The central bank has been formulating new regulations for some time to address this issue and has decided to introduce a minimum and maximum loans-to-deposit ratio (LDR) to which all banks must subscribe. The legislation, now entering the final stage of preparation, would impose a minimum LDR of 75 percent and a maximum LDR of 102 percent. Effectively, it means that banks will no longer be allowed to hoard liquidity and will need to find ways of disbursing new loans.

It is hoped that this will encourage banks to offer more financing, particularly to economic sectors that are facing a lack of capital and investment. Halim Alamsyah, the deputy governor of Bank Indonesia, told The Jakarta Post, "We hope the new regulation will encourage banks to disburse more loans to industries. We need to ease the way for industries to borrow."

The central bank's efforts to encourage lending illustrate just how far the sector, and the country, has come. On the back of the global credit crunch, the republic's banks have largely remained liquid and profitable, a far cry from the Asian financial crisis of 1997-1998, when the banking sector disintegrated under the burden of bad debt.

By most assessments a little more than a decade on from the crisis, the banking sector is in rude health. The summary of the IMF 2010 Article IV consultation mission to Indonesia states, "The financial system has made remarkable progress over the last decade which helped it withstand the adverse effects of the 2008 global crisis. Fundamentals have strengthened, with most Indonesian banks reporting high capital, comfortable levels of liquidity and solid profitability."

The banking system has continued to expand in line with an economy that grew by 4.5 percent in 2009 and is expected to see a further 6 percent rise in 2010. The central bank hopes to continue to juggle strong growth with stability in the financial system. Bank Indonesia Governor Darmin Nasution told OBG, "Monetary policy will be geared towards the achievement of low and stable inflation, while maintaining close attention to financial system stability. Banking policy, on the other hand, will not only focus on the banking industry, but will also uphold macroeconomic stability and provide support for economic activity."

Much has already been achieved. Since 2000, consumer lending has increased significantly, and non-performing loans (NPLs) have been brought under control. Between 2002 and 2006, consumer lending grew at a compound annual rate of 30 percent, a trend that has been little impacted by the global financial crisis. The first half of 2010 has been a strong period for the country's banks.

For example, Bank Central Asia, Indonesia's biggest lender by market value, recorded loan growth of 7 percent in the first half of 2010, a figure which it expects to rise to over 20 percent for the full year. This growth helped the bank record first-half profits of Rp 3.9 trillion (US$436.7 million), a year-on-year increase of 20 percent.

Bank Mandiri has also had a strong showing in 2010 so far, with total loans and receivables up 18.68 percent year-on-year to Rp 195.26 trillion ($22.11 billion) as of end-June 2010. The bank's first-half pre-tax profits reached Rp 5.34 trillion ($605 million), up 21.48 percent year-on-year.

This trend of increased lending is evident across the sector as a whole. In the first five months of 2010 alone, credit offered by commercial banks increased by 8.96 percent, with operating income from credit disbursed reaching Rp 81.4 billion ($9.1 million) in May 2010. This growth has been aided by favorable borrowing terms for consumers, with the central bank expected to keep the main interest rate at 6.5 percent in August, a record low for a twelfth straight month.

However, it is also indicative of a long-term sustainable increase in demand for credit. David Fletcher, the president of Bank Permata, told OBG, "Within the consumer and wholesale market there is a very robust pipeline of financing available. Many companies are looking to expand and grow their operations in 2010, and we should see lending increase. This is due mostly to a fundamentally strong economy."

The banking sector is now in a position to support these trends. It has reached a position of relative stability, with banks gaining greater confidence in the ability to expand their credit portfolios as the NPL ratio across the commercial segment has fallen from 7.56 percent in 2005 to 3.31 percent in 2009. It has continued to decline since, registering 3.21 percent in May 2010.

The Bank of Indonesia would like to see the sector expand its loan portfolio even further and facilitate growth throughout the economy, rather than simply focusing on the retail market and consumer loans.

While the LDR of commercial banks in Indonesia increased from 72.13 percent in January 2010 to 75.71 percent in May 2010, this modest growth in lending is too mild for the central bank's taste. The new regulation mandating a minimum LDR of 75 percent is designed to facilitate increased lending in the sector, fuelling further economic growth and bolstering the operating income of local banks. If this ambition is achieved, Indonesia could well emerge as not only a leading economy in the region, but also on a global scale.

The writer is the editorial manager of OBG Indonesia.

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