Indonesian Banking Booklet · Closure of Bank Branch Office 97 ... Product of Islamic Bank and...

Indonesian BankingBooklet

2012

Bank Licensing and Banking

Information Department

INDONESIANBANKINGBOOKLET

2012

i

FOREWORD

The 2012 edition of Indonesian Banking Booklet is publication media presenting brief information regarding Indonesian banking. It is expected that this booklet will enable the readers to obtain information banking-related policies and regulations published by Bank Indonesia up to March 2012.

The latest information presented in this Booklet includes but not limited to 2012 Banking Policy, Prudential Principle for Commercial Banks in Partly Submitting Work to Other Party, the Application of Anti-Fraud Strategy for Commercial Banks, the Application of Risk Management to Commercial Banks Serving Prime Customers, Guidance in Credit Risk RWA Calculation by Using Standard Approach, Transparency of Prime Lending Rate Information, Function of Compliance of Commercial Banks, Application of Risk Management to Bank Performing Activities Related to Provision of Housing and Car Loan, and several revisions on the preceding banking provisions.

Furthermore, for any further information and explanation with regards to banking provisions, the readers may refer to the provisions issued by Bank Indonesia that may be obtained, among others, from the website of Bank Indonesia (www.bi.go.id).

We hope that, despite the limited information presented in this Indonesian Banking Booklet, the readers may still obtain optimum benefit from this book.

Jakarta, April 2012

Bank Indonesia

Bank Licensing and Banking Information Department

INDONESIANBANKINGBOOKLET2012

ii

CONTENTS

FOREWORD iCONTENT ii

I. BANK INDONESIA 3A. Mission and Vision of Bank Indonesia 3B. Strategic Values of Bank Indonesia 3C. Legal Basis of Bank Indonesia 3D. Important Duties of Bank Indonesia 3E. Detailed Description of Duties 3F. Organization of Bank Indonesia 4

II. BANKING SYSTEM 9 A. Definition 9 B. Operations of Banks 9 Operations of Conventional Commercial Banks 9 Operations of Islamic Commercial Banks 11 Operations of Conventional Rural Banks 13 Operations of Islamic Rural Banks 13 C. Operations Not Permitted for Banks 14 Operations Not Permitted for Conventional Commercial Banks 14 Operations Not Permitted for Islamic Commercial Banks 14 Operations Not Permitted for Conventional Rural Banks 15 Operations Not Permitted for Islamic Rural Banks 15 III. BANK REGULATION AND SUPERVISION 19 A. Objectives of Banking Regulation and Supervision 19 B. Scope of Bank Regulation and Supervision 19 C. Bank Supervision System 20 D. Information System in Supporting Bank Supervisory Tasks 22 E. Banking Investigation and Mediation 25 IV. BANKING POLICY 29 A. Banking Policy Direction in 2012 29 B. Improvement of Financial Inclusion 30 C. Basel II 36 D. Basel III 40 E. Reform of Global Financial Sector 43


2012

iii

F. BPD as Regional Champion (BRC) 44 G. Development of Islamic Banking 45 H. Development of Rural Banks (BPR) 52 I. Micro, Small and Medium Enterprise (UMKM) Development 57 J. Credit Bureau 60 K. Macroprudential Policy 62 V. KEY BANKING REGULATIONS 67 A. Regulations of Establishment of Banks, Management of Bank and Bank Owner 67 1. Establishment of Banks 67 2. Bank Owners 69 3. The Single Presence Policy In Indonesian Banks 70 4. Management of Banks 71 5. Islamic Supervisory Board 82 6. Islamic Banking Committee 83 7. Employing Foreign Worker and Transfer of Technology Program in Banking Sector 84 8. Fit and Proper Test for Commercial Banks and Rural Banks 85

9. Purchase of Shares in Commercial Banks 90 10. Merger, Consolidation, and Acquisition of Bank 91 11. Establishment of Bank Offices 92 12. Conversion of Bank Name and Logo 95 13. Conversion of Business Activities from Commercial Bank to Islamic Bank 96 14. Closure of Bank Branch Office 97 15. Requirements of Non-Foreign Exchange Bank to

Foreign Exchange Status 98 16. License Modification from Commercial Bank to Rural Bank in the framework of Consolidation 98 17. Supervisory Actions and Designation of Bank Status 98 18. Follow Up Action to Rural Bank under Special Surveillance 104 19. Follow Up Action to Islamic Rural Bank under Special Surveillance 106 20. Bank Liquidation 107

21. Revocation of Business License at the request of Shareholders (Self Liquidation) 107


iv

B. Regulations Pertaining to Business Operations and Bank Product 109 1. Money Changer’s License for Bank 109 2. The Purchase of Foreign Currency Versus Rupiah

to Banks 109 3. Derivative Transactions 110

4. Commercial Paper (CP) 110 5. Deposits 111

6. Product of Islamic Bank and Islamic Business Unit (UUS) 113 7. The Implementaion of Sharia Principles in Fund Mobilization, Fund Distribution and Islamic Banking Services 113 C. Prudential Regulations 114 1. Minimum Tier One Capital for Commercial Banks 114 2. The Minimum Capital Adequacy Requirement 115 3. Net Open Position (NOP) 117 4. Legal Lending Limit (LLL) 117 5. Earning Assets Quality 120 6. Provision for Assets Losses 124 7. Debt Restructuring 129 8. Financing Restructuring for Islamic Bank and Islamic Business Unit (UUS) 130 9. Statutory Reserves (GWM) 130 10. Transparency of Bank Financial Condition 132 11. Transparency in Bank Product Information and Use of Customer Personal Data 133 12. Prudential Principles in Equity Participation by Commercial Banks 133 13. Prudential Principles in Asset Securitization for Commercial Banks 135 14. Prudential Principles in Structured Product for Commercial Banks 135 15. Prudential Principles in Implementing Agency Activity of Foreign Financial Products by Commercial Banks 136 16. Prudential Principle for Commercial Banks Submitting A Part of the Work to a Third Party 137 17. Implementation of Anti Fraud Strategy for Commercial Banks 138


2012

v

18. Guidelines for the Calculation of Risk-Weighted Assets for Credit Risk Using Standardized Approach 139 D. Regulation of Bank Soundness Rating 140 1. Conventional Commercial Bank 140 2. Islamic Commercial Bank 142 3. Rural Bank 143 4. Islamic Rural Banks 144 E. Self-Regulatory Banking (SRB) Regulations 145 1. Guidelines for Formulation of Bank Credit Policy 145 2. Implementation of Good Corporate Governance (GCG) 145 3. Internal Audit Unit at Commercial Banks 146 4. Compliance Implementation of Commercial Bank 147 5. Business Plan and Annual Budget 148 6. Application of Risk Management in the Use of Information Technology by Commercial Banks 149 7. Application of Risk Management for Commercial Banks 150 8. Consolidated Application of Risk Management by Banks that Control Subsidiaries 152 9. Application of Risk Management in Internet Banking 153 10. Application of Risk Management on Bank Engaging in Joint-Marketing Activity with Insurance Company/Bancassurance 153 11. Application of Risk Management for Banks Conducting Activities Related to Mutual Funds 154 12. Risk Management Certification for Management and Officer of Commercial Banks 155 13. Application of Risk Management to Commercial Bank Offering Prime Customer Services (LNP) 155 14. Application of Risk Management to Bank Offering Mortgages (KPR) and Motor Vehicle (KKB) Loans 156 15. Application of Risk Management for Islamic Bank 157 16. Application of Anti Money Laundering and Prevention of Terrorism Financing Program (APU and PPT Program) 158


vi

17. Resolution of Customer Complaint 160 F. Funding Regulations 160 1. Short Term Funding Facility (FPJP) for Commercial Banks 160 2. Short Term Funding Facility (FPJP) for Rural Banks 161 3. Short Term Financing Facility (FPJPS) for Islamic Banks 161 4. Short Term Financing Facility (FPJPS) for Islamic Rural Banks 162 5. Intraday Liquidity Facility (FLI) for Commercial Banks 162 6. Intraday Liquidity Facility (FLIS) for Commercial Banks Based on Sharia Principles 163 7. The Emergency Financing Facility (FPD) 163 G. Related to MSMEs Regulation 164 1 Technical Assistance 164 2 Bussiness Plan 164 3 Legal Lending Limit 164 4 Risk-Weighted Assets for Claim to Micro, Small and Retail Portfolio 165 5 Assessment on Asset Quality 165 H. Other Regulations 165 1. BI Rupiah Deposit Facility (FASBI) 165 2. Bank Foreign Borrowings 165 3. Interbank Money Market Based on Sharia Principles (PUAS) 166 4. Certifying Institution for Rural Bank 166 5. Restrictions on Rupiah Transactions and Foreign Currency Loans By Banks 167 6. National Clearing System 169 7. Real Time Gross Settlement (RTGS) 169 8. BI Certificates (SBI) 169 9. BI Certificates on Sharia Prinsiples (SBIS) 170 10. Government Securities (SUN) 170 11. Bank Secrecy 170 12. Human Resources Development at Banks 171 13. Banking Mediation 172


2012

vii

14. Incentives in The Framework of Bank Consolidation 172 15. Debtor Information System (SID) 173 16. Indonesian Banking Accountancy Guide for Conventional Commercial Banks 173 17. Guidelines for Islamic Banking Accountancy (PAPSI) for Islamic Bank and Islamic Business Unit 174

18. Determination of Financial Accountancy Standard for Rural Bank 174 19. Information Transparency on Prime Lending Rate 175 20. Rating Agencies and Ratings Acknowledged by BI 176 I. Bank Reports 177 1. Commercial Bank 2. Rural Bank VI OTHERS 183 A. Banking Popular Terminology 183 B. Role of the Bank in Prevention and Combatting Money Laundering based on Act of the Republic of Indonesia No. 8 of 2010 186 C. Type of Agreement in Islamic Banking Business Activities 190 VII APPENDIX 195

LIST OF FIGURE 1. Bank Indonesia Organization Structure 5 2. Risk Based Supervision Cycle 21

3. Pillar of Financial Inclusive 33 4. Basel II 37 5. Minimum Standard of Organization Structure of Rural Bank 54 6. APEX Cooperation Model of Rural Bank 56

CHAPTER

I

BANK INDONESIA

This page intentionally left blank


2012

�

I. BANK INDONESIA

Bank Indonesia (BI) is the Central Bank of the Republic of Indonesia. BI is an independent state institution, which is free from intervention of the government and or other parties, except for matters explicitly prescribed in Act concerning BI.

A. Mission and Vision

1. Mission To achieve and maintain stability in the Rupiah through

management of monetary stability and development of financial system stability in support of long-term, sustainable national development.

2. Vision To be a Central Bank established as institution of trust

with national and international credibility through reinforcing of its strategic values and achievement of stable, low inflation.

B. Strategic Values Competency, integrity, transparency, accountability,

cohesiveness.

C. Legal Basis of Bank Indonesia1. 1945 Constitution of the Republic of Indonesia2. Act of the Republic of Indonesia Number 23 of 1999

concerning BI as amended by Act of the Republic of Indonesia Number 3 of 2004

3. Act No. 6 of 2009 concerning the Stipulation of Government Regulation in Lieu of Law no. 2 of 2008 concerning the Second Amendment of Act No. 23 of 1999 concerning BI to become Law.

D. Important Duties of Bank Indonesia1. Establishment and implementation of monetary

policy;2. Regulation and ensuring the smooth operation of the

payments system;3. Regulation and supervision of banks.

E. Detailed Description of Duties1. Establish monetary targets, taking into account inflation

targeting, conduct monetary control, extend credit


�

or financing based on Sharia Principles to overcome short-term financial problem of banks (mismatch), provide Government-funded emergency financing in the event of a bank experiencing financial difficulties with systemic impact that may potentially set off a crisis endangering the financial system, implement exchange rate policy, and manage foreign exchange reserves.

2. Determine the use of payment instruments, regulate the inter-bank clearing system, arrange the final settlement of inter-bank payment transaction, issue and circulate the Rupiah currency as well as to revoke, withdraw and destroy such currency from circulation.

3. Grant and revoke licenses of an institutional and certain business. Prescribe regulations, activities of a bank, conduct banking supervision and impose sanctions on banks in accordance with prevailing regulations.

F. Organization of Bank Indonesia

BI is headed by a Board of Governors, consisting of a Governor, a Senior Deputy Governor, and at least four and not more than seven Deputy Governors, nominated and appointed by the President upon the approval of the House of Representatives.

In general terms, BI performs its tasks through four sector units, the BI regional offices, and BI representative offices, all of which are responsible to the Board of Governors.


