Reviewing the Discourse on Revision of P2P Lending Rules

Four years after OJK issued POJK 77 of 2016, the dynamics of the lending industry grew rapidly. As of December 7, 2020, there are 152 companies operating, with 36 of them having obtained permits and the rest are still registered.

This figure actually shrank compared to last year which reached 164 registered and licensed organizers. It was discovered that the registration mark was revoked because it did not meet the provisions or voluntarily returned it to the OJK.

Total outstanding loans as of September 2020 were recorded at Rp12,72 trillion. The booming potential of this industry is supported by the inflow of investment from global and local investors. In notes Startup Report 2019 arranged DailySocialIn the last three years, fintech has become the top three industries that have received the most investment.

However, the growing number of players is in line with the growth in the number of illegal fintech companies. According to records, the Investment Alert Task Force since serving from 2018 to October 2020 has stopped 2.923 companies, more than the number of companies officially operating.

The regulator's homework doesn't end there. Of the total outstanding, its distribution is still focused on the island of Java and is still dominated by consumer loans. In fact, of all organizers, OJK recorded only the top 10 players with contributions of up to 61,68% of the industry's outstanding share.

Several of the reasons above have finally led the regulator to revise POJK 77 of 2016 and the plan is to ratify it towards the end of this year. In the draft, there are seven points emphasized:

1. Removal of registration status, only permissions.
2. Increase in minimum paid-up capital requirements, to IDR 15 billion when licensing from previously IDR 2,5 billion.
3. Conditions of requirements equity of 0,5% of the total outstanding or at least IDR 10 billion.
4. Existence fit & proper test administrator and PSP.
5. Loan obligations to the productive sector and outside Java.
6. Strengthening provisions so that shareholders Existing more committed to supporting the implementation of p2p lending.
7. Adding the provisions of sharia principles that have not previously been regulated.

The majority of the points above are allegedly OJK's way of making players more efficient lending in order to make a more significant economic contribution to the country.

OJK has been showing signs of taking this step since February 2020, when it passed a registration moratorium for new organizers until the second half of this year.

The reason is that the number of players is currently too large and the quality of the industry needs to be improved first. At the same time, regulators need time to improve the supervision system.

Same treatment

Regulators also apply efficiency to the number of industry players for all the industries they oversee. In the financial industry alone, OJK encourages all industries under it to consolidate, be it mergers or acquisitions, in order to have competitiveness as well as a form of adaptation to the current economic situation.

OJK's orders are even, namely imposing a minimum capital limit that must be met before the specified deadline. In banking, for example, Indonesia had around 1.800 small-scale BPRs and 113 BUKU I-IV banks as of last year.

Through POJK Number 12 concerning commercial bank consolidation, which was only ratified in March 2020, it is stated that towards the end of the year small banks or BUKU I banks must have core capital of at least IDR 1 trillion. Then gradually the core capital must reach a minimum of IDR 3 trillion in 2022.

If they fail to fulfill these provisions, the bank must make an agreement with the OJK regarding exit policyuntil there is a mutual commitment. As for other options, banks can downgrade or convert to BPR, or self-liquidation.

News about mergers and acquisitions ultimately colors the dynamics of the banking industry. For example, BCA has taken over two banks, namely Bank Royal and Rabobank to become their parent companies (respectively becoming BCA Digital Bank and merged with BCA Syariah).

Then, POJK Number 5 of 2015 concerning the obligation to provide minimum capital and fulfill the minimum core capital for BPRs, which requires BPRs to have a minimum core capital of IDR 3 billion until 31 December 2019 and IDR 6 billion until 31 December 2024.

Chief Executive of Banking Supervision and Member of the OJK Board of Commissioners, Heru Kristiyana, said that OJK's bank supervisory officers are being used a lot to supervise the large number of small banks. Supervision has become inefficient and OJK hopes that these small banks can consolidate to become stronger.

Institute for Development of Economics and Finance (Indef) economist Nailul Huda said that it seems like OJK is taking steps to streamline its industry by emphasizing the need for mergers and acquisitions in the financial industry.

"With the increase in core capital, of course it will be increasingly burdensome for current p2p lending fintechs and players who will enter the industry because of the requirements which I personally think are quite tough for a start-up business," he said to DailySocial.

He is of the view that the revised plan, especially regarding the minimum capital limit, is more suitable for the company p2p loans which are already stable and receive funding from investors, so that the increase in core capital requirements may not be burdensome for them.

Less precise

OJK's excuse is that the fewer the number of players, the higher the quality of fintech players. He actually looks at it from the other side, that the quality of fintech players is not only seen from core capital restrictions, but also from the use of technology, requirements and limitations of the loan platforms provided.

Nailul focuses more on the technology side, because it could be that in the future the technology used by companies will be better and cheaper. This will be in contrast to the core capital limit, if it is too high it will actually hinder business competition. "I believe technology will become more sophisticated and cheaper."

