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How the COVID-19 crisis is impacting Indonesian fintech lenders

Fintech platforms report surging loan demand, but expansion and fundraising plans are in question.

The pandemic that started in China in December 2019 is now affecting 203 countries and territories, sending financial shockwaves around the world. In Indonesia, finance minister Sri Mulyani recently stated that the country’s economy will face major turmoil. In the worst scenario, economic growth will drop to negative 0.4% and the rupiah could slide to IDR 20,000 per US dollar, which would mark its weakest conversion rate in history. At noon on Friday, the local currency was trading at IDR 16,465 per USD, already at the lowest level since the 1998 crisis.

The significant decline in economic growth is caused by plummeting investment activity, as well as a drop in household and government consumption, Mulyani told local media on Wednesday. Small and medium enterprises (SMEs), which stabilized the economy during the 1998 crisis, are now suffering the most, as the government implements social distancing measures limiting people’s activities to their homes.

Surging online loan demand

In the fintech space, the online lending industry is already registering a rise in demand. Many self-employed workers already lost their income while companies across the country are placing staff on unpaid leave, or dismissing them altogether. As a result of the growing need for cash, a number of platforms already see a surge in loan requests. Peer-to-peer lending startup UangTeman received 40% more applications than in the previous month, according to CEO Aidil Zulkifli.

Zulkifli noted that many of the borrowers work as online taxi and motorcycle drivers, or are owners of small kiosks, which have been experiencing direct impacts and are now in need of quick microloans. “Whether this [increase] is good or not depends on the perspective. As a socially responsible lender, we’ll continue monitoring credit quality in order to ensure the online lending ecosystem in Indonesia remains solid and healthy,” said Zulkifli in a recent web-based press conference.

Under normal circumstances, this increase would have a positive impact on the platform, especially towards the credit growth target. However, in the midst of a pandemic like this, surging loan applications could indicate a weakening economic environment. Zulkifli affirmed that UangTeman had anticipated the impact of a coronavirus crisis since the beginning of the year, and it has been implementing a strict risk assessment for prospective borrowers in order to prevent loan defaults.

Aside from consumer lending, other areas of the lending business don’t seem to have been affected yet. KoinWorks, which focuses on small business and education loans, didn’t see a clear spike in applications in the past month. The company believes that its business will nevertheless continue to run strongly, despite situations brought on by COVID-19.

“We know from history that all pandemics are short term in nature and usually pass in a few months. Our borrowers may have operating difficulties during this time, but they are still fundamentally good businesses with a value proposition to their clients,” KoinWorks’ CFO Mark Bruny told KrASIA. “As a responsible lender, we feel KoinWorks is well-positioned to assist these SME entrepreneurs to continue to run during these difficult but temporary times.”

KoinWorks believes that the role of fintech is certainly vital in the current situation. Fintech lenders can protect their communities by continuing to support local businesses during this time, and by providing additional capital. “This is a great time to work even more closely with our borrowers and lenders, and to forge strategic, long-term relationships which will benefit all parties for years to come,” Bruny said.

Dima Djani, CEO of shariah-compliant P2P lending platform Alami, which offers invoice financing for SMEs, shares this view. Djani said that most of its borrowers are from defensive sectors like food, utilities, and healthcare, so their businesses are not vulnerable during the crisis. Therefore, the current situation doesn’t change the company’s loan dynamics drastically.

Read this: What does it mean to be a shariah-compliant fintech company?

Increasing risk of non-performing loans

While online lenders will likely see a spike in demand, they need to keep an eye on the solvency of their borrowers. A sudden economic decline can have a detrimental impact for clients, especially those who live from paycheck to paycheck. A much higher bad loan ratio will have negative effects on investor confidence, as well as on the lender’s growth and cash flow.

The Indonesian fintech lending association (AFPI) considers the rising demand for loans to be a challenge because it also carries the risk of increasing non-performing loans (NPLs). There has not been an observable uptick in NPLs so far, but fintech companies should mitigate risks while facing the pandemic.

UangTeman applies a more comprehensive selection process to prospective borrowers and coordinates with the financial services authority OJK and the AFPI on new policies. Meanwhile, KoinWorks believes that it can protect lenders through strict underwriting standards, ISO-certified operations, and its strong capital position. Since its establishment, the company has managed to keep NPLs at about 1%, implementing a rigorous assessment process for borrowers using modern digital data combined with traditional banking systems. “All collection processes are still running normally now. We have a digitized reminder system for our borrowers, complemented by our teleservices team,” said Bruny.

Possible delays in expansion and fundraising

The economic slowdown may also cause a delay in deals and fundraising as investors are becoming more cautious and risk-averse. Sequoia Capital warned in a letter about the “black swan of 2020” and told companies to prepare themselves for turbulence—business activity will certainly drop and private financing could soften significantly this year.

UangTeman was targeting to hit profitability this year when it raised USD 10 million in a Series B round in February. Now, this objective appears to be more difficult to achieve. “The target applies when everything is normal, without an economic downturn,” said Zulkifli. “Today, we need to adjust our priority and our focus is to protect business, employees, and customers.” UangTeman will also delay the launch of its shariah product and its regional expansion plan to the Philippines this year, at least until the crisis is over.

Alami’s Dima Djani shares the pain. The startup recently piloted a shariah-compliant PayLater product in collaboration with aquaculture-focused startup eFishery, and was looking to launch another product this year. That plan is currently being reviewed, leading to a possible delay. Alami is also reviewing its disbursement target of IDR 500 billion (USD 30.3 million) and its plan to raise new funding, which was previously expected to close in the third quarter.

Partnership projects may be affected too, according to Djani, especially when they involve governmental institutions with layered bureaucracy. Startups need to be sensible in spending their cash, which may mean postponing business plans.

A defining moment

From its emergence, P2P lending was touted to be resilient to economic turmoil and a good investment with stable returns. The pandemic will be an important moment for the industry, to prove that money-lending is solid and offers financial protection for lenders and investors. “We always say that the P2P lending industry is resilient and now we’ll need to prove that. This crisis will show which business can deliver better outcomes, and if we can get through this and come out victorious, investors’ interest and confidence will rise,” said Djani.

For the companies that survive, there will be new opportunities, as the pandemic is transforming the way society lives, making online services more convenient. “Here lies the advantage of fintech lending over conventional financial institutions. We do not require any physical interaction,” AFPI vice head of institutional and public relations Adelheid Bokau told KrASIA.

With regards to strategy, the association urges fintech lending companies to always ensure that their operational activities are in accordance with existing policies set by the OJK, especially when there is a sharp increase in loan applications. The AFPI will continue to coordinate with all stakeholders, including the OJK. Together, they are currently reviewing the possibility of loan restructuring, for example by giving interest discounts to borrowers in order to avoid a bad loan. “Our homework is to make sure companies protect their business and convince investors that the business will remain safe despite the crisis,” Bokau concluded.