This article originally appeared in The Jakarta Post.
As the government grapples with fuel subsidies, a continuing current-account deficit, and other mounting issues, the economy’s growth is slowing, and the nation’s banks feel the heat.
While still healthy by international standards, the banking industry’s growth weakened in the first half of 2014. Average return on equity remains attractive at 14.5 percent, but it dipped by 2.5 percent in the second quarter. And while non-performing loans are still low by historical and international standards, there’s been a slight uptick.
Last year, non-performers accounted for 1.7 percent of all loans. In May of this year that percentage rose to 1.96 percent and by June it increased to 2.08 percent. We expect loan growth will continue to slow slightly in the months ahead, reflecting Bank Indonesia’s (BI) decision last year to hike benchmark interest and the continuing pace at which lending outgrows funding.
Thomas Olsen is a partner and Edy Widjaja is a manager in Bain & Company’s Jakarta office. Both are members of the firm’s financial services practice.