2012

�

Mon

etar

y

(6 D

irect

orat

e)

Bank

ing

(8 D

irect

orat

e)

Paym

ent

Syst

em

(2 D

irect

orat

e)

Inte

rnal

Man

agem

ent

(10

Dire

ctor

ate)

Reg

ion

al O

ffice

s(4

1 O

ffice

s)

Rep

rese

nta

tive

O

ffice

s(4

Offi

ces)

BO

AR

D O

F

GO

VER

NO

RS

Fig

ure

1. B

ank

Ind

on

esia

Org

aniz

atio

n S

tru

ctu

re

Hea

d O

ffice

CHAPTER

II

BANKING SYSTEM


2012

�

II. BANKING SYSTEM

Banking is defined as all that pertains to banks, including of banking entities and bank offices, scope of banking business, and methods and processes employed in the conduct of banking business.

The key principle for business operations conducted by the Indonesian banking system is economic democracy applied with the use of prudential principles The primary function of the banking system in Indonesia is to mobilize and disburse funds belonging to the public and to support national development to bring about improved equitable distribution, economic growth, and national stability aimed at improving the welfare of the population at large.

The banking system has a strategic role in supporting the smooth operation of the payment system, implementing monetary policy, and achieving financial system stability. To achieve these aims, it is essential to have a sound, transparent, and accountable banking system.

A. Definition

1. Bank is a business entity that mobilizes deposit funds from the public and channels these funds to the public in credit and/or other forms in order to improve the living standards of the population at large.

2. Conventional Bank is a bank conducting conventional business and based on its types consists of Commercial Conventional Bank and Rural Bank.

3. Sharia Bank is bank conducting business based on Sharia Principles and according to its types consists of Islamic Commercial Bank and Islamic Rural Bank.

4. Sharia Principles are principles based on Sharia law in banking activities which are in accordance with fatwa published by institution authorized in defining fatwa in compliance with Sharia Principles.

B. Operations of Banks

Operations of Conventional Commercial Banks

1. Mobilizing funds from the public in the form of deposits comprising demand deposits, time deposits, certificates


10

of deposit, savings deposits, and/or other equivalent form;

2. Extending credit;3. Issuing notes;4. Purchasing, selling, or guaranteeing against own risk or

on behalf of and/or at the request of a customer :• Bills of exchange, including banker’s acceptances of

which the maturity is no longer than the common practice of trading such documents;

• Notes and other commercial paper of which the maturity is no longer that the common practice of trading such documents;

• Treasury bills and government guarantees;• BI Certificates (SBIs);• Bonds;• Commercial paper with a maturity of up to 1 (one)

year;• Other securities with a maturity of up to 1 (one)

year;5. Transferring money, either on own behalf or at the

request of a customer;6. Placing funds in, borrowing funds from, or lending funds

to other banks, whether by letter, telecommunications device, or by sight draft, cheques, or other means;

7. Accepting payments in respect or claims for securities, settling accounts with or among third parties;

8. Providing safety deposit boxes for valuable goods and papers;

9. Undertaking custodial activities on behalf of another party based on contracts;

10. Undertaking placement of funds among customers in the form of securities not listed in the stock exchange;

11. Conducting business in factoring, credit cards, and trusteeship;

12. Providing financing and/or conducting other activities based on Sharia Principles in accordance with the regulations stipulated by BI;

13. Conducting other business commonly undertaken by banks providing that such activities shall not be in contravention of Act concerning Banking and prevailing laws;


2012

11

14. Conducting activities in foreign currencies with due observance to the regulation of BI;

15. Conducting equity participation in other banks or business entities operating in financial services, such as leasing, venture capital, securities houses, insurance, and securities clearing house and custodian, with due observance of the regulation stipulated by BI;

16. Conducting temporary equity participation to settle problem of bad debt or bad financing based on Sharia Principles, on the condition that in due time the equity participation shall be withdrawn, with due observance to the regulation stipulated by BI; and

17. Acting as founder and the management of a pension fund in accordance with the prevailing laws on pension funds.

Operations of Islamic Commercial Banks

1. Mobilizing fund in the form of saving comprising demand deposit, saving deposit or other equivalent form based on wadi’ah agreement or other agreement not in contravention with Sharia principles;

2. Mobilizing fund in the form of investment comprising Time Deposit, Saving Deposit or other equivalent form based on mudharabah agreement or other agreement not in contravention with Sharia principles;

3. Disbursing profit sharing financing based on mudharabah agreement, musyarakah agreement or other agreement not in contravention with Sharia principles;

4. Disbursing financing based on murabahah agreemnet, salam agreement, istishna’ agreement, or other agreement not in contravention with Sharia principles;

5. Disbursing financing based on qardh agreement or other agreement not in contravention with Sharia principles:

6. Disbursing financing of rental of moving object or non moving object to customer based on ijarah agreement and/or leasing in the form of ijarah muntahiya bittamlik or other agreement which is not in contravention with Sharia principles;


12

7. Taking over of receivables based on hawalah agreement or other agreement which is not in contravention with Sharia principles;

8. Conducting business on debit and/or financing cards based on Sharia principles;

9. Purchasing, selling or guaranteeing at own risk third party securities issued based on underlying transaction and based on Sharia principles, such as, ijarah, musyarakah, mudharabah, murabahah, kafal or hawalah agreements;

10. Purchasing securities based on Sharia principles published by the government and/or BI;

11. Accepting payment of liabilites on securities and negotiating with a third party or among third parties based on Sharia principles;

12. Undertaking custodial activities for the interest of other party pertaining to an agreement based on Sharia principles;

13. Providing safety deposits for goods storage and securities based on Sharia principles;

14. Transferring money, either on own behalf or at customer’s interest based on Sharia principles;

15. Conducting trusteeship operation based on wakalah agreement;

16. Providing letter of credit or bank guarantee based on Sharia principles; and

17. Conducting other activities normally undertaken in the field of banking and social insofar as not in contravention with Sharia principles and in accordance with provisions of the applicable laws and regulations;

18. Conducting activities in foreign currency based on Sharia principles;

19. Conducting investment activity in Sharia Commercial Bank or financial institution conducting business based on Sharia principles;

20. Conducting temporary equity participation due to bad financing based on Sharia principles subject to requirement of subsequent withdrawal from equity participation;

21. Acting as the founder and the manager of pension


2012

1�

fund based on Sharia principles; 22. Conducting activity in capital market insofar as not in

contravention with Sharia principles and provisions of applicable laws and regulations in the field of capital market;

23. Organizing activity or banking products based on Sharia principles using electronic facilities;

24. Publishing, offering and trading short term securities based on Sharia principles, directlyor indirectly through money market;

25. Publishing, offering and trading longterm securities based on Sharia principles, directly or indirectly through capital market;

26. Providing products or conducting business activity of other Sharia commercial bank based on Sharia principles.

Operations of Conventional Rural Banks1. Mobilizing funds from the public in the form of deposits

comprising time deposits, savings deposits, and/or other equivalent form;

2. Extending credit;3. Placing funds in BI Certificates (SBIs), time deposits,

certificates of deposit, and/or savings deposits in other banks.

Operations of Islamic Rural Banks1. Public fund collecting in the form of:

a. Saving in the form of saving deposit or equivalent based on the wadi’ah or other agreement which is not in contravention with Sharia principles; and

b. Investment in the form of time deposit or saving deposit or other equal form based on mudharabah agreement or other agreement which is not in contravention with Sharia principles;

2. Fund distribution to public in the form of:a. Profit sharing financing based on mudharabah or

musyarakah agreement; b. Financing for buying and selling transaction based

on murabahah, salam or istishna agreement; c. Lending and borrowing based on qardh


1�

agreement; d. Leasing of moving or non moving objects to

customers based on ijarah or leasing agreement in the form of ijarah muntahiya bittamlik; and

e. Undertaking custodial activities of liabilities based on hawalah agreement;

3. Placing fund in other Sharia bank in the form of depository based on wadi’ah agreement of investment based on mudharabah agreement and/or other agreement which is not in contravention with Sharia principles;

4. Transferring money, either on own behalf or for customer’s interest through Islamic Rural Bank existing in Islamic Commecial Bank, Conventional Commercial Bank and Islamic Business Unit; and

5. Providing product or conducting business of other sharia bank in accordance with Sharia principles and subject to the approval of BI.

Supporting the activities of Business

Business support activities are carried out other activities outside the bank in bank operations. Business support activities include those relating to human resources, risk management, compliance, internal audit, accounting and finance, information technology, logistics and security.

C. Operations Not Permitted for Banks

Operations Not Permitted for Conventional Commercial Banks1. Conducting equity participation, with the exception

of those referred to No. 15 and 16 operation for commercial bank above;

2. Conducting business in insurance;3. Undertaking business other than those referred to in

letter B above.

Operations Not Permitted for Islamic Commercial Banks

1. Conducting business activities in contravention with Sharia principles;


2012

1�

2. Conducting activities related to direct buying and selling of shares in capital market;

3. Equity participation except as referred to in point 19 and 20 in Sharia bank business activities;

4. Conducting business in insurance, except if acting as agent of product marketing of sharia insurance.

Operations Not Permitted for Conventional Rural Banks

1. Accepting deposits in the form of demand deposit and participating in transaction;

2. Conducting business in foreign currencies except as money changer;

3. Conducting equity participation;4. Conducting business in insurance;5. Conducting other business other than those referred to

in letter B.

Operations Not Permitted for Islamic Rural Banks

1. Conducting business activities in contravention with Sharia principles;

2. Accepting saving in the form of demand deposit and participating in payment traffic;

3. Conducting business activities in foreign currency, except foreign currency exchange with the approval of BI;

4. Conducting insurance business activities, except as product marketing agent of Sharia insurance;

5. Participation in investment, except in institution established to overcome liquidity difficulties of Sharia Rural Bank; and

6. Conducting business other than business activities as referred to in section B.


16

CHAPTER

IIIBANK REGULATION AND

SUPERVISION


2012

1�

III. BANK REGULATION AND SUPERVISION

As part of its mandate for bank regulation and supervision, BI enacts regulations; issues and revokes licenses for incorporation, establishment of bank offices, and specific bank activities; conducts bank supervision; and imposes sanctions.

A. Objectives of Banking Regulation and Supervision

The primary focus of banking regulation and supervision is to ensure the optimum functioning Indonesia’s banking system with the aim of creating a sound banking system (both overall and in terms of individual banks) capable of safeguarding the public interest, achieving sound growth, and contributing in a useful capacity to the national economy.

B. Scope of Bank Regulation and Supervision

1. Right to license, comprising the right to establish procedures for the licensing and establishment of a bank. The scope of licensing by BI includes issuance and revocation of operating licenses for banks; issuance of licenses for establishment, closure, and change of address of bank offices; approval of bank owners and management; and issuance of licenses for banks to conduct certain business operations.

2. Right to regulate, comprising the right to establish regulations governing banking operations and activities for the purpose of fostering a sound banking system capable of delivering banking services as desired by the public.

3. Right to control, comprising the right to supervise banks:a. On-site supervision may take the form of general

examination and special examination aimed at obtaining a picture of the financial condition of the bank, monitoring the level of bank compliance with prevailing regulations, and ascertaining whether the bank is involved in any unsound practices that may jeopardize the sustainability of bank operations.

b. Off-site supervision is supervision through periodical reports delivered by banks, examination reports,


20

and other information. 4. Right to impose sanctions in accordance with laws

and regulations in the event that a bank is not fully compliant or is in non-compliance with regulations. Such actions contain elements of guidance to encourage banks to operate in compliance with sound banking principles.

C. Bank Supervision System

In conducting bank supervision, BI currently uses a system applying 2 types of approach:1. Compliance Based Supervision that includes

monitoring of bank compliance with provisions related to bank operation and management in the past with the objective of confirming that bank has been well operated and correctly managed based on prudential principles.

2. Risk-Based Supervision that includes supervision based on forward looking oriented risk focusing on inherent risk on bank functioning activities as well as risk control system. This system will enable the authority of bank supervision to proactively take any preventive actions in facing problems that might potentially arise.


2012

21

Figure 2. Risk Based Supervision Cycle

Risk based supervision is focused on the kind of risks below:

Kind of Risk

Risk is the Risk arising from default by a counterparty in meeting its obligations.

Risk arising from adverse movement in the market variables of the port folio held by the Bank that may incur losses for the bank. In this letter, market variable sare interest rates and exchange rates.

Risk including but not limited to Risk caused by default of the Bank on liabilities at due date.

Risk including but not limited to Risk caused by in adequacy or dysfunction in internal processes, human error, system failure, or existence of external problem saffecting the operations of the Bank.

