Low-interest lending push may strain KDMP beyond limits

The administration of President Prabowo Subianto plans to add another state-backed business line for Red and White Cooperatives (KMP) in the form of low-interest lending as part of ongoing efforts to combat predatory and illegal loans. However, the high-risk and heavily regulated nature of the financing business could strain the cooperatives’ already limited repayment capacity and even threaten their survival. As such, the plan risks squandering a significant portion of the Village Fund, which has effectively been pledged as collateral for Red and White Village Cooperatives (KDMP) debt.

The Cooperatives Ministry stated that Red and White Cooperatives would be allowed to disburse loans with interest rates of up to 6 percent per annum as a countermeasure against loan sharks and illegal online lending platforms. These loans would be channeled through ultra-micro financing units within the cooperatives. The initiative follows President Prabowo’s expectation that more than 80,000 Red and White Village and Subdistrict Cooperatives will help expand financing access for low-income Indonesians. He noted that large employers typically receive loans at 9–12 percent interest per annum, while microloans can carry rates as high as 24 percent.

In line with the plan, the Financial Services Authority (OJK) is preparing to revise its regulation on bank business plans (RBB) to encourage greater support for the administration’s priority programs, including the Red and White Cooperatives. While the regulator maintains that participation will remain voluntary and aligned with banks’ respective risk appetites, the policy is also designed to help achieve the 12 percent loan growth target in 2026.

Despite these intentions, allowing the cooperatives to engage in low-interest microfinancing carries a significant risk of rising non-performing loans. Data from the OJK shows that the 90-days-past-due (TWP90) ratio for peer-to-peer (P2P) lending has continued to climb, increasing from 4.38 percent in January 2026 to 4.54 percent in February 2026. This marks a sharp rise from 2.78 percent in February 2025 and brings the ratio closer to the OJK’s 5 percent safety threshold.

Under Finance Ministry Regulation (PMK) No. 15/2026, each cooperative is eligible for loans of up to Rp 3 billion (US$175,272) at 6 percent annual interest, with a 72-month maturity and a grace period of 6–12 months to support initial construction and procurement. Repayment is structured through transfers from the General Allocation Fund (DAU), Revenue Sharing Fund (DBH) or the Village Fund. For subdistrict cooperatives, installments are paid monthly via the DAU or DBH, while village cooperative repayments are effectively made annually through the Village Fund, covering a year’s installments in one lump sum.

In practice, this means village cooperatives’ loan repayment has become heavily dependent on the Village Fund, particularly after PMK No. 7/2026 allocated Rp 34.57 trillion out of a total Rp 60.57 trillion Village Fund to support the cooperatives, alongside Rp 1 trillion in incentives for priority villages. At the same time, Rp 90 trillion of the roughly Rp 200 trillion in loans from state-owned banks has been earmarked for spending by Agrinas Pangan, including plans to import 105,000 trucks from India. However, the project remains uncertain following a Rp 7.39 trillion down payment for the first 1,000 units, alongside the establishment of 30,712 cooperative stalls as of Feb. 24.

Analysts have raised concerns about Red and White Cooperatives’ operational capacity to offer competitive and accessible loans, given their limited operational capabilities and bureaucratic constraints. This skepticism is reflected in public sentiment, with some potential borrowers indicating a preference for higher-interest online loans if village cooperative financing proves more difficult to access. They emphasize that speed of disbursement is often the deciding factor, particularly in urgent situations.

Some cooperative managers themselves argue that low-interest lending is too risky and should not be prioritized within the cooperative model. They instead advocate refocusing the Red and White Cooperatives program on its original goal of shortening distribution chains. Meanwhile, some fintech players have welcomed the initiative as a potential avenue for collaboration, citing differences in market segments and business models, while also emphasizing the need to strengthen cooperatives’ risk management.

These concerns are compounded by the growing expectations placed on the village cooperatives to function as comprehensive one-stop service hubs in rural areas, particularly after Agrinas Pangan’s two-year management period ends. The cooperatives are expected to act as aggregators of local agricultural output, suppliers for the free nutritious meal program, distributors of social assistance and providers of payment services.

Given that many rural markets are small and fragmented due to limited purchasing power and logistical challenges, village cooperative operations should focus on a limited number of core services tailored to local conditions. This would maximize their chances of success rather than stretching resources across multiple mandates. As the Village Fund support for the Red and White Cooperatives has made village development dependent on the program’s success, the low-interest lending plan appears to be ill-advised. Furthermore, expanding financial literacy programs would likely be a more effective and sustainable approach to tackling predatory lending.