On Thursday (15/03) Widodo gathered key directors and commissioners of four state-owned banks, 27 regional development banks, 75 private banks, and eight branches of foreign banks at the Presidential Palace and urged their banks to leave their "comfort zone" and become more willing to boost credit growth even though that would come at the risk of rising non-performing loans (NPL) and a lower capital adequacy ratio (CAR).

It is not the first time Widodo requests the nation's banking sector to boost lending in an effort to encourage economic activity and economic growth. Last year when he spoke in front of the nation's banking leaders he requested to see a credit growth rate of between 9 - 12 percent (y/y). However, actual credit growth realization in 2017 only reached 8.3 percent (y/y) according to data from the Financial Services Authority (OJK).

The relatively high CAR of 23.26 percent in Indonesia's banking sector shows that banks have plenty of room to boost lending. A CAR above 12 is considered safe as it means that banks have enough cushion to absorb a reasonable amount of losses before becoming insolvent and lose depositors' funds. Meanwhile, the NPL ratio in Indonesia's banking sector has improved to 2.6 percent (gross) or 1.2 percent (net) at the end of 2017.

OJK Chairman Wimboh Santoso added that the year 2018 is the correct time for local banks to invest in credit disbursement amid low inflation and rising commodity prices. Stronger commodity prices imply that commodity-related companies are now financially stronger and therefore carry a lower risk as debtor. The OJK targets for a 12 percent (y/y) increase in credit disbursement in 2018.

Kartika Wirjoatmodjo, President Director of Bank Mandiri, said he wants his company's credit disbursement to expand in line with Widodo's wishes. This is now the right moment because the company's restructuring phase has been completed over the past two years, while commodity prices have strengthened, the manufacturing sector shows good signs of growth, and the property market has improved. These sectors are therefore interesting sectors for the company's credit disbursement. Hence, this year Bank Mandiri plans to invest less in government bonds and more in credit.

Bank Mandiri, which is government-controlled as well as listed on the Indonesia Stock Exchange, targets for a 12 percent (y/y) growth in the bank's credit disbursement in 2018 (the same as the OJK's target for the whole banking sector), up from 10.2 percent (y/y) in the preceding year.

Credit in Indonesia's Banking Sector:

 2015  2016  2017  2018¹
(in IDR trillion)
3,706.5 4,092.1 4,413.4 4,782.0 5,300.0
Y/Y Growth
  n.a.   10.4    7.8    8.3  10-12

¹ forecast

Net Profit in Indonesia's Banking Sector:

 2013  2014  2015  2016  2017
Net Profit
(in IDR trillion)
 92.83 106.71 112.63 104.63 106.54 131.15

Source: Bisnis Indonesia