Economic growth in Indonesia is forecasted to remain moderate between 4.9% and 5.1% year-on-year (YoY) in 2025. Meanwhile, inflationary pressures remain elevated due to rising domestic costs and external factors such as global supply chain disruptions caused by the aggressive tariff policies of the Trump administration, as well as the resulting exchange rate fluctuations. 

Against this backdrop, Indonesia’s banking industry is still poised to maintain stability, with credit growth projected between 9–11% and third-party funds (DPK) expected to grow by 6–8%, according to the Indonesian Financial Services Authority (OJK). Loan growth remained strong at the end of 2024, reaching 10.39% YoY, driven by investment loans at 12.3%, consumption loans at 10.9%, and working capital loans at 10%. The OJK anticipates continued positive trends, supported by government stimulus programs, expected lower benchmark interest rates, and economic recovery following the 2024 elections. 

Main Challenge: Banking Liquidity  

Liquidity in the banking system remains tight, with Indonesia’s loan-to-deposit ratio (LDR) standing at 87.5% as of October 2024, up from 84.0% in 2023. The increased LDR indicates that banks are lending a higher proportion of their deposits, driven by steady credit demand. Major banks, including those classified under KBMI 4 and 3 – categories set by the OJK to classify banks based on their core capital, with the larger number representing banks with higher capital – reported LDRs above the industry average. While competition for low-cost funding has intensified, analysts predict that loan competition in 2025 will not be as aggressive as in previous years due to persistent high funding costs. According to BCA Banking Outlook 2025 report, the cost of funds rose by over 100 basis points between August 2022 and April 2024, making liquidity management a key focus for banks. 

Amid these tightening financial conditions, Bank Indonesia (BI) cut its benchmark interest rate by 25 basis points to 5.75% in January, signaling a shift towards growth-supportive policies. BI Governor Perry Warjiyo stated that the rate cut was consistent with the outlook for low inflation and aimed to support economic growth amid global uncertainties. The move is expected to ease borrowing costs and support credit expansion. 

Indonesia’s CPI Inflation Rate-to-LDR Comparison, 2014-2024 

Source: BI, OJK 

However, the move also comes at a time when external risks continue to pose challenges to the banking sector, including the combination of volatile commodity prices and global trade tensions dampening export earnings, which could further complicate banking liquidity management. The global economic environment remains uncertain, with supply chain disruptions and shifting trade policies—particularly the US administration’s aggressive tariff measures—adding further volatility to financial markets. Additionally, the government’s fiscal deficit is projected to widen in 2025 due to increased public spending. While this spending is expected to stimulate domestic consumption, it raises concerns over potential crowding out of private sector investment, especially if government borrowing drives up bond yields. 

Profitability Trends 

Despite these volatilities, the OJK’s Q1 2025 Banking Business Orientation Survey (SBPO) showed that banks remain optimistic about credit expansion, particularly in key industries such as investment loans, which saw strong demand in capital-intensive industries like mining and mineral processing. Consumption loans remained stable, though mostly driven by higher-income households, while loans to Micro, Small, and Medium Enterprises (MSMEs) showed weaker growth, reflecting economic challenges in labor-intensive sectors. Despite concerns over non-performing loans (NPLs) in consumer lending, overall asset quality remains stable. The OJK maintained its Risk Perception Index (IPR) at 55, indicating that banking risks are perceived as manageable. 

Indonesia’s Loan-to-NPL Development, 2024 

Source: OJK

This credit expansion has also been supported by a rebound in deposit growth, which reached 6.7% YoY in October 2024, mainly driven by an increase in Current and Savings Accounts (CASA). However, time deposit growth remained stagnant, reflecting a shift in household and corporate liquidity preferences. To further strengthen deposit mobilization, the government introduced new regulations, including extended retention periods for export receipts and proposed tax amnesty programs. At the same time, digital banking adoption continues to expand, with increased use of QRIS and online savings accounts contributing to broader financial inclusion. 

While deposit growth has provided a foundation for lending activity, banks have also sought to diversify their income streams to maintain profitability in a high-interest-rate environment. Many have increased their holdings in government securities and leveraged Bank Indonesia’s liquidity management instruments, as well as by adjusting their portfolios to align with structural shifts in the economy, prioritizing high-margin industries. In this regard, larger banks remain dominant in both loan and deposit growth, whereas smaller banks continue to face challenges, particularly with rising NPLs in the MSME sector. Verdhana Research, a Jakarta-based securities firm, expects Net Interest Margins (NIM) to stabilize in 2025, supported by reduced reliance on lower credit costs to drive profits. 

Regulatory Outlook and Future Considerations 

The OJK emphasizes continued regulatory strengthening in 2025, focusing on financial system stability and market deepening programs. The agency’s key priorities include enhancing financial inclusion and sustainable banking growth, strengthening bank supervision and governance frameworks, and implementing policies to support economic recovery and digital transformation in financial services. 

Indonesia’s banking industry enters 2025 with a cautiously optimistic outlook. While challenges remain—ranging from tight liquidity and global economic uncertainties to evolving regulatory landscapes—the sector’s resilience is supported by steady credit demand, digital banking expansion, and regulatory backing. The ability of banks to adapt to shifting market dynamics will be crucial in maintaining growth and stability throughout the year.