BI strengthens KLM to keep lending rates more controlled after BI Rate rise

Makassar (ANTARA) - Bank Indonesia (BI) has strengthened the KLM interest rate channel incentives based on the spread between the BI Rate and banks’ lending rates after the policy rate rose by 50 basis points, in order to keep movements in lending rates more controlled or manageable.

Director of the Macroprudential Policy Department at BI, Dhaha P. Kuantan, in a discussion with the media in Makassar on Friday, explained that through the Macroprudential Liquidity Incentive Policy (KLM) scheme, banks will reconsider adjustments to lending rates.

If banks can maintain a certain spread against the BI Rate so that increases in lending rates do not happen aggressively, banks stand to obtain KLM incentives optimally.

“The expectation was that when the BI Rate was adjusted by 50 basis points yesterday, banks would not immediately raise lending rates,” said Dhaha.

For information, KLM is an incentive set by the central bank through reductions in banks’ giro deposits with BI in order to meet the Minimum Reserve Requirement (Giro Wajib Minimum, GWM) on average.

Dhaha explained that the previous mechanism for the KLM interest rate channel incentives was calculated based on the elasticity between the BI Rate and the new lending rate.

Now the new incentive scheme, which will take effect from 1 August 2026, is based on the spread between the BI Rate and the new lending rate, with the maximum incentive amount of 1.0 percent of third-party funds (DPK) for conventional commercial banks, sharia-compliant banks, and sharia units.

Quoting the attachment to the May 2026 RDG press release, BI noted that banks able to maintain the spread of the new lending rate below 3 percent against the BI Rate will receive a maximum incentive of 100 bps.

Meanwhile, spreads of 3 percent up to less than 6 percent receive an incentive of 40 bps, spreads of 6 percent up to less than 10 percent receive 10 bps, while spreads above 10 percent receive no incentive.

With the strengthening of the spread-based interest rate channel mechanism, BI hopes policy transmission will be better and the rise in lending rates will remain manageable so that credit growth can continue.

In addition to the interest rate channel, BI also strengthens the KLM lending channel into a financing channel through the addition of non-traditional financing.

In the new scheme, banks’ ownership of securities or corporate Islamic securities designated by BI can be counted as part of financing to the SME sector, cooperatives, inclusion, and sustainability.

Dhaha said the move was taken because growth in MSME financing is still considered limited, leaving ample room to expand through various financing instruments.

BI maintains the maximum financing channel incentive at 4.5 percent of DPK, including an additional incentive for non-traditional financing of up to 1 percent of DPK.

Next, BI adds a new channel to the KLM, namely financing to funding channel to strengthen banks’ funding sources beyond DPK.

Through this scheme, additional incentives are given to banks that have not yet reached the maximum 5.5 percent and meet the macroprudential intermediation ratio (RIM) rules according to BI’s criteria based on funding sources other than DPK.

Dhaha said non-DPK funding requires effort and innovation from banks, so BI provides additional room for incentives through that channel up to 0.5 percent for banks able to strengthen alternative funding sources.

“We are able to provide incentives if they pursue innovations in that direction,” said Dhaha.

The BI Rate was decided to rise by 50 bps from 4.75 percent to 5.25 percent at the May 2026 Board of Governors Meeting (RDG).

This rate rise marks the first adjustment after the policy rate was held at 4.75 percent since September 2025.

Throughout 2025, BI had previously trimmed the policy rate five times with a total reduction of 125 bps.

According to BI notes, bank lending in April 2026 grew 9.98 percent year-on-year, higher than March 2026’s 9.49 percent yoy.

In the same period, lending rates stood at 8.73 percent, while 1-month deposit rates were 4.16 percent.

BI projects credit growth in 2026 to stay within the 8-12 percent range.

In a press conference following the BI Board of Governors meeting in Jakarta on Wednesday (20 May), BI Governor Perry Warjiyo also urged banks to improve efficiency so they do not raise lending rates and to continue lending after the 50 basis point BI Rate rise.

“We ask banks to also improve efficiency so as not to raise lending rates. Efficiency must be enhanced to truly spur lending,” said Perry.