T

he banking industry is feeling more optimistic about 2016, as the economy is predicted to improve despite the lingering effects of the global and domestic slowdown last year.

That optimism reflects in an average loan growth target of 14.1 percent stated in banks'€™ business plans submitted to the Financial Services Authority (OJK) by the end of November last year.

The 2016 target is higher than the average credit growth last year, which likely failed to reach the targeted range of 11 to 13 percent, with bank loans growing only 9.8 percent year-on-year (yoy) as of November 2015.

'€œThe optimism remains in line with the OJK'€™s outlook for this year, which is for bank loans to grow within a range of 12 to 14 percent,'€ OJK chairman Muliaman D. Hadad said in Jakarta recently.

Muliaman added that the OJK expected progress in the banking and financial services industry this year to be supported mainly by the domestic economy, rather than external factors, as low global commodity prices and currency volatility lingered on.

Global and domestic challenges put strain on the banking industry in Southeast Asia'€™s largest economy last year, as loans grew by around 10 to 11 percent, and even in single digits in several months, after much faster growth in previous years.

The sluggish credit growth was mainly ascribed to the country'€™s weak economy, which grew at less than 5 percent in the first nine months of last year as government spending was delayed and domestic consumption, the country'€™s largest growth engine, was weak.

Slow GDP growth was coupled with the lingering effects of a global commodity price slump as well as currency volatility due to the US'€™s Federal Reserve'€™s plan to hike its fund rate.

The worsening environment also took its toll on domestic banks. Rising risks from bad loans in the domestic banking industry for nearly a year forced lenders to raise their loan-loss provisions, sending costs up and profits down.

OJK data show that gross non-performing loans (NPL) in banks stood at 2.66 percent of total gross loans as of November 2015, up from 2.46 percent in May.

Bank Mandiri economist Dendi Ramdani said the rising NPL trend was predicted to remain in 2016, even though the speed of increase had started to slow in the final months of last year.

'€œWith improvements in the economy, the NPL will probably decrease; we predict that signals of economic recovery will probably emerge after the first half of 2016,'€ he said.

Dendi said the consumer confidence index had started to improve in November 2015, but actual consumption had yet to show any rebound, indicating that the government'€™s recent economic stimulus packages lacked in effect on the consumption side.

CIMB Niaga strategy and finance director Wan Razly Abdullah said economic recovery would only start in the second half of this year, adding that '€œthe recovery will depend on government incentives for industries'€.

'€œThis year will be better than 2015, but we expect our loans will grow below 10 percent, as economic growth is still slow. However, we will see higher growth if the economic recovery is accelerated,'€ he said.

Bank Mandiri finance and strategy director Kartika '€œTiko'€ Wirjoatmodjo said the lender expected to grow its loans by 13 percent this year, which was within the banking industry'€™s range of growth.

'€œWe actually see a spike in loan demand in December, especially for infrastructure projects, such as oil and gas in addition to smelters,'€ Tiko said.

On the funding side, Muliaman said banks had also predicted in their business plans that third-party funds would grow by 12.7 percent yoy this year, which was within the OJK'€™s projected range of around 13 to 15 percent.

Third-party funds in banks grew 7.7 percent yoy as of November 2015, OJK data shows.

According to the OJK'€™s latest assessment, banks have ample liquidity as their liquid assets are sufficient to anticipate higher disbursement of third-party funds into loans or other investments.

OJK data shows that the ratios of liquid asset to non-core deposits as well as liquid assets to third-party funds stood at 76.01 percent and 15.99 percent respectively as of Dec. 21, 2015, which was higher than the minimum 50 percent and 10 percent.

'€œWe also see room for policy easing in certain aspects,'€ Muliaman said.

Both the OJK and Bank Indonesia (BI) already relaxed their policies to help lenders manage their liquidity better amid the economic squeeze. For instance, BI last year lowered the reserve requirement ratio to 7.5 percent from 8 percent, which was expected to provide the banking system with additional liquidity of around Rp 18 trillion (US$1.29 billion) that could be used to boost lending.