Credit Risk

Market Risk

Liquidity Risk

Operational Risk

Data and Information Collection 1. Understanding

Institution

RBS CYCLE

2. Bank Risk and Soundness Rating

3. Supervisory Plan

4. Risk-Based Examination

5. Update of Risk Profile andSoundness Rating Bank

6. Supervisory and Monitoring Action

RBS Panel Forum Phase 1

Bank Risk Profile and Soundness Rating

Annual Supervision Strategy

Verification of Working Plan

Report of Examination Result

RBS Panel Forum Fase 2


22

D. Information System in Supporting Bank Supervisory Tasks

1. Banking Information System (SIP)

BI has developped the Blue Print of Banking Information System as a guideline in information system development in order to support commercial bank supervision task that is expected to provide quality information through the application of the following principles:a. SIP is directed as business tool functioning at the

same time as a media of information provider. b. SIP provides information on macro basis, individual

bank as well as other information related to the

Kind of Risk

Risk caused by weaknesses injuridical matters. Weaknesses injuridical matters include but are not limited to weaknesses resulting from legal claims, absence of legal framework, or contractual weaknesses such of failure to meet the requirements for legal and imperfect collateral binding agreement.

Risk including but not limited to Risks caused by negative publicity pertaining to the business operations of the Bank or negative perceptions of the Bank.

Risk including but not limited to Risks caused by adoption and implementation of an in appropriate strategy for the Bank, in appropriate decision making in the business affairs of the Bank, or lack of responsiveness of the Bank to external change.

Risk caused by failure of the Bank to comply with or implement prevailing laws and regulations and other legal provisions. Management of Compliance Risk takes place through consistent application of an internal control.

Legal Risk

Reputational Risk

Strategic Risk

Comp l i ance Risk


2012

2�

bank business environment. c. SIP presents information collected from mass media,

government agencies as well as other institutions.d. SIP integrates data that are currently dispersed in

different systems.

SIP is developed based on the following Information Systems:a. Supervision Management Information System

(SIMWAS)

SIMWAS is an information system used by bank supervisor in conducting analysis activities on bank condition, accelerating the obtention of information on bank financial condition (including Bank Soundness Rating), enhancing the security and integrity of banking information and data.

b. Information System of Bank in Investigation (SIBADI)

SIBADI is an information system in order to support the implementation of investigation duties related to criminal acts in banks as well as duties related to mediation activities between customer and bank.

In supporting the process of fit and proper test, SIBADI also provides data/information of banking crime suspect.

2. Rural Bank Supervision Management Information System (SIMWAS BPR)

With reference ot the implementation of Rural Bank supervisory tasks, BI has developped and implemented Information System (SI) consisting of these two following units: a. Online reporting system, that enables Rural Bank

to send online periodic reports to BI in order to enhance the effectiveness of reporting and efficiency both from Rural Bank side and BI side. There are 4 types of periodic report submitted on online basis: Monthly Report, Maximum Lending Limit Report, Debtor Report and Rural Bank published financial report.

b. Data processing system, developped to eliminate


2�

redundancy of data input and to minimize human error and data inconsistency. Rural periodic report received by BI through reporting system will be processed for the interest of supervision and statistic as a supporting material of rural industrial development policy.

In supporting transparency to public and for the interest of relevant stakeholders, BI facilitates the presentation of rural publication report through BI website (www.bi.go.id) comprising data of Rural Bank industries and addresses of Rural Bank.

Furthermore, in the framework of enhancing the quality of Rural Bank supervision, the Information System of Rural Bank is directed to a more focused supervisory system in terms of offsite and onsite supervision with regards to any condition encountered by the Rural Bank. The development of Early Warning System (EWS) of Rural Bank has the objective of improving offsite monitoring of Rural Bank condition, in addition to soundness rating organized periodically. A tool has been development to support supervisors in performing onsite supervision on rural banks.

BI will continually improve on information system related to Rural Bank supervision so as to develop a system that is expected to become the “window” of information presenting the real condition of rural bank that may be used as materials in determining the improvement to be conducted.

�. Debtor Information System (SID)

SID is an information system providing debtor information, both individual and corporate, developed to support Bank credit risk management and BI supervisory duties. The information gathered in the SID include debtor information, trustees and debtor enterprises, provision of information facilities debtor funds received (credit, loans, securities, irrevocable L/Cs, bank guarantees, investments and/or other bills) collateral, underwriting and financial statements of the debtor. SID uses web-


2012

2�

based technology with extranet network enabling reporting entity to have real-time on-line data access.

E. Banking Investigation and Mediation

1. Policy Related to Banking Investigation For the effectiveness, acceleration, and optimization

in handling presumed banking criminal acts (Tipibank) and pertaining to the more complex the problem and the handling of banking criminal act indication, BI has taken strategic actions to collaborate with other institutions, such as:a. On December 19, 2011, an agreement was signed

between BI, the State Police and the Attorney General’s Office concerning the Coordination in Handling Banking Criminal Acts, No. 13/104/KEP.GBI/2011, No. B/31/XII/2011 and No. Kep-261/A/JA/12/2011, completed by Practical the Guidelines No. 13/10/KEP.DpG/2011, No. B/4768/XII/2011/Bareskrim, No. Kep-04/E/EJP/12/2011 and No. Juk 12/F/Fsp/12/2011 concerning the Coordination in Handling Banking Criminal Acts. This Agreement replaces the Joint-Decree (SKB) between the Attorney General, the Chief of the State Police and the Governor of BI in 2004. Several basic issues set forth in the Joint-Decree and the Practical Guidelines are the scope of coordination, organization and the task of Coordinating Team as well as the implementation of the coordination.

b. The Common-Decree between BI and LPS No.14/1/KEP.DpG/2012, No. KEP.001/KE/I/2012 dated January 4, 2012 concerning the mechanism in handling presumed banking criminal act on bank imposed of revocation of license. Several basic issues set forth in the Common-Decree are the completeness of supporting document, assistance during investigation, discussion of investigation results, development of handling of banking criminal acts, and financing of investigation implementation.


26

2. Policy related to Banking Mediation

BI performs banking mediation function based on PBI No.8/5/PBI/2006 concerning Banking Mediation as amended to PBI No. 10/1/PBI/2008. The main objective of banking mediation process is to facilitate the coordination in the settlement of customer’s complaint potentially inflicting customer’s interest and affecting bank reputation. Banking mediation is also conducted to facilitate small-scale customers in seeking banking dispute settlement using a simple, efficient and fast method.

The development of facilities for an easier and faster banking transaction has also increased the potential problem due to this increase. One of them is the opportunity of banking criminal practice using fraud as operation mode and bank account as the media in collecting the earnings of the crime.

With regards to the above mentionned subject, banking sector facilitated by BI prepared By Laws draft concerning Blocking of Customer’s Saving Account. The Bye Laws is aimed at facilitating bank in handling fraudulent act by using fund transfer facility and providing protection for the victim customer. Thenceforth, with the promulgation of Law No. 10 of 2008 concerning Prevention and Fighting Criminal Act of Money Laundering, BI provides banking sector to make amendment to the Bye Laws to be in harmony with the Law of TPPU. One of the subject of amendment is the synchronization of terminology between these two regulations.

In response to the booming delivery of Short Message Service to the public which is considered as one of fraudulent acts involving bank account which is suspected to have been opened using false identity, BI has asked the commitment of banking sector to do the follow up by verifying the account being used for this fraud and to take the necessary measures in providing protection to customers.

CHAPTER

IV

BANKING POLICY


2012

2�

IV. BANKING POLICY

A. Banking Policy Direction in 2012 In 2012, banking policy is directed to maintain

the stability between competition enhancement and strenghthening of banking resilience by supporting Bank intermediation including widening people’s access to low cost banking services. In the effort of reinforcing banking competitiveness, the policy related to Prime Lending Rate will be continued to ensure that market mechanism works well and policy target may be reached. From bank supervision, law enforcement will be enhanced by requiring bank to submit Bank Business Plan, including targets of efficiency enhancement and lowering loan interest rate at reasonable level.

Policy related to strengthening banking resilience is conducted through capital improvement in supporting economic growth and in anticipating busines cycle change. Aspect related to customer protection and banking management will also be focused. In 2012 BI will continue the policy to improve customer protection and potential customer as well as to improve provision related to financial report transparency, especially published financial report and the public accountant to be used by banking sector. BI continues to review ownership policy in banking sector and multi-license policy in line with bank activities that have become more complex.

In addition to strengthening competitiveness and banking resilience, BI will support banking intermediation through the following measures:1. Continuing the effort to support banking access

expansion (financial inclusion) to the public particularly low cost banking services for rural community, including quality enhancement of Tabunganku program, financial education development, implementation of Financial Identity Number and the implementation of literacy survey.

2. Facilitating intermediation to support financing in various potential sectors in collaboration with various government institutions. Other than that, various constraints in financing will be reviewed for sectors with


�0

relatively low credit growth. Pertaining to the need of financing sectors that are not considered commercially eligible by banking sectors but have strategic role in economy, BI in collaboration with the government will develop various financing schemes.

The effort in enhancing competitiveness and establishing better management, product development and business activities are also targetted by the policy direction of islamic banking. Strategy related to Islamic rural bank development will be directed to the strengthening of islamic rural bank characteristics as a sound, strong and productive community bank and may focus on offering financial services to MSME and local community in the rural area.

Macroprudential policy in reinforcing the function and active role of BI as systemic regulator in maintaining financial system stability, the strengthening of systemic regulator function was considered accurate following the validation of Law of Financial Services Authority (OJK) for the transfer of function pertaining to bank regulation and supervision which were previously performed by BI to OJK at the end of 2013.

BI will still escort banking industry with the application of function related to financial system stability, by conducting surveillance to both bank and non-bank, verifying bank in the framework of macroprudential, escorting the efficient function of intermediation as well as coordinating in the framework of crisis prevention and handling. The function and tasks of BI related to financial system stability and the establishment of efficiency in banking industry becomes an important part in the amendment to the Law of BI that has been included in the agenda of National Legislation Program 2012.

B. Improvement of Financial Inclusion

Despite the rapid development of financial industry in the last decades, there are still a part of the community that do not have yet any access to the basic financial services. According to the publication of World Bank 2008, more than 50% of the population of most developing countries do not have any account in a financial institution. Even


2012

�1

in most African countries only less than one-fifth of the society have an account in a financial institution. Whereas access to financial services is a critical aspect in poverty alleviation.

Root of the Problem

Difficulties faced by the community in obtaining access to financial services are generally classified into two major categories namely supply side and demand side.

1. Supply Sidea. Geographical condition. In addition to natural

problems such as people living in remote areas, Leyshon & Thrift study (1994) stated that financial crisis and deregulation are contributing factors impeding people’s access to financial services. Economic crisis has forced investors to withdraw their funds from developing countries leading to massive bank closing. Then deregulation era boosting tight competition, has forced banking sector to enhance efficiency that requires them to be very selective in choosing customers and to close their branch offices located in less profitable areas.

b. Services Design and Pattern. As an example, saving product with high administration fee for people with small purchasing power or unavailability of daily credit service for micro traders. This has thus led them to keep using the services of loan shark who will receive the installment directly from the traders. On the other side, generally banks provide priority to big loan than small scale credit needed by the micro, small and medium size industries.

c. Information gap between the requirements and bank procedures or bank products and those generally known by MSMEs. This gap requires a connection between the society, especially UMKM, and financial institution, especially banking, in order to identify and to solve problems in accordance to the real problem.


�2

2. Demand sidea. Education. The low level of education and

knowledge has impeded the society in obtaining financial services. Incapability in preparing financial report and or business prospect analysis has impeded the society in acquiring loan from banks. In addition to this, lack of knowledge on insurance benefit has also contributed to the low penetration of insurance products for low class community.

b. Legal or Formalization gap. Bank and customers are generally attached formally with strict legal requirements. It is generally difficult for micro business to meet bank formal requirements such as business license, assurance in the form of certificate, etc. All this has impeded the poor society in obtaining adequate credit access.

c. Self Exclusion. Other contributing factor for the reluctance in obtaining financial services is religious factor. A part of moslem community believes that receiving interest from conventional bank is riba or against the religion, therefore financial services based on sharia principles are the right solution for this community.

Access to Financial Services

Referring to the report of World Bank in 1995, there are at least four types of vital financial services for the people’s life, they are fund saving, credit facility, payment system and insurance covering pension fund. These four aspects are the basic requirements to be met by every society in order to have a better life.

Despite the existence of various services model of informal micro finance and spontaneous institution providing services to low income community especially in developing countries, these alternative financial institutions are capable to fulfill a small part of the needs of the community. Therefore, good collaboration between formal financial institutions especially banking sector and these micro financial institutions becomes a key element to the success in realizing inclusive financial institutions for all levels of society.


2012

��

National Strategy of Financial Inclusion

The enhancement of access of the society to financial institution is considered as a complex problem that requires inter-sectoral coordination involving banking authority, non-bank financial services and other ministries interested in the efforts related to education and poverty alleviation. The existence of an overall policy within one national strategy is needed and pertaining to this, 5 pillars of inclusive financial policy were formulated as described in the following chart.

