The peer-to-peer (P2P) lending procedures and regulations are soon to come under the regulation of the Financial Services Authority (OJK) as a way to minimize the risks of bad debts in the world of virtual finance for businesses. OJK director, Hendrikus Passgi, says that his institution would issue guidelines for all P2P transactions before the end of the year.

Regulations do not currently exist

Currently, there is no official regulation of P2P lending in the financial business sector in Indonesia, which has given rise to a huge increase in defaults on bad debts. Online-based businesses are high-risk for lenders and many lenders ignoring the importance of proper supervision of the loans and repayments increase the risk. Without any form of credit application mechanism in the sector, there is no way to blacklist “at risk” companies, which gives rise to a higher number of defaulted P2P loans than with bank loans. Applications require such simple documents as identity cards and vehicle ownership certificates to get a P2P loan, and the contract of loaning has no regulatory body to enforce receivership or repayment terms.

Regulation without interference is the idea

Calls for regulation by the OJK have been going on for some time, including from the economists of the Indonesia Stock Exchange.  The OJK, which stands for Otoritas Jasa Keuangan, is the Indonesian government department that regulates and supervises the rest of the financial sector of the country. An autonomous agency designed to be free from interference by government officials and big businessmen alike, the OJK has the power to regulate, supervise, inspect, and investigate all businesses inside the financial sector, and work in cooperation with the Bank of Indonesia in enforcing its decisions.

Once the guidelines are in place, it will mean that the OJK will have new procedures on P2P lending, and all borrowing will be regulated in great detail, including how agreements can anticipate the risk of bad debt and how the lenders can better resolve the issues with defaulting borrowers, including the use of the Indonesian Courts. Passgi has also stated that the institution will regulate the new mechanism that is being put in place, known as “Know Your Customer” (KYC), which uses the existing financial technology (fintech) to better record customer data. The KYC system will use an application form that will facilitate digital signatures of the borrowers, such as facial scans, fingerprints, biometrics, and allow for video conferencing with their customers.

Release expected within the year

The circular detailing the remit of the OJK is expected to be released within 2017 and is currently still in the draft stages. However, Passgi also stated that the agency wants to issue the circular on the regulations as soon as possible, to minimize the impact of bad debt on the country’s economy. And with the fintech industry growing at an astounding pace in Indonesia, regulation of P2P lending is definitely necessary, to protect both the businesses and the economy in general.

Transition permits already given

The OJK has already issued transitionary permits for sixteen fintech businesses, while there are still another 44 applications waiting to be processed. Additionally, there are around 35 others that have reported their plans to submit proposals for the obtaining of fintech permits to the OJK. With all this going on, and proper regulations being put into place, it is expected that the P2P lending industry will take an upturn in the number of good loans that are given, and reduce the number of potentially bad debts that are currently the main problem in the country.