Analysis: Rising bank financing appetite in the mining sector

By Tri Subhki R

Key takeaways:

• Indonesia’s domestic banking industry is increasingly willing to finance the mining sector including coal, despite the ongoing energy transition.

• The mining and quarrying sector's non-performing loan (NPL) ratio has been improving in recent years, signaling enhanced credit quality.

• Bank financing to the mining sector is expected to grow, supported by a positive growth outlook and improving NPL.

Despite the global shift away from fossil fuels, Indonesia’s banking sector continues to support the mining industry, offering vital working capital financing. The growing financial support in recent years can be attributed to the improving credit quality within the sector.

The mining industry remains one of Indonesia’s key contributors to economic growth. Coal production, for example, has consistently increased and hit a record 836 million tons in 2024, exceeding its target by 17%. Additionally, the growing mineral downstream industry, with more nickel processing facilities set to come online in the coming years, further enhances the sector’s potential.

This translates into lucrative growth opportunities, demanding significant investment as mining companies plan to expand operations and increase coal and mineral product production.

According to the Central Statistics Agency (BPS), the mining and quarrying sector contributed Rp 2,198 trillion, or 10.5%, of Indonesia’s GDP in 2023, which totals Rp 20,892 trillion. The Ministry of Energy and Mineral Resources (MEMR) also reported that the coal and mineral sector contributed Rp 140.5 trillion—over 50%—of the total Rp 269.5 trillion in non-tax state revenue, surpassing the oil and gas sector’s Rp 110.9 trillion.

The combination of lower credit risk and the mining sector’s growth potential is expected to further fuel bank financing for projects in this industry.

Recent financing deals and global trends

PT Dian Swastatika Sentosa Tbk (IDX: DSSA), a subsidiary of the Sinar Mas Group, recently secured a Rp1 trillion (US$64 million) credit facility from PT Bank Negara Indonesia (Persero) Tbk (IDX: BBNI) to support corporate activities, including operational expenses and subsidiary development. The company, active in coal mining, power generation, and telecommunications, illustrates the continued appetite for financing within Indonesia's mining sector.

While global financiers are increasingly shying away from fossil-related projects, focusing instead on renewable energy, domestic banks in Indonesia remain more supportive of the mining sector. This trend is evident despite over 140 banks from 44 countries forming the Net Zero Banking Alliance (NZBA), committing to align their lending with net-zero emissions by 2050. Recently, however, major U.S. banks such as JPMorgan Chase, Bank of America, and Citigroup withdrew from the NZBA, signaling a shift in the global financing landscape.

Bank financing in Indonesia

The flow of financing to Indonesia’s mining sector remains robust. Bank Indonesia reported that, as of July 2024, loans to the mining and quarrying sector grew by 33%, reaching Rp 302 trillion. The Financial Services Authority (OJK) reported in September 2024 that credit disbursement to the sector stood at Rp 341.99 trillion, a 26.66% year-on-year increase from Rp 270.01 trillion in September 2023, representing 4.51% of the total banking sector credit.

The banking sector is becoming increasingly aware of the importance of Environmental, Social, and Governance (ESG) practices. As a result, banks are increasingly considering ESG factors when providing financing to mining companies. Large, listed mining companies in Indonesia, such as those on the Indonesia Stock Exchange, are required to submit annual Sustainability Reports in line with their ESG commitments.

Several major banks in Indonesia are actively financing the mining sector, particularly companies backed by large conglomerates such as Sinar Mas Group, Barito Pacific Group, and Bakrie Group. These banks play a pivotal role in supporting domestic mining operations.

Domestic banks credit disbursement to mining sector as of September 2024 (in Rp trillion)

Several large loans to mining sector

The increase in financing is supported by the improving credit quality of the mining sector, demonstrated by the decreasing Non-Performing Loan (NPL) ratio.

In September 2024, the NPL ratio for the mining and quarrying sector fell from 2.13% to 1.28%. This improvement is primarily attributed to the coal mining sub-sector, peat excavation, and coal briquette manufacturing, signaling a healthier credit environment for the sector.

Challenges in 2025

Despite the positive outlook, the mining industry faces significant challenges in 2025. Global coal demand is expected to soften, which could lead to stable or even lower prices. Additionally, domestic mining companies are grappling with rising operational costs, particularly from the government’s mandate to use B40 biodiesel fuel for industrial use.

Another potential hurdle is a new government regulation requiring mining companies to hold 100% of their export earnings in local banks for one year. This move has been met with strong opposition from industry players, who argue that it will disrupt cash flow and hinder their ability to cover operational expenses.

NPL trend by economic sectors

Source: Financial Services Authority, September 2024

Conclusions and recommendations:

• Domestic banks are showing an increasing willingness to provide loans to the mining sector, driven by strong growth prospects and an improved NPL ratio.

• ESG practices are becoming an essential factor for banks when providing financing to the mining industry.

• Mining companies should strengthen their ESG implementation to better position themselves for future financing opportunities.