March 31, 2026 | 03:55 pm
The high rate of non-performing loans in the MSME sector is a warning sign. The lingering problems from the past are now putting pressure on the banking sector.
THE surge in non-performing loans among micro, small, and medium-sized enterprises (MSMEs) serves as a warning sign of two problems: the sluggishness of the grassroots economy and the poor governance of past credit disbursement. This situation calls for stimulus policies to support businesses, while also curbing reckless lending practices.
Bank Indonesia’s March 2026 report, Assessment Report on the Transmission of Policy Rates to Bank Lending Rates, flags a worrying anomaly. The non-performing loan (NPL) ratio for the MSME sector rose from 4.60 percent in January to 4.68 percent in February. Although still below the 5 percent safety threshold, the upward trend signals systemic risk.
The rise in NPLs is ironic, as it comes at a time when interest rates on MSME loans are falling. From January to February 2026, interest rates on microcredit fell by 2 basis points from 10.57 percent to 10.55 percent.
This indicates that the problem facing MSMEs is not the high cost of capital, but their inability to repay debt. The sector is being squeezed by weak purchasing power among lower-middle-income households. If this is left unaddressed, the target for economic growth above 5 percent will remain a pipe dream, given that MSMEs contribute 61 percent to the gross domestic product and account for 97 percent of the national workforce.
However, non-performing loans among MSMEs are not merely due to weak purchasing power but also past reckless lending practices. When the government launched a populist program called the National Economic Recovery during the Covid-19 pandemic, it massively expanded the disbursement of various microcredit schemes. This is where moral hazard and irregularities arose. To meet credit disbursement targets, many bank officers set aside the principle of prudence.
The problem has in fact been detected for a long time. For example, in 2021, the Supreme Audit Agency (BPK) reported irregularities in the distribution of aid to micro-business owners. At that time, there were 2,413 recipients with duplicate identity numbers, 29,060 recipients who turned out not to be business owners, and even 8,933 recipients who had already passed away. This haphazard distribution has become a series of time bombs that are now beginning to explode.
The impact is being felt today. This magazine’s team found many banks still struggling to repair asset quality due to the high volume of outstanding loans from the pandemic era. Some super-micro credit providers even recorded alarming monthly NPLs in 2025, ranging from 17 to 40 percent.
Under pressure, banks are forced to bolster their loan-loss reserves. As a result, funds that should be channeled into productive lending are instead diverted to cover past losses. Furthermore, the problem with these non-performing loans could trigger a credit crunch.
There is no alternative but to improve economic conditions. Rather than spending the state budget on weapons or problematic projects like free nutritious meals, the government would be better off providing stimulus to small business owners, as long as distribution is strictly and prudently monitored. However, most importantly, it should avoid repeating the mistake: recklessly doling out credit for the sake of political populism.
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