Figure �. Pillar of Financial Inclusive

The descriptions of the pillars are as follows: Providing financial education to the people is one form

of customer protection as reflected from Pillar 1 regarding customer education and protection. Activities related to financial education are activities aimed at improving people’s knowledge and awareness on financial products and services. This knowledge is a part of one of the pillars in financial inclusive activities considering that one of the reasons why the people do not interaction with financial institution is due to lack of people’s understanding regarding financial products and services. BI has conducted several activities related to financial education, such as “Ayo Ke Bank” campaign, provision of website of

Acces forPoor Productive Community

To Bank & Non Bank Financial Institutions

Pilar

Saving

Credit/Financing

PaymentSystem

Insurance

Financial Services forUMKM

FinancialEducation

Financial Eligibility

IntermediationFacilities

Channeling/Distribution

SupportingRegulations

Infrastructure

Description :

: Program has been conducted and will be continued by BI

: Program will implemented by BI

: Program is relevant to other institution / agency outside BI


��

consumer information and education and the integration of financial education in the curriculum of elementary and junior high schools in Bandung, Semarang, Surabaya, Medan, Makassar and Banjarmasin as pilot project. In 2012 education activities for the people will still be continued and will be focused at least on these six areas, Consumer protection is one of the advantages obtained by the people for dealing with formal financial institution compared to those in relation with non-formal financial services. Formal financial service is equipped with regulator that conducts regulation and supervision including regulation related to consumer protection. For example, for bank customer, BI requires bank to provide information to the potential customer regarding the benefit, risk and cost in one financial product, and requires the bank to follow up any complaint from customer with definite process and time of settlement and to facilitate the people having problem that may not be solved with bank through Working Unit specifically handling banking mediation in BI.

The second pillar is financial information mapping (financial eligibility) which is related to one of the constraints of the people in interacting with financial services such as legality. This is reflected in the fact that many MSMEs do not have any legal entity and business license that are actually the requirements in obtaining loan from bank. In this case, BI develops MSME clusters and conducts the initiation of MSME credit rating.

The third pillar is related to intermediation facilities focusing on the efforts of enhancing financial institutions awareness of potential communities to have financial services. In the effort of enhancing intermediation facility, BI has developed of linkage program in which commercial bank collaborates with rural bank for credit disbursement to micro customers of rural Bank with commercial bank providing the source of fund, In addition to this, BI MSME banking intermediation bazaar and MSME facilitating are also included in the list of activities.

The fourth pillar is the distribution channel aiming at enhancing the scope of services of formal financial institution for a group of rural community. Activities perform


2012

��

related to the expansion of distribution services are among others optimization of post office network and the study of branchless banking with possibility of applying mobile money in Indonesia by using cellular phone as the means of keeping money in the form of an account in a certain bank. By adopting the concept of branchless banking it is expected that banking facilities may be offered to remote areas without having to provide the infrastructure of bank office.

A study on provisions that may support easy access for the people to financial services is considered necessary and this initiative is included in the fifth pillar. The government and BI will provide their support in the form of publication of regulations that may help the people to have easy access to financial services by using a method based on information technology such as e-payment and branchless banking.

Cross Pillar

The effectiveness in the implementation of the above five pillars may be reached and is inseparable from a number of contributing factors that together may be viewed as cross pillar activities. These activities include but not limited to: a) Enhancement of supporting infrastructure (physical and ICT), b) Database (both from demand and supply sides) that supports the process of inclusive financial policies, c) Boosting the establishment of credit bureau institution to support inclusive financial policies.

The improvement of community access to financial services will enable low-income society will benefit various services such as saving. Financial institution will be able to know more about its customer from the saving pattern of the community thus will give opportunity of financing for prospective customers. Moreover, the easy access to the services of payment system will give impact to the easiness of economic transaction, even to the community residing in remote areas. The activities of buying and selling can be performed more smoothly and the community will be able to use advance technology such as mobile phones to pay the purchase of raw materials from farmers in remote


�6

areas. Farmers do not have to sell their products at lower price due to the limited cash provided by collectors because payment can be performed using e-money. This effort will contribute to the strengthening of economic activities that will lead to the quality improvement of the community life. In terms of insurance services, the existence of micro insurance will be able to help the community in facing problems that may be settled by the insurance. These efforts are expected to strengthen the condition of the community in maintaining sustainable activities and to participate in economic activities.

C. Basel II

Minimum Capital Requirement is one of the main focuses of all bank supervisory authority in implementing prudential principles. Therefore it is deemed necessary to formulate regulation regarding capital in order to strengthen banking system and to support potential loss.

Considering the importance of bank capital, Basel Committee on Banking Supervision (BCBS) has issued a concept of capital framework with international standard. The initial concept of bank.

Capital framework was issued in 1988 and improved in 2006 with the publication of International Convergence on Capital Standard (A Revised Framework) or more known by Basel II.

Basel II has the objective to reinforce the security and soundness of financial system by focusing on the calculation of risk-based capital, supervisory review process and markert discipline.

In general, Basel II framework consists of three pillars, namely Pillar 1: minimum capital requirements; Pillar 2, supervisory review process; and Pillar 3: market discipline.


2012

�7

Figure �. Basel II

Pillar 1. Minimum Capital Requirements

Pillar 1 determines the minimum capital requirements related to credit risk, market risk and operational risk. In this case, bank is obliged to maintain adequate capital in order to face risk. In accordance with Basel II Document, bank capital ratio or comparison between regulatory capital and risk weighted asset shall not be less than 8%.

Pillar 1 of Basel II introduces several alternative approaches in calculating minimum capital to face credit risk, market risk and operational risk. Starting from the simple approach to a more complex one, this method can be used based on product and activity complexity level of the bank. The implementation of a more complex approach in calculating minimum capital requirement is voluntary for each type of risk and depends on bank readiness and it is subject to the approval of the supervisory authority.

Pillar 2. Supervisory Review Process

Pillar 2 requires a review process conducted by supervisor to confirm the adequacy of bank capital in order to describe the overall bank risk profile. On one side, banks are required to have process and strategy to maintain its capital level (Internal Capital Adequacy Process – ICAAP). On the other side, the supervisor will make assessment on the process conducted by bank (Supervisory Review and Evaluation Process – SREP). Supervisor will take the necessary measures in response to capital measurements performed by bank. Supervisor may require bank to provide capital higher than the minimum capital ratio or to

- - -


�8

take improvement measures such as enhancement of risk management or other actions if the supervisor considers that capital measurement process used by the bank is not adequate and equal to bank risk profil.

There are 4 (four) main principles in Pillar 2 desgined to complete Pillar 1 with respect to calculation of minimum capital requirement and they are:Principle 1. Bank has the obligation to have an assessment

process of overall capital adequacy related to risk profile and strategy in maintaining capital level (Internal Capital Adequancy Assessment Process ICAAP).

Principle 2. Supervisor shall review and evaluate bank ICAAP, including bank capability in monitoring and confirming compliance to provision related to capital ratio and taking correct supervisory measures.

Principle 3. Supervisor has the obligation to require bank to operate over the defined capital ratio and to require bank to provide capital over minimum limit.

Principle 4. Supervisor is obliged to make intervention to avoid any capital decrease to below minimum level required to support banking risk characteristics and is obliged to require bank to conduct an immediate supervisory action.

In conducting SREP as referred to in the above Principle 2, Supervisor can estimate bank capital adequacy towards:1. Risks that that have not been fully estimated in Pillar

1, due to the use of standard approach, such as concentration risk;

2. Risks of Pillar 2, including liquidity risk, interest rate in the banking book, reputation risk and strategic risk. The assessment of some of these risks cannot be carried out quantitatively and there will be more qualitative interpretation including the risks from banking external factor that can appear due to policy and economic or business condition.


2012

��

Pillar �. Market Discipline

In completion to the other pillars, Pillar 3 of Basel II defined the requirements that will enable market players to assess main information regarding the scope of risk, capital, risk exposure, risk assessment process and bank capital adequacy. In principle, the objective of Pillar 3 is to support the establishment of sound banking business environment, by requiring banking sector to disclose all material information and the role of the public in bank supervision.

In order to achieve this objective the following main requirements should be fulfilled: 1. sufficient information available for public regarding

bank condition, and 2. public capability in evaluating bank condition through

the analysis of information provided.

Implementation of Basel II in Indonesia

The implementation of Basel II in Indonesia was conducted gradually starting from the simplest up to the more complex approach. The implementation Basel II in Indonesia has started since 2007 by the publication of provision concerning the measurement of market risk capital weight and ATMR for market risk by using standard method and internal model.

For operational risk, the calculation of Minimum Capital Adequacy (KPPM) uses basic indicator method. BI sets up transition period for the obligation in the calculation of Risk-Weighted Assets of operational risk amounting to 5% of the average yearly positive brut revenue for the last three years for the period of January 1, 2010 to June 30, 2010, 10% for the period of July 1, 2010 to December 31, 2010 and 15% starting from January 1, 2011. Risk-weighted assets of credit risk will be calculated using standard approach starting from January 2012. This calculation will be more risk sensitive compared to the approach used in the preceeding period. This approach is based on debtor/other party category, credit risk indicator is also based on debtor/other party rating published by rating agency acknowledged by BI. Through a more accurate


�0

ATMR calculation banking minimum capital requirement is expected to reflect more on credit risk level.

Pertaining to the provisions requiring the use of rating from rating institution, BI has published a list of rating institutions and ratings acknowledged by BI in BI website (www.bi.go.id).

With the overall implementation of Basel II it is expected that Indonesian banking industry will be more sound, more resilient against crisis and more competitive in global financial industry. Thenceforth this will lead to the soundness reinforcement of Indonesian financial system.

D. Basel III

In response to the global financial crisis 2008/2009, Leaders Summit in 2008 in Washington D.C.has agreed on 50 measures in saving world economy or known as Washington Action Plans (WAP). Following this agreement, G-20 initiated to suggest to Basel Committee on Banking Supervision (BCBS) to prepare a global¹ financial reform package aiming at (i) enhancing the capability of banking sector in absorbing econimic and financial crisis; (ii) reinforcing risk management and governance practice as well as strengthening transparency and information in banking sector; and (iii) fostering systemic resolution for banks and in operation in cross border manner.

This global financial reform or known as Basel III is aimed at reinforcing resilience both at micro and macro levels. Resilience enhancement at micro level is performed by strengthening bank capital quality, bank capital ratio, enhancing bank liquidity sufficiency and sustainability and fostering bank1 resilience especially during crisis. Resilience enhancement at macro level is conducted by reform on macroprudential regulation such as applying leverage ratio that may assist in mitigating risk that has potential risk to economic and financial system, minimizing procyclicality and applying countercyclical capital buffer that has to be developed during the improved economic condition, to be

1 BCBS has published 2 (two) documents as part of global financial reform package, namely, A Global Regulatory Framework for More Resilient Bank and Banking System and International Framework for Liquidity Risk Measurement


2012

�1

then used in covering potential risk during crisis. In general, Basel III framework includes (1) enhancement

of capital quality, consistency and capital transparency; (2) enhancement of bank capital ratio; (3) widening of risk scope in the framework of bank capital; (4) application of leverage ratio to support bank capital ratio; (5) minimizing procyclicality and boosting countercyclical buffer; (6) resolving systemic risk; and (7) application of global liquidity standard.

Basel III framework will be applied in January 2013 gradually up to full implementation in January 2019.

In general, the regulation in the framework of Basel II

will be as follows:

Topic Regulation

• Tier 1 Capital increases from 4% to 6%

• Ratio is set up at 4,5% on January 1st, 2013, 5,5% on January 1st, 2014, 6% on January 1st, 2015

• Buffer is used to absorb loss at the time of crisis

• Capital conservation buffer is formed at 2,5%, and must be met from common equity. Fulfillment of buffer is conducted with transitionperiod from 2016 – 2018.

• Bank that may not fulfill conservation buffer will encounter restriction in dividend, shares and bonus payment.

• Buffer will be around 0%-2,5% of common equity or other type of capital instrument that absorbs loss.

• Liquidity Coverage Ratio (LCR) is ratio to ensure the sufficiency of high quality

Higher Tier 1

Capital Conservation Buffer

Countercyclical Capital Buffer

Liquidity Standard\


�2

Topic Regulation

liquid asset to fulfill bank liquidity need in short term (30 days). This ratio is effective from January 1st, 2015.

• Net Stable Funding Ratio (NSFR) is ratio to measure bank long-term resilience, in the form of a more stable source of fund to support sustainably business activity.

• Matrix liquidity monitoring focusing on maturity mismatch, funding concentration and asset available to be used (unencumbered).

• This ratio is used to measure bank capital adequacy in supporting bank asset and business activity.

• Leverage Ratio is set at minimum of 3%.

• The application is conducted in parallel from 2013-2017 and starting from 2018 will be a part of Pillar 1 (capital adequacy).

• Capital Ratio is set up at least 8% of risk-weighted asset (ATMR).

• Additional Capital Conservation Buffer increases the ratio of minimum capital to 10,5% from risk-weighted asset (ATMR) in which 8,5% must be in the form of Tier 1.

