OJK relaxes single presence policy in banking sector but tightens minimum capital requirements

The Indonesian Financial Services Authority (OJK) recently issued Regulation 12/POJK of March 2020 (Regulation 12, effective 17 March 2020),(1) which relaxes bank ownership rules under the OJK's single presence policy but simultaneously increases minimum capital requirements.

Regulation 12 was conceived prior to the COVD-19 crisis and the issuance of emergency economic legislation by the government on 31 March 2020, which touches on some of the same ground as that covered by the regulation. Consequently, the big question now is whether Regulation 12 will continue to be relevant, given the perfect storm facing the national economy and the Indonesian financial services industry.

Definitions
Banking sector consolidation schemes under Regulation 12
Establishment of banking groups
Minimum core capital and capital equivalency-maintained asset requirements
Comment

Definitions

Regulation 12 defines a 'bank' as a conventional or shariah-based commercial bank. Further, a 'banking group' is two or more banks that form part of a single group based on common ownership or control. A 'controlling shareholder' is a legal entity, individual or business group that holds 25% or more of the issued shares with voting rights of a company or bank, or less than 25% of the issued shares with voting rights of a company or bank, but exerts direct or indirect control thereover.

A controlling shareholder of a bank may be:

  • a bank;
  • an incorporated non-bank financial institution;
  • an incorporated entity that is not a financial institution; or
  • an individual.

Banking sector consolidation schemes under Regulation 12

Regulation 12 allows a controlling shareholder of a bank to own more than one bank, provided that the prescribed requirements for banking sector consolidation are satisfied. Consolidation may be carried out in the following ways:

  • Merger, amalgamation or integration – such actions may be undertaken by a controlling shareholder of a bank in respect of banks that it owns or between a bank that it owns and a bank owned by a different controlling shareholder.
  • Acquisition followed by merger, amalgamation or integration – this may be undertaken by a party that:
    • is a bank controlling shareholder which has acquired one or more banks; or
    • will become a controlling shareholder of a bank and will acquire two or more banks.
  • Establishment of a banking group for banks owned by a controlling shareholder of a bank – this may be undertaken by:
    • a controlling shareholder of a bank that owns one or more banks; or
    • an incorporated non-bank financial institution, an incorporated entity that is not a financial institution, an individual or a controlling shareholder domiciled outside Indonesia that owns two or more banks.
  • The establishment of a banking group following the spinning off of a sharia unit by a conventional bank.
  • The establishment of a banking group following the acquisition of one or more banks by a controlling shareholder of a bank.

Establishment of banking groups

As mentioned above, Regulation 12 provides for the establishment of banking groups and their formal recognition as such by the OJK. This is a new initiative that aims to introduce greater flexibility into the application of the OJK's single presence policy, which previously prohibited a party from being the controlling shareholder of more than one bank.(2) As the OJK admits in its frequently asked questions sheet on Regulation 12, the previous policy resulted in a lack of flexibility, as it required all the banks owned by a single controlling shareholder to be merged, amalgamated or integrated, thereby giving rise to a number of drawbacks in practice. For example, it would prevent the controlling shareholder of one bank from acquiring and growing a smaller niche bank (eg, a bank focused on a specific sector, like micro, small and medium enterprise lending) as the smaller bank would have to be merged, amalgamated or integrated with the larger bank, thus stripping the smaller bank of its individual identity. By permitting the establishment of a banking group, Regulation 12 now allows banks that are owned by a single controlling shareholder to retain their individual characteristics and focus.

In order for a banking group to be established under Regulation 12, the following criteria must be satisfied:

  • There is a controlling shareholder, legal entity that consolidates and directly controls the entire banking group's operations or an executor for the holding company, which are capable of fulfilling the capital and liquidity adequacy of the member banks in the banking group.
  • The proposed merger, consolidation or integration will not result in a significant increase in the business scale of the member banks in the banking group, with due compliance with the requirement that the controlling shareholder, holding company or executor of the holding company can fulfil the capitalisation and liquidity requirements of the banks that form part of the banking group.

