On 26 January 2016, the Indonesian Financial Services Authority ("OJK") issued a new OJK Regulation No. 6/POJK.03/2016 regarding Business Activities and Office Network Based on the Bank's Core Capital ("POJK 6/2016") which came into force on 27 January 2016.
Business Activities and Office Network Based on the Bank's Core Capital was previously regulated under Bank Indonesia Regulation No. 14/26/PBI/2012 on Business Activities and Office Network Based on the Bank's Core Capital ("PBI 14"). However, OJK revoked PBI 14 and replaced it with POJK 6/2016 in the framework of harmonizing all Bank Indonesia regulations related to the institutional and supervisions of banks which were transferred from Bank Indonesia to OJK on 31 December 2013. All key provisions under PBI 14 remain unchanged and are the same with the key provisions under POJK 6/2016 (key changes are outlined below).
The main objective of POJK 6/2016 is to improve the efficiency and competitiveness of banks in anticipating the integration plan of ASEAN financial sectors in 2020 which will enable Qualified ASEAN Banks to operate freely in ASEAN. In addition, the development of economic growth also requires the bank to strengthening their capital to anticipate the risk of complexity of business activity and office network.
This section is intended to give an overview only on the key provisions under POJK 6/2016, as described below:
1. Business Activities based on Core Capital
POJK 6/2016 classifies Banks into 4 categories, (known as "BUKU") which are determined based on the amount of the banks' core capital:
(a) BUKU 1: banks with a core capital of less than Rp 1,000,000,000,000
(b) BUKU 2: banks with a core capital of at least Rp 1,000,000,000,000 up to less than Rp 5,000,000,000,000
(c) BUKU 3: banks with a core capital of at least Rp 5,000,000,000,000 up to less than Rp 30,000,000,000,000
(d) BUKU 4: banks with a core capital of at least Rp 30,000,000,000,000
The classification for Sharia Business Unit is based on the core capital of its parent commercial banks.
POJK 6/2016 determines types of business activities for commercial banks ("Commercial Banks' Business Activities") which consist of (i) Collection of fund; (ii) Distribution of fund; (iii) Trade finance; (iv) Treasury activities; (v) Foreign exchange activities; (v) Cooperation and agency activities; (vi) Electronic banking and payment system activities; (vii) Capital participation activities; (viii) Temporary capital participation in the framework of credit savings; (ix) Other services; and (x) Other activities that may often conducted by Banks to the extent it does not breach any prevailing regulations. The business activities which not classified in the coverage of the basic product and activities and/or have high risk and complexity must obtain the approval from the OJK.
The above type of business activities may be performed by commercial banks based on its BUKU classification, which are:
BUKU 1 category
BUKU 1 may only perform the following activities: (i) business activities in Rupiah currency, which include fund raising activities which constitute the basis of a product or activity, the distribution of funds activities that constitute the basis of a product or activity, trade finance activities, the scope of activities which limited to the agency and cooperation, the activities of payment and electronic banking systems with limited coverage, temporary capital participation for credit based and other services; (ii) foreign currency trader activities; and (iii) Other activities that are classified as a product or a basic activity in Rupiah that commonly done by the Bank and not contradictory to regulations.
BUKU 2 category
BUKU 2 may only perform the following activities: (i) Business Activities in Rupiah and foreign currency, which include the same business activities as BUKU 1, the activities carried out in the distribution of funds as BUKU 1 with a wider coverage, trade finance activities, treasury activities on a limited basis; and other services; (ii) Business Activities as BUKU 1 with a wider coverage for the agency and cooperation; and the activities of payment systems and electronic banking; (iii) The capital participation in the activities of financial institutions in Indonesia; (iv) The temporary capital participation for credit based; and (v) other activities commonly conducted by the Bank and not contradictory to regulations;
BUKU 3 category
BUKU 3 may perform all Commercial Banks' Business Activities, both in Rupiah and foreign currency and capital participation in financial institutions in Indonesia and/or abroad but limited to Asia only;
BUKU 4 category
BUKU 4 may perform all Commercial Banks' Business Activities, both in Rupiah and foreign currency and capital participation in financial institutions in Indonesia and/or whole regions abroad with a number greater than BUKU 3.
2. Capital Participation
Capital participation in another financial institution can only be conducted by banks under BUKU 2, 3, and 4 categories under the following restriction; (i) maximum capital participation for BUKU 2 is 15% of the bank's capital; (ii) maximum capital participation for BUKU 3 is 25% of the bank's capital; and (iii) maximum capital participation for BUKU 4 is 35% of the bank's capital.
3. Office networks
Banks must obtain a license from the OJK before opening a branch office, representative office and other offices offshore and must submit a report and obtain an affirmation from the OJK for opening an office other than as mentioned previously. However, only Banks under BUKU 3 and 4 categories are allowed to open an office offshore. BUKU 3 may open an office offshore limited to Asia, while BUKU 4 may open an office in any regions.
All key provisions under PBI 14 remain unchanged. POJK 6/2016 only broadens the actions that are subject to sanctions under this regulation. Pursuant to POJK, the violation of the obligations to, among other things, conduct business activities and office network based on the bank's core capital, provide credit to Productive Business, obtain approval from OJK for complex product, submit action plan in the event of core capital decrease, the requirement in opening the office network, and etc. will be imposed by administrative sanctions in the form of a written warning, the reduction of banks' soundness level, the prohibition to open new office network and/or the business license suspension.
In addition, POJK 6/2016 also removes several obligations which previously regulated under PBI 14 due to the expiration of submission/compliance period for such obligation, such as the obligation of banks to submit their action plan in adjusting their business activities and office network based on core capital as previously regulated under the PBI 14.
How Does This Affect You?
- Existing banks which have not yet
complied with the requirement of Business Activities under POJK
6/2016, no later than the end of June 2016, must:
i. Adjust its business activities in accordance with its BUKU category; or
ii. Increase its core capital.
- Existing banks owned by the regional government must fulfil the obligation above at the latest before June 2018;
- Existing banks under BUKU 3 categories that already have branch office, representative office, and other kind of office outside Asia before 27 December 2012, will still be able to operate its office in such locations.
This note is intended to give only a general overview. Please do not hesitate to contact us if you need a more detailed advice, or have specific questions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.