• Tier 3 Capital is annulled

Leverage Ratio

Capital Ratio


2012

��

E. Reform of Global Financial Sector

Financial crisis has taught a valuable lesson related to the management aspect of global financial sector. It was obviously described that global financial sector was triggered by less effective management regime in responding to systemic risk. On the other side, ramification of the crisis was not easily detected due to information asymmetry. Global financial market and institution can transmit crisis rapidly form one economy to other economy due to the integrated global financial market. Meanwhile, key financial institutions globally operated (systemically important financial institutions) do not have adequate capital cushion to absorp their loss. One of the reasons is the weakness of capital regulatory regime bearing tendency for procyclicality amplification.

Pertaining to this issue, G-20 initiated a reform of global financial sector as one of important responses towards global financial crisis. During the meeting of leaders of G-20 countries in Washington in November 2008, an agenda was set forth regarding safety measures for global financial sector. This agenda has been implemented ambitiously since Washington Action Plan (WAP) reflected from the strict deadline applied to its completion. Among the initiatives, the most important reform agenda is a reform of global capital and liquidity regulation regim and procyclicality mitigation commonly known as Basel III. Meanwhile, crisis resolution for financial institution with systemic impact was also enhanced. This reform also linked to the reinforcement of OTC financial market, enhancement of supervisoy intensity as well as the extension of regulatory limits of financial sector in order to remove any fragmentation between banking sector, capital market and non-bank financial institution.

The agenda of reform of financial sector was eventually set up in response to G-20 meetings in Washington DC, London and Pittsburgh. As a member of G-20, Financial Stability Board (FSB) and Basel Committee on Banking Supervision (BCBS), Indonesia is committed to support this reform comprising 12 main agenda, namely:


��

1. Building high quality capital and liquidity standards2. Addressing systemically important financial institutions

and cross-border resolutions 3. Reforming compensation practices4. Improving over-the-counter derivative markets 5. Strengthening adherence to international standard6. Strengthening accounting standards 7. Developing macro-prudential policy frameworks and

tools8. Differentiated nature and scope of regulation9. Hedge Funds regulations10. Credit Rating Agencies11. Supervisory Colleges12. Re-launching securitization on sound basis.

F. BPD as Regional Champion (BRC)

Under the framework of Pillar 1 of Indonesian Banking Architecture, Bank Indonesia (BI) together with ASBANDA and BPD (Regional Bank) throughout Indonesia belonging to the working group have completed Regional bank transformation program through reinforcement of competitiveness and Regional bank institution, to be more efficient in their function as agent of development at regional level including its implementation strategy. The preparation of Regional Bank blueprint to become Regional Champion (BRC) will be based on the several factors, such as:a. The capital of Regional Bank (BPD) which lower

compared to average capital of national banking industry has the potential to weaken BPD sustainability in facing competition with other regional banking groups.

b. Unsatisfactory BPD services and low BPD Brand awareness may cause the lack of interest from the community towards BPD products and services and may undoubtedly lead to a lack of trust from the customers.

c. Human resources with low quality and competence in anticipating market development may fail in optimizing the potential of regional economy.


2012

��

d. The relatively low level of credit channeling to productive sector and the tendency of disbursing consumption credit to the employees of the regional government have impeded the role of BPD in regional real sector financing. The opportunity in financing productive sector may have the potential to be performed by other banks thus creates more difficulties for BPD to be the host in its respective region.

BRC vision is “to become a leading regional bank through competitive products and services supported by wide network and professional management in the framework of boosting regional economic growth.” This vision will be reached through various programs classified in the Pillar of strong institutional resilience in order to conduct an efficient operation; capability as an agent of regional development in the framework of supporting regional economic development; and the capability to provide services needed by the society.

To mark the commitment of BPD in implementing the above mentioned programs, on December 21, 2010, the signing of commitment has been performed by all President Directors of BPD and supported by all Governors and President of Commissioners of BPD throughout Indonesia. At this occasion, the Vice-President showed his great support towards the implementation of BRC because without any common effort to transform BPD to have a better resilience and competitiveness, BPD will face difficulties in facing future challenge and in supporting regional economic development. As the follow up of this activity, all BPD have prepared Bank Business Plan (RBB) in compliance with the target of BRC and have been submitted to BI in January 2011. Pursuant to the implementation of the initiative it is expected that several BPD will have become Regional Champions in their respective regions in 2014.

G. Development of Islamic Banking

1. Performance of Islamic Bank

The existence and development of Islamic banking in Indonesia is a reflection of need of an alternative


�6

banking system that will give more positive contribution for financial inclusion and financial deepening, as well as enhance system stability of national banking. The present development of Islamic banking industry reflects public demand that requires an alternative banking system that besides providing sound banking/financial services also complies with sharia principles.

With reference to Law No. 21 of 2008 concerning Islamic Banking, BI, as the authority of banking industry, has been assigned to prepare banking finance based on sharia principles.

The objective of Islamic banking is to support the implementation of national development, such as performing the function in supporting real sector through financing based on sharia principles and real transaction (intermediation function), that support national development in the framework of even distribution of people’s welfare. In addition to this, Islamic banking also performs social function such as collecting funds such as Zakat, Infaq, Sadaqah, hibah and other to be disbursed to organizations of zakat management, as one of the forms of Islamic financial institutions receiving religious donation in the form of money (wakaf uang). With these various unique functions, Islamic banking positions itself as bank classified as not just a bank (beyond banking) in national banking map. In line with the improved economic performance, Islamic banking in general is still capable to maintain its positive performance along with the enhancement of its intermediation function. Islamic bank capital is not relatively affected by the turmoil of international financial market, considering the lack of direct exposure in the form of overseas portfolio. The momentum of conducive economic development has given positive impact to the development of Islamic banking. The average annual growth rate of Islamic banking business volume is between 15-20%. Intermediation function of Islamic banking performs well at optimum level, reflected from Financing to Deposit ratio reaching 89.9%.


2012

�7

2. Policy Implementation

With reference to the Law as the authority of Islamic banking, BI has implemented various policies in various sectors. The implementation of these policies is based on 7 (seven) pillars in the Blue Print of Islamic Banking covering: (i) high quality human resources, (ii) effective regulation and supervision, (iii) supportive infrastructure, (iv) effective banking structure, (v) synergic strategic alliance, (vi) effective customer empowerment, and (vii) product and market development. Based on this Blueprint in 2011 BI implemented various policies related to Islamic banking in various types of activity. This activity may be classified into research, development, regulation, supervision and licensing of Islamic bank.

�. Effectiveness Enhancement in Islamic Banking Regulation and Supervision

Review on provisions has been conducted in 2011 to accommodate the development in accordance with Islamic banking condition. The review was conducted in view of synchronization and harmonization with the prevailing regulations and in compliance with the recommendation of international institutions. The result of the review recommended establishment and/or amendment to the prevailing regulations, namely: a. Maximum Limit of Fund Disbursement of Islamic

Bank and Islamic Business Unit;b. Institutional Aspect of Islamic Rural Bank;c. Fit and Proper Test of Islamic Bank;d. Good corporate governance in Islamic Rural Banks;e. Transparency of financial condition of Islamic Rural

Bank; andf. New products and activities of Islamic banking.

�. Direction of Islamic Banking Development

In addition to the effort of accelerating the growth of Islamic banking by still maintaining the robust system stability and adequately fulfilling sharia principles, BI will make a number of strategic initiative that will refer to Indonesian Banking Architecture (API) and Blueprint


�8

of Islamic Banking Development that will continuously be improved, by explaining the ideal condition of banking industry with a number of key pillars as its components. This will be completed by the placement of various types of bank at the correct position, in accordance with the reason of each existence that will also include assessment on the position of conventional bank and Islamic bank and how to keep each of them in synergy.

A number of priorities related to the development Islamic banking will be implemented in short term covering the following issues:

a. Human Capital Development of Islamic Banking Industry

In general the direction of human capital development of national Islamic banking is “to develop and manage human capital innovatively in order to support national Islamic banking in reaching its target and strategy through reinforcement of human resources productivity, religion, leadership effectiveness and individual development”. The main objective of human capital development of Islamic banking is to provide human resources in number and competence in accordance with industrial need and to become the strength factor to the competitiveness of sharia banking industry. In the effort of reaching the goal, a number of initiatives related to competency model, link and match program, regulation and capacity will be implemented in the future.

b. Improvement of Supervisory System Quality

In line with the direction of general development, sharia banking supervisory system will be directed to meet international supervisory standard in the form of regulations that are more compatible with international standard and more effective supported by the mechanisme of a more complete and efficient supervisory infrastructure. Several


2012

��

initiative programs to be implemented include regulatory convergence and integrated supervisory platform.

c. Strengthening of industrial infrastructure

The enhancement of industrial infrastructure in 2011 shall be focused on the development of sharia financial market through the effort of product enrichment expected to be able to increase effectiveness of liquidity management by sharia banking. This effort will also implemented by using communication forum between banking actors with supervisory authority and monetary more intensively and regularly and by involving National Sharia Board.

d. Capital and Industrial Structure Reinforcement

The effort of capital strengthening may be conducted through dividend policy aiming at growth and promotion for investor to increase sharia bank capital. Capital strengthening may also be conducted through invitation to holding companies owning sharia bank to make commitment in reinforcing the capital of its sharia bank. In addition to that, in line with the full-fledged plan of developing sharia bank institutional structure, the efforts in proceeding to the direction of strengthening operation quality independently are driven through commitment process with the management of the parent company. In terms of synergy between sharia and conventional bank players, several operational and promotion activities were conducted between sharia business unit and the head company and between sharia business unit and the parent company reflecting the application of one bank concept or one firm concept within the concerned banks. In that concept, sharia business units or sharia commercial bank holds the position of business unit or product owner of the bank headquarter/parent company.


�0

This tendency is the response of the policy from a group/corporate in order to reach wider market, by using the trend momentum of the increasing interest of the people towards the products of sharia bank. From the perspective of market development, the coopetition (cooperation-competition) phenomenon is considered to have increased the quality of sharia bank services to the society. The increase of sharia bank capital by bank headquarter/parent company, has strengthened the capacity of sharia bank in providing services to the society. In the meantime, through office channeling and delivery channel it will be easier for the society to have access to sharia bank services in the offices of conventional bank. The use of ATM network and the same technological facilities by sharia bank has enabled sharia bank in providing wide and modern services.

A clearer market development program will be conducted with sharia bank for a more focused service segment. The type of segment/cluster will be formulated together with sharia banking industries in accordance with the positioning of each bank, such as, international service segment, corporate service, individual service, micro finance, retail sector and others. For each segment/cluster sharia banking industry will be supported to select segment champion, eventually agreed to become the development model for other sharia bank in the same cluster.

e. Possibility of Cross Sector Collaboration

The interaction between sharia banking and other sharia financial sectors has become one of the targets of industrial development to be reached gradually. The collaboration with voluntary sector (Zakat, Infaq and Sadaqah) aiming at enhancing the capacity of sharia banking in reaching micro sector will be assessed through various research activities used as the reference of policy direction of financing


2012

�1

collaboration in order to maximize industrial outreach in reaching unbankable segments and to minimize potential risk arising from the financing activities.

f. Market Development Program of Islamic Banking

The socialization program of iB Campaign in 2012 will still concentrate on PDB (positiong, differentiation, branding) from sharia banking industry as “More Than Just a Bank”, through inclusive and focused communication regarding the benefits of sharia bank (functional benefits), product variations, and its varios financial schemes. by focusing on the specificity of Islamic Banking in partnership, pro real sector and UMK.

Innovative and integrated public socialization/education program as in the preceding year will be continued in 2012, by using various communication media (media mix) to boost the active participation of the people in using the services of Islamic Banking.

g. Program Working Group of Islamic Banking (WGPS)

In the framework of fatwa harmonization and accountancy standard with the policy direction of Islamic banking a Working Group Perbankan Syariah (WGPS) has been established at the end of 2010 with members comprising BI, DSN-MUI and DSAS IAI. During 2011 WGPS has implemented recommendations pertaining to 4 main topics related to Islamic banking products and operation, namely: a). Tawarruq, b). Commodity Murabaha, c). KTA Syariah, and d). Profit Equalization Reserve (PER). In 2012 an agenda has been prepared for WGPS discussions: a). Gold Murabahah, b). Islamic Hedging, c). Wa’ad (Agreement) in multi akad agreement, and d). Wadi’ah and Qardh in fund mobilization.