As a banking group will consist of a number of banks, it should have the following structure:

  • a holding company in the form of a bank; and
  • one or more bank subsidiaries.(3)

In relation to the above, if the controlling shareholder is a bank, the bank will serve as the holding company in the banking group structure. However, if the controlling shareholder is an incorporated non-banking financial institution, an incorporated entity that is not a financial institution or an individual domiciled outside Indonesia that owns two or more banks, one of the banks owned by such controlling shareholder will be designated as the holding company. The bank so designated will be the bank with the greater total assets or better soundness level.

The proposal for the establishment of a banking group, along with its proposed structure and documents evidencing the designation of a holding company, must be submitted to the OJK as follows:

  • within one month of the issuance of Regulation 12 in the case of the establishment of a banking group;
  • on submission of an application for the spin-off of a sharia business unit in the case of the establishment of a banking group; and
  • on submission of an acquisition licence in the case of the establishment of a banking group.

Minimum core capital and capital equivalency-maintained asset requirements

Regulation 12 prescribes significantly higher minimum core capital requirements that must be satisfied on a phased basis by banks, subject to exemptions for those undergoing consolidation processes. While minimum core capital was set at Rp100 billion previously, Regulation 12 establishes the following new core capital requirements.

Rp1 trillion (approximately $63.5 million)

By not later than 31 December 2020

Rp2 trillion (approximately $127 million)

By not later than 31 December 2021

Rp3 trillion (approximately $190.5 million)

By not later than 31 December 2022

In addition, the following minimum capital equivalency-maintained asset requirements must be fulfilled by the Indonesian branch offices of banks domiciled overseas.

Rp2 trillion (approximately $127 million)

By not later than 31 December 2021

Rp3 trillion (approximately $190.5 million)

By not later than 31 December 2022

A bank whose core capital is less than Rp1 trillion must submit an action plan to the OJK by 16 June 2020, explaining how it proposes to meet the minimum core capital requirements going ahead. A failure to do so will be subject to administrative penalties ranging from written warnings up to business licence revocation.

Comment

Regulation 12 provides for greater flexibility in the application of the OJK's Indonesian Banking Architecture plan and single presence policy, which encourage banks to consolidate to strengthen the structure of the banking industry and promote healthy competition in the sector. Greater flexibility is provided by, among other things, an exemption from the single presence policy in the case of banking groups that satisfy the establishment and recognition criteria set out in Regulation 12.

Further, to ensure that banks are adequately capitalised, Regulation 12 requires banks to gradually increase their core capital in prescribed stages.

However, as alluded to above, Regulation 12 was conceived prior to the eruption of the COVID-19 crisis, which represents nothing less than an existential threat to the global economy.

In response to the crisis, the Indonesian government has issued emergency legislation (effective 31 March 2020),(4) which provides a legal basis for the government and relevant agencies (including the OJK) to take prompt action to limit the fallout.

In the banking sector, the emergency legislation authorises the OJK to directly instruct financial institutions to conduct various actions – including merger, amalgamation, acquisition, integration or conversion – and mandates it to issue ancillary or implementing regulations to give effect to these new powers.

In light of this, it remains to be seen how effective Regulation 12 will be in practice, particularly given that few will be interested in investing in the banking sector until a clearer picture emerges as to what the future shape of the global economy will be after the pandemic recedes. Further, the looming deep recession that is predicted by most economic forecasters will likely make it difficult for many banks to satisfy the new capitalisation requirements prescribed by Regulation 12.

For further information on this topic please contact Emir Nurmansyah, Nafis Adwani or Agus Ahadi Deradjat at Ali Budiardjo, Nugroho, Reksodiputro by telephone (+62 21 250 5125) or email ([email protected], [email protected] or [email protected]). The Ali Budiardjo, Nugroho, Reksodiputro website can be accessed at www.abnrlaw.com.

Endnotes

(1) OJK Regulation 12/POJK.03/2020 on Consolidation of Commercial Banks (Peraturan Otoritas Jasa Keuangan 12 /POJK.03/2020 Tentang Konsolidasi Bank Umum).

(2) See OJK Regulation 39/POJK.03/2017

(3) Article 5 of OJK Reg 12/2020.

(4) Government Regulation in Lieu of Law 1 of 2020 (Peraturan Pemerintah Pengganti Undang-undang Nomor 1 Tahun 2020).

Get unlimited access to all Global Banking Regulation Review content