Good morning. We would like to thank you for joining us for Bank Rakyat Indonesia's first quarter of 2024 earnings call. We would like to begin the meeting now. First, I would like to introduce the members of our board of directors who are joining us today, starting with our CEO, Pak Sunarso, our Vice CEO, Pak Catur, our CFO, Bu Vivi, our Director of Micro, Pak Supari, our Director of Risk, Pak Agus Sudiarto, our Director of Networks, Pak Andrijanto, our Director of Consumer, Bu Handayani, and our Director of IT and Digital Banking, Pak Arga, our Director of SME, Pak Amam Sukriyanto, our Director of Corporate, Pak Agus Noorsanto, our Director of Compliance, Pak Solichin, our Director of Human Capital, Pak Agus Winardono. I would like to mention a few points before we get started.
First, for everyone joining on the Zoom call, I would strongly encourage you to download a copy of our presentation materials. They are currently available on our IR website, which is inside the Bank Rakyat website at ir-bri.co.id, or from the link that we've sent to most of you this morning. Second, this is a webinar format. For Q&A, when called upon, we will ask you to please unmute your microphone, and then please state your name and the company you work for before asking your questions during the Q&A segment. I would now like to introduce Pak Sunarso, our CEO, to begin the meeting.
Thank you, Bret. Good morning, everyone. Thank you for joining this, this, conference, this, meeting today. I will start this presentation with macroeconomic situation update. While we believe that Indonesian macro situation remains stable, and outlook of attractive with our projection of 2024 GDP growth of 4.8%-5.1%, which is in line with 2023 GDP growth of 5.04%. We do see some near-term headwind that could have an impact on our performance. First, let's begin with the positive, that the government is projecting a larger fiscal deficit of 2.29%, representing a sizable increase from 1.65% in 2023.
More importantly, for our customer base, subsidy spending is anticipated to increase by nearly 27% year-on-year, based on the government's target. However, as we can see in the bottom left chart, while reported inflation in first quarter 2024 stood at modest 3.05%, we have seen a persistent and continued increase in inflation from volatile items that is now up over 10% year-on-year, primarily driven by food prices. As we are aware from historical experience, inflation tend to cause challenges for our micro customer base, and we are cautious as prices remain elevated. The impact of El Niño is working through our loan book, but we believe it will start to present. For food price inflation, the government was successful in achieving self-sufficiency in rice in recent years.
However, the weaker harvest in 2023 lead to the need for import as we enter 2024. We are particularly cautious through the first half of 2024, and hope in second half 2024, that prices will decline. Elevated prices have weakened Indonesian domestic consumption through constraining purchasing power, thereby causing challenges among the lower middle class, a key group of our micro customer base. Indonesian domestic consumption trend has been weakening since 2023, reflected in lower car and motorcycle sales, among other key metrics. Moreover, weaker consumer purchasing power in the economic has supported a much lower core inflation rate of 1.77% as of first quarter 2024, compared to the historical average of 3.07%.
Additionally, the income gap between lower middle class and upper class has been widening post-pandemic, as signified by the Gini Ratio increase from 0.379 in 2021 to 0.383 in 2023. Second, the currency has been under pressure over the last month, as we have seen a strengthening dollar and bond investor outflow post-election. The Rupiah is currently at near IDR 16,200 to the U.S. dollar, and has surpassed the central bank target, likely implying fewer rate cuts in 2024 versus previous expectation, and this would impact our liability sensitive balance sheet, as funding costs may not come down as quickly. That said, in first quarter 2024, we didn't see pressure on funding costs, and deposit growth has been robust versus 2023.
Risks that we are monitoring include persistent U.S. inflation and economic strength, supporting the potential of higher for longer. China has not been able to boost its economy despite fiscal stimulus effort. Based on our economic forecast, Indonesia's economy is highly correlated with China due to key economic activities. Furthermore, the significant increase in geopolitical risk that is tied to oil can keep inflation in place and make it challenging for rates to come down globally and in Indonesia. Financially, we feel our first quarter 2024 consolidated financials were impacted from the macroeconomic items mentioned, primarily through our asset quality. We book in line year-on-year loan growth of 10.9% with our consolidated loan reaching IDR 1,308.65 trillion.
Our micro loans stayed and stand at 47.6% of total loan, down slightly year-on-year due to our cautious outlook. Despite this current high rate environment, we continue to see the resilience of our net interest margin, which stand at 7.84%, slightly below our guidance. We are seeing continuous improvement in our earning asset mix, and CASA deposit increase in first quarter 2024 by 7.8% year-on-year, while total deposit increased by 12.8% year-on-year. Our cost to income ratio improved to 37.4% from 47.9% in the years ago period. Our cost of credit increased to 3.83%. Net cost of credit was 2.47%, and gross NPL ratio was 3.11%.
