Risk Issues in Multifinance Companies

A Bank’s Perspective
 Overview of Multifinance Companies in Indonesia

Total Asset and Number of Multifinance Companies Receivables and Non Performing Financing
IDR Tio IDR Tio; %

Sources : OJK
• The number of multifinance companies (200 companies) have remained stable over the last 6 years.
• 21 of the largest companies own 66% (IDR 271 Tio) of total market share.
• Over the same time period, total assets have grown significantly (39%) from IDR 342 Tio in 2012 to IDR 468
Tio in September 2017.
• Total assets are mainly driven by the growth in financing receivables, which grew 32% from IDR 311 Tio in
2012 to IDR 410 Tio in September 2017.
• However, Non Performing Financing (NPF) has increased significantly from 2015 to 2016 by 124% due to:
• Macroeconomic conditions
• Regulatory rule changes in classifying financing receivables.
 Overview of Multifinance Companies in Indonesia

ROA & ROE Type of Financing

% IDR Tio

Sources : OJK

• ROE and ROA decrease in 2014 & 2015 is caused by a fall in NPBT due to macroeconomic conditions,
mainly lower commodity prices and stagnation of automotive markets.
• Receivables until 2015 were relatively equal between consumer and investment financing. However, a
drop in commodity prices have caused a drop in investment financing which consist of heavy equipment
and commercial vehicle.
• Since 2016 receivables have been dominated by consumer financing (63%) which comprises of 2 and 4
wheel vehicle financing.
 Overview of Multifinance Companies in Indonesia

Sources of Funding in Multifinance Companies Joint Financing and Chanelling

IDR Tio Times
Sources : OJK

Year 2012 2013 2014 2015 2016 Sep-17

Gearing Ratio (x) 3.85 3.60 3.54 3.19 3.03 3.00

• 78% of multifinance companies sources of funds are from Bank Loans.

• Nominally, bank loans (excl. JF and Channeling) have remained relatively unchanged since 2013.
• The source of funds driving financing receivables growth from 2013 – Sept 2017 have predominantly
come from joint financing scheme.
• Joint financing scheme has increased since 2012, whereas channeling scheme has decreased.
• Due to this, Gearing Ratio has slightly decreased from 2012 to Sept 2017.
 Key Challenges of Multifinance Companies

• Economic slowdown and stagnant automotive industry growth.

• Increased problem loans driven by shrinking purchasing power, resulting in higher

Economic operational costs due to allowance for doubtful receivables.

• Rise of alternative financing companies e.g: Fintech firms.

• Concentrated in 2 sectors, automotive and heavy equipment financing.

• Majority of receivables consists of installment loans, quick receivables cycle is key.

Financing
• Slowdown in financing and decrease in receivables quality.

• Focuses on Low to Middle End segment to avoid direct competition with Banks, which
increases potential credit risk.

• Highly dependent on Bank Loans and Bonds, which increases liquidity risk exposure and
a higher cost of funds.
Funding
• Leverage significantly lower compared to banks due to higher risk business model and
regulatory restrictions on gearing ratio.
 Bank Financing Scheme and Its Risks

Chanelling Joint Financing Executing

Loan Scheme Indirect Direct

Borrower End user End user Multi finance

% Bank Portion to EU 100% < 100% -

Bank Collateral Financed object AR

Risk Exposure 100% Proportional 100%

Potential Risk
Fictive end user √ √ √
Double pledge receivables √ √ √

Bad receivables quality √ √ √

Asset recovery √ √ √

• Executing scheme poses higher risk for Banks due to weaker collateral (receivables) and increased
concentration risk.
• Channeling and Joint Financing schemes, although covered by the asset being financed as collateral is still
very dependent on:
• Capability and effort of asset collection
• Condition of asset upon collection
• Market demands on assets
 Bank’s Point of Review

Bank Multifinance

Why? Funding √
Loan initiation √
Review √
Disbursement √

Most of the Documentation

Collection
√
√
loan processes are done by
Monitoring √
the multifinance
companies Asset recovery √

Point Of Review

Shareholder & Financial

System & Procedure Financing Object and
Management Performance
Target Market
 Shareholder and Management

Character & Integrity

Integrity is Key
Common Cases:
• Data Manipulation Bad character?
• Financial Engineering Bad system ?
• Fictive End User
Or both?
• Double Pledging

Shareholder & Management Experience

Shareholder / Management experience in managing
multifinance company is a must
• Marketing & Sales
• System & Procedure
• Collection & Recovery

Company Back Bone

Have strong financial back bone from holding company /
ultimate shareholder.
21 Largest Companies:
• Based on ownership : 7 co's by banks, 4 co's by ATPMs, 8
co's by multinational companies and 2 co's by local
companies
• 3 co's are public companies and 18 co's are private
companies
 System and Procedure

Strong and reputable company is not enough, it surely needs a good end to end
process and procedure backed by reliable IT System to run the business

Loan
Process

Collection Recovery

Accurate Reconciliation of Data with Banks

 Financing Object and Target Market

Consumer Investment Working Capital

IDR 237 Tio (63%) IDR 117 Tio (31%) IDR 25 Tio (6%)

Market Size

Over 80% of receivables originate from only 10

provinces.
 Financial Performance

Financing Receivables Non Performing Financing

IDR Tio %
Sources : OJK

Profitability Overhead Cost

IDR Tio %; IDR Tio
 Financial Performance

Key financial metrics in evaluating multifinance company

 Wholistic View of Multifinance Company

Shareholder &
Management

Financial System &

Performance Procedure

Financing Object & Target

Market
 Vicious Circle

Economic Condition

Receivable
NPF Bank stop
Growth
credit

Bad character
Bad system

Fictive End User

Double pledge
receivables
Thank You