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."
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.