Our profitability metrics remain strong, partly because our dividend payout impact on capital, as our return on assets stood at 3.22%, and our return on equity was 20.56%. Leverage employee increased to 6.7 x from 6.4 x in the year-ago period. Finally, our net profit in first quarter 2024 increased by 2.7% to IDR 15.98 trillion, primarily due to strong net interest margin and lower costs. The key strength we note in the quarter were our continuous benefit from the mix shift in our loan portfolio, efficiency gains and increased leverage and strong PPOP growth. Our asset shift is supporting higher yield.
This is being led by loans to earning assets, increasing to 71.4% from 70% in the year-ago period, with a lending yield of 13.6%, +68 basis points year-on-year, further supported by portfolio rebalancing in micro and an increase in managed rates that we implemented earlier this year. Furthermore, our ultra-micro subsidiaries, Permodalan Nasional Madani, PNM, and Pegadaian, have increased by 13.5% year-on-year, and now account for 9.3% of total loans and 19.2% of net interest income. The loan mix shift contribute to profitability metric that we believe are positioned to move higher.
In 2023, our return on assets increased by 23 basis points to 3.24% year-on-year, and our return on equity increased by 232 basis points to 20%. We face challenges on asset quality and the decreased likelihood of rate cut, which I will discuss on the next slide. I would now like to address our guidance for the remainder of 2024. Although a few of our figures are adjusted, they are all a function of the increase in cost of credit that we are anticipating.
First, on our loan growth, we are widening the loan growth guidance to 10%-12%, from 11%-12%, lowering the bottom range of the guidance by 100 basis points, as we are forecasting that our micro loan growth will deliberately slow in 2024, based on our concern on asset quality due to the macroeconomic condition, and based on the impact from higher write-off in the segment. We feel it is prudent to slow micro after the strong growth during the pandemic.... particularly in the KUR portfolio, where we added over 5.2 million net new borrower from 2020 to 2022. We want to closely evaluate this customer before potentially moving them into Kupedes. We would note that under KUR, this borrower have a 70% insurance coverage.
We anticipated that we can look at the, at other lending segment if our loan growth is to reach the higher end of our target. If we lend to Corporate, we would look at value chain businesses and short-term loan that are uncommitted. As this action is temporarily and our target remain to grow micro to over 50% of the portfolio after the current situation improve, we have made a few shifts in our micro strategy that Pak Supari will, Pak Supari as Micro Director will discuss in his section. On our net interest margin, we are lowering the bottom range of our guidance to 7.6% from 7.9%, so the range is now 7.6%-8%. The net interest margin impact will be a function of two items.
First, while cost of funds have performed well year-to-date, we have less visibility on rate cut in 2024 due to the development of macroeconomic and global situation, and this might potentially impact our targeted cost of fund. Second, the lower micro growth will likely impact our lending yield, implying that net interest margin could be below original guidance. We are adjusting our credit cost to a maximum of 3%. We have experienced an increase in loan at risk and write-off across small and micro. Some of this is in line with our guidance, given the COVID restructure portfolio, and some is due to the El Niño and elevated volatile food prices we have experienced in the last nine months.
Our target implies that cost of credit improves to the remainder of 2024, and assume an increase in write-off to IDR 40 trillion from our target of up to IDR 34 trillion previously. This will be primarily in Micro, so it should imply higher recoveries as well. On our NPL guidance, we anticipate it is slightly higher at below 3% for the years based on the above mentioned asset quality situation. Our cost to income ratio should be maintained at 40% - 41%-42% for 2024, in line with our guidance. I would now like to turn the call over Bu Vivi, our CFO, to discuss our financials in more detail. Bu Vivi, please.
Thank you, Pak Sunarso. Now let's us walk through our balance sheet and also our P&L. So year-on-year, our total asset increased by 9.1%, supported by loan growth of 10.9%. This growth has been pushed the compositions of loan to earning asset, increasing to 71.4% from 70% in a year-ago period. And this is very important because our lending yield is at 13.66%, if we compare with 5.52% from our non-loan earning asset yield. Overall, our earning asset remain 91.9% of the total asset. At consolidated level, the contributions from PNM and Pegadaian, combining together, stood at 9.3% of total loans and helped to drive the loan growth at the micro level.
Our loan loss reserve decreased by 8% year-on-year, as we strategically built the reserve during the pandemic, and now we are using it to offset some of the COVID restructured portfolio and macro-related write-offs. As the earning asset provisions now is remain at 6.6% of the total loans from 8.1% last year. We will be very carefully looking to our loan loss reserve before we decrease into pre-pandemic level of 4%-4.5%. Deposit growth is starting to improve year-on-year, rising 12.8%, and the CASA increased nearly 8%, leading to a decline in our loan-to-deposit ratio, around 90 basis points to 83.3% from year-end 2023. I would note that we are modestly increasing our leverage.
