T

he banking industry is witnessing a trend in declining time deposit rates to lower costs that have risen due to an increase in idle funds, with more people saving instead of borrowing amid a domestic economic slowdown, according to Deposit Insurance Corporation'€™s (LPS) latest data.

The LPS liquidity indicator report published recently shows that the average time deposit rates in early October decreased by 3 basis points (bps) to 7.17 percent compared to early September. Maximum deposit rates given by banks to their customers also dropped by 4 bps to 8.38 percent.

'€œRestrained loan growth has created a loosening in third-party funds liquidity [idle funds], prompting several big banks to adjust their deposit rates,'€ LPS said in the report, predicting that the declining trend of deposit rates would continue.

People prefer saving than borrowing as growth in third party funds '€” which include time deposits and savings '€” has surpassed that of lending at 14.31 percent versus 9.69 percent year-on-year (yoy) in July.

Meanwhile, demand for foreign exchange (forex) loans fell, while forex deposits saw a 23.29 percent increase in forex deposits as of July yoy, LPS data revealed.

Indonesia'€™s economy weakened to six-year lows in the past few quarters, with the latest Bank Indonesia (BI) consumer survey in September finding that people plan for an increase in savings over the next six months.

With flat loan growth and rising idle funds, banks are predicted to face contractions in their profitability as revenues from interest rates will be lower.

LPS said loan growth, which was predicted to remain flat in the third quarter, would force banks to squeeze their costs, especially in terms of deposit rates and credit expansion.

'€œThere is a risk of declining net interest income, because banks have more idle third-party funds, which will increase their cost-of-funds,'€ LPS said.

Bank Central Asia (BCA) president director Jahja Setiaatmadja acknowledged that current economic uncertainties were forcing banks to better manage their liquidity with ample idle funds.

The depreciation of the rupiah over the past few months had also triggered rising costs in banks, especially investments in operation-related services, such as ATMs, electronic data capture machines as well as IT, which were paid in US dollars, Jahja said.

'€œThe condition has triggered a surge in overhead and resources costs,'€ Jahja told reporters, adding that BCA'€™s cost-of-funds remained stable as its deposit rate already reached below the LPS rate of 5.25 percent.

Bank Tabungan Negara (BTN) president director Maryono said the lender was reviewing whether to cut its interest rate for non-subsidized mortgage loans as it also saw a declining trend in deposit rates.

Maryono said the bank, which has a core business in mortgages, was assessing a plan to offer mortgage programs with fixed-lending rates for one to three years. '€œWe will try to adjust our lending rates in accordance with the market trend,'€ he added.

'€œAs long as there is a decline of lending rates in the market and we still have the ability to raise low-cost funds, we will cut the rate as we also try to increase our efficiency,'€ Maryono said.

Despite seeing rising idle funds, Bank Maybank Indonesia president director Taswin Zakaria said the lender would always be active in seeking third-party funds or other alternative sources in the market, such as negotiable certificate deposit (NCD) and bonds.

In August, Taswin said the bank was mulling the possibility to issue an NCD worth around Rp 500 billion (US$36.8 million) to Rp 1 trillion later this year to diversify its source of funds.