Esther Samboh, Jakarta – The governor of Bank Indonesia (BI) is slamming inefficiency in the country's banking industry that he says pushes up lending rates and blocks the nation from expanding to its full potential of 7 percent annual growth.

Darmin Nasution said on Friday that the inefficiency was due to hefty lending costs and the use of idle funds in the financial markets instead of for loans.

"The availability of financing is among the factors that hinders investment," he told bankers, business players and policy makers at an annual bankers dinner while addressing the central bank's policy and economic outlook for 2012.

"Business access to credit is hampered by the high lending rate factor, collateral availability and complicated lending requirements."

Investment should grow at a rate of 12 percent for the economy to reach its fullest potential, while bank contributions to overall corporate financing should be at a "minimum" of 25 percent for working capital loans and 21 percent for investment loans, he said.

Internal cash remained the main source of corporate financing at 48 percent of overall financing for working capital loans and 61 percent for investment loans, according to a BI survey.

Lending rates for working capital, investment and consumer loans in Indonesia were "costly", at 12.09 percent, 11.66 percent and 13.4 percent respectively – almost twice BI's 6 percent overnight policy rate.

The low efficiency level of the banking industry meant higher costs and increased lending rates, reflected in a high cost-to-income ratio of 86.44 percent in October, versus 40 to 60 percent in other nations in Southeast Asia.

Meanwhile, the banking industry's return on assets was high at 3.11 percent as of October, compared with an average of 1.14 percent for banks in the region – indicating that Indonesian banks have been very profitable.

"We cannot stand still and consider our banking industry balanced, especially looking at other Asian banking industries which have continued to fix themselves. If [we] don't build our competitiveness, we will ensure that our banking industry will be left out in light of the implementation of the 2015 ASEAN Economic Community," Darmin said.

"Though our banking industry has improved a lot, its contribution to national economic development is still suboptimal, or not enough."

The ratio of bank assets to gross domestic product (GDP) stood at 47.2 percent as of September, while the lending-to-GDP ratio was "only" at 29 percent, he said, contrasting it to a 114 percent lending ratio in Malaysia, a 117 percent ratio in Thailand and a 131 percent ratio in China.

"This is because the placement of banking assets which, according to a macro-perspective, is not productive," Darmin said, referring to placement in monetary and government bond instruments.

As of October, local banks owned Rp 245.97 trillion (US$27.17 billion) in government bonds, while their placements in other monetary instruments such as BI certificates and term deposits stood at Rp 415.48 trillion, representing 31.4 percent of the overall Rp 2,106.2 trillion in outstanding loans.

"About 60 percent of BI's monetary instruments was controlled by 10 big banks," he added.