The banking industry gave a positive response to Bank Indonesia's (BI) macroprudential liquidity incentive (KLM) policy plan for banks willing to accelerate the reduction of lending rates as directed. However, the wait-and-see attitude gives a strong signal that in carrying out the intermediation function, it is the strength of credit demand that determines the effectiveness of these incentives for banking performance in the fourth quarter of 2025.
The direction of the policy mix was first stated at the Press Conference of the BI October 2025 Board of Governors Meeting (RDG), Wednesday (22/10/2025). BI Governor Perry Warjiyo stated that the performance-based and forward-looking KLM will be effective from December 1, 2025 with a mechanism to provide incentives to banks for their commitment to channel financing credit to certain sectors and set financing credit interest rates in line with BI policy.
"The KLM incentive that can be received consists of a lending channel incentive of 5% DPK and an interest channel incentive of 0.5% DPK. The total incentive that will be received is a maximum of 5.5% of DPK, up from the incentive of 5% of DPK in the previous period," Perry said.
Perry further explained, for the lending channel, incentives are given to banks that are willing to channel credit to government priority sectors, namely agriculture, industry, downstream, creative economy, real estate, housing, UMKM. Meanwhile, for the interest channel, incentives are given to banks that are willing to accelerate the decline in interest rates in accordance with BI's direction.
"The amount of incentives received takes into account the adjustment factor of financing credit realization compared to the previous period's commitment, and is based on the speed at which banks adjust new lending rates to BI's benchmark interest rate policy," he said.
Complementing Perry's explanation, BI Deputy Governor Judha Agung revealed that the KLM incentive was inseparable from BI's decision to reduce the BI Rate 6 times by 0.25 bps or 150 bps between September 2024 and September 2025 from 6.25% to 4.75%. However, at the same time, deposit rates only fell 29 bps from 4.81% to 4.52%, while lending rates only fell 15 bps from 9.20% to 9.05% as of September 2025.
"In the past, BI saw the realization first, then we gave incentives. Now, banks that make a commitment will be given incentives immediately. Of course, if the commitment is not made, there will be a penalty. The faster, the greater the incentive, and given higher liquidity," said Judha.
Without hesitation, Perry responded to Judha's explanation with a line of rhyme, "Fish sepat ikan ikan gabus, the faster the better."
Wait and see
Banking industry players welcomed the announcement positively, given that the previous monetary policy direction had provided more than enough impetus for banks to accelerate lending. However, the welcome was followed by a wait-and-see, mainly due to the absence of official regulations directing banks to do so.
Executive Vice President Corporate Communication & Social Responsibility of Bank Central Asia (BCA) Hera F. Haryn stated that in principle, BCA always supports BI policies as the authority related to KLM as well as various other policy mixes that are expected to boost national economic growth.
"BCA will scrutinize these incentives, coordinate with authorities and regulators, and await the issuance of related technical regulations. However, in general, credit growth will be in line with economic growth. For the record, as of September 2025, BCA's loans grew 7.6% YoY to Rp944 trillion," Hera explained in a written message received by SUAR. SUARThursday (29/10/2025).
Sharing the same view as Hera, Bank Mandiri Corporate Secretary Muhammad Ashidiq Iswara stated that his party views the Macroprudential Liquidity Incentive (KLM) policy issued by Bank Indonesia as a positive step in improving policy transmission and strengthening the banking intermediation function so that it has a positive impact on economic growth.
"This policy is in line with Bank Mandiri's commitment to continue supporting national economic growth through financing to productive and value-added sectors to the community. We will continue to adjust our fund management strategy in line with monetary policy, and continue to uphold prudence and commitment to stability and sustainable economic growth," Iswara explained in a written communication.
Demand power
On the one hand, banks' positive response to the KLM incentive provision plan reflects their confidence in the acceleration of credit demand in Q4 2025, thanks to the stimulus boost circulating in the system, as well as the acceleration of year-end spending. On the other hand, the response sends a strong signal that in performing the intermediation function, it is the strength of demand that determines the effectiveness of the rate cut, not the cut itself.
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Political Economy Analyst of Laboratorium Indonesia 2045 (LAB45) Nadia Restu Utami explained that the effectiveness of KLM is highly dependent on macroeconomic conditions, especially the strength of domestic demand. She underlined that although large, the incentives were disbursed in the midst of sluggish household consumption, declining purchasing power, and employment that had not fully recovered, so that the move to loosen credit would not necessarily boost growth.
"Credit demand depends on income expectations and public confidence in the economic outlook. When economic conditions are sluggish, households hold back spending and businesses postpone expansion, so lending tends to stagnate despite abundant liquidity," Nadia said when contacted. SUARFriday (30/10/2025).
Theoretically, according to Nadia, this phenomenon is in line with the concept of credit crunch and endogenous demand-following growth theory . New investment and consumption will grow if there is effective demand in the market. Under economic uncertainty, banks become cautious as the risk of default increases, while businesses are reluctant to take on debt. As a result, no matter how BI provides incentives and loosens monetary policy, the credit transmission channel remains blocked.
"Therefore, before turning on the expansionary monetary engine, the government needs to ensure the foundation of aggregate demand is strong enough. This means accelerating productive fiscal spending, expanding employment, and strengthening people's purchasing power. Thus, BI's liquidity incentives can work more effectively as there is a real need for financing," Nadia concluded.
