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ank Indonesia (BI) and rating agency Moody'€™s Investors Service predict that banks will continue to raise time deposit rates in the second half of this year as they compete for customers'€™ funds against the backdrop of a tight liquidity environment.

'€œThese banks are still chasing credit growth. To do that, they need to secure funds by raising the deposit rate that will hopefully attract customers'€™ [funds],'€ BI Deputy Governor Halim Alamsyah, who is also an ex-officio member of the Financial Services Authority (OJK), said Friday.

BI has told banks to put the brakes on lending to avoid consumption growing too fast. The central bank embarked on the most aggressive tightening cycle in the past eight years by raising its benchmark interest rate by 175 basis points last year to 7.5 percent.

Since then, banks have competed to grab third-party funds at the cost of their net interest margin (NIM) being squeezed. NIM, the difference between the credit rate charged to customers and deposit rate owed to customers, is an indicator of profitability for a bank.

According to central bank observations, the deposit rate increase is specifically aimed at big clients with large funds, such as those with funds of over Rp 25 billion (US$2.1 million) per person.

Halim said that BI would be watchful of the situation, adding that banks should comply with the credit growth guideline set by financial regulators late last year.

Both BI and the OJK set this year'€™s credit growth at 15 to 17 percent, lower than the 20 to 22 percent recorded in previous years. The third-party funds growth is also set at an almost similar rate, which is 14 to 15 percent.

'€œWe do not want to see banks pursuing excessive credit growth and set a much higher interest rate because it will potentially raise their NPL [non-performing loans] ratio,'€ he said, adding that it would also affect their NIMs.

Indonesian banks are among the most profitable lenders in the world as they are still able to charge relatively high interest rates to banking customers. That translates to high NIM and high profitability.

However, the banking industry has seen its average NIM slowly decline since BI decided to jack up its benchmark interest rate gradually between June and November 2013.

The latest data from the OJK showed that the average NIM stood at 4.3 percent in April, down from 5.4 percent a year ago.

Meanwhile, Moody'€™s confirmed BI'€™s conviction in its latest report, saying that competition for deposits would remain intense over the 12 to 18 months, seen by the significant increase in rates offered on deposits.

'€œWe expect competition for deposits to remain intense over the next 12-18 months, given the high system average loan-to-deposit ratio of about 90 percent on March 31, 2014, which was only slightly lower than the regulatory limit of 92 percent,'€ Moody'€™s assistant vice president and analyst, Alka Anbarasu, said.

In the year to March 31, according to Moody'€™s, the rates offered on new one-month, three-month and six-month deposits rose 248 basis points (bps), 273 bps and 218 bps, respectively.

The increases reflected higher policy rates, but were significantly higher than the increases in the policy rates between June and November, it said.

'€œSystem-wide net interest margins, on the other hand, fell to 4.3 percent at end-March 2014 from an average of 5.4 percent between 2012 and 2013,'€ Moody'€™s added.

However, despite the NIM contraction, Moody'€™s upheld its optimism that Indonesian banks would remain among the most profitable globally.