Jakarta, Indonesia – A confluence of factors, primarily driven by the Bank Indonesia (BI) benchmark rate hikes, has led to a noticeable tightening of liquidity across the Indonesian banking sector. Economists are sounding alarms, particularly for mid-tier banks, warning of potential "deposit rate wars" as institutions compete fiercely for public funds. This tightening liquidity, while not necessarily an overall shortage, is characterized by an uneven distribution that heavily favors larger, well-established financial institutions, posing significant challenges to the stability and intermediation function of the nation’s banking system. The implications extend beyond bank balance sheets, potentially affecting credit growth, economic expansion, and the broader financial landscape.
Expert Analysis Highlights Pressures on Mid-Tier Banks
M. Rizal Taufikurahman, Head of the Center of Macroeconomics and Finance at the Institute for Development of Economics and Finance (INDEF), has been vocal about the acute pressures faced by banks classified as Kelompok Bank berdasarkan Modal Inti (KBMI) II and III. These mid-sized banks, defined by their core capital ranges (KBMI II: Rp 6 trillion to Rp 14 trillion; KBMI III: Rp 14 trillion to Rp 70 trillion), find themselves in a precarious position. "The prevailing complaints regarding tight liquidity, particularly from mid-tier banks (KBMI II-III), indeed signal an intensified competition in mobilizing public funds," Rizal stated to CNBC Indonesia on Tuesday, July 21, 2026. This heightened competition, he elaborated, carries the palpable risk of triggering aggressive deposit rate increases, effectively initiating a "deposit rate war" across the sector.
Such a scenario would disproportionately disadvantage banks with a limited base of Current Account, Saving Account (CASA) funds. CASA funds are considered ‘cheap money’ for banks as they typically bear lower interest rates compared to time deposits. A reliance on more expensive time deposits means that an increase in deposit rates would directly inflate a bank’s cost of funds. "If a deposit rate war materializes, the cost of funds will inevitably rise, Net Interest Margin (NIM) will come under pressure, and the room for lowering lending rates will become increasingly constrained," Rizal explained. This compression of NIM—the difference between interest income generated and interest paid out—directly impacts bank profitability and their capacity to extend credit at competitive rates. Consequently, the ability of KBMI II and III banks to support economic growth through credit disbursement, their crucial intermediation function, would be severely hampered. Rizal emphasized that the dual challenge for the government and monetary authorities extends beyond merely maintaining monetary stability; it now crucially involves ensuring adequate banking liquidity to prevent any disruption to the vital intermediation process.
Uneven Liquidity Distribution: A Deeper Look
Adding a layer of nuance to the discussion, Josua Pardede, Chief Economist at Bank Permata, suggested that the core issue might not be an absolute shortage of liquidity within the entire banking system, but rather an imbalance in its distribution. "Liquidity distribution remains uneven among banks, where large banks (KBMI IV) tend to be more robust due to their extensive low-cost fund base and broader transactional ecosystems," Pardede observed. In contrast, he noted, "mid-tier banks (KBMI II-III) are far more sensitive to the movement of large depositors’ funds."
Pardede confirmed that while signs of a deposit rate war are indeed emerging, they are currently selective rather than a full-blown industry-wide phenomenon. "Indications of a deposit rate war have started to appear, but they are still selective, not yet escalating into a major industry-wide conflict," he elaborated. Data on deposits by KBMI category underscores this disparity. As of May 2026, KBMI IV banks, comprising the largest financial institutions with core capital exceeding Rp 70 trillion, commanded a staggering Rp 5,550.8 trillion in deposits. This figure dwarfs the collective deposits held by KBMI I, II, and III banks, highlighting a significant concentration of funds within the top tier. Pardede further elucidated the competitive environment: "In an environment of rising benchmark interest rates, attractive Bank Indonesia Rupiah Securities (SRBI), high-coupon retail Government Securities (SBN), and increasingly yield-sensitive large depositors, mid-tier banks are compelled to offer more competitive interest rates to retain their funds." This creates a difficult balancing act for these banks, as they must compete for deposits while simultaneously managing their cost of funds and profitability.
