Banking Credit Gap Remains a Challenge; Bank Indonesia's Strategy
The credit gap in Indonesian banking remains a significant challenge. Although bank liquidity is abundant, credit growth has not yet reached optimal levels, according to Senior Deputy Governor of Bank Indonesia Destry Damayanti at the launch of the Financial Stability Review No. 46 on Friday, 27 February.
The national financial system demonstrates robust health, with banking sector liquid asset ratios currently at 27.6% and capital adequacy ratios at 25.9%, significantly above the 8% threshold. However, undisbursed loans remain substantial at Rp2.506 trillion, representing 22.65% of available credit facilities.
Bank Indonesia is promoting improvement through several policies, primarily the Macroprudential Liquidity Incentive Policy (KLM). Since its implementation two years ago, the KLM has provided banks with total incentives reaching Rp427.5 trillion as of February. Under this mechanism, banks in normal conditions must place funds as mandatory minimum reserve (GWM) at 9%, but those channelling credit to priority sectors and inclusive finance sectors see their effective GWM reduced to 3.5%, with the difference of 5.5% returned to the banks.
The KLM operates through two channels: the lending channel, targeting banks directing credit to priority sectors, and the interest rate channel, supporting banks that rapidly implement BI’s monetary policy transmission. Of the Rp427.5 trillion in incentives, approximately Rp357.9 trillion comes from the lending channel and Rp69.6 trillion from the interest rate channel.
Banking intermediation faces challenges over the past 6 to 12 months, with liquidity available on the supply side but demand-side pressures persisting. Higher interest rates stemming from monetary policy transmission have also constrained credit growth. However, the BI Reference Rate has declined 150 basis points since September 2024, and lending rates for new credit have fallen 88 basis points, signalling improving bank readiness and lending appetite.
BI Assistant Governor Solikin M Juhro acknowledged that the credit gap remains below potential levels. To advance economic development, financing must be expanded from both supply and demand perspectives, alongside stable macroeconomic conditions. The lending capacity index remains relatively loose, and interest rates continue to decline, though further transmission improvement is required.
The KLM represents significant macroprudential innovation. Unlike previous reserve requirement reductions, it now permits GWM compliance through liquidity incentives, conditional on lending to productive and priority sectors aligned with government programmes. BI will strengthen the KLM to be performance-based and forward-looking, with banks required to submit their business plans and future forecasts to qualify for incentives. Should banks fall below their projected targets, incentive adjustments or repayments will be mandated.