I

ndonesia's banking industry will confront a 'new normal' set of market conditions next year, as lending is estimated to grow at an even slower rate and profitability will undergo corrections, executives at major banks have said.

Thanks to robust economic growth, over the past several years the industry enjoyed soaring domestic lending growth of between 20 and 25 percent annually.

The situation generated hefty profits, with an average net interest margin (NIM) ratio hovering between 6 and 8 percent, making Indonesian banks some of the most profitable lenders in the world.

However, all that is slowly changing, according to Citibank NA, Indonesia chief country officer, Tigor Siahaan. Tigor said that lending had begun to decelerate in line with the overall economic slowdown.

Next year, he said, the industry would probably see lending rise between 13 to 15 percent.

'It is a realistic estimate if we take into account the current situation. We have been very accustomed to 20 to 25 percent growth, but if we think it through, it [the new rate] is actually not bad,' he said on Thursday.

The 2015 rate estimate represents a challenge to the banking industry as financial regulators' have requested industry-wide lending growth of between 15 to 17 percent this year.

'This year's performance will be lower than the range, especially because funding sources are getting harder to come by,' Tigor added.

Bank Central Asia (BCA) president director Jahja Setiaatmadja and Bank Mandiri president director Budi Gunadi Sadikin also predicted that domestic credit growth would slow in 2015.

While Jahja estimated that loans would climb by 15 percent year-on-year, Budi predicted that credit would increase by 17 percent annually at most.

They said current conditions of tight liquidity was one of the limiting factors of credit expansion.

'The DPK [third-party funds] growth has not been able to match credit [growth],' Jahja said.

Latest banking statistics jointly published by Bank Indonesia (BI) and the Financial Services Authority (OJK) support concerns from banks that funding sources have dried up.

As of August 2014, outstanding DPK funds had climbed 12.1 percent year-on-year, or 5.2 percent year-to-date, to reach Rp 3.85 quadrillion (US$316.6 billion).

On the other hand, the outstanding loans portfolio has risen by 13.9 percent year-on-year, or 6.1 percent year-to-date, reaching Rp 3.52 quadrillion.

The slower DPK growth rate resulted in a loan-to-deposit ratio of 90.6 percent by the end of August, 175 basis points higher than a year ago.

Meanwhile, as credit expansion constricts, banks will be required to find income alternatives to net interest income.

Achmad Baiquni, finance director of the most profitable lender, Bank Rakyat Indonesia (BRI), said that the bank was prepared to see reduced NIM in 2015.

'Not to mention the possibility of seeing BI raise its interest rate because of rising interest rates in the US and a rising domestic inflation rate triggered by fuel-price adjustments,' he said.

Tigor said that banks might venture into other services to generate fee-based income that could help maintain their bottom line.