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Banks vie for deposits in prolonged high-rate environment
The cost of funds would continue rising through the end of the year as lenders keep offering higher interest rates to attract customers, risking their profit margins.
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Show me the cash: A teller presents rupiah bank notes on Oct. 30, 2023, at a branch of Bank BSI in Jakarta. (Antara/Muhammad Adimaja)
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ocal banks are scrambling for customer deposits to maintain liquidity amid uncertainty in the industry over when the United States Federal Reserve and Bank Indonesia might finally cut interest rates.
This has been driving up the cost of funds (COF) and hurting lenders’ profit margins.
Analysts say the trend will continue through the end of the year, impacting smaller banks most of all. They suggest banks focus on high-yield loan disbursement and reducing operational costs to maintain profitability.
Squeezed margins
BI data show the COF for local banks has been rising, as indicated by an increase in interest rates for one-month time deposits from 4.14 percent in June 2023 to 4.63 percent in June 2024. Over the same period, credit interest rates dropped from 9.34 to 9.25 percent due to tightening market competition, resulting in lower profit margins.
Abdul Manap Pulungan, a researcher at the Institute for Development of Economics and Finance (INDEF), explained that the high-interest-rate climate had led to increased rates for other financial instruments, such as government bonds. As a result, local banks needed to raise their time deposit rates to prevent money outflows that could hamper their liquidity.
This was exacerbated by uncertainty over when central banks would start cutting interest rates. While many analysts project the first Fed move in September, Moody’s Analytics expects BI to only follow suit in the first quarter of next year. The firm noted that BI would prefer to keep rates high to ensure a sufficient yield differential between US and Indonesian investment instruments.