At the first quarter of 2024, our leverage rose to 6.7 x from 6.4 x in a year ago period. But this is because still first quarter, usually the equity deducted a lot because of the payment of the dividend. If we are looking at our loan portfolio, our loan book in the first quarter was relatively in line with our guidance, growing by 10.9%. From this total loan, basically, Pegadaian grew 17%, so the contribution is increasing to 5.47%, and PNM growing 8.78%, and the contribution is 3.8%. Please note that the growth in PNM will be slowly a little bit in the next one until two years because of two things.
The first one is the result of the product alignment implementations, where the individual loan that we call ULaMM will be in stages right that decline from the PNM portfolio. We will focus in BRI for individual lending. And then the second one is because of we start to review and improving the business process and PNM. Even though our corporate portfolio growth rate in the first quarter was 15.1% year-on-year, our long-term aspirations to have 14%-15% corporate loan consolidated in our loan portfolio still remains. We see our growth this year in Corporate is more towards opportunistic growth, especially coming from the short-term loan. We also finance corporate clients who directly supporting our value chains businesses.
This quarter, we are seeing draw down, draw downs at Bulog, the State Logistics Agency, around IDR 6 trillion year-on-year, and new customers in FMCG with a significant value chains potential of around, the total financing that we give to them is around IDR 8 trillion, accounting for half of the growth in the first quarter. As Pak Sunarso stated earlier, we will slow our micro growth after growing significantly in the last several years, including during the pandemic. We will focus on collections and improving asset quality in a Micro segment, given the impact from higher inflations and COVID restructure downgrades. We do continue to expect that micro loan growth will be driven by Kupedes, as we have seen vintage improvement post first quarter, 2023. Next, we will talk about our third party fund, our deposit.
As I mentioned earlier, our overall deposit growth was 12.8% year-on-year, and the CASA growth was nearly 8%. Our CASA ratio decreased year-on-year by 280 basis points to 61.7%, but remains well above the historical level of below 60%. I would note that we wanted to maintain liquidity through the first quarter or probably the second quarter, and we could let some time deposits roll off the books if liquidity remains well managed. Aligned with our aspirations to strengthen retail banking capabilities, we saw improvement from savings account. Our savings account, both from micro and retail, continue to grow more than 3% level year-on-year.
We were able to maintain the cost of CASA at 1.42%, as 59.4% of our CASA is saving account, with the average interest expense is 0.28%. We are still cautious with the cost of fund, given yesterday rate hike, but we feel that the pressure of funding could improve in the second half, since most of the liquidity needs or the liquidity events are already behind in the first half. And also, like Pak Sunarso mentioned earlier, we are slowing down our loan growth in 2024. We are working on initiative across the business to increase the CASA growth further, including continuing to improve our merchant businesses product, our merchant business productivity, and also BRI mobile penetrations.
Our capital positions remain elevated, with a total CAR of 23.9% and Tier 1 CAR around 23%, following our dividend payout in the first quarter, around IDR 48.1 trillion. Over the medium term, we would like to see our capital adequacy ratio close to 20% through stronger future loan growth and continue to return cash to shareholders. I would like now to discuss our income statement and key impacts, key item impacting our growth. Our net interest income increased by 9.7% year-on-year, and I think the contributions from bank only is around 79% decrease, and the contribution from Pegadaian and PNM basically is increase. We would note that the interest income continues to benefit from our mix in earning asset and also shifting within the Micro segment.
This helped contribute to the increase in interest income of 17.9% year-on-year and helped to offset basically the increase in the interest expense of 45.9% due to the rising interest rate and cost of fund. Our non-interest income was up 25.9% year-on-year, as we continue to see strong recovery income growth and expect this level of growth could be maintained for the next few years because of our stock of return of loans is elevated in 2023 and 2024. We have been preparing several initiatives to accelerate recovery income going forward so that this income could become a positive upside to the bottom line.
Our costs were well controlled, increasing around 1.7% year-on-year, and helping to achieve a consolidated cost-to-income ratio of 37.4%, well below our full year target, 41%-42%. But I do understand that you guys understand that, you know, there is a seasonality in the first quarter as always, and we anticipate the full year 2024 costs to increase roughly around 5%-8%. This led to a PPOP increasing of 22.2% year-on-year, however, was primarily offset by the increase of the provisions cost of 91.4% year-on-year, and bringing the year-on-year net profit growth to a modest 2.8%. Our consolidated net interest margin stood at 7.84% in the first quarter, while bank-only is, like, 6.6%.
