By Paul Sutaryono, banking observer, Assistant Vice President of BNI (2005-2009), Expert Staff of UPDM Center for Business Studies (PSB), and Advisor of Center for Sustainable Tourism Indonesia (PPBI) Unika Atma Jaya.
ON April 2, 2025, Indonesia imposed import tariffs to the United States (US) – Indonesia’s exports to the US – of 32 percent effective as of April 9, 2025. However, the tariff policy was later postponed for the next 90 days. It is not only the government that will be overwhelmed, banks can also be affected. How can banks face these challenges?
Compare with Trump’s tariffs to ASEAN countries: Cambodia 49 percent, Vietnam 46 percent, Thailand 36 percent, and Malaysia 24 percent. Also, China 34 percent, Taiwan 32 percent, India 26 percent, South Korea 25 percent, Japan 24 percent, and the EU 20 percent. The 2024 trade data shows that the US had a US$1.2 trillion goods trade deficit with 92 countries, but also recorded surpluses with 111 countries. These deficits are not solely the result of partner countries’ trade policies, but rather the result of the US’ own comparative advantage and budgetary imbalances.
With tax cuts and increased budget deficits, US domestic savings are reduced and will increase the US savings-investment gap, which in turn enlarges the trade deficit (Mari Pangestu, Kompas, April 4, 2025).
So, what are the effects for banks? What are the bank’s mainstays in warding off these effects? First, of course, the application of tariffs will suppress Indonesia’s exports. In fact, so far, Indonesia’s trade with the US has recorded a surplus of USD18 billion.
Banks will also experience a decrease in exports and imports with letters of credit (L/C). So far, L/C provisions have reached 0.125 percent. As an illustration, when the volume of export or import transactions at a top national bank reaches 1,000 per month with an average export or import value of Rp100 million, the bank will earn 0.125 percent times 1,000 (volume) times Rp100 million, reaching Rp125 million per month or Rp1.5 billion per year.
Banks also serve services transactions, such as ingoing transfers and outgoing transfers. The volume of services transactions at a top-tier national bank can reach around 10,000 per month. Just imagine, for example, a service transaction fee of Rp10,000 per transaction. Then, the bank will reap revenue from commissions of 10,000 times Rp10,000, reaching Rp100 million per month or Rp1.2 billion per year.
Income from trade finance and services is one of the non-credit income (non-interest income) called fee-based income. Fee-based income at top foreign exchange banks can reach around 30 percent of total fee-based income. Savory income!
Therefore, the government needs to immediately negotiate with the US by cooperating with other ASEAN countries. This is because ASEAN contributes around 23 percent of global trade, making ASEAN negotiations more powerful.
Second, the implementation of the tariffs could make the rupiah exchange rate depreciate against the US dollar (USD). So, other countries prefer to divert their investment funds to the US dollar which is safer (safe heaven). For this reason, Bank Indonesia (BI) must conduct market operations to control the rupiah exchange rate. The market operation could erode foreign exchange reserves of USD157.09 billion as of March 27, 2025. The amount increased from USD154.51 billion as of February 2025 and USD156.09 billion as of January 2025.
Trump’s tariff policy has caused stock market turmoil and depressed the rupiah exchange rate. The deeper the rupiah slumps, the more careful banks must be in managing treasury transactions and foreign exchange (forex) loans.
Is it a big risk? Apparently not. However, banks must continue to improve the implementation of risk management, especially credit risk and market risk as an effort to anticipate current market conditions. This is because banks are the leading players in treasury transactions, which include asset placement, foreign exchange transactions, and money markets. Thus, rupiah depreciation may risk affecting the performance of bank loans, especially foreign exchange loans and the increase in foreign exchange loan interest rates. Therefore, banks must be more vigilant about domestic market conditions (Paul Sutaryono, Kompas, April 10, 2025).
What is the net foreign exchange position of banks? Data from the Financial Services Authority (OJK) noted that the market risk implied in the NPL improved from 1.24 percent as of January 2025 to 1.35 percent in February 2025, below the 20 percent threshold. The overall NPL is a figure that is the sum of the absolute values for the sum of (a) the net difference in assets and liabilities in the balance sheet for each foreign currency plus (b) the net difference in claims and liabilities, both committed and contingent in administrative accounts for each foreign currency, all expressed in rupiah.
The fulfillment of PDN aims to control changes in exchange rates up or down so that banks can minimize the risk of loss. It also aims to support BI in controlling the rupiah exchange rate.
