Indonesia's Banking Sector Faces Credit Market Disequilibrium

Weak Credit Growth Persists

Indonesia's banking credit growth remained sluggish at 7.7% as of September 2025, falling short of the target range of 8-11% for the year. This weak performance is attributed to both demand and supply side factors. On the demand side, economic uncertainty has led potential borrowers to delay business expansion and rely on internal funding rather than bank loans. The high level of undisbursed loans confirms this trend.

Interest Rate Dynamics

Despite a significant 150 basis point reduction in the BI Rate since September 2024, credit interest rates have only marginally decreased from 9.2% to 9.05% during the same period. Similarly, deposit rates have not fully reflected the monetary easing, with 1-month deposit rates dropping by only 29 basis points from 4.81% to 4.52%. This discrepancy highlights the inefficiencies in monetary transmission.

Market Structure Challenges

The Indonesian banking sector's oligopolistic structure, dominated by four to five major banks, plays a significant role in this disequilibrium. These large banks act as price leaders, influencing the overall market pricing. The practice of offering special rates to large depositors, which accounts for 26% of total third-party funds, further complicates the issue. This practice has been prevalent since the removal of interest rate capping in 2018.

Policy Implications

The current monetary and macroprudential policies have limited effectiveness due to these structural issues. While liquidity incentives have increased bank liquidity, they have not significantly lowered credit interest rates. The financial authorities need to address the oligopolistic tendencies in the banking sector to achieve a more balanced and efficient credit market.

Path Forward

Achieving an optimal balance between scale and efficiency in the banking sector is crucial for long-term financial stability and economic growth. The current disequilibrium in the credit market is symptomatic of deeper structural issues that require comprehensive policy measures. Addressing these challenges will be key to enhancing the effectiveness of monetary and macroprudential policies.