T

he latest data issued by the Financial Services Authority (OJK) should calm any excessive jitters regarding the banking industry despite the warning by most analysts that the asset quality of banks in Indonesia and those in other ASEAN countries could weaken through the rest of this year until the first half of next year.

The OJK reported that bank lending in the first half still grew by slightly over 10 percent even though total lending for the whole year could fall sharply from the 20 percent expansion last year due to the weaker economic growth. But it still foresaw a credit expansion of over 10 percent for the whole year, backed up by a much higher pace of budget spending by the government in the second half and direct elections in more than 265 regions in December.

Standard & Poor'€™s rating report two weeks ago warned that credit risks have been building up for ASEAN banks due to rising property prices and household indebtedness, funding pressure from tight liquidity and market risks from rising interest rates in certain countries.

The OJK said the Indonesian banking sector'€™s assets increased by 11.11 percent in the first half and capital (core) adequacy ratios averaged a respectable 18 percent. Even though non-performing assets rose slightly they were still hovering at a fairly comfortable level of 2.55 percent as was net interest margin at 5.32 percent, the highest in the ASEAN region.

The credit-growth slowdown should even be welcomed at this point in time, especally in the wake of the rupiah depreciation, as banks should maintain a strong liuidity position to cope with the impact of the weaker rupiah. But the central bank should see to it that the excess liquidity within the banking industry is not used for foreign exchange speculation.

Our economy requires functioning credit markets in order to operate well but credit markets have grown to become dependent on the broader financial system because of the way in which credit risk is traded and distributed. Banks also need to balance their third party funds, interest margins and safeguard against the threat of soaring non-performing loans.

For sure, the business risks have now become much greater due to the slump in Europe and most emerging economies and the sharp downturn in China, which happens to be Indonesia'€™s biggest trading partner.

Given the lingering prospect of a money-tightening move by the US Federal Reserve within the next few weeks, a tight liquidity environment at present would make things more difficult especially for small and mid-size banks. The 10 biggest banks that control more than 75 percent of the deposit market have become more reluctant to lend to those smaller banks, preferring instead to put their excess liquidity in government bonds and Bank Indonesia debt papers.

But the business risks could be mitigated if the government is really serious about improving its regulatory and legal framework, as President Joko '€œJokowi'€ Widodo has promised over the past few months.