Third, BI is also obliged to control inflation, which was recorded at 1.03 percent as of the end of March 2025. Previously, Indonesia experienced deflation (inflation minus 0.09 percent) as of February 2025. Indonesia was hit by deflation for five consecutive months: May-September 2024. Deflation implies that people’s purchasing power has fallen. As a result, unsecured loans (KTA) become an attractive option to celebrate Lebaran. Unfortunately, post-Lebaran can be a potential risk of increasing non-performing loans (NPLs).
Why? Because, pockets begin to run thin so that installment payment obligations can be faltered. The potential increase in NPLs is not only faced by banks, but also paylater applications or “buy now pay later” (BNPL) and financial technology (fintech).
In fact, the potential risk could be higher in paylater and fintech. Given, their loan approvals are faster than banks. However, now banks also have paylater features to compete with paylater applications in pampering millennial customers.
Fourth, Trump’s tariffs could also ignite turmoil in the capital market. This happens when export-based issuers are finally unable to withstand the increase in operating costs. Consequently, the issuer’s company performance declines, which can push the stock down. The trouble is, when the issuer also has an obligation to pay installments to banks, their obligations can be disrupted.
Fifth, these conditions can push up NPLs. OJK noted that gross NPLs (yoy) fell from 2.35 percent as of February 2024 to 2.22 percent as of February 2025. The ratio is below the safe threshold of 5 percent. Similarly, loan at risk/LAR (yoy) fell from 11.56 percent as of February 2024 to 9.77 percent in February 2025. The LAR ratio is still below the pre-pandemic level, which was 9.93 percent as of December 2019.
Now, when NPLs rise, the allowance for impairment losses (CKPN) will swell, which can erode capital. In fact, capital is a powerful buffer in absorbing various risks: credit, market, operational, and liquidity.
How strong is bank capital? The minimum capital adequacy ratio (CAR) fell from 27.01 percent as of January 2025 to 26.98 percent in February 2025. Capital remains strong, which is well above the 12 percent threshold.
What about bank liquidity? The data shows that the liquid assets/non-core deposit (AL/NCD) ratio rose from 114.86 percent as of January 2025 to 116.76 percent as of February 2025, well above the 50 percent threshold. Liquid assets/third-party funds (AL/DPK) also rose from 26.03 percent to 26.35 percent, still above the 10 percent threshold. Safe!
The bank’s profitability level is also stable. This can be seen from the return on assets (ROA) ratio, although it narrowed from 2.52 percent as of February 2024 to 2.41 percent as of February 2025. The ratio is above the 1.5 percent threshold.
Improving Risk Management
Sixth, therefore, banks must improve the implementation of risk management. In clearer language, banks must be more selective in lending. Not just chasing targets.
What about credit performance? Credit (yoy) fell from 11.28 percent as of February 2024 to 10.30 percent as of February 2025. However, credit (month to month/mtm) rose from 10.27 percent as of January 2025 to 10.30 percent as of February 2025. This growth was below the credit growth target according to OJK and BI of 11 percent-13 percent in 2025.
Third-party funds (yoy) also grew from 5.66 percent to 5.75 percent. As a result, the loan to deposit ratio (LDR) rose from 84.05 percent to 87.67 percent within the threshold of 78 percent – 92 percent. In essence, banks are quite aggressive in lending.
The LDR threshold can be different in each country. It is set by the local financial services sector regulator or central bank and is adjusted to global economic conditions. When the economy is in high spirits, LDR can reach 90 percent -110 percent.
Seventh, banks are also challenged to disburse credit to sectors that can absorb labor. Let’s say, the manufacturing sector. According to Trading Economics, Indonesia’s manufacturing purchasing manufactures’ index (PMI) fell from 53.6 in February 2025 to 52.4 as of March 2025. Despite the decline, this was the fourth consecutive month of increased factory activity. Growth in output and new orders remained strong, although the pace of increase slowed slightly.
When the PMI is above 50 (index number 0-100), it means that the manufacturing sector is expanding or growing compared to the previous month. When the PMI is below 50, it means that the manufacturing sector is contracting from the previous month. With such a variety of mainstay moves, banks are expected to remain healthy and jingling!
The author is a banking observer, Assistant Vice President of BNI (2005-2009), Expert Staff of the UPDM Center for Business Studies (PSB), and Advisor of the Center for Sustainable Tourism Indonesia (PPBI) Unika Atma Jaya.
