OREANDA-NEWS. The Indonesian government's increased budget allocation of IDR10trn (USD750m) for its micro-loan subsidy programme will help to support loan growth this year, in the face of weaker consumer and business confidence, says Fitch Ratings.

Government has set aside the funds to provide an interest-rate subsidy of up to 10 percentage points to the KUR (micro-loan) programme. This should allow the mainly state-owned distributor banks to cut the lending rate for KUR loans to 9% compared with above 20% for other non-subsidised micro-loans. The government is targeting KUR loans of IDR100trn-120trn in 2016, which should equate to around 20% of the banking sector's total loan increase - based on the central bank's estimate of 12%-14% bank credit growth this year. The subsidy is intended as a stimulus measure to support consumer growth in response to a broadly weaker macroeconomic environment.

The government's credit growth estimate for 2016 is higher than last year's 10.4% growth rate, which was the lowest annual increase since 2009. Only IDR23trn of KUR loans were channeled in 2015, which means a projected five-fold increase in KUR loans this year under the new subsidy scheme.

The current non-performing loan rate for the KUR programme is around 5%. However, the government has a guarantee scheme to contain the risk of non-performing loans to ensure that banks will not suffer losses as a result of the programme. Banks are currently required to pay a guarantee fee of around 1.5% to one of two appointed insurance companies - PT Asuransi Kredit Indonesia (PT Askrindo) and Perusahaan Umum Jaminan Kredit Indonesia (PT Jamkrindo). These insurers in turn provide compensation to the banks should KUR debtors fail to meet their financial obligations.

This highlights the important roles that PT Askrindo and PT Jamkrindo perform in supporting government programmes to increase access to capital for micro and small enterprises. The insurers' role in KUR will incur losses, and the extent to which these losses are not offset by other profitable non-KUR business will have the potential to weigh on their standalone credit profiles. But the insurers are state supported, and growing non-KUR loans should also limit the overall impact of the KUR programme.