Urip Hudiono, Jakarta – The banking industry has rebounded from a disappointing 2006, with lending poised to register growth of more than 20 percent by the end of the year.

According to data from the central bank, bank lending as of the end of August had reached Rp 893.5 trillion (US$99 billion), up nearly 23 percent from the same period last year, as the economy continues to improve, slowly ironing out the recent problems of low demand and high borrowing costs.

More than half of total lending was disbursed as working capital loans, which grew by 23 percent year-on-year to Rp 461.7 trillion. Both investment and consumer loans showed solid growth as well, rising nearly 26 percent to Rp 174.4 trillion and more than 24 percent to Rp 257.4 trillion, respectively.

Most of the working capital and investment loans went to businesses in the manufacturing, trade and tourism industries, while consumers in the country took up more mortgages, car and motorcycle loans.

Small and medium enterprises (SMEs) were a main lending market, with loans to the sector increasing by 20 percent to 461.7 trillion. Most of the lending in the sector was consumer loans to support businesses, but working capital loans for SMEs also rose to Rp 185.9 trillion.

Bank Indonesia is eying overall loan growth of 22 percent for this year, from 14 percent last year.

Although borrowing costs in the country are still high, the average base lending rates have declined to 13.4 percent from 14.9 percent in August last year, in line with Bank Indonesia having trimmed its key rate to 8.25 percent at present.

Indonesia's economy is also expected to grow higher by 6.4 percent in the third quarter from 6.3 percent the previous quarter on rising consumer spending and investment.

"Bank lendings should be able to continue growing as well until the end of the year on that development, and on the back of a likely 25 percent growth in loans to the SME sector," industry analyst Djoko Retnadi said.

"The public's purchasing power having recovered from the effects of previous fuel price hikes should also drive more mortgages and auto consumer loans."

Learning from the recent credit crunch in the US mortgage market, Djoko however warned local banks not to get carried away in a possible year-end credit boom and trip themselves up by lowering their risk management measures toward so-called sub-prime debtors.