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Regulation Update concerning Consolidation of Commercial Banks Indonesian

By : Wemmy Muharamsyah, Agung Santoso, Suherlin

21-Jun-2020

Financial Services Authority (Otoritas Jasa Keuangan – “OJK”) has recently enacted Financial Services Authority Regulation (Peraturan OJK - “POJK”) Nr. 12/POJK.03/2020 of 2020 concerning Consolidation of Commercial Banks (Konsolidasi Bank Umum) (“POJK Nr. 12/2020”) on 17 March 2020.

This POJK Nr. 12/2020 revokes the previous Bank Indonesia Regulation Nr. 7/15/PBI/2005 of 2005 as amended by Bank Indonesia Regulation Nr. 9/16/PBI/2007 of 2007 concerning Amount of Minimum Core Capital of Commercial Banks. The highlights of this POJK Nr. 12/2020 are:

1. The banks consolidation schemes;
2. The establishment of Banks Business Group (Kelompok Usaha Bank – “KUB”); and
3. Increase in the amount of minimum core capital (“Core Capital”) of Commercial Banks (“Banks”) and the amount of minimum Capital Equivalency Maintained Assets (“CEMA”) of branch offices of offshore banks (“Branch Offices”).

In order to give a brief summary on this POJK Nr. 12/2020, we would like to draw the readers’ attention on these following key points:

I. Banks Consolidation Schemes

Controlling Shareholders (Pemegang Saham Pengendali – “PSP”) of Banks may own 1 (one) or more Banks through Banks consolidation scheme. POJK Nr. 12/2020 provides 5 (five) schemes of Banks consolidation. Banks consolidation schemes along with its requirements shall be provided briefly in the table below:

1. Merger, consolidation, or integration

Requirements

Apply to PSP of Banks, either between Banks owned by the same PSP or with Banks owned by other PSP(s).

 

2. Acquisition, which is followed by merger, consolidation, or integration

Requirements

Activities Apply to parties who fulfill the followings: a. have already become PSP of Banks, and conducting acquisition to 1 (one) or more Banks; or b. will become PSP of Banks, that conducts acquisition to 2 (two) or more Banks, which further shall be followed by merger, consolidation or integration activities.

 

3. Establishment of KUB, which consists of owned Banks

Requirements

Apply to: a. PSP in form of Bank, that owns 1 (one) or more Banks; or b. PSP in form of non-bank financial institution legal entity, non-financial institution legal entity, individual, or offshore PSP, that owns 2 (two) or more Banks.

 

4. Establishment of KUB due to separation of Sharia Business Unit (Unit Usaha Syariah – “UUS”)

Requirements

Apply to KUB that conducts separation of UUS.

 

5. Establishment of KUB due to Acquisition

Requirements

Apply to PSP of Banks and that conducts acquisition to 1 (one) or more Banks.

In a nutshell, the formation of KUB can now become an alternative for PSP, which owns more than 1 (one) Banks but choose not to opt for merger, consolidation, or integration.

 

II. Establishment of KUB

There are two prerequisites to establish KUB:

1. Established by PSP, parent company, and/or executor of parent company (pelaksana perusahaan induk) which is considered capable of meeting the capital and liquidity adequacy of Banks within the KUB; and
2. If merger, consolidation, or integration of Banks plan will not significantly increase the business scale* of the relevant Banks after such merger, consolidation, or integration is conducted.

*) For instance now, one can argue that a merger between IDR100 trillion Bank with an IDR500 billion Bank, will not significantly increase the business scale of the IDR100 trillion Bank.

 

In order to establish KUB, the parent company or the executor of parent company shall submit to OJK the following documents:

1. KUB establishment plan along with the KUB structure; and
2. Documents that evidence the appointment of the executor of parent company.

Note: - KUB structure shall consists of

• parent company in the form of Bank; and
• subsidiary(-ies) which consists of 1 (one) or more Banks; - KUB establishment documents shall be submitted to OJK in the following timeline: for the establishment of KUB which consists of banks owned: at the latest 1 (one) month after this POJK Nr. 12/2020 is issued;
  1. for the establishment of KUB due to separation of UUS: the same date as the date of the UUS separation permit application is proposed; or
  2. for the establishment of KUB due to acquisition: the same date as the date of the acquisition permit application is proposed.

 

III. Minimum Core Capital and CEMA

POJK Nr. 12/2020 provides that the minimum Core Capital to be fulfilled by Banks is at least IDR3 trillion.

Further, POJK Nr. 12/2020 sets out that the minimum CEMA to be fulfilled by Branch Offices is at 8% (eight percent) of the total liabilities of Branch Office each month and at least IDR3 trillion.

Both new arrangements in relation to the minimum Core Capital of Banks and minimum CEMA of Branch Offices above shall be fulfilled with the following timeline:

 

Minimum Core Capital	Minimum CEMA	Deadline
IDR1 trillion	--*)	no later than 31 December 2020
IDR2 trillion	IDR2 trillion	no later than 31 December 2021
IDR3 trillion	IDR3 trillion	no later than 31 December 2022

 

*) Existing POJK No. 11/POJK.03/2016 of 2016 concerning the Minimum Capital Requirement for Commercial Banks (as lastly amended by POJK No. 34/POJK.03/2016) has previously regulated that the minimum CEMA is set at 8% (eight percent) of the total liabilities of Branch Offices each month and at least IDR1 trillion. Based on this POJK Nr. 12/2020 such requirements have been upgraded.

 

IV. Sanction

Non-compliance to the provisions concerning the minimum Core Capital and CEMA under POJK Nr. 12/2020 will be subject to various administrative sanctions imposed by OJK in the form of among others:

 

Bank

1. Sanction Written
2. prohibition to expand business activities and/or office networks; and/or - suspension of certain business activities
3. Required to adjust the form and business activities of Banks to become Rural Banks (Bank Perkreditan Rakyat) or Sharia Rural Banks, or submit application for revocation of business licenses at the request of the relevant Banks.
4. PSP, Board of Directors, Board of Commissioners and/or executive officer of the relevant Banks shall be prohibited to become the main party of any Banks. - The relevant Banks will be determined as Rural Banks or Sharia Rural Banks based on the decision of OJK.

Branch Office

1. Written Warning
2. Prohibition to expand business activities and/or office networks; and/or - suspension of certain business activities
3. Required to submit a request for revocation of branch office of offshore bank business license at the request of an authorized organ in the head office.
4. Board of Directors and/or executive officer of the relevant Branch Offices shall be prohibited to become the main party of any financial institution. 

*) The sanctions above will be given sequentially if the earlier sanctions given were not met. This summary only highlights certain issues under POJK Nr. 12/2020 and may not be complete and comprehensive.

  

Please visit our website at www.aymp.law for more information about our firm.

For more specific inquiry about this matter or other emerging legal issues in Indonesia, please contact the following lawyers: - Wemmy Muharamsyah (wemmy@aymp.law) - Agung Santoso (agung@aymp.law) - Suherlin (suherlin@aymp.law)

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