�2

�. Development of Interbank Money Market Based on Sharia Principles (PUAS)

So far PUAS transaction performed by market players has been using Mudharabah Interbank Investment Certificate (SIMA). Generally, SIMA instrument has not fulfilled bank demand related to the confirmation of rate of return. The recommendation of WGPS referred to the possibility of using the mechanism of Tawarruq principle for interbank liquidity transaction has been reconfirmed in its recommendation concerning Commodity Murabaha. Follow up has been made to WGPS recommendation in the form of DSN fatwa No.82/DSN-MUI/VIII/2011 concerning Commodity Trade Based on Sharia Principle in Commodity Market, BI followed up the recommendation among others by making amendment to the regulation concerning Interbank Trade Commodity Certificate based on Sharia Principle (SiKA). SiKA is the certificate issued based on sharia principles by Islamic Bank or Islamic Business Unit in PUAS transaction as the proof of sale and purchase by deferred payment on commodity transaction in markets. SiKA is published using Murabahah agreement.

H. Development of Rural Banks (BPR)

The policy of Rural Bank development is still directed to the enhancement of Rural Bank industrial capacity to be capable of competing with the other business players in micro financial market, as well as to maintain Rural Bank business sustainability. Reinforncement of scope and service quality have become the focus of Rural Bank development. For the realization of this effort, BI set up several policy measures, covering:

1. Preparation of Rural Bank Business Model

Rural Bank Business Model has been prepared based on observation stages on the performance and behavior of Rural Bank industrial players during the last 5 years. Based on the observation, several Rural Banks with better performance and that have significantly developed their business have been selected. These selected Rural Banks will become the business models


2012

��

in Rural Bank management. The aspects presented in the business model will become the reference for the establishment of new Rural Bank and the management of Rural Bank already in operation in order to conduct their business in a sound manner. The launching of book concerning Rural Bank Business Model has been performed by the Governor of BI on December 5, 2011 in Jakarta. It is one of BI’s policies in supporting a sound and sustainable Rural Bank establishment that is capable in playing its role in regional economic development.

Rural Bank Business Model comprises 6 main aspects which are most influential to Rural Bank business, they are:a. Owner Ideally the owner of Rural Bank comes from the

region in which the bank to be located and has the capability and commitment in capital supply and the seriousness in supporting the bank management in a sound manner.

b. Capital The complementary capital is required to sustain

the operational continuity of the Rural bank. c. Operation Location and Area The establishment of Rural Bank needs to consider

the factor of location by taking into account the economic potential and the number of banks in the location. Rural Bank location must be easily reached by the public in the rural area and the MSEs, as customers.

d. Business Strategy For the growth and development of Rural Bank

business, Rural Bank management must have the right business strategy, such as:• Focusing on the financing of small and micro

scale productive business with familiar character and determining competitive and affordable interest rate.

• Fulfilling the need of MSME by setting up simple and rapid requirements and procedures. Making use of Information Technology in its operation


��

to be able to enhance the quality of the service that is faster and more efficient.

• Widening office network in accordance with the need.

e. Management and Human Resources Policy Rural Bank must be managed by human

resources with high integrity, professionalism and have understanding on business potential, the characteristic of area and the people (market) included in the scope of services of the Rural Bank.

Figure �. Minimum Standard of Organization Structure of Rural Bank

f. Relationship with the community Despite its orientation in business, Rural

Bank must still assimilate and be part of the local community. It is important in building relation and bond through the involvement of the Rural Bank in social community activities in the area such as religious festivities, holiday celebrations or customer party.

2. Boosting the collaboration of Apex BPR

a. Apex institution is the form of collaboration between Commercial Bank as the parent bank and Rural Bank as member. The presence of Apex institution is an ideal synergy to offer joint-services to MSME in order to minimize unhealthy business competition between commercial bank and rural bank. The term Apex is taken from Greek language

ACCOUNTING(1 Person)

CUSTOMER SERVICE(1 Person)

MARKETING(1 Person)

SECURITY(1 Person)

GENERAL ADIMINISTRATOR(1 Person)

CASHIER(1 Person)

CREDIT ANALYST(1 Person)

BOARD OF COMMISIONERS(2 Persons)

BOARD OF DIRECTORS(2 Persons)


2012

��

that means “guardian/protector” thus it signifies that Apex BPR must become the protector for the BPR members.

b. In general Apex BPR performs the function of: i) management of pooling of funds and assisting Rural bank in overcoming liquidity difficulties due to mismatch; ii) setting up collaboration in financing (like linkage program); iii) providing technical assistance in the development of information technology, product development, training and financial system services; and iv) facilitating rural bank in finding other sources of fund.

c. Several reasons in selecting commercial bank to become Apex BPR: (i) capability in performing Apex functions, especially those related to the provision of facilities/access to the payment system; (ii) better managerial capacity in fund management, (iii) possessing a relatively high capital back up, and (iv) possessing complete instrument in the framework of collected fund management.

d. Model Apex BPR model is prepared by BI in the book of Generic Model Apex BPR containing general guidelines in the establishment and implementation of Apex BPR for regional banks (BPD) acting as Apex, is the follow up of the announcement of BRC program. The role of BPD in this issue is continuously expanding to become an agent of regional development which is one of the criteria of BPD to become Apex BPR.

e. Apex organization consists of 3 main parts, first, commercial bank as Apex, that prepares the infrastructure supporting the operational implementation of Apex, such as determining working unit, branch office offering services to Apex members, implementation human resources, SOP and information technology. Second, rural bank as Apex member. Third, Apex committee consisting of representatives of commercial banks, regional board of directors Perbarindo, and the board of commissioners of Perbarindo.


�6

f. Both parties may have the benefit of Apex. For commercial banks (Apex BPR), (i) using rural bank office network as the extension of Commercial Bank to serve the area and the people that have not been reached by their services, such as through linkage program; (ii) creating products and services together in order to reach and offer their services to more customers; (iii) taking advantage of pooling funds (idle funds) of rural bank as source of pooling of fund; and (iv) having the opportunity to generate fee based income from rural bank transactions through ATM network of commercial banks.

The benefit obtained by Rural banks (members of Apex BPR) includes but not limited to: (i) having a protecting institution that may provide financial support (especially in mismatch condition) and technical assistance to rural banks; (ii) using Apex as an institution providing service of payment system especially in transferring fund among rural banks customers as members of Apex; (iii) collaborating in taking advantage of information technology-based products/services (such as ATM) and the marketing of other products/service; and (iv) obtaining other services from Apex in rural bank development, such as facilitating and training (competency building).

Figure 6. Apex Cooperation Model of Rural Bank

BANK INDONESIA REGIONAL GOVERNMENTPolicies &Facilities

A P E X B P R

APEX Working Unit APEX Committee

Pooling of Funds

Minimum CompulsarySavingsCommited Facility Line

Financial Assistance

Mistmatch Fund

Revolving Fund

Linkage Program

Financial Assistance

IT and product development

Human Resources Training

Other Sources of fund

BPD Perbarindo

BPR MEMBER

APEX and member requirements Cooperation Agreement (Rights and Obligations of Relevant Parties) Ethic Codes

MoU

ORGANIZATION

FUNGTIONS

OF

ENGAGEMENT


2012

�7

I. Micro, Small and Medium Enterprises (UMKM) Development

In line with the development of Indonesian economic condition and the Law No. 23 of 1999 as amended by Law No. 3 of 2004, the role of BI the future direction of MSME development policy is to close the information gap between and banking sector with the objective of reinforcing MSME access to banking industry. In general, the role of BI in this development may be implemented through Demand Side policy and Supply Side policy and supported by the cooperation and coordination of the government.

Demand Side

Demand side is policy directed to support MSME to increase its eligibility and capability in order to meet the requirements from Bank (bankable). The types of activities carried out pursuant to this policy are:

1. Research a. Research on Lending Model of Small business with

the objective of providing information regarding potential commodities to be financed in line with MSME development through conventional or Islamic patterns and the objective of this research is to support the development of Islamic Financial Institutions (LKS).

b. Research on Commodity, Product, Type of Business (KPJU) Development with the objective of providing information to stakeholders regarding primary products and potential products of a region/province.

c. Research on Regional Main Sector Map in 9 regions of BI Coordinator Office (Medan, Semarang, Denpasar, Banjarmasin, Makassar, Padang, Palembang, Bandung and Surabaya) and Jabodetabek. The objective of this research is, among other, to provide information regarding regional main sectors to be used as the basis of monetary policy and credit policy that will lead banking sector to those sectors.


�8

d. Research on “Finding Effective Financing for Agricultural Sector” in collaboration with Management Department, Faculty of Economy, University of Indonesia.

e. Concept of developing economic potential and MSME in border area and poor and disadvantage area for 4 Provinces, West and East Kalimantan, North Maluku and East Nusa Tenggara.

f. Research on “Mapping and Identification of Requirement on Micro Financial Institution (LKM) Enhancement in West Java Province”.

g. A Study on social impact of BPR service innovation as a part of Microfinance for Decent Work-International Labour Organization (ILO) program, in collaboration with ILO.

h. A Study in the framework of boosting banking seriousness industrially or individually in credit disbursement to MSME sectors.

2. Training or Technical Assistance The objective of Training or technical assistance is

to enhance MSME eligibility and capability as well as to improve banking expertise on MSME. The effort made is to develop real sector through (i) the development of national cluster and regional cluster; and (ii) provision of technical assistance through socialization, cultivation development facility, partnership facility and group reinforcement.

3. Provision of Information BI developed INFOUMKM in its website (www.

bi.go.id) and was launched on August 17, 2011 as the replacement of the menu of BI Data and Information (DIBI). The website is considered as the facility to disseminate the information regarding MSME characteristics to the banking sector and other external party. Provision of information was also conducted through the organization of activity “BPR Serbu Pasar” in the form of BPR road show to the centers of MSME economic activities.


2012

��

4. Coordination with government a. Coordination and program synergy with the Ministry

of Marine and Fishery Affairs (KKP) for Minapolitan Program in the framework of enhancing regional economic capacity and fishermen’s welfare.

b. As the counterpart of the government in KUR Policy Committee, BI is involved in facilitating working program to enhance KUR distribution, especially in priority sectors (Agriculture, Fishery, Forestry and Processing Industry), in the form of KUR facility and socialization; participation in the discussion of KUR regulation and facility of financial education for Indonesian manpower in order to boost enterpreneuship and to have access to financing institution/bank, as the follow up of the cooperation with the Ministry of Manpower and Transmigration based on the Memorandum of Understanding No.13/5/GBI/DPNP dated August 1st, 2011.

c. Follow up to the MoU No.13/1/GBI/DKBU/NK between GBI and the Minister of Agriculture dated March 16, 2011 by conducting the following activities: • Facilitating program of credit socialization,

particularly KKPE and KUPS.• Providing input in monitoring and evaluating

the program of credit disbursement in order to know the obstacle, problem and efforts in enhancing the program of credit disbursement.

Supply Side In the framework of encouraging and providing

incentive for banking industries in disbursing credit to micro, small and medium size enterprises, BI makes effort in the reinforcement of financial infrastructure to improve financing access by MSME players in the following forms:1. Acceleration in the establishment of Regional

Credit Insurance Company (PPKD) through the participation in the socialization of PMK No. 99/PMK.010/2011 concerning the amendment to


60

PMK No. 222/PMK.010/2008 concerning Regional Credit Insurance Company and Credit Re-Guarantee Company coordinated by the Ministry of Finance-Bapepam LK, Coordinating Ministry of Economy, Ministry of Cooperatives and SME, and Ministry of Internal Affairs.

2. Planning for the establishment of Credit Rating Agency for MSME in the preparation of encountering ASEAN ECONOMIC COMMUNITY 2015 as a multi years project since 2010.

J. Credit Bureau

1. Function of Credit Information Bureau The main function of Credit Information Bureau

(BIK) is a public credit registry collecting, storing credit data, exchanging and distributing them as debtor information in generating credit information to support the implementation of intermediation function of financial institution. BIK also supports the task implementation of BI related to bank regulation and supervision by providing credit information in compliance with the need of BI in sustaining overal financial system stability.

It is expected that BIK implementation will be able to boost market discipline in order to develop sound and efficient credit culture that will eventually lead to financial system stability, growth of real sector as well as extensive growth of Indonesian economy.

a. Operasional BIK In implementing its tasks, BIK uses and manages

a system known as Debtor Information System (SID). This system is used to collect and store data of funding allocation facility submitted by all SID reporter currently consisting of 120 Commercial Banks, 1165 Rural Banks and 16 Financial Institutions.

This data are then processed by the system in order to produce output containing debtor information covering all data of funding allocation


2012

61

received by debtor (from 1 rupiah upward) classified as Current or Under Special Mention including payment history performed by debtor within the period of the last 24 months. Consequently this debtor information will provide a description about credit exposure, performance and credit quality of the concerned debtor.

b. Progress of Credit Information Bureau in 2011 In 2011, BI has conducted various activities,

such as: • Enhancement of data quality through

the implementation of report submission monitoring, crash program on data cleaning, on-site and off-site supervision as well as training and evaluation.

• System implementation and the applicationof new version SID in the framework of enhancing system performance and SID data quality; and developing data cleaning application to accelerate data quality reinforcement.

