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Economy

Indonesia to cap rates on micro loans

JAKARTA -- Indonesia's financial regulators are planning to cap interest rates on micro loans to help boost growth of small businesses.

      A spokesperson for Indonesia's financial services authority, known as the OJK, said the body is planning to issue the new regulations as early as November, adding that the OJK is still in discussions with banks over details.

     "We want to protect the interests of the consumers" said the spokesperson. "The current rates are too high for them."

     The move follows a series of efforts by regulators who aim to spur economic growth among lower-income earners, who dominate the country's population of 250 million, by providing easier access to credit. The OJK is set to issue guidelines for branchless banking by the end of the year, which would allow banks to appoint agents to carry out small loans and savings. The project is aimed at bringing financial services to those without bank accounts.

     Micro loans, defined by most lenders as credit of up to 100 million rupiah ($8,000), carry high interest rates due to the risk that banks have to bear. Bad debt has also surged since the central bank hiked policy interest rates in the second half of 2013. Data from the OJK shows that nonperforming loans among small and medium enterprises jumped 32% in July from a year earlier to 26.53 trillion rupiah.

     Lower lending rates would potentially boost banks' customer bases. But it may come at the cost of high profitability. State-owned Bank Rakyat Indonesia, which controls around a third of the micro loan market, is one of the most profitable banks in Indonesia. It had a net profit of 21.35 trillion rupiah in 2013 and is a significant contributor to state revenues. Bank Mandiri, Bank Danamon and BTPN have also expanded their micro lending operations in recent years.

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