Non-Performing Loans and the Threat to Business Climate Stability
Introduction
Credit plays a central role in sustaining modern economic activity. Through financing mechanisms, financial institutions provide businesses with the capital required to expand operations, increase productivity, and generate employment. In many developing economies, including Indonesia, the availability of credit also serves as a critical instrument for enabling entrepreneurship, supporting small and medium enterprises (SMEs), and accelerating national economic growth.
However, when credit obligations are no longer fulfilled, what was initially a contractual relationship between debtor and creditor can evolve into a broader economic risk. A rising level of non-performing loans (NPLs) not only affects financial institutions but may also undermine market confidence, restrict the flow of credit, and ultimately disrupt the stability of the broader business environment.
In this context, the management of problematic credit becomes not merely a financial issue, but also a legal and economic concern that directly affects the sustainability of national economic growth. The legal framework governing credit relationships, dispute resolution mechanisms, and the boundary between civil liability and criminal accountability plays a decisive role in determining whether financial stress evolves into a systemic risk for the business climate.
The Rising Trend of Problematic Credit
Entering early 2026, several indicators suggest increasing pressure on Indonesia’s financing sector. The ratio of non-performing loans in the national MSME sector reached approximately 4.6 percent in January 2026, reflecting growing financing risks within productive sectors that have long served as the backbone of the national economy.
At the same time, the fintech lending sector faces similarly serious challenges. Data up to the end of 2025 shows that the default rate reached approximately 4.32 percent, equivalent to Rp4.17 trillion, with an upward trend continuing into early 2026.
These figures indicate that financial stress is not limited to conventional banking institutions but is also affecting the rapidly expanding digital lending ecosystem. Over the past decade, fintech lending has become an alternative source of financing for individuals and small businesses that may not have access to traditional banking services.
If left unmanaged, the accumulation of problematic credit could create a domino effect within the financial system. Rising default rates weaken the asset quality of financial institutions, reduce their risk tolerance, and ultimately lead to tighter credit policies. While these measures are necessary to maintain prudential standards, they may simultaneously limit access to financing for productive sectors of the economy.
Non-Performing Loans from a Legal Perspective
From a legal standpoint, a credit relationship fundamentally arises from a contractual agreement between debtor and creditor. This principle is reflected in Articles 1320 and 1338 of the Indonesian Civil Code, which establish that a legally valid agreement is binding as law upon the parties who conclude it.
Article 1320 determines the essential elements of a valid agreement, namely consent of the parties, legal capacity, a specific object, and a lawful cause. Once these elements are fulfilled, Article 1338 affirms the principle that agreements must be honored (pacta sunt servanda), meaning that the contractual obligations created by the parties carry binding legal force.
Within this framework, a debtor’s failure to fulfill repayment obligations constitutes breach of contract (wanprestasi). The legal doctrine of wanprestasi encompasses several forms of contractual failure, including:
Civil law treats such failures as contractual liability rather than criminal wrongdoing. The legal consequences typically include the obligation to perform the contract, payment of damages, termination of the agreement, or the enforcement of collateral rights.
This distinction is fundamental because contractual failure does not inherently imply criminal intent. Commercial transactions inherently involve risk, and the possibility of business failure forms part of normal economic activity.
The Role of Collateral and Legal Protection for Creditors
In credit agreements, financial institutions commonly require collateral (jaminan) as a form of legal protection. Collateral mechanisms—such as mortgage rights, fiduciary security, or pledges—are designed to provide creditors with enforceable rights in the event that a debtor fails to fulfill repayment obligations.
Indonesian law provides several legal instruments to enforce such security rights, including:
These legal structures ensure that creditors retain a mechanism for recovering outstanding debts without immediately resorting to criminal prosecution. The enforcement of collateral through auction or execution procedures reflects the civil law approach to resolving credit disputes.
The existence of such mechanisms demonstrates that the legal system already provides structured and proportional remedies for addressing default without transforming every contractual dispute into a criminal matter.
Mechanisms for Resolving Problematic Credit
In banking practice, the resolution of problematic credit is typically carried out through a progressive and structured approach before litigation becomes necessary.
Common mechanisms include:
This layered approach reflects the principle that financial recovery and economic value preservation should remain the primary objective of credit dispute resolution
The Boundary Between Breach of Contract and Criminal Offense
One of the most complex issues in problematic credit cases lies in the blurred boundary between civil breach of contract and criminal conduct.
In certain circumstances, debt default is interpreted as a criminal act, particularly when financial institutions owned by the state are involved or when the resulting losses are framed as losses to the state.
However, criminal liability requires the presence of fault (schuld) and criminal intent (mens rea). The mere inability to fulfill repayment obligations does not automatically satisfy these elements.
Criminal law traditionally distinguishes between:
Only the latter falls within the scope of criminal prosecution.
This distinction is crucial to avoid the over-criminalization of commercial disputes, a phenomenon that may occur when contractual disagreements are prematurely escalated into criminal investigations.
Crimnal Law as Ultimum Remedium
Legal doctrine widely recognizes that criminal law should function as ultimum remedium, meaning it should be used only as a last resort when other legal mechanisms fail to address wrongful conduct.
Applying criminal sanctions prematurely to contractual disputes may undermine the fundamental structure of commercial law. Businesses often operate under conditions of uncertainty, where market fluctuations, operational challenges, or economic shocks may affect repayment capacity.
If every unsuccessful business venture is potentially subject to criminal prosecution, the legal environment may discourage risk-taking and entrepreneurial activity. Such an environment may ultimately weaken economic dynamism and reduce the willingness of investors to participate in the domestic economy.
A balanced legal framework must therefore ensure that criminal law targets intentional financial crimes, while contractual disputes remain within the domain of civil law remedies.
Implications for the Business Climate
Rising levels of non-performing loans affect not only financial institutions but also the broader economic ecosystem.
When NPL ratios increase, financial institutions typically tighten lending policies to protect the quality of their financing portfolios. While such prudence is necessary, it may also result in credit contraction, particularly affecting MSMEs that rely heavily on external financing.
Over time, restricted access to financing can slow business expansion, reduce investment activity, and weaken overall economic momentum.
Furthermore, legal uncertainty in the classification of credit disputes may undermine investor confidence in the reliability of the legal system. Investors rely heavily on predictable legal frameworks when evaluating the risks of operating within a particular jurisdiction.
A legal system that clearly distinguishes between contractual disputes and criminal wrongdoing is therefore essential to maintaining a stable and predictable business environment.
Conclusion
Non-performing loans are an unavoidable phenomenon within any credit-based economic system. Nevertheless, a rising NPL ratio should serve as an early warning signal for financial institutions, regulators, and business actors alike.
A balanced and proportionate legal approach is essential to ensure that problematic credit does not evolve into legal uncertainty that ultimately harms the business environment. Civil law mechanisms should remain the primary avenue for resolving credit disputes, while criminal law must be applied cautiously and selectively as a last resort.
Ultimately, the resilience of a healthy financing system depends not only on the ability to distribute credit, but also on the capacity to manage risks wisely—from both economic and legal perspectives. Without such balance, efforts to protect financial stability may unintentionally create legal uncertainty that undermines business confidence, investment activity, and long-term economic growth.
Authored by:
Juventhy M. Siahaan, S.H., M.H.
Managing Partner, JBD Law Firm