Banking industry is projected to post stronger performance in the second half (H2) of 2025, supported by falling interest rates and cautious yet expansionary lending strategies, according to the Financial Services Authority (OJK).

The agency’s Banking Business Orientation Survey (SBPO) for third quarter (Q3)-2025, released on Sunday, August 24, 2025, shows that commercial banks remain optimistic about their outlook, banking on expectations of improved domestic macroeconomic conditions and manageable risks.

“The shifts in global dynamics and macroeconomic conditions mean that banks are taking a more conservative approach in expanding lending in line with their business plans. However, the Indonesian Central Bank’s (BI) rate cuts have provided positive momentum,” OJK chief banking supervisor Dian Ediana Rae said in a statement.

As of August 2025, BI had lowered its benchmark rate by a total of 100 basis points to 5 percent. In tandem, average rupiah lending rates in July fell by 7 bps year-on-year, particularly for productive loans.

This has the potential to boost credit distribution, profitability, and capital, continuing the positive trend from previous quarters. OJK has urged banks to gradually adjust their rates in line with market conditions while avoiding unhealthy competition.

Banks’ ability to cut lending rates remains tied to their cost of funds, as many still rely on time deposits within their third-party funds (DPK) composition. Still, deposits are expected to grow, supported by corporate clients, strategies to boost low-cost funds, and the inflow of central government deposits into regional banks in Q3.

“Banks must strengthen their funding strategies, particularly by increasing low-cost deposits, to create more room for rate reductions,” Dian said.

OJK reaffirmed its commitment to monitor risks to banks’ performance, systemic stability, and public trust, ensuring the sector continues to support the national economy.

Solid credit growth

In July 2025, bank lending grew 7.03 percent year-on-year, supported by sound asset quality. Non-performing loans (NPLs) stood at 2.28 percent, slightly higher than January’s 2.18 percent, while loans at risk (LaR) declined to 9.68 percent, below pre-pandemic levels.

Investment lending surged 12.42 percent year-on-year, driven by export-oriented sectors such as mining and plantations, as well as transport, industry, and social services.

Deposits also expanded 7 percent year-on-year, bolstering liquidity. Liquidity indicators remain above regulatory thresholds, with ratio of bank’s liquid assets to non-core deposits (AL/NCD) at 119.43 percent and ratio of bank's liquid assets to its third-party funds (AL/DPK)at 27.08 percent.

Meanwhile, banks’ capital adequacy ratio (CAR) stood at 25.81 percent in June, underscoring their resilience in absorbing risks amid global uncertainties.

“The data confirms that the banking sector remains robust, supported by sound governance and prudent intermediation. We expect continued growth backed by positive sentiment,” Dian said.