OJK issues warnings to Indonesian banks on interest rates and climate risks

The Indonesian Financial Services Authority (OJK) has issued several warnings to the banking sector regarding managing risks amidst shifting economic and environmental conditions.

Regarding interest rates, OJK Executive Head of Banking Supervision Dian Ediana Rae advised banks to adjust credit rates gradually. This follows a cumulative 100 basis point increase in the BI Rate between April and July 2026. Banks are urged to consider debtors' repayment capabilities to prevent a rise in non-performing loans (NPL) and to focus on increasing low-cost funding to maintain profitability.

Additionally, OJK warned against aggressive pricing wars to attract export proceeds from natural resources (DHE SDA), noting that excessive returns could inflate the cost of funds.

On the environmental front, OJK highlighted the risks posed by El Nino. The regulator encouraged banks to integrate climate risk into their business strategies, as extreme weather can disrupt production in sectors like agriculture and fisheries, potentially impacting asset quality and bank liquidity.