Bank Indonesia also informed that the average lending rate was 11.45 percent in November 2017, down 10 basis points from the average rate in the preceding month. Falling rates are the result of Bank Indonesia's aggressive monetary easing over the past two years. The central bank's benchmark interest rate was gradually cut from 7.75 percent at the start of 2015 to 4.25 in late-2017 amid low inflation, a stable rupiah exchange rate, and an under-control current account deficit.

Despite the more attractive interest rates, credit growth in Indonesia's banking sector will most likely not reach the targeted 10 percent (y/y) in full-year 2017. The 10 percent (y/y) credit growth target was set by the government. Bank Indonesia, however, has its (revised) target at 8 percent (y/y) for full-year 2017.

Wimboh Santoso, Chairman of the Board of Commissioners at the Financial Services Authority (OJK), explained that sluggish credit growth in Southeast Asia is due to the fact that many banks are still in the stage of restructuring. Therefore their credit growth could not reach double-digit figures yet in 2017.

Undisbursed loans in full-year 2017 reached IDR 1,400 trillion, or about 30 percent of total credit available in Indonesia's banking sector. Hence, consumers and investors remained cautious last year as economic growth only accelerated modestly and export growth did not improve significantly.

What about Credit Growth in 2018?

The domestic and global economies are expected to improve further in 2018 and therefore credit growth in Indonesia's banking sector should accelerate accordingly to the range of 9 - 11 percent (y/y). Accelerating credit growth should also be supported by the improving quality of credit in Indonesia's banking sector (with an strengthening non-performing loan ratio). Meanwhile, improving commodity prices (such as coal and crude oil) encourage credit growth as companies need funds for investment and working capital to boost production capacity.