BI Notes Increased Selectivity in MSME Lending Amid Rising Credit Risk

Banking Sector Response to Growing Credit Concerns

Bank Indonesia (BI) has observed that banks are becoming more cautious in their lending practices, particularly in the consumer and Micro, Small, and Medium Enterprises (MSME) segments. This increased selectivity is primarily due to the rising credit risk associated with these sectors. According to BI Governor Perry Warjiyo, while the overall lending appetite of banks remains robust, the lending requirements for consumer and MSME credit have become stricter.

MSME Loan Growth Contraction

The impact of this increased caution is evident in the MSME loan growth figures. In November 2025, MSME loan growth contracted by 0.64% year-on-year. This contraction highlights the challenges faced by MSMEs in accessing credit during periods of heightened credit risk. Despite this, the overall loan growth for November 2025 stood at 7.74% year-on-year, an improvement from the previous month's growth of 7.36%.

Credit Dynamics and Future Prospects

The banking sector in Indonesia maintains a significant pool of undisbursed loans amounting to Rp2,509.4 trillion, which represents 23.18% of the total available credit facilities. This substantial figure indicates the potential for future credit growth, contingent on economic conditions and borrower demand. Governor Warjiyo emphasized the need for continued efforts to enhance credit growth to support economic expansion. He noted that the demand for credit remains subdued, influenced by businesses' cautious 'wait and see' approach and the slow decline in lending rates.

Monetary Policy and Interest Rate Dynamics

The slow transmission of monetary policy easing to lending rates has been notable. Despite a 125 basis point reduction in the BI rate, the decrease in lending rates has been more muted. One-month deposit rates dropped by 67 basis points from 4.81% at the beginning of 2025 to 4.15% in November 2025. Lending rates decreased by only 24 basis points from 9.20% to 8.96% over the same period. This lag in interest rate adjustments reflects the complexities in the banking sector's response to monetary policy changes.

Outlook and Policy Coordination

BI projects that credit growth for 2025 will be at the lower end of the 8-11% year-on-year range and expects an improvement in 2026. To address these challenges, BI plans to strengthen coordination with the government and the Financial System Stability Committee (KSSK) to promote credit growth and improve interest rate structures. This collaborative approach aims to create a more conducive environment for economic growth through enhanced banking sector activity.