As the net interest margin at our PNM and Pegadaian contributed 114 basis points to our, consolidated net interest margin, up around 5 basis points from a year-ago period. In the first quarter, our lending yield increased to 13.66%, like I mentioned earlier, because of the mix shift and also a contribution from... It's, it's a one-off, basically one recovery, roughly around IDR 650 billion, on, Corporate side because of the resolution of a toll road that was non-performing and sold. We also continue to selectively reprice up our managed rate portfolio to help improving the interest income. In terms of cost of fund, we manage our cost of fund very well from the monthly data in December, where our exit cost of fund stood at 3.69%.
And through March 2024, with an exit cost of fund is 3.55%, so it's declining month-on-month basis. However, on a year-on-year basis, our cost of fund did increase to 3.54%, increasing 98 basis points year-on-year. Even as a liability sensitive bank, we are able to manage the increase in interest expense quite well, as reflected by our reported NIM. Non-interest income continued to report strong growth while operating expense growth was very well managed, I cannot say it's very well managed, because it's still, like, first quarter. The non-interest income increased by 25.9% to IDR 12.6 trillion, supported by very strong recovery income that up 48.2% year-on-year to IDR 4.4 trillion. Recoveries of return of asset now account for 35% of non-interest income, compared to only 30% a year ago.
On the OpEx sides, costs continue to, well manage, well control, with total OpEx up 1.7%. There is some seasonality to our OpEx, and we do anticipate full year growth to, like I mentioned earlier, 5%-8%, year-on-year. So that's why the guidance of 41% until 42% consolidated cost to income ratio is still remained. Our reported non-interest income was up 26.1%, as fee and commission income was up 6.6% year-on-year. Within fee and commissions income, the two biggest contributors remain e-channel and also deposit admin fee. The e-channel continued to grow and were up nearly 12%, year-on-year. And these two segment basically account for 61% of the fees and commissions in Rakyat.
I would now like to turn the presentations over to Pak Agus Sudiarto to discuss asset quality.
Thank you, Bu Vivi. I would like now to discuss on our asset quality and give an update on adjustment to 2024 asset quality. Our NPL ratio increased by 25 basis points to 3.11% year-on-year, as we strategically decided to accelerate downgrades of our COVID restructured loan book and are starting to see an impact from high food price inflation, and El Niño. The increase was primarily across our Micro and small segments, rising 45 basis point and 99 basis points, respectively, while our Corporate reported non-performing loans improving by 86 basis points. The special mention loan increased to 5.68% from 5.20% in the year ago period. The increase was primarily driven by higher downgrades in the Micro and Small segments, particularly in loans impacted by the pandemic and the impact of El Niño and higher food prices.
We are going to be cautious on loan graduating from KUR to Kupedes, as we have seen an increase in downgrades at this segment as well. The provision for loans and financing stood at IDR 87.1 trillion, representing 6.7% of our total loans. From 2015-2019, before the pandemic, our loan loss reserve to loans never surpassed 4.4%, and we anticipate that as we work through our COVID restructured portfolio, that this reserve will revert back to a level closer to our pre-pandemic ratio of loan loss reserve to loans. Our coverage ratio is starting to move closer to normalized levels, as it decreased to 214.25%, and we would expect this can continue to move lower over 2024.
Our loan at-risk ratio increased to 12.7% from 12.5% at December 2023, as the increase is small, special mention loan and non-performing loan impacted the stock. That said, we have seen solid improvement in loan at-risk since 2020, as our structured loan continue to decline. The cost of credit increased quite aggressively to 3.83%, while our net cost of credit is 2.47%. The increase has led to our guidance adjustment for this year, as we have seen a more emphatic impact from high volatile food price inflation and also El Niño. Due to the pressure on asset quality, we are increasing our write-off budget to IDR 40 trillion from IDR 34 trillion. However, this will correspond with more recoveries as well. Based on our data to date, we do not see asset quality deteriorating further.
We do believe that cost of credit will remain elevated through the first half of 2024. In the first quarter 2024, we wrote off IDR 10.4 trillion, which represent about 25% of our revised write-off budget. Reported recoveries of IDR 4.4 trillion, and we anticipate this figure can increase to more than IDR 22 trillion in this year. At year-end 2023, total outstanding COVID-19 restructured loans decreased to 3.5% of total loans and 2.3% of total borrowers, from 4.8% and 3.2%, respectively, at December last year.
