evaluate their debtor’s repayment capabilities in such a productive sector. “And this is where our service as PCBs takes part,” says Leonardo.

By partnering with PCBs, Banks can make informed credit decisions. These decisions are based on a credit risk model that imports client data and performs quantitative analysis to generate credit scores. This process not only ensures accurate evaluations but also opens up new opportunities for the industry.

The new form of credit data also influences the relationship dynamic among stakeholders in the credit industry ecosystem. In addition to traditional credit data, new data, such as telco transactions activity, e-commerce transactions, and digital service subscriptions, will gradually be included in credit risk assessment. These new data sources provide insights into a debtor’s financial behavior, such as their regularity of income, spending habits, and financial commitments, thereby enhancing the accuracy of credit risk assessment. PCBs can analyze these valuable data sources and share them with financial Institutions that seek a more considerable debtor pool from new segmentation.

On a business level, Banks can leverage the PCBs service by fully exploring clients’ credit information and transforming it into credit scores to have an accurate understanding of the market and get insight into clients’ value toward larger credit. “At the end, we want Banks to have a larger debtor pool, and each debtor can deepen their access to financial service, increase loan ticket size and tenure of issued loans at prime interest rates,” said Leonardo.