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Is Indonesia inflating a credit bubble?

An employee of BNI bank, an Indonesian state-owned bank, prepares rupiah banknotes for their ATMs and branch offices.
Bay Ismoyo | AFP | Getty Images
An employee of BNI bank, an Indonesian state-owned bank, prepares rupiah banknotes for their ATMs and branch offices.

Historically, stories that begin with central banks easing bank lending requirements don't often have a happy ending, but Indonesia may be able to dodge creating a credit bubble.

One key reason is that making it easier to get a loan in the archipelago doesn't mean there will be a lending surge.

"Because of the slowdown in growth, loan demand might not be there, even if the terms are a little more favorable now," said Euben Paracuelles, an analyst at Nomura, noting that there's already a slowdown in demand for cars and motorcycles. "It's not because people can't afford it. It's because they're more cautious."

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Indonesia's central bank has its work cut out: the country's economy has stumbled so far this year, with first-quarter economic growth coming in at 4.7 percent on-year, below expectations and the slowest pace since 2009, during the Global Financial Crisis.

But cutting its policy rate from the current 7.50 percent isn't a palatable step, as Indonesia is vulnerable to a potential spike in inflation and its currency, the rupiah, is already weak. On Thursday, the central bank governor said inflation in the second and third quarter was expected to be around 7 percent. Because the country has a current account deficit, it could also face a renewal of fund outflows once the U.S. Federal Reserve increases interest rates, something analysts expect as early as September.

So Bank Indonesia has turned to easing loan-to-value requirements on mortgages and lowering downpayments for auto and motorcycle loans, as well as reviewing banks' reserve requirements.

While this will likely spur some increased lending, it's not likely to have a huge impact on loans or economic growth, said Wellian Wiranto, an economist at OCBC.

"Rates are still high. The amount you have to fork out is still high," Wiranto said.

Consumer debt levels also aren't particularly high in the country, he said, with household debt at around 20 percent of gross domestic product (GDP), compared with levels at as much as 80 percent in South Korea and Malaysia. Wiranto noted, however, that getting "clean" data on Indonesia's household debt is difficult.

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There's another reason Indonesia might not be able to boost bank lending: not many people have a bank account.

"There're a lot of banks in Indonesia, [but] they're only serving a small portion of the population," Nomura's Paracuelles said.

Only about 36 percent of Indonesians over the age of 15 reported having an account at a financial institution in 2014, with just 13 percent saying they borrowed from a financial institution over the past year, according to the World Bank's Financial Inclusion survey published in April. To be sure, the data show more than 56 percent have borrowed money over the past year, suggesting Indonesians aren't tapping banks.

Businesses may not pick up the borrowing slack. Softer economic conditions are hurting the credit quality of Indonesia's companies, Standard & Poor's said in a note Tuesday.

"Consumers and companies will continue to hold back spending and investment," while awaiting more clarity on the new government's policies, it said.

"Further depreciation of the rupiah since the beginning of the year could worsen the uncertainty, affecting consumer confidence and spending at Indonesian companies," it said, noting that fuel prices are also likely to rise ahead, which would dampen disposable income growth.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1