The COVID-19 restructured portfolio totaled IDR 41.5 trillion in the first quarter of 2024, representing a decline of 23.9% quarter-on-quarter, mostly driven by improvement in the Micro and Small segment and write-off of IDR 4.1 trillion. We anticipate the majority of this restructured book will be resolved in 2024. Within the COVID restructured portfolio, it is composed primarily of small and micro loans that account of 64% of the total. At March 2024, nearly 43% were current in payment, with 28.2% in special mention and 29.3% in non-performing loan. We feel the coverage of 32.6% is adequate to absorb any losses, as nearly 25% of the loan are corporate structuring, that we do not foresee having payment issues.
I would now like to turn the presentation over to Pak Supari, our Micro Director, to discuss in the Micro segment.
Thank you, Pak Agus. Let's discuss the current situation in micro and strategic adjustment we are committing to as a means to improve asset quality and performance. The current situation is a function of three issues: business as usual performance, COVID restructured portfolio downgrade, and impact from the macroeconomic situation. Let me clarify this issue. Business as usual tends to result in low NPL below 2%, a net cost of credit of 1.5%, and best-in-class profitability. This is impacted by the well-telegraphed and temporary run-off of the COVID restructure pool. This now stands at only IDR 9.4 trillion in Micro, and we have noted that we would like to write off over 15% on this remaining segment, primarily in 2023 and 2024.
Additionally, the microeconomic impact of El Niño, particularly affecting our micro loan portfolio, especially in the agriculture sector, which comprises 5.27% of total micro borrower. Along with high inflation impacting our borrower and distributor-... and limited government spending are areas of concern. We continue to see high food price inflation with driving our caution going forward. We are broken, or we have broken down our strategy response into three segment: risk profile-based growth strategy, improved business process implementation, and human capital enhancement. For risk profile-based growth, we are focusing on utilization of our BRIBrain generated pipeline for loan disbursement. That is lower down grade based on vintage analysis compared to non-pipeline method by over 300 basis point over 24 month. Under business process implementation, we will implement cap of refinancing increases from- for borrower applying to loan amount and to installment increases.
We may, in some cases, restructure agriculture and El Niño-related business loans. From a human capital enhancement perspective, we will add over 1,000 new Loan Officers and 800 business support assistants to help Micro Loan Officers and to focus on collection. The adjustment of PSR through the end of this first quarter has proven effective, managing to contain the degradation of Special Mention Loan 3 by 15%. Now, as part of the ongoing progress in developing the ultra-micro holding ecosystem, the contribution of PNM and Pegadaian to consolidated micro loans increased to 19.5%. At PNM, the growth slowed to 8.8% as the women group lending business grew 14.1%, while ULaMM decreased by 27.6%. Women group lending is currently over 19% of PNM total loans.
Pegadaian grew 17.9%, with Pegadaian non-pawn lending is the main contributor, rising 67.7%, while pawn lending grew 9.5%. At year end, 2024, we expect non-pawn lending could reach nearly 20% of Pegadaian loan. Our micro loan growth in the first quarter of 2024 is driven by Kupedes increasing 30.7% year-on-year, as we transition back to our core commercial and more profitable micro loan. Our subsidized portfolio, known as KUR, is down 0.5% . We are seeing the number of Kupedes borrower remain flat quarter-on-quarter, with a 30% graduation rate from KUR to Kupedes. Furthermore, our business process utilization reflects strong results through increasing the productivity of micro account officer.
We expect to meet the KUR disbursement target of IDR 150 trillion for micro and super micro KUR, while continuing to see on subsidized micro loan increase to 65% or higher of micro loan. I would now like to turn our presentation back to Pak Bret to organize Q&A. Please.
Thank you, Pak Supari. We would now like to move on to the Q&A segment. At this time, please raise your hand if you would like to ask a question. When called upon, please unmute your phone, your microphone, and please state your name and company before asking your question. Please raise your hands now, and we'll aggregate the questions. We do have a few questions from the Zoom that we will address first. I will read the question, and then, Bu Vivi can start with the answer, and anyone else can contribute. So this is from Harsh Modi at JP Morgan. The three questions: Is this the first guidance cut or the last? As in, if we do not get any rate cuts this year, will it lead to even lower NIM and higher cost of credit? That's question one.
Question two, on the loans outstanding per loan officer, it has almost doubled in the last six years. Is that a driver of asset quality issues in Micro, and will the bank need to meaningfully expand the Loan Officer hiring? And question three, can you reduce the loan growth to below 10% to manage asset quality and cost of funds?
Okay. Thank you, Bret. Hi, Harsh. Thank you for the questions. Okay, so the first one, I think it's about rate cuts. If we do not get, any further rate cuts, will it lead to lower net interest margin and a higher CoC? So, basically, based on our sensitivity analysis, every 25 basis point increase in a benchmark rate, that will impacting our net interest margin negatively around 4.6 basis point. And I think in the new guidance of NIM, we already taking into account, like, that the central bank will increase the benchmark rate 2x, right? So we, in Rakyat , we are expecting another 25 basis point this year from, coming from the, central bank.