• Widening of Reporter Coverage especially from Rural Banks and Financing Companies.

• Public access to debtor information through Information Counters at BI or BIK counters in several special events and facilities of on-line Individual Debtor Information (IDI) through BIK website despite the fact that output collection still has to be obtained through Information Counters at BI.

• Implementation of public education to improve the awareness on the importance of maintaining credit quality through socialization activity in several areas and several events such as exhibition, distribution of posters to financial institutions and video recording on public services.

c. BIK Development In 2012, in addition to efforts in enhancing

service quality, BI will focus on data quality


62

improvement and development plan. Data quality may be enhanced by data cleaning of SID database and training activities and evaluation on Reporters as data source. In line with the gradual implementation of SID version 6 in 2011, BI will maximize the use of SID features version 6 that will be implemented in 2012 to establish an effective reporting process and to provide a more complete output data.

By considering the importance of public awareness on SID, socialization activity related to the benefit of SID which has been conducted within limited scope such as seminar or other activity will be expanded through mass media. It is expected that this socialization activity will boost the people in maintaing their credit reputation through a good credit management.

In line with the demand of financial industries on an updated credit information, in 2012 BI will continue its previous study concerning the direction of the development of credit information industry, in order to meet the demand of financial institutions as well as the need of policy makers in Indonesia.

K. Macroprudential Policy

Global financial crisis has given a very valuable lesson regarding the importance of maintaining financial system in order to survive at the time of crisis. The ongoing crisis was trigerred by a number of failures of financial institutions generating systemic impact and disfunction of global financial market. Failure experienced by financial institution has led to bail out activity that will increase the load of taxpayers. Meanwhile, due to crisis, financial market is faced by disfunction due to the failure in performing its function as the vehicle of monetary policy transmission, financial transmission from surplus to deficit unit and facility to store and develop assets in order to reach wealth management. At regulatory side, policy framework is not directed to prevent systemic risk in financial sector.

The resilience of financial sector towards crisis is related to the result of the effort to: (i) maintain the soundness


2012

6�

of financial institutions; (ii) maintain the ongoing process of credit and financing intermediation in order to support a sustainable and sound economic condition; and (iii) maintain the function of financial market which is capable of efficiently managing and allocating fund. Maintaining financial system stability will also maintain macro economic stability. A macroprudential policy is required in order to maintain financial system which is resilient towards any possibility of turmoil and crisis. Macroprudential policy is aimed at maintaining the resilience of overall financial sector to be able to sustain systemic risk due to the failur of financial institution or market with impact of crisis that may deteriorate the economy.

Macroprudential policy is required to close the gap between macroeconomic policy and the microprudentila regulations for financial institution and market. The difference between macroprudential and microprudential policies lies in the target. Macroprudential policy is aimed at mitigating systemic risk (limit system–wide distress), while microprudential is aimed at developing a sound financial institution (limit individual institutions’ distress). Therefore, macroprudential policy is more focused on the effort to establish the soundness of overal financial sector, while microprudential policy is aimed at establishing a sound, efficient financial institution that will be able to perform intermediation well. In Indonesia, macro and microprudential policies are widely applied in banking sector, considering that banks dominate financing and credit in national economy.

In measuring systemic risk, the approach of macro-prudential policy depends on several indicators. These indicators must describe risk aggregation from financial institution individually (cross-sectional dimension) and measure systemic risk evolution from time to time (time dimension). Cross-sectional dimension may be used by monitoring the balance sheet of financial institutions. Meanwhile, time dimension is performed by monitoring the development of certain indicator, such as credit ratio to GDP, aggregate banking liquidity condition, and monetary magnitude.


6�

In the implementation, the authority may apply a series of regulations that function as macroprudential policy (macro-prudential tools). For example policy for mitigating procyclicality, limiting the excessive growth of non productive credit, mitigating liquidity risk, as well as limiting bank leverage. Policy related to mitigation of procyclicality is applied by setting forth countercyclical capital buffer requiring banks to make capital savings during normal condition and to use the capital at the time of crisis in order to be able to make credit expansion. Basel III has included macroprudential regulation through the application of leverage ratio, countercyclical capital buffer and liquidity coverage ratio (read information on Basel III).

The central bank plays a very important role in macro-prudential policy. BI conducts continuous surveillance of financial system in order to identify potential risks that may disturb the stability of financial system. Currently, macro-prudential policy performed by BI concentrates on 4 (four) issues: i) controlling economic liquidity mainly banking liquidity; ii) controlling foreign capital in-flow; iii) enhancing banking intermediation function; and iv) mitigating the growth of unsound non productive credit and default risk by applying loan to value ratio. Consequently financial system stability may be maintained thus it will be able to support the sustainability of domestic economic growth.


2012

6�

CHAPTER

V

KEY BANKING REGULATIONS


66



2012

67

V. KEY BANKING REGULATIONS

A. Regulations of Establishment of Banks, Management of Bank and Bank Owner

1. Establishment of Banks

Establishment of Commercial Banks

Commercial banks may only be established and conduct business activities with a license of Board of Governors of BI. The paid up capital for establishment of a Commercial Bank is stipulated at no less than Rp 3 trillion and paid up capital for establisment of sharia commercial bank is stipulated at no less than Rp 1 trillion. Commercial Banks may only be established by:a. Indonesian citizens and/or Indonesian legal entities;

orb. Indonesian citizens and/or Indonesian legal entities

in partnership with foreign citizens and/or foreign legal entities

Establishment of Rural Banks/ Islamic Rural Bank

Rural Banks may only be established and conduct business activities with a license of BI. Rural Banks may only be established by a. Indonesian citizensb. Indonesian legal entities wholly owned by

Indonesian citizens, c. Regional Governments, ord. Two or more of the parties referred to letter a, b

and c.

The paid up capital for establishment of a Rural Bank is stipulated at a minimum of:a. Rp 5 billions for a Rural Bank to be established in

the area of the Capital City Territory of Jakarta;b. Rp 2 billions for a Rural Bank to be established in a

provincial capital in the Java Island and Bali Island and the area of the Regencies/Municipalities of Bekasi, Bogor, Depok dan Tangerang.

c. Rp 1 billion for a Rural Bank to be established in a provincial capital outside the area referred to in letter a and letter b;


68

d. Rp 500 millions for a Rural Bank to be established outside the areas referred to in letter a, b, and letter c.

The minimum paid up capital for establishment of a Islamic Rural Bank is stipulated at:a. Rp 2 billions for an Islamic Rural Bank established

in the Capital City of Jakarta and the Regencies/Municipalities of Tangerang, Bogor, Depok, and Bekasi;

b. Rp 1 billion for an Islamic Rural Bank established in a provincial capital outside the regions referred to in the above letter a;

c. Rp 500 millions for an Islamic Rural Bank established outside the regions referred to in the above letter a and letter b.

Establishment of Foreign Bank Branch Offices

A foreign bank may open a branch office subject to the following requirements:a. Minimum A rating issued by a leading international

rating agency.b. Ranks among the 200 largest banks in the world by

total assets. c. Has paid up a minimum of Rp 3 trillion equivalents

in operating funds.

Establishment of a Foreign Bank Representative Office

A Representative Office of a Foreign Bank may be established if the bank intending to open the Representative Office ranks among the 300 largest in the world by total assets.

Representative Office shall be permitted only to conduct activities among others:a. Providing information to third parties on the

requirements and procedure for maintaining relations with the Head Office/overseas Branch Office;

b. Assisting the Head Office or an overseas Branch Office in monitoring of loan collateral in Indonesia;


2012

6�

c. Acting as agent in contacting government agencies/institutions for the requirements of the Head Office or an overseas Branch Office;

d. Acting as monitor of projects partially or wholly financed by the Head Office or an overseas Branch Office;

e. Conducting promotional activities for introducing the bank;

f. Providing information on trade, economy, and finance in Indonesia to overseas parties, or vice versa;

g. Assisting Indonesian exporters in securing access to overseas markets through the international network of the Representative Office, or vice-versa.

2. Bank Owners

Sources of Fund used with regards to the Conventional Commercial Bank/Shariah, Coventional Rural Bank, Sharia Rural Bank ownership are not permitted, if obtained:a. From Loan or funding facilities in any form from

bank and/or other party in Indonesia; and/orb. From and for the purpose of money laundering.

For Conventional Rural Bank the sources of fund from the Regional Budget. The Parties eligible to become Bank owner shall fulfill the following requirements:a. Possessing high integrity and strong moral values

indicated by the ccommitment to comply with the prevailing laws and regulations and has not been convicted by criminal law in the last 20 (twenty) years before nominated candidate.

b. Commitment to comply with the prevailing laws and sharia banking regulations for Sharia Commercial Bank;

c. Strong commitment to the development of sound bank operation (for conventional commercial bank); and high commitment to bank operational development (for Sharia commercial bank).

d. Not included in the disqualified list (for conventional commercial bank).


70

e. Commitment not to conduct and/or repeat certain behavior and/or action, for potential members of the Board of Commissioners or the Board of Director who have been included in the disqualified list of the fit and proper test and have been imposed a sanction determined by BI.

The conversion of Bank ownership shall abide to the alteration of Bank ownership procedures as stipulated in the prevailing regulations.

�. The Single Presence Policy in Indonesian Banks

The main of single presence policy is a party only becomes a controlling shareholder in 1 (one) commercial bank. Controlling shareholder is a legal entity and/or an individual and/or a business group which:a. Holds bank share amounting to 25% or more of

share issued by the bank and owns voting right;b. Holds bank share less than 25% of shares issued by

the bank and owns voting rights but has evidently exercised control on the bank either directly.

The single presence policy, except for:a. Controlling shareholder in 2 banks which carry out

business under a different principle respectively, namely conventional and based on sharia principles;

b. Controlling shareholder in 2 banks, one of which is a joint venture bank;

c. Bank holding company that build as single presence policy regulation.

Since the enactment of this BI Regulation those parties which have become controlling shareholders in more than 1 bank are required to adjust their ownership structure as follows.a. To transfer a part or the whole ownership on their

shares in one or more banks under their control to other party resulting that they only become a controlling shareholder in 1 banks; or

b. To implement merger or consolidation on banks under their control; or

c. To establish a bank holding company by:


2012

71

- establishing a new legal entity as the bank holding company ;or

- assigning one of banks under their control as the bank holding company

Subsequent to the publication of this provision parties being members of the Controlling Shareholder (PSP) have purchased shares in order to meet the criteria as the PSP of the purchased bank, the concerned parties are obliged to conduct a merger or consolidation on the stated bank with the bank they own previously.

On request of a controlling shareholder and banks under its control, BI may grant time extension for the ownership structure adjustment if, according to BI, the complexity of problems faced by the controlling shareholder and/or banks under its control causes the ownership structure adjustment unable to be resolved within the time period.

�. Management of Banks

Management of Commercial Bank

Members of Board of Commissioners and Board of Directors have the obligation in fulfilling the requirements related to integrity, competency, and financial reputation. The requirements and evaluation procedures are stipulated in the provisions regarding fit and proper test and GCG.

a. Board of Commissioners

• The number of members of a Board of Commissioners of a conventional Commercial Bank is a minimum 3 members and a maximum the same number as the members of the Board of Directors. At least 1 of the members of a Board of Commissioners must be domiciled in Indonesia.

• A Board of Commissioners is chaired by a President Commissioner.

• A board of Commissioners consists of the Commisioner and Independent Commissioners

• A minimum 50% of the total members of


72

a Board of Commissioners are Independent Commissioners.

• Any proposal to replace and/or appoint a member of a Board of Commissioners at a General Meeting of Shareholders must take into consideration a recommendation of the Remuneration and Nomination Committee.

• Members of a Board of Commissioners must pass a Fit and Proper Test in accordance with the provisions of BI concerning the Fit and Proper Test.

• Each member of the Board of Commissioners may only hold another position as member of Board of Commissioners, the Board of Directors, or Executive Officer at 1 non financial institution/company or member of the Board of Commissioners, the Board of Directors, or executive officer performing supervisory function at 1 non financial institution/company controlled by Bank

• A majority of the members of a Board of Commissioners are prohibited from having a familial relation to the second degree with another member of the Board of Commissioners and/or Board of Directors.

• A Board of Commissioners must conduct its duties and responsibilities independently and is prohibited from involvement in decision-making concerning the operations of a bank.

• A Board of Commissioners is obliged to form at least: an Audit Committee, Risk Monitoring Committee and Remuneration and Nomination Committee.

• The Board of Commissioners shall organize a regular meeting at least 4 (four) times a year, with the physical presence of all members of the Board of Commissioners at least 2 (two) times a year. In the event that a member of the Board of Commissioners fails to attend the meeting physically, he or she will be required


2012

7�

to attend the meeting by using teleconference technology.

