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s the gap between credit and deposit growth widens, Indonesian banks are now facing fierce competition to collect more deposits to support their robust lending expansion.

Banking statistics released by Bank Indonesia (BI) last month showed that total third-party funds in the country’s banking industry topped Rp 3,225 trillion (US$332 billion) at the end of last year, growing 15.8 percent. Growth in deposits was significantly lower than lending growth, which surged 23 percent compared to a year earlier.

Almost all Indonesia’s top-10 banks have witnessed lending outpacing deposits. Bank Mandiri, the nation’s biggest lender, saw an almost 10 percent gap between the two banking indicators, as it recorded 14.3 percent growth in customer deposits, as compared with 23.7 percent in lending.

“What is happening here is unusual, as the gap between lending and deposits should not exceed 5 percent,” Doddy Ariefianto, head of economic and banking system risk with the Deposit Insurance Corporation (LPS), said on Monday. Last year, the gap between lending and deposit growth in Indonesia’s banking industry reached 7.2 percent, higher than in 2011 when it topped 5.6 percent.

Doddy explained that the situation would drive up loan-to-deposit ratios (LDR) , a measurement of a bank’s liquidity and ability to expand its lending business.

Any drastic rise in LDR, which stood at the relatively safe level of 84 percent at the end of December, would eventually lead to tighter liquidity in the country’s banking system, ultimately squeezing banks’ lending growth and profits.

Doddy said that small banks would be hardest hit by tighter liquidity, as they were already struggling to survive amid “unbalanced” competition to collect third-party funds in a deposit market that was controlled by the big banks. “The oligopoly is inevitable,” he said. “This is because the 10 largest banks control around 60 percent of third-party funds in the banking system, while the remaining 110 banks compete to collect the other 40 percent.”

Competition to collect third-party funds in Indonesia has been so fierce lately that several banks have begun to offer interest rates higher than the LPS’ maximum ceiling of 5.5 percent, according to BI Deputy Governor Halim Alamsyah.

He said that any bank with savings accounts offering interest rates that surpassed the permitted maximum rate would not be refunded by the LPS if the bank went bust, as the interest came in the form of gifts and various cash-back schemes.

David Sumual, chief economist with Bank Central Asia (BCA), the country’s largest privately owned bank, said the best way for banks to boost deposit growth was in supporting the government’s financial inclusion goal by extending their banking outreach toward more remote, untapped locations.

“There are still many citizens in rural areas that do not have access to financial services and are unable to deposit their money in banks. This then is an opportunity,” he said.

Another way for banks to boost their deposit growth was to encourage exporters to deposit their earnings in Indonesian rather than offshore banks, according to Bank Mandiri finance director Pahala N. Mansury. “Our studies show that if all exporters here put their earnings in domestic banks, there would be no gap between deposit and lending growth,” he noted.

Nevertheless, not all Indonesian banks recorded higher growth in lending than deposits. Bank Tabungan Negara (BTN) and Bank Internasional Indonesia (BII) were two banks that experienced the opposite phenomenon.

BTN, which focuses primarily on mortgages, posted deposit growth of 30 percent as compared to loan growth of 28 percent. Meanwhile, BII, which is controlled by Malaysian banking giant Maybank, saw its deposits surge by 22 percent, higher than its loan growth of 20 percent.

“The expansion of our branch network and electronic banking supported the increase in deposits,” BII president director Khairussaleh Ramli said when asked about the strategy that led to deposit growth well above the industry’s average.

“Our funding strategy is to prioritize a customer-service approach to cross-sell and encourage referrals, rather than canvassing sales. Our large base of payroll customers is also an advantage for BII in the gathering of mass funds,” he added.