And I think, the cost of credit in this case is more related to the macroeconomic conditions, so it's less correlations with the benchmark rate increase, actually. So that's the first one. And, the second one, your second question is about the span of control, right? About the asset quality. Yeah, yeah, yeah. Yeah. So, Harsh, I have a, I have an illustrations here. It's because more than 27 of our Loan Officers basically is in a, sit in a Micro segment. So we have a study here in the Micro segment that, we have been doing calculations that, the, the loan quality, the asset quality, is not depend or significantly impacted by the span of control of one Loan Officers.
So, now, the average account manager at a micro loan officer roughly is around 498 customers. Within our calculations, the optimal span of control of a Micro Loan Officersis between 523-676. In our model, the factors that affecting the asset quality are the discipline of the pipeline or pipeline management, then the discipline to do the work area. So if probably you recall that, I think since last year, we only assigned two villages for each micro loan officer. So if that, because that contributes significantly to the asset quality. And while the number of managed customers in a micro does not have a significant impact on the quality of loan office management.
But if you say that, do we want to hire more Micro Loan Officers? We will, based on the Pak Supari explanations previously. We will hire more, especially to accelerate the recovery income in the Micro segment. Yes, we will hire more. We will add more monthly in a Micro segment. And the next question is about the loan growth. Can we reduce the loan growth below the 10%? The simple answer is basically yes we can, right? Yes, we can. Yes, we can, like, lowering into 9%. B ut we will not make the same policy for all segments. In this case, we are cautiously growing our Micro and Small, so that's why we are kind of slowing down the loan growth in the Micro segment.
However, we still open an opportunity if there is a potential growth coming from the Retail segment, like consumer or in a Corporate segment, especially for short-term loan and the loans, I mean, the clients that will give us a lot of potential from the value chains business. That's why then the guidance is decreasing from 11%-12%, now it's like 10%-12%. I think we still have one question. I mean, I don't know, is it Harsh or, is it the last rate, guidance cut or something?
There was one more question about time deposits, and-
From Harsh?
No. Oh, separate from Harsh. Sorry.
Okay.
The last question from Harsh was, "Can you reduce the loan growth to below 10% to manage asset quality and cost of funds?
No, I think we still have one question from Harsh. It's about, is this the last cuts for the guidance, right?
Yeah.
Yeah.
Yeah, it was the first one. Yep.
Yeah, so that's the first one. Harsh, we do hope that we will not revise our guidance for the rest of 2024.
Okay, now, we're gonna take a question from the call. Handy, could you please unmute your line?
Hi, Bret. Can you hear me?
Yeah, yeah. W e can hear you. B ut if you could speak a little bit louder, it'd be great. Thanks.
Sure. Okay. Thanks BR management for taking my question. I have three question. The first one is regarding the new credit cost guidance, which is now at maximum 3% level. Could you share with us under what kind of scenario, based on your stress test, that could hit the 3% level? And then my second question regarding the increase of the micro SML, how much of the increase was due to the COVID-related, and how much from the non-COVID? And my final question is on the asset quality from the graduation of customer from KUR to Kupedes. Any color on this that you could share with us? That's all from me. Thank you.
Okay. So for the CoC guidance, basically, there are two things. The first one, if we are looking at the macroeconomic. I think if we are talking about the current credit costs, we are already taking into account the current conditions like inflations, and then also the currency, and also the last one is the interest rate. But I think most importantly, it's coming from the assumptions of the, from coming from internal. So the cost of credit of 3%, it is based on assumptions that there will be additional write-off this year. So initially, the guidance for the write-off for 2024 is roughly around IDR 34 trillion. But now, I think we see that this number will increase roughly to IDR 38 trillion-IDR 40 trillion write-off.
And then, the second assumptions, I think it's very important, is also the downgrades from especially coming from Micro and Small. In the first quarter, the net downgrade in Rakyat is around IDR 12.4 trillion, driven by Micro, IDR 7.3 trillion, and Small, ID R 4 trillion. So going forward, the cost of credit 3%, it's assuming that the Micro, Micro will be roughly around IDR 1.6 trillion-IDR 1.9 trillion. A nd I think Small is like, probably around, around IDR 1 trillion- IDR 1 .-- Sorry, it's like IDR 1 trillion, probably. So that's the assumptions, Handy. And then for the micro special mentions, well, if we are talking about special mentions in the Micro segment, I think, it's like a 50/50 from the COVID-19 and non-COVID-19.
