How Local Governments Can Borrow from the State Budget through Banks and Non-Bank Institutions

The government has issued a policy regulating the borrowing scheme by local governments (pemda) sourced from banks or non-bank financial institutions. This mechanism is contained in Minister of Finance Regulation (PMK) Number 11 of 2026, signed by Purbaya Yudhi Sadewa and effective from 16 March 2026. This loan serves as a new financing option for local governments. “To support efforts to achieve development targets and economic growth, alternative financing is needed for local governments to fund the implementation of activities and/or programmes related to the implementation of national fiscal policy,” states an excerpt from PMK No. 11 of 2026, quoted on Tuesday, 14 April 2026. This regulation governs the loan scheme, funding sources, and forms of financing. Debt to support national fiscal policy (KFN) may take the form of activity loans or cash loans. KFN is guided by the national medium-term development plan, macroeconomic framework and fiscal policy principles, Government Work Plan, State Revenue and Expenditure Budget (APBN), or financial note, as well as presidential policies or directives. At least three technical requirements must be met by local governments to obtain this financing: administrative, financial, and programme feasibility requirements. From a financial perspective, the maximum regional debt limit is set based on the sum of current outstanding debt and the new loan to be applied for. The total accumulation must not exceed 75 percent of the previous year’s regional revenue and expenditure budget (APBD) revenue. Banks or non-bank financial institutions (LKB or LKBB) disbursing the loans may propose interest rates to the Minister through the Director General of Financial Balance, referencing the maximum rate equivalent to the yield of the reference Government Securities series with a matching tenor. This also considers the regional fiscal condition and certain indicators. The government may also provide interest subsidies for Regional Loans to local governments. If the loan is agreed upon, local governments are obligated to pay the principal debt, interest or yield, and late payment penalties if applicable. If a local government is unable to pay its loan obligations that have fallen due, the Minister of Finance may deduct from the revenue sharing funds (DBH) or general allocation funds (DAU) not designated for specific uses.