Source : Bank Indonesia, OJK

A Bank Indonesia board of governors meeting in February decided to cut the BI rate and deposit facility rate by 25 basis points (bps) to 7.5 percent and 5.5 percent, respectively, while the lending facility was maintained at 8 percent. It was the first rate cut since the beginning of the tightening monetary policy cycle in June 2013.

From June 2013 to November 2014, BI increased its rate by 200 bps from 5.75 percent to 7.75 percent in an attempt to stabilize the inflation pressure and volatility of the rupiah. The rate cut in February 2015 was undertaken because of the lessening inflationary pressure. The inflation pressure had moderated in the previous three months, and year-on-year (yoy) inflation had eased to 6.38 percent from its peak of 8.36 percent in December 2014. BI expects to see inflation at the lower end of its target of 4 percent ± 1 percent in 2015.

The rate cut had an immediate positive impact on banks'€™ loan growth. The latest data in February 2015 showed that loans to third parties grew 12.2 percent yoy to Rp 3.6 quadrillion, an improvement from 11.6 percent in January 2015. Although this remained much lower than the 23-25 percent growth in the 2011-2013 boom period, it was the first time loan growth had picked up in 16 months.

There was increased growth in working capital and consumer loans, while investment loans slowed slightly. Working capital and consumer loans grew by 12.1 percent and 11.1 percent, respectively, higher than January'€™s levels of 10.7 percent and 11 percent, respectively. Meanwhile, investment loans grew 13.6 percent, slightly lower than 13.8 percent in the previous month. Credit in almost all business sectors grew in February. Among them, loans to wholesale and retail trade grew 27.9 percent yoy, an increase from 27.5 percent yoy in the previous month, while loans to the processing industry grew 18.2 percent, compared with 14.2 percent yoy in January.

At the same time, growth picked up by 15.5 percent to Rp 4.10 quadrillion, from 14.2 percent in January 2015. The increase in deposit growth was supported by higher growth of demand and time deposits, which grew by 10.1 percent yoy and 26.2 percent yoy, respectively, higher than 9.6 percent yoy and 24.1 percent yoy, respectively, in the previous month. Meanwhile, saving deposit growth slowed to 3.7 percent yoy, compared with 4.1 percent yoy in January 2015.

The Loan-to-Deposit Ratio (LDR) fell to 88.42 percent from 88.48 percent in January, the lowest level since July 2013, because of the higher deposit growth compared with credit growth. The LDR had been stable below 90 percent. Banks in Indonesia had experienced tighter liquidity because of the tightening monetary policy in June 2013 to November 2014 and because of higher credit growth compared with deposit growth. Since February 2010, credit growth was constantly higher than deposit growth. Average credit growth in the Indonesian banking industry from 2010 to 2013 was 22.05 percent, while average deposit growth at the same time was only 16.7 percent. This caused the LDR to reach its highest level of 92.2 percent in July 2014. Data from the past five months showed that deposit growth was consistently higher than credit growth.

Source : Bank Indonesia, OJK

We expect that credit and deposit growth will increase further this year. According to the banking business plan survey conducted by BI, banks'€™ average expectation of this year'€™s credit growth is 17.5 percent, while BI and the Financial Services Authority (OJK) expect deposits to grow between 14 percent and 16 percent this year. Loan growth improved more rapidly in February than we had predicted; it usually takes between three and six months for banks to lower their credit rates after a policy rate cut, which affects credit growth.

We believe that there is room for BI to make a further 25 bps cut to its policy rate this year, as inflation is expected to continue to be moderate, the current account deficit is improving and there is potential for inflow into the domestic capital market as the concern over a Fed rate hike has eased. Moreover, we expect that the Indonesian economy will grow faster this year to 5.3 percent, compared with 5.02 percent in 2014. This will also have a positive impact on credit and deposit growth.

The capital adequacy ratio (CAR) of the banking industry has also improved significantly. Banks'€™ CAR in February 2015 reached a high of 21.3 percent, well above the minimum 8 percent required by BI. Banks have managed their capital growth well enough to compensate for their growing risk-weighted assets. The Indonesian banking industry'€™s total capital in February 2015 reached Rp 830.6 trillion, an increase of 19.9 percent yoy, while risk-weighted assets over the same period grew 12.3 percent yoy to Rp 3.9 quadrillion.

However, the bad news is that non-performing loans (NPL) increased to 2.43 percent from 2.37 percent during the period of monetary tightening. The increasing NPL was also caused by the rupiah depreciation and weakening global commodity prices. Even though 80 percent of credit in Indonesia is denominated in rupiah, there are risks attached to debtors whose production activities use a lot of imported components. Moreover, weaker global commodity prices have affected the growth of producing areas, especially provinces in Kalimantan. Central and East Kalimantan have fairly high NPL of 3.54 percent and 2.52 percent, respectively. The banking industry will have to be more cautious of bad loans in the future, as both the rupiah and commodity prices are likely to weaken further. The uncertainties of the global situation will remain high in the incoming period, which will potentially have an impact on currency fluctuation. Banks will probably need more provision to anticipate increasing bad loans. We are hoping that the banking indicators and overall domestic economy will continue to improve and stabilize in the future.
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The writer is a financial market analyst at Bank Mandiri (Persero).