When Trillions Nap in Banks: The Limits of Indonesia’s Liquidity Push
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This paper takes a closer look at the government’s decision to place two hundred trillion rupiah in state-owned banks, noting that while the policy may prevent funds from remaining idle at the central bank and strengthen banks’ balance sheets, it does not necessarily lead to stronger credit growth nor faster economic recovery.
Empirical evidence shows that lending rate movements have only a limited impact on credit volumes, suggesting that high lending rates in Indonesia are not solely the result of liquidity shortages. Firm survey data further indicate that complex procedures and high collateral requirements remain key obstacles preventing firms from accessing credit.
To ensure success, the current liquidity injection should target borrowers with higher probabilities of success, drawing on lessons from the KUR program, where optimal success rate was limited to certain groups
Unfavorable conditions amid weakening credit demand pose a significant challenge, further amplified by the sharp decline in working capital loans as the main indicator of productive lending alongside persistent weakness in household sentiment.