The Monetary Policy Context: Navigating Global Headwinds and Domestic Stability
The current liquidity landscape in Indonesia cannot be understood without acknowledging the broader global and domestic monetary policy backdrop. Bank Indonesia has been on a sustained trajectory of increasing its benchmark rate, the BI Rate, in response to persistent inflationary pressures and the need to maintain rupiah stability amidst global economic uncertainties and aggressive monetary tightening by major central banks, particularly the U.S. Federal Reserve. For instance, after maintaining a relatively low BI Rate of 3.50% through much of 2021 and early 2022, BI initiated a series of hikes, pushing the rate progressively upwards. By early 2026, the BI Rate had reached 6.25%, a significant increase designed to anchor inflation expectations and strengthen the rupiah against external shocks.
This proactive stance by BI is rooted in its dual mandate: to achieve and maintain price stability and to maintain the stability of the rupiah exchange rate. Global supply chain disruptions, elevated commodity prices, and a strong U.S. dollar have all contributed to imported inflation and capital outflows, necessitating a robust monetary response. While effective in curbing inflation and stabilizing the currency, higher interest rates inherently make borrowing more expensive for banks and attract funds away from traditional bank deposits into higher-yielding alternative instruments. This direct linkage between monetary policy and banking sector liquidity is at the heart of the current challenges.
Deep Dive into Liquidity Dynamics: The Battle for Funds Intensifies
The competition for funds, particularly impacting mid-tier banks, is exacerbated by the availability of attractive alternative investment instruments. Bank Indonesia itself introduced the Bank Indonesia Rupiah Securities (SRBI) as a monetary policy instrument to absorb excess liquidity and strengthen the monetary policy transmission mechanism. SRBI offers competitive yields, making it an appealing option for institutional investors and even large individual depositors seeking higher returns than conventional bank deposits. Similarly, the government’s issuance of retail Government Securities (SBN) with enticing coupon rates further diverts funds from the banking system. These instruments serve legitimate macroeconomic purposes but inadvertently intensify the pressure on banks, especially those less able to offer similarly high returns due to their business models or capital structures.
The Indonesian banking sector is structured into four main KBMI categories based on core capital:
- KBMI I: Core capital less than Rp 6 trillion (typically small, regional banks).
- KBMI II: Core capital between Rp 6 trillion and Rp 14 trillion (mid-sized national banks).
- KBMI III: Core capital between Rp 14 trillion and Rp 70 trillion (larger national banks, some with significant market share).
- KBMI IV: Core capital exceeding Rp 70 trillion (systemically important large banks, often with extensive branch networks and digital ecosystems).
This hierarchical structure naturally grants KBMI IV banks significant advantages. Their vast customer base, extensive branch networks, advanced digital platforms, and strong brand recognition enable them to attract a larger share of low-cost CASA funds. This structural advantage means they are less reliant on expensive time deposits and thus better insulated from the pressures of rising interest rates and potential deposit wars. In contrast, KBMI II and III banks often have a higher proportion of time deposits, making them more vulnerable to rate competition and the sensitivity of large depositors. Data from Otoritas Jasa Keuangan (OJK), Indonesia’s financial services authority, consistently shows that deposit growth rates in KBMI IV banks have outpaced those in lower KBMI tiers in recent periods, further solidifying this uneven distribution of liquidity. For instance, while overall deposit growth might be steady, the proportion flowing into KBMI IV versus KBMI II-III often reveals this disparity.
Implications for the Banking Sector: Profitability, Lending, and Potential Consolidation
The squeeze on liquidity and the potential for a deposit rate war have profound implications for the Indonesian banking sector.
Profitability Under Pressure
As the cost of funds increases, banks’ Net Interest Margins (NIMs) will inevitably compress. This directly impacts their profitability, reducing their ability to generate capital internally for expansion or to absorb potential loan losses. While large banks (KBMI IV) might see a slight dip, mid-tier banks (KBMI II-III) are likely to experience more significant pressure on their bottom lines. OJK data for Q1 2026 already indicated a modest contraction in the average NIM for KBMI II and III banks compared to the previous year, signaling the early effects of these pressures.
Slowdown in Lending Growth
With higher funding costs and compressed NIMs, banks will have less incentive and capacity to offer competitive lending rates. This will likely translate into a slowdown in credit growth, particularly for segments heavily reliant on mid-tier banks, such as Small and Medium Enterprises (SMEs) and certain consumer segments. A deceleration in credit expansion can act as a drag on overall economic activity, as businesses find it harder to secure financing for investment and expansion.
