Urip Hudiono, Jakarta – All's well on the banking front this year, with lending back on track and registering ever stronger growth on the back of Indonesia's fast growing economy.

In short, 2007 has been a breeze for the banking sector after the bummer that was last year. The question now is whether the industry can maintain the momentum – and whether it's sustainable – given the challenges already lurking ahead.

As we know, next year comes at a time of high global oil prices, which could cause a storm of rising inflation and a possible slowdown in Indonesia's economy – spelling bad news again for the banking sector.

Next year will also see the central bank stepping up its efforts to consolidate the industry – after this year's first deadline for fulfilling minimum capital requirement rules, and submitting action plans for the "single presence policy" – all of which could also affect the banking sector's performance.

But before delving further into that, let's first look at how the industry has done so far – and whether it is indeed on a sound footing for moving ahead.

In terms of the industry's main gauge of lending, the country's banks by the end of October had lent out a total of Rp 183.9 trillion (US$20 billion) in new and extended loans, which translates into a 23 percent increase over last year to reach a total outstanding loans level of Rp 980 trillion.

This level of growth marks a significant rebound from last year's disappointing 14 percent. More than half of the loans were disbursed as working capital and investment loans – rather than consumer loans – which should create more productive business activities in the economy. The industry's level of non-performing loans (NPL), meanwhile, has also improved to 5 percent of total lending, from 8 percent last year.

A further look into the lending figures, however, reveals the industry's continuing problems with undisbursed loans, worth up to Rp 198.7 trillion, or a fifth of total agreed loans. The amount of undisbursed loans has also increased by 21 percent from last year, or nearly the same as the lending growth figure itself.

The more loan that are agreed upon helps polish up the industry's performance figures, but they're practically useless – to the industry and to the whole economy – if they remain merely commitments on paper. But the banks cannot be wholly blamed for this as the problem of undisbursed loans also involves the borrowers themselves being unable to put the funds to productive use.

Another long-standing issue in the banking sector is the tendency of the banks to still place a portion of their deposits in central bank bills, rather than disbursing them as loans. A total of Rp 351.5 trillion in depositor funds have been invested so far in Bank Indonesia (BI) Certificates, to gain at least some interest at a lower risk than disbursing them as loans. This is up 22 percent from last year – or again, nearly matching the lending growth figure.

The industry's total deposits grew by 15 percent to Rp 1,419.7 trillion, making the average loan-to-deposit (LDR) ratio of the country's banks only little changed from last year at 66 percent.

This shouldn't come as much of a surprise, with lending growth only managing to significantly surpass deposit growth, but still pretty much equaling the growth in undisbursed loans and investments in central bank bills – making the banking sector's overall performance not as shiny as it would first appear.

At this stage, a sort of a blame-game usually arises, with the banks saying they cannot extend more loans if demand from business and the real sector is not there. Business, meanwhile, complains about high lending rates, making them prefer to seek cheaper financing through the capital markets. The banks in turn point to the continuing high risk of lending to the real sector as the reason for high lending rates.

At present, average lending rates are somewhere between 14 and 15 percent, although the benchmark BI rate has consistently fallen back to 8 percent this December from 9.5 percent in January. The average deposit rate, meanwhile, is already down to 5 percent. The large margin between this and lending rates indicates inefficiencies in how Indonesia's banks do their business and make their profits.

Fortunately, the situation has improved somewhat this year, with this trend likely to continue next year as well, as banks become more willing to lend to the real sector.

The country's four top lenders, Bank Mandiri, Bank Rakyat Indonesia (BRI), Bank Negara Indonesia (BNI) and Bank Central Asia (BCA), for example, have been touting their latest major loan agreements recently. These include loans for infrastructure projects, housing projects, small businesses, and the booming commodities sector.

This recent "credit boom" – although not that impressive if we dig beneath the surface – has been supported by the favorable economic conditions of late, which, however, leads us to another issue: whether the banks' loan books are themselves healthy?

In light of this, a well-known saying among bankers, which was brought up during an international bankers forum earlier this year in Jakarta, might come to mind.

The saying is to the effect that "It is in the good times that bad loans are made" – a fair reminder of how banks sometimes forget and lower their prudential guard to take advantage of an economic boom, and only later realize that it is too late when the bubble bursts.

This is not inconceivable if we remember that next year may likely throw up a number of challenges on the economic landscape. While today may be sunny, tomorrow may be raining

For example, rising inflation (as a result of rising oil prices) could lead to higher interest rates, causing potential defaults in the banking industry.

Regarding this, BI Deputy Governor Muliaman D. Hadad has asserted that lending growth in the industry must not be at the expense of prudential principles. Since last year, BI has relaxed several of its regulations to allow for greater credit growth, but has always kept a strict watch over the industry so that it does not succumb to excessive lending leading to bad loans. It, for one, does not want a repeat of the industry's experience during the 1997 Asian financial crisis.