BI TO CHANGE CAPACITY AND ATTITUDE OF BANKS

The national banking industry was now in the effort to implement Bank Indonesia’s policy on shares ownership of banks. As known, regulations on ownerships structure of banks was linked with the rules on multi-licence. This was related to banks’ activities based on their capabilities. The objective was that BI wished to change capacity, habit and attitude of banks.

The regulation was applied on conventional banks and syari’ah banks, domestic or foreign. Broadly speaking, financial institutions could own maximum shares of 40 percent, legal institutions maximum 30 percent, and personal or families maximum 20 percent.

Somehow it was still permissible for banks to own 40% shares of other banks provided they met some requirements and had BI’s approval. The pre-conditions were bank must be in a healthy condition, had gone public, agreed to buy promissory notes which was equity, had the commitment to develop prioritized sectors of Indonesia’s economy, and had the commitment to own bank in a certain period of time as stipulated by the supervisory authorities.

By approving banks to buy promissory notes of equity, in the event that something happened bank did not have to use public’s money. In other words banks would be able to help themselves. So banks could own shares of other banks up to 99 percent, one of the pre requirements was that banks must prepare some fund for buying bonds from investment bank as reserve capital.

Government’s Regulations of 1999 stipulated that investors that investors could buy bank shares in Indonesia up to 99%. There were three categories of banks being exempted from this regulation, they were: Regional Development Banks, (BPD) and Government owned banks. However, as mentioned by Irwan, BI kept encouraging BPD to increase core capital.

In reality, bank would be appraised of  their health and were given time to improve in up to 3 times 6 months or up to December 31, 2013. Bank must get good rating, i.e. 1 or 2 for risk profile, management, capitalizing and profitability. In thee event that by 31 December 2013 bank’s rating was still 3,4, or even 5, bank must dive state their shares. Previous owner must comply to maximum deadline of shares ownership.

In the event that investors owned shares of some banks, BI allowed the investor to set up a holding company encompassing the existing banks. This holding company was given incentive to merger. In case of dive station a period of 5 years was given to comply to the rules. The objective was to stimulate banks to be efficient, healthy and strong.

During post-release of BI’s regulation on bank ownership in June 2012 last, predictably many foreign or local investors would apply for permit to acquire local banks. Investors, foreign or local, were willing to comply with the rules, i.e. to command over maximum 40% of shares; meaning investors would not mind even if they did not possess majority of shares.

Foreign investors seemed more dominant than local investors. Investor’s appetite to acquire local banks were high because the Indonesian banking sector was highly reputable in maintaining company’s stability from the tremors of global crisis. for example as per July 2012 or reaching Rp 2.487 trillion while Third Party Fund (DPK) rose by 20% to become Rp 2.961 trillion.

This increase Margin (NIM) which stimulated investors’ appetite. By July, NIM was posted at 5.41 percent. A word was out that out that many local banks were in a queue to be acquired. Indonesia’s banking sector was still highly potential for growth in the future; the prospect of banking business in Indonesia was still appetizing.

On notable thing was when BI planned to make it mandatory for foreign banks in Indonesia to be based on local law (company) monetary authorities of a neighboring country moved faster to outrace Indonesia before Indonesia even realized the concept. Last June, the Monetary Authority of Singapore (MAS) announced some changes in the Qualifying Full Bank (QFB) to deepen business root in Singapore and the same time strengthen financial stability in that country.

Singapore was asking important and firm rooted QBF in the domestic market to establish a legal body for retail operations in Singapore; the objective of the Regulation was to determine which bank needed to do this MAS considered some factors such as QBF market share in domestic deposits. The Monetary authorities in Singapore would consult with QBF about the criteria for banks which had to rest on a legal institution.

To banks which belonged to this category, MAS would give away 25 extra business locations 10 of which were branch offices. This condition was only applicable to banks of countries having Free Trade relationship with Singapore. With this additional QBF would have a total of 50 offices?

Whether or not QBF would enter depended on many factors for example having majority of representative directors in Singapore. Singapore was the main market of that group of banks, contributing profit and assets to the group of banks. The bank had headquarters in Singapore as main business line and decision maker.

QBF had privileges greater than that of other banks. Among them the number of offices that could be opened more than other foreign banks. The number of QBF increased from four banks in 1999 to six banks in 2001 and eight this year 2012. Eight QBF in Singapore, i.e. Australia and New Zealand Banking Group Limited, BNP Paribas, Singapore Citibank Limited, Hong Kong and Shanghai Banking Corporation Limited, ICICI Bank Limited, Malayan Banking Berhad, Standard Chartered Bank and State Bank of India.

Citibank is already based on local law while Standard Chartered Bank February 2012 announced they would soon set up a local legal body for retail operations. Now there were 112 commercial banks only 6. Furthermore of 112 commercial banks only 27 banks were licensed for retail operations. The Government of Singapore wished at least to command over half of people’s fixed deposits.

Most probably Singapore’s policy was an act to copy Indonesia who planned to oblige representatives of foreign banks to be in the form of company (PT). Rumors had it that a number of foreign banks operating in Indonesia were ready to adapt them selves to the new condition.

Banking circles in Indonesia rated that MAS seemed to respond to the BI regulations on Bank ownership so MAS wasa making it more difficult and protect retail bank business in Singapore. The application of Singapore’s new policy was rated as a barrier that makes it difficult for national banks to expand to Singapore.

In that case it was advisable that the principle of reciprocal be immediately implemented by BI to that equal treatment be felt by foreign banks who were freely operating in Indonesia. Or else, soon or late, national banks would be dominated by foreign banks. What is BI waiting for?.

Business News - October 12, 2012