And then the last one. Yo ur questions is the asset quality coming from the graduations. If we are looking at the 2023 vintage analysis, I think the vintage were getting worse from nine months of the book above. It means that we saw that, the graduations that happened in the first quarter of 2023, play a very significant role in the downgrades. If you remember, in the first quarter 2023, there was no KUR. It's only Kupedes. So everyone, basically, you know, like, will get a Kupedes. We think we have, like, some improvement. I mean, we think we have, like, probably some loopholes at that time, but we start to improve the weakness in the first quarter 2023 by applying a new underwriting methodology in October 2024.
So hopefully, that will help to improve the asset quality. So like Pak Supari mentioned earlier, to mitigate this, we will applying a new criteria for graduations, for example, like limiting the increase of the top-up or ticket size, and probably also the tenor as well.
Thank you, Bu Vivi. We have a number of questions in the actual queue. What we're going to do is take one more question from the Zoom, and then we're going to take a question from the hands that are raised. A nd then we'll go back later, and we will respond to the questions that you've sent in to us. We'll send them individually, just because there's a number of them here. The next question comes from Yuli at BNI Securities. There's a multiple-part question here. One, on recoveries, you mentioned that recoveries shall improve. Can you share the budget, if possible, for this year? Maybe I can just take that one. We were originally targeting about IDR 20 trillion in recoveries.
We feel that with the additional write-offs in Micro, particularly, that the recoveries would be higher, and our recovery rate can be probably somewhere between IDR 22 trillion-IDR 24 trillion for recoveries this year. Question two: What's your Kupedes growth rate this year? In previous analyst meetings, I think the latest guidance was around 30%-35% year-on-year. What's your NPL coverage target? What... Seeing that the consumer segment NPL is also up a little bit on a quarter-on-quarter basis, a trend that we've seen in other banks, is it coming from the auto segment or other parts? And five, will Pegadaian benefit from higher gold prices? So maybe, Bu Vivi can answer, questions, you know, two and three, and then Bu Handayani can answer question four on the asset quality and consumer.
Bu Vivi could also maybe hit question five on Pegadaian, on the gold prices.
Okay, thank you, Bret. So for the Kupedes, I think this year we start to disburse KUR since January. Basically, it's very different with last year, where we start to disburse KUR on March. So the Kupedes basically will grow until December 2024, roughly around 25%-30% year-on-year. That's already taking. That's, basically, that's declining, I mean, decreasing from the, the budget, the previous budget. And for the coverage, we have an aspiration, or our comfortable level, basically, is roughly is around 200%. But I think this year, we are because we have to use our provisions to do the write-offs, so 190%-200% probably will be our comfortable level for this year.
Bu Handayani, do you want to take the question on the consumer asset quality?
Thank you. Thank you, Bret. Based on the data for Q1, actually, the driver of growth on the Consumer segment, driven by a mortgage, while in terms of the asset quality, mortgage also shows a bit a downgrade on the SML and also on the NPL. But then in these situations, in this current situation, we are going to more focus into the first homeowner to make sure that our penetrations in second quarter give the better impact into the loan quality. As well as, we also more focus into the first year developer in a in an urban city with average ticket size around IDR 750 million-IDR 1 billion .
So hopefully, with the specific target market segment in second quarter, we are going to maintain the asset quality better. While on the other loan products, such as salary-based loan, we are still optimistic to grow, because we still have potentials throughout the penetrations of our payrolls. Thank you.
Oh, I think we still have one. Sorry. Okay, Ba Yuli, sorry. So it's like, about the Pegadaian and the increase in the gold price. Of course, Pegadaian will get benefit because, basically, with the increase in the gold price. Pegadaian can, you know, increase the maximum amount of loan that can be dispersed to our customers. But I think, they will also will maintain the loan-to-value as well. And I think that's, that's the answer. Thank you, Bret.
We are going to take the next call question from the dial-in. Selvie from Morgan Stanley, could you please ask your question?
Hi, thanks. Thank you for taking my question. I have two questions. So firstly, on the asset quality, I think it's like a follow-up question, I'm just trying to seek a bit more clarity just in terms of, like, the deterioration in the micro loans. And I think just now, Bu Vivi also mentioned about the loopholes during, like, the KUR growth was a bit slow last year, first quarter. A nd therefore, the Kupedes growth was stronger. Just in terms of, like, the asset quality deterioration that you are seeing, I think at the beginning remark, there was also some mention about the deterioration in the KUR. So but just to get things right, in terms of the micro loans, KUR deterioration, where is it from, the KUR or the Kupedes, and what do you actually seeing?
