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ight liquidity and compressed margins took center stage in the domestic banking scene throughout 2014 as lenders went all out to guard their funding sources and to prevent their profitability from free falling.

Executives at major banks interviewed by The Jakarta Post acknowledged that they saw funding sources dry up in 2014, unlike what happened in previous years.

Bank Rakyat Indonesia (BRI) finance director Achmad Baiquni, one of the interviewed executives, said that the banking industry'€™s credit expansion had been seriously restrained by tight liquidity. '€œWe cannot disburse loans without sufficient funds,'€ he said.

The funds in question are difficult to get, as a result of a '€œtight-bias'€ monetary policy that has been set by Bank Indonesia (BI) since mid-2013.

The central bank gradually raised its benchmark interest rate by a total of 200 basis points (bps). The last increase occurred in November 2014, when BI jacked up the rate by 25 bps to its current level of 7.75 percent.

BI has repeatedly claimed that such a move is required to tackle growing inflation and avert overheating in the economy.

Following the benchmark rate increases, banks engaged in heavy competition to secure scarce funds, especially by boosting the interest rate of their time deposits.

Significant changes were eventually recorded in their interest rates, as well as in the overall funding and lending growth rates.

Banking statistics issued by the Financial Services Authority (OJK) show that rupiah time deposit interest rates underwent the highest spike throughout the competition.

The three-month and six-month deposit rates were up 355 bps and 325 bps to 9.45 percent and 9.31 percent, respectively, between the May 2013 and October 2014 period.

BRI'€™s Baiquni said that the state lender was among banks that pushed its deposit rate higher in its attempt to prevent customers from fleeing. '€œIn the end, we booked several bps increase in our costs of funds. It had to be done,'€ he said.

The statistics also reveal that by October 2014, year-to-date funding growth rate slowed down to 9.5 percent only, while that of lending stood at 8 percent.

OJK chairman Muliaman Hadad said the regulator '€” which took over banking supervision functions from BI starting in January 2014 '€” estimated that full-year funding and lending growth would stay at 10 percent and 13 percent, respectively, lower than what the industry posted during the past years.

The tight liquidity and depleting funds were also reflected by soaring loan-to-deposit ratios (LDR), which is a statistic used to measure liquidity. High LDR means lending grows too rapidly relative to deposits or funding.

The LDR was 85.8 percent in May 2013, a month before BI began increasing its rate. The ratio quickly exceeded 90 percent within the next few months and reached its peak at 92.2 percent in July 2014. The July position was higher than the 92 percent healthy threshold set by both OJK and BI.

Bank Mandiri finance and strategy director Pahala N. Mansury said that it posted an uptick in its LDR as well, signifying tighter liquidity.

'€œIt briefly reached the range of 85 percent to 86 percent, but we expect it to ease to around 83 percent and 85 percent by year-end,'€ he said in a telephone interview.

In October, OJK imposed a cap on the interest rate offered for big-scale depositors. At the time, OJK commissioner on banking supervision Nelson Tampubolon said that '€œunhealthy'€ development forced it to tone down funding
competition.

'€œ[...] even banks that have no liquidity issues have raised the rate to prevent customers from fleeing to other lenders,'€ he said.

However, the limitation did little to curb soaring costs as it was implemented only three months before the end of the year.

Even though the official full-year profitability figure is not out yet, bankers are already prepared to see their bottom line squeezed. By October 2014, the overall net interest margin (NIM) ratio '€” an important profitability measure '€” hovered at 4.2 percent, down from 4.9 percent in December 2013.

Those already bracing for lower NIM include private lenders Bank Danamon and Bank Internasional Indonesia (BII). Danamon finance director Vera Eve Lim and BII finance director Thilagavathy Nadason said their NIMs might be lower than what was gained in 2013.

Last year, Danamon'€™s NIM was 9.6 percent, while BII'€™s was 5.2 percent.