Potential for Consolidation
The sustained pressure on profitability and the competitive landscape could accelerate consolidation within the banking sector. Smaller and less capitalized banks, particularly in KBMI I and II, might find it increasingly difficult to compete, potentially leading to mergers or acquisitions by larger, more resilient institutions. This trend, while potentially leading to a more robust and efficient banking system in the long run, could also reduce competition and access to credit for niche markets.
Asset Quality Concerns
While not immediately apparent, tight liquidity and higher lending rates can indirectly impact asset quality. Businesses facing higher borrowing costs may struggle to service their debts, potentially leading to an uptick in non-performing loans (NPLs) in the future, particularly if economic growth slows.
Broader Ripple Effect on the Real Economy
The challenges faced by the banking sector have a direct ripple effect on the broader Indonesian economy.
Slower Economic Growth
Reduced credit availability and higher lending rates can dampen investment and consumption, critical drivers of economic growth. Businesses may postpone expansion plans, and consumers may defer large purchases, leading to a deceleration of GDP growth. This could make it more challenging for Indonesia to achieve its ambitious economic growth targets.
Impact on SMEs
Small and Medium Enterprises are the backbone of the Indonesian economy, contributing significantly to employment and GDP. Many SMEs rely on mid-tier banks for financing. If these banks face liquidity constraints and higher funding costs, SMEs will bear the brunt, potentially hindering their growth and innovation. This could have widespread social and economic consequences.
Housing Market Sensitivity
The housing sector, often highly sensitive to interest rates, could also experience a slowdown. Higher mortgage rates, driven by banks’ increased cost of funds, would make homeownership less affordable, impacting real estate developers and related industries. This could also affect consumer confidence.
Financial Inclusion Challenges
While not an immediate crisis, if smaller, regional banks struggle, it could affect financial inclusion efforts, especially in remote areas where larger banks may have less presence. These local banks often serve as vital conduits for financial services in underserved communities.
Regulatory and Policy Responses: Steering Through the Turbulence
Both Bank Indonesia and Otoritas Jasa Keuangan (OJK) are closely monitoring the evolving liquidity situation and are expected to implement measures to mitigate risks.
Bank Indonesia’s Role
Beyond managing the BI Rate, BI employs various tools to manage liquidity. These include open market operations, adjustments to reserve requirements, and providing liquidity facilities. BI’s introduction of SRBI, while contributing to competition for funds, is also a mechanism to manage systemic liquidity effectively. There is an ongoing assessment of whether additional targeted liquidity injections or adjustments to reserve requirements might be necessary to ease specific pockets of tightness without undermining the overall monetary policy stance aimed at inflation control. BI also maintains macroprudential policies designed to ensure the overall health of the financial system.
OJK’s Oversight
As the prudential regulator, OJK’s primary role is to ensure the health and stability of the banking sector. OJK continuously monitors key financial indicators such as Capital Adequacy Ratio (CAR), Net Interest Margin (NIM), Loan-to-Deposit Ratio (LDR), and Non-Performing Loans (NPLs) across all KBMI categories. In the face of potential deposit rate wars, OJK would likely step up its supervision, ensuring that banks maintain sound risk management practices and do not engage in excessively aggressive competition that could jeopardize their financial health or systemic stability. OJK may also encourage banks to diversify their funding sources and strengthen their CASA base. Furthermore, OJK’s ongoing efforts to promote digital transformation in banking aim to enhance efficiency and potentially reduce operating costs, which could indirectly help banks manage funding costs.
Outlook and Future Challenges: A Delicate Balancing Act
The current tight liquidity environment and the emerging threat of deposit rate wars present a delicate balancing act for Indonesia’s economic policymakers. Bank Indonesia must continue its vigilance against inflation and maintain rupiah stability, but without inadvertently stifling credit growth to an extent that severely hampers economic activity. The uneven distribution of liquidity underscores a structural challenge within the banking sector, where larger banks wield significant advantages due to scale and existing infrastructure.
Going forward, a collaborative approach between BI and OJK will be crucial. This might involve refining liquidity management tools, potentially exploring measures to encourage more equitable distribution of funds, and continuing to foster a healthy, competitive, yet stable banking environment.
