Indonesian banks are expected to be cautious boosting credit disbursement in the next couple of quarters because the non-performing loan (NPL) ratio is currently high with the gross NPL ratio hovering above 3 percent since mid-2016, approximately the same level as it was in 2011 when Indonesia's five-year economic slowdown commenced. Although various external and internal matters were to blame for Indonesia's 2011-2015 economic slowdown, the high NPL ratio today can undermine economic acceleration as credit growth is curbed.

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Credit growth in Indonesia improved in October 2016 after touching a low in the preceding month. In October credit growth in Indonesia was recorded at a pace of 7.4 percent year-on-year (y/y), reaching IDR 4,246.6 trillion (approx. USD $314.6 billion), accelerating from a growth pace of 6.4 percent (y/y) in September. This development is caused by Bank Indonesia's lower interest rates although the victory of Donald Trump in the 2016 US presidential election may have curtailed demand for credit due to the higher degree of uncertainty about future US political and economic policies.

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The Financial Services Authority (OJK), the Indonesian government agency that regulates and supervises the country's financial services sector, expects credit growth in Indonesia to expand by a bleak 6 - 7 percent (y/y) in 2016, far below the initial growth forecast of 12 - 14 percent (y/y). OJK Chairman Muliaman D. Hadad said credit growth is slowing in Indonesia amid sluggish global and domestic economic growth as well as the strategy of companies to settle debts rather than seek credit for business expansion, while individual credit demand remains bleak as well.

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Credit growth in Indonesia is expected to have continued its slide in Q3-2016. On an annual basis, credit growth may have eased to 6 percent. Bank Indonesia, the nation's central bank, still upholds its 2016 credit growth target of 7-9 percent (y/y) as it eyes an improvement in credit disbursement in the last quarter of the year. Slowing corporate credit growth signals that firms are less enthusiastic to engage in business expansion and investment, while easing individual credit growth implies that consumers are less eager to obtain loans for the purchase of property, cars and motorcycles.

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Indonesian entrepreneurs say their credit demand is limited due to few expansion and investment plans ahead of the end of the year. Although the Indonesian economy is recovering - reflected by accelerated GDP growth figures in the first two quarters of the year - demand from abroad for Indonesian products remains weak, while domestic demand remains somewhat subdued as well (reflected by the nation's structurally weakening export and import figures over the past 15 months). As a result credit growth has been slowing accordingly.

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Although Indonesia’s economic fundamentals and future economic outlook have improved in recent months, supported by government spending, recovering household consumption and rising commodity prices, Indonesian banks remain very conservative when it comes to disbursing new credit to companies. Recently, the central bank of Indonesia (Bank Indonesia) cut its projection for credit growth in the nation's banking sector this year from the range of 10 - 11 percent year-on-year (y/y) to 7 - 9 percent (y/y).

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The net interest margin (NIM) of Indonesian banks rose while the nation's credit growth slowed and economic growth remained 'bleakish'. In June 2016 the average NIM of Indonesian banks was recorded at 5.59 percent compared to 5.32 percent in the same month one year earlier. The higher NIM is the result of improved credit quality, reflected by a lower non performing loan (NPL) ratio. NIM is the difference between interest income generated by banks and the amount of interest paid out by banks to the lenders. A higher NIM implies that the bank is more profitable.

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By relaxing the loan-to-value (LTV) ratio, the central bank of Indonesia (Bank Indonesia) expects to see House Ownership Credit (Kredit Pemilikan Rumah, abbreviated KPR) growth to accelerate by an additional 5 percent. Up to April 2016, KPR growth was recorded at 7.61 percent (y/y) only, down significantly from the years 2012-2013 when - amid the glory years of property development in Indonesia - KPR growth touched figures of between 30 - 49 percent (y/y). Back then concerns emerged whether Indonesia was about to experience a price bubble in the property sector.

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The central bank of Indonesia (Bank Indonesia) expects Indonesia's economic growth in the second quarter of 2016 to improve slightly to 4.9 - 5.0 percent (y/y) compared to the 4.92 percent (y/y) GDP growth realization in the first quarter of the year. Regarding growth in full-year 2016, Bank Indonesia remains optimistic that a 5.4 percent growth pace can be achieved supported by a looser monetary policy (that should boost demand for credit). Bank Indonesia cut its key interest rate (BI rate) by 0.25 percentage point to 6.50 percent in the June policy meeting.

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Credit disbursement in Indonesia's banking sector grew at its slowest pace in six years in the first quarter of 2016. This weak performance is attributed to the slowdown in the country's real sector. Muliaman D. Hadad, Chairman of Indonesia's Financial Services Authority (OJK), said credit expansion grew 10 percent (y/y) to IDR 4,084 billion (approx. USD $300 billion) in Q1-2016. However, Hadad remains optimistic that credit expansion will accelerate in the second half of the year in line with forecasts for accelerating GDP growth. This will be a better context for businesses to expand.

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The banking sector remains a key sector for growth of Indonesia's financial industry as well as the country's general economic expansion as the sector posted the highest profits worldwide. Prasetiantoko Augustine, economist at Bank Tabungan Negara (BTN), said that profitability in Indonesia's banking sector is not only highest in the ASEAN and Southeast Asian region but also worldwide. Bank Rakyat Indonesia posted the highest profit of Indonesian banks in 2013 (IDR 21 trillion), followed by Bank Mandiri (IDR 18 trillion) and BCA (IDR 14 trillion).

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Moody's Investors Service, one of the big three global credit rating firms, predicts that profit in Indonesia's banking sector remains stable due to strong financial fundamentals. In its report "Indonesia Banking System Outlook", which discusses Indonesian banks' creditworthiness over the next 12 to 18 months, Moody's assesses that - despite an economic slowdown having reduced GDP growth to 5.78 percent in 2013 and puts some pressure on asset quality - high profitability and strong capital levels will continue into 2014.

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At Bank Indonesia's Board of Governors’ Meeting today (13/02), it was decided to maintain the country's benchmark interest rate (BI rate) at 7.50 percent as well as the interest rates on the Lending Facility and Deposit Facility at 7.50 percent and 5.75 percent respectively. The policy is consistent with the tight monetary policy stance currently adopted in order to steer inflation back towards its target corridor of 4.5±1 percent in 2014 and 4±1 percent in 2015, as well as to reduce the current account deficit to a more sustainable level.

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Today, Bank Indonesia kept its benchmark interest rate (BI rate) at 7.50 percent at the Board of Governors’ meeting. The lending facility rate and deposit facility rate were maintained at 7.50 percent and 5.75 percent respectively. An assessment of the economy in 2013 and outlook for 2014-2015 indicated that such policy is consistent with ongoing efforts to keep inflation within the target of 4.5±1 percent in 2014 and 4±1 percent in 2015, as well as to help reduce the current account deficit to a sustainable level.

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