Indonesian Banks Tighten SME Lending Amid Rising Credit Risk

Cautious Approach to UMKM Credit

Indonesian banks are adopting a more cautious approach to lending to Usaha Mikro Kecil Menengah (UMKM) or Small and Medium Enterprises (SMEs) due to increasing credit risk. As of September 2025, UMKM credit growth slowed to 0.23% year-on-year, significantly lower than overall credit growth at 7% YoY ¹

Analyst Edo Ardiansyah from Phillip Sekuritas noted that banks are taking prudential measures in lending to UMKM due to their higher risk profile. This includes implementing stricter screening processes to ensure that borrowers are creditworthy ¹

Credit Growth Trends

According to Otoritas Jasa Keuangan (OJK) data, overall credit growth stood at 7.36% YoY as of October 2025, with total loans reaching Rp8,220.21 trillion. While investment credit grew by 15.72% and consumption credit by 7.03%, working capital credit grew by only 2.39% YoY. Corporate credit grew by 11.02%, while UMKM credit actually contracted by 0.11% YoY ²

Challenges in UMKM Lending

The challenges in UMKM lending are not limited to large banks. Even smaller banks like PT Bank Woori Saudara Indonesia 1906 Tbk. (SDRA) have significant exposure to UMKM credit. SDRA has UMKM loan products with 3-5 year installment periods and requires borrowers to have been in business for at least three years with positive financials ²

Regulatory Perspective

OJK's Head of Financial System Stability Directorate, Bayu Dwi Kariastanto, attributed the slowdown in credit growth to the contraction in UMKM lending, which was partly due to rising non-performing loans (NPLs) nearing 5%. This highlights the need for banks to maintain robust risk management practices in UMKM lending ²