Therefore, Nailul believes that the steps taken by OJK are for numerical efficiency p2p loans it felt inappropriate because he believed that the more he came here, the cheaper and better the technology would be. This condition makes the costs of setting up a fintech company even cheaper.

"However, because there are capital restrictions that are too high, it can cause fintech start-up companies to have difficulty getting core capital. "This could be detrimental in terms of competition and consumers will be increasingly suffocated by the currently relatively high interest in fintech."

He adds to his argument with a simple illustration. With technological developments, production costs for fintech will become cheaper. People can get interest at relatively low rates. However, because there are OJK regulations regarding high core capital, this burden will be borne by people who want to borrow. “So the interest is getting higher.”

Therefore, if it continues to be implemented, he hopes that the OJK can implement it in stages or divide it into several classes (BUKU) like banking. This is to accommodate start-up companies and not hinder technological development and innovation.

Views of fintech players

DailySocial also asked for views from two lending providers regarding the minimum capital readiness stated in draft revised POJK 77 of 2016.

Modalku Co-Founder and CEO Reynold Wijaya is of the view that capital and equity requirements are important and reasonable for financial services institutions. Capital adequacy is one way to determine the health level of a company and is a strategy for surviving in difficult conditions.

"To carry out business activities in the field of technology-based lending and borrowing services, of course the organizers are expected to have healthy finances and therefore, capital and equity requirements are one of the benchmarks that are planned to be regulated in the future."

Regarding the discourse on funding obligations outside Java, Reynold fully agrees that this is an effective step to accelerate equitable financial literacy. "Currently, Modalku has also reached MSMEs outside Java through loan facilities for online sellers and will continue to expand our reach."

He also hopes that, if the policy discourse is passed, adequate time can be given so that organizers can ensure that this implementation can be carried out optimally and in stages.

Modalku as a group is claimed to have succeeded in disbursing financing amounting to IDR 18,8 trillion in accumulation. The company has also entered the online seller segment without collateral of up to IDR 250 million with an average loan nominal of around IDR 25 million. This product has distributed more than IDR 760 billion to more than 26 thousand online entrepreneurs.

KoinWorks COO Bernard Arifin also agreed that increasing core capital is not an issue because in principle it is very important to do. Moreover, investors' interest in investing their capital in lending companies in Indonesia is still considered quite large, especially because of the large potential of the financing distribution market for SMEs in Indonesia itself.

"This is a positive thing because now lending has entered a mature industry so it is necessary to apply the principles of prudence and transparency, because consumer awareness is increasing."

In line with this, the company's efforts to expand its presence outside Java will continue to be encouraged starting next year. This year, KoinWorks opened a representative office in Sumatra. Currently 50% of the outstanding loan distribution at KoinWorks is still centered on Java and is dominated by Jabodetabek, then there is Medan 15%, Bali 10%, and Sulawesi 10%.

Currently outstanding KoinWorks' distribution is more than IDR 2,5 trillion with an average monthly distribution of between IDR 200 billion-IDR 300 billion, almost back to the pre-pandemic distribution figure of around IDR 350 billion. Lender growth grows to 61% year-on-year or 549 thousand users at the end of this year.

Glimpses to the land of the Bamboo Curtain

OJK may have read correctly about the condition of the p2p lending ecosystem in China which has been devastated. Its downfall began last year. Chinese regulators set strict rules to minimize the practice shadow banking which is detrimental to consumers.

They stipulate that only companies with capital of no less than 50 million Yuan can operate and are required to transition the business into a regional lending company, and no less than 1 billion Yuan to transition into a small lender eligible to operate nationwide.

This harsh rule  effectively reduces the number of companies from around 6 thousand companies in 2015, to 427 at the end of October 2019. In fact, the number has now shrunk to six companies in September 2020. The industry has lost investors more than 800 billion Yuan ($115 billion) from failed platforms .

It didn't stop there, the Chinese government finally united so as not to repeat mistakes that had systemic impacts. They began to highlight the data banks and their protection that were collected giant technology company such as Alibaba, Tencent, Baidu, Meituan, and others in providing fintech services to users via their platforms.

Guo Shuqing, Chairman of the China Banking and Insurance Regulatory Commission (CBIRC), said that the fintech industry has caused many new phenomena and problems. Therefore, it is necessary to pay attention to the answers to questions like these:

“Are big tech [companies] blocking new entrants? Are they collecting data incorrectly? Do they refuse to disclose information that should be made public? Are they engaging in behavior that misleads users and consumers?”

Guo said that large companies such as Alibaba and Tencent have many subsidiaries operating in the fintech sector, even though they are known for their products in the electronic payments sector. But under the same umbrella they can provide more than just that service.

“Some big techs run cross-sector businesses with financial and technology activities under one roof. "It is necessary to keep abreast of these spillovers… and take timely and targeted action to prevent new systemic risks," he said.