So effectively, is it like they just can't make the payment or like the payment was delayed? I'm trying to get clarity from on that front. And then the second question is on more on, like, the movement between the recovery as well as the write-off. I guess, like, the KUR loans is 70% guaranteed. Is that, like, you required to write it off first before you can get the guarantee, or how does it work? Yeah, so those are my two questions. Thank you.
Okay. Thank you, Selvie. So it's about the asset quality in Micro. I think one thing that's very important. The graduations from KUR to Kupedes, when we, by intentions, try to normalize our asset mix in the Micro, back to Kupedes, I do hope that you guys basically expect that the cost of credit will increase in Micro. Because the cost of credit in Kupedes is roughly around 7%. The cost of credit of KUR is roughly around 5.9%. So we are moving to basically a higher cost of credit product, but of course, with a higher yield as well. So that is very important.
To answer your questions, whether this coming from KUR or Kupedes, Selvie, basically, some of it coming from the KUR that graduated to Kupedes in the first quarter of 2023. And that's basically impacting the asset quality. And based on our review, most of them because of their repayment capacity, because of the macro environment conditions. B ased on our last research, the BRI MSME Index Survey, the rentability of MSME or rentability MSME index basically is declining. And because of this rentability's decline, it will impacting their debt service, I mean, the capability to pay their loan. Of course, we also saw a weakness coming from internal factors, but I think that's a common. I mean, common is, you know, we have been doing Micro business for years, I mean, hundred of years.
Not all of the times it's always good. There is a time that we need to slowing down, reviewing things, reviewing infrastructure, reviewing the risk, reviewing the people, and then start to grow again. Now, Micro has been growing significantly for several years, including during the pandemic. So from business strategy perspective, I think it's fair for them to just slowing a bit, reviewing their infrastructure, including people, underwriting methodology to be better going forward. So I think that's a common business cycle that we see here. And the last one, I think the KUR insurance about the SOP, right? Usually, the credit insurance basically cover 70% of the total outstanding. When the KUR customers down grade it into NPL, basically, Rakyat can propose to the credit insurance, so the credit insurance then pay the claim.
Usually, or based on the agreement, it will need 30 business days. However, if we are looking at the facts, it will take longer than 30 days, usually, like, four to six months before they are able to, to pay. And this is not because of the capability of the credit insurance, but more on the working, the working papers, the administrations, the, because it's not 100% automatic claim yet. Thank you.
Thank you for the question, Selvie. We're going to take one more question from the Zoom, and this one's from Chang Qi Ong, from JP Morgan. On KUR migration to Kupedes, do maturing KUR loans that can no longer be renewed as KUR automatically qualify as Kupedes? If yes, does that mean the new Kupedes loan will eventually see the same asset quality issues as current KUR? If no, how much of these maturing KUR loans qualify for Kupedes? How much of those that don't qualify for Kupedes fail to repay?
Yep. It's very good questions. Thank you. So it's not. That's not the way how we play on the graduations. It doesn't mean that if I am a KUR customers, then I am no longer eligible for KUR, then automatically I can be a customers of Kupedes. No, that's. Still, because Kupedes is commercial-based. We need to review again the capacity, the capability, especially the repayment, and then the collateral that they have, because Kupedes is collateralized business. So it's not automatically become a Kupedes customers. And one more thing, I think the most important thing when we want to graduate from KUR to Kupedes, is about looking at the consistency of the behavior of cus- of KUR customers before they are able basically to become a Kupedes borrowers. That's also important.
Thank you, Bu Vivi, and I think Pak Sunarso has some final words.
We have to transform in term of our business model, I think, in Micro and Small. And also, I think we have to transform maybe in term of Micro Loan Officers, more, some more small, sorry, some more Small Relationship Manager, I think. And then also cover about their coverage, yeah, their coverage. And business model, their coverage, and also we have to aware that actually, as Bu Vivi mentioned, that the shifting for KUR client to be Kupedes, it is not so easy. B ecause I think for long times, KUR client is pampered by subsidies. That's not only maybe a part of our effort to empowering people, but also creating a new habit for customer.
So I think because, maybe so long, for a long time, they pampered by the subsidy. I think the, now, I think we have to start a commercial-based lending, is fully commercial-based lending, starting from zero, not from shifting the, also shifting from the KUR client. B ecause it's already creating a habit. Not only empowering people, but already creating a habit. So I think we have to respond to strategic, more, more fit strategic through transformation, primarily in a s- Micro and also, Small. I think that's, we have to respond it. Yeah.
Thank you, Pak Sunarso, for the final thoughts, and thank you all for joining. Thank you to our Board of Directors for being a part of the call, and also for all the investors and analysts. We will be having some post-call, post-earnings call, follow-up calls, so we look forward to speaking with you on that. Thank you.