• Former members of Board of Directors or Executive Officer or parties closely related to banks, capable of exercising influence in acting independently can only be Independent Commissioner to the Bank after completing a cooling off period of 1 year. This provision will not be applicable to former member of the Board of Directors or Executive Officer performing supervisory function.

b. Board of Directors

• The number of members of a Board of Directors of a conventional Commercial Bank is a minimum 3 members. All of the members of a Board of Directors must be domiciled in Indonesia.

• A Board of Directors is chaired by a President Director.

• Any proposal to replace and/or appoint a member of the Board of Directors by a Board of Commissioners at a General Meeting of Shareholders must take into consideration a recommendation of a Remuneration and Nomination Committee.

• A majority of the members of a Board of Directors must have a minimum 5 years experience in bank operations as an executive manager of a bank. For a Sharia Bank, a majority of the members of a Board of Directors must have a minimum of 2 years experience as an executive manager of Sharia bank operations.

• A President Director of a bank must derive from a party that is independent of the controlling shareholders.

• A majority of the members of a Board of Directors are prohibited to have a familial relation to the second degree, including the father-in-law of a member of a Board of Commissioners.

• Members of the Board of Directors are prohibited


7�

to hold concurrent position as members of the Board of Commissioners, the Board of Directors or Executive Officer of other bank, company or institution.

• Member of the Board of Directors may not hold concurrent position if the Board of Directors responsible for the supervision of the participation at bank subsidiary company, executing functional task as a member of the Board of Commissioners at non bank subsidiary company controlled by bank, providing that the concurrent position may not cause any neglection of task implementation and responsibility as member of bank Board of Directors.

• Members of a Board of Directors, whether jointly or severally are prohibited from owning shares valued at over 25% of the paid up capital of another company.

• Members of the Board of Directors are prohibited from granting general empowerment to other party resulting in transfer of duty and function of the Board of Directors.

• A Board of Directors is fully responsible for the management of a Bank.

• A Board of Directors is obliged to manage the Bank in line with its authority and powers as arranged in the Articles of Association and the laws and regulations in force.

• A Board of Directors is obliged to give an account of the fulfillment of its duties to the shareholders at a General Meeting of Shareholders.

• A Board of Directors is obliged to explain the strategic policies concerning employment to the employees of a Bank.

• Any decisions of a Board of Directors made in compliance with set guidelines and work procedures is binding and is the responsibility of all of the members of a Board of Directors.

• Former member of Board of Directors or Executive Officer or parties related to the


2012

7�

Bank, capable of exercising influence in acting independently cannot be Independent Party as Audit committee member and Risk Management committee member the Bank before completing a cooling off period of 6 months. This provision is not applicable to former members of the Board of Directors or Executive Officer performing supervisory function.

Bank is obliged to apply risk management related to Bank management, Executive Officer, opening, change of status, change of address and/or closure of Bank office, including but not limited to: • active supervision of the Board of Commissioners

and the Board of Directors;• adequacy of policies, procedures and

establishment of limits;• adequacy of risk identification, measurement,

monitoring and controlling process as well as Risk Management information system; and

• comprehensive internal control system.

One of the considerations in granting approval on the plan of the opening, change of status, change of address and/or closure of office in the coming year is based on the study submitted by bank that includes at least:• compliance to business strategy and impact on

financial projection; • supervision mechanism and assessment of bank

office performance;• bank wide analysis including but not limited to

economic condition, risk analysis and financial analysis; and

• operational preparation plan such as human resources, information technology and other supporting facilities.

Management of Islamic Commercial Bank

Members of Board of Commissioners and members of Board of Directors are obliged to meet the


76

requirements on integrity, competency, and financial reputation. Requirements and evaluation procedure for fulfillment of the requirements are regulated in BI stipulations concerning the fit and proper test. The supervision by Board of Commissioners is undertaken by using as guidelines among other BI stipulations concerning implementation of good corporate governance principles applicable for Banks.

a. Board of Commissioners• Total number of members of Board of

Commissioner shall be no less than 3 people and no more than the total number of members of Board of Directors.

• At least 1 member of Board of Commissioners should domicile in Indonesia.

• Board of Commissioners shall be led by President Commissioner or Principal Commissioner.

• At least 50% of members of Board of Commissioners should be Independent Commissioners.

• Any recommendation to appoint and /or replace members of the Board of Commissioners to the General Meeting of Shareholders must take into consideration the recommendation from the Remuneration and Nomination Committee.

• A member of Board of Commissioners could only have concurrent positions as a member of Board of Commissioners, a member of Board of Directors, or an executive officer at 1 non financial institution/company, a member of Board of Commissioners or Board of Directors exercising the supervisory function at 1 non-bank financial institution that is a subsidiary owened by the Bank, a member of Board of Commissioners a member of Board of Directors, or an executive officer at 1 company that is a shareholder of the Bank; or an officer at no more than 3 non profit institutions.

• The majority of members of Board of Commissioners are prohibited from having


2012

77

family relations up to the second degree with other members of Board of Commissioners and/or members of Board of Directors.

• The Board of Commissionners are obliged to do monitoring and evaluation on strategic policy implementation of Sharia Commercial Bank.

• In implementing their tasks and duties, the Board of Commissioners are oblighed to set up at least:- Risk Monitoring Committee;- Remuneration and Nomination Committee;

and- Audit Committee.


• Total number of members of board of Directors shall be no less than 3 people.

• Each member of the Board of Directors should domicile in Indonesia.

• Board of Directors is led by President Director or Principal Director.

• The nomination and/or replacement of member of the Board of Directors proposed to Shareholders meeting, is conducted by taking into account any recommendation of Nomination and Remuneration Committee.

• The majority of members of the Board of Directors are obliged to have a minimum experience of 4 (four) years at least as Executive Officer in banking industry such as at least 1 (one) year as Executive Officer in Islamic Bank and/or Islamic Business Unit. Sharia Bank established from a conversion of enterprise operation from Conventional Commercial bank to Islamic Commercial Bank is obliged to have only 1 (one) candidate of member of the Board of Directors and is required to meet the majority of the Board of Directors not later than 2 (two) years after the publication of converted enterprise license.


78

• President Dorector or Principal Director should come from a party independent from PSP

• Member of Board of Directors is prohibited from having concurrent positions as a member of Board of Commissioners, a member of Board of Directors, or an Executive Officer at another bank, company and/or institution, the prohibition is waived in the case of:- A director being responsible for the super-

vision of participation at bank subsidiary company, executing functional taska as a member of Board of Commissioners at non bank subsidiary company that is controlled by the Bank; and/or

- A director having positions at 2 non profit institutions.

• Members of Board of Directors, individually or jointly, are prohibited from owning shares amounting to more than 25% of paid up capital at other companies.

• The Board of Directors is fully responsible for the management implementation of Sharia Bank based on prudential and Sharia principles.

• The majority of members of Board of Directors are prohibited from having family relations up to the second degree with other members of Board of Directors and/or members of Board of Commissioners.

• Members of the Board of Directors are prohibited from granting general empowerment to other party resulting in transfer of duty and function of the Board of Directors.

• The Board of Directors are obliged to be responsible of his task implementation to the shareholders in the General Meeting of Shareholders.

Management of Rural Banks

The management of a Rural Banking shall consist of the Board of Directors and Board of Commissioners.


2012

7�

Members of the Board of Directors and Board of Comissioners shall meet the following requirements: (i) Competence; (ii) Integrity; and (iii) Financial reputation.

a. Board of Commissioners• A Board of Commissioners shall comprise at

least 2 (two) member.• At least 50% members of Board of Commissio-

ners shall possess knowledge and/or experience in banking.

• Any member of the Board of Commissioners may serve in concurrent position as a commissioner at no more than 2 other rural banks or sharia rural banks.

• Any member of the Board of Commissioners is prohibited from serving in concurrent position as a member of the Board of Directors at rural banks, Sharia rural banks, and/or commercial banks.

• Members of the Board of Commissioners shall convene a regular meeting of the Board of Commissioners at least 4 times a year.

• If needed by BI, members of the Board of Commissioners shall present the result of their supervision on the rural bank.


• The number of members of the Board of Directors shall be no less than 2 persons.

• The minimum level of formal education for members of the Board of Directors shall be D-3 or Bachelor Degree or a completion of at least 110 credits in undergraduate education program (S-1).

• At least 50% of members of the Board of Directors shall possess experience as an officer in banking operation for at least 2 years; or have been in apprenticeship for at least 3 month in any rural bank and hold a passing certificate issued by a Certification Agency when proposed as prospective member of the


80

Board of Directors.• Any member of the Board of Directors shall hold

a passing certificate issued by a Certification Agency.

• Any member of the Board of Directors shall be prohibited from having family ties with other member of the Board of Directors as parent, child, parent-in-law, son/daughter-in-law, husband, wife, natural brother/sister or brother/sister-in-law; and/or member of the Board of Commissioners as parent, child, parent-in-law, son/daughter-in-law, husband, wife, or natural brother/sister.

• Any member of the Board of Directors is prohibited from serving in concurrent positions as a member of the Board of Directors or an Executive Officer at any other bank, company, or institution.

• Any member of the Board of Directors is prohibited from granting general empowerment resulting in unlimited transfer of duties and power.

Management of Islamic Rural Bank (BPRS)

The management of an SRB shall consist of the Board of Directors and Board of Commissioners. Members of the Board of Directors and Board of Commissioners shall meet the following requirements: (i) Competence; (ii) Integrity; and (iii) Financial reputation.

a. Board of Commissioners

• The Board of Commissioners is chaired by the President of Commissioners

• The number of members of the Board of Commissioners shall be not less than 2 (two) persons and not more than 3 (three) persons.

• At least 1 (one) member of the Board of Commissioners must be domiciled within commuting distance of the Head Office of the SRB.


2012

81

• A member of the Board of Commissioners of an SRB may serve in concurrent positions only as: (i). member of the Board of Commissioners at no more than 2 (two) SRB or Rural banks; or (ii) member of the Board of Commissioners, Board of Directors or Executive Officer with full responsibility at no more than 2 (two) othernon-bank institutions/companies.


• The Board of Directors is chaired by President Director.

• The number of members of the Board of Directors of an SRB shall not be less than 2 (two) persons.

• At least 50% (fifty percent) of the members of the Board of Directors, including the President Director, shall possess operational experience at least as follows: (i). ( (two) years as officer in funding and/or financing in sharia banking; (ii) 2 (two) years as an employee in funding and/or financing in conventional banking and has knowledge in sharia banking; or (iii) 3 (three) years as a member of the Board of Directors or equivalent position to the Board of Directors in sharia micro financial institution.

• The minimum level of formal education for members of the Board of Directors is Diploma III or Undergraduate.

• Any member of the Board of Directors is required to hold a passing certificate issued by a certification agency with validity not later than 2 years after effective date of appointment.

• The President Director and other members of the Board of Directors shall perform their duties independently.

• Directors are responsible for implementing the management of SRB as an intermediary institution in compliance with prudential principles and sharia principles.


82

• The President Director of an SRB shall be appointed from a party independent of the Controlling Shareholder.

• All members of the Board of Directors of an SRB must be domiciled within commuting distance of the Head Office of the SRB.

• Members of the Board of Directors are prohibited from having family ties with: (i). any other member of the Board of Directors, whether as parent including mother-in-law or father-in-law, child including son-in law and daughter-in-law, biological brother or sister, including brother-in-law and sister-in-law, or as husband or wife; and/or (ii). other members of the Board of Commissioners, whether as parent including mother-in-law or father-in-law, child including son-in law and daughter-in-law, biological brother or sister, including brother-in-law and sister-in-law, or as husband or wife;

• Members of the Board of Directors of an SRB are prohibited from serving in concurrent positions as members of the Board of Directors or Board of Commissioners or Supervisory Board or as Executive Officers of any other banking institution, company, or other institution.

• Members of the Board of Directors of an SRB are prohibited from granting general empowerment resulting in unlimited transfer of duties, authority and responsibility.

�. Islamic Supervisory Board

Sharia Bank is obliged to establish DPS located in the Bank’s Head Office. Member of Sharia Supervisor Board shall fulfill the requirements related to integrity, competency and financial reputation. DPS has the responsibilities to give advice and suggestion to the Board of Directors and also to supervise Bank Activity to comply to sharia principles. Implementation of DPS duties and responsibilities shall include the following :


2012

8�

a. Evaluating and ensuring sharia principles implementation based on operational guideline and products generated by Bank;

b. Supervising the development process of Bank’s new product;

c. Applying fatwa to National Sharia Council for Bank’s new products to be released by bank;

d. Performing review to sharia principles implementation periodically to the mechanism of fund mobilization and funds disbursement mechanism, as wel as Bank Services; and

e. Requiring data and informationrelated to sharia aspects from bank working unit in order to conduct their duties.

DPS in Islamic Commercial Bank, shall at least consist of 2 (two) persons or not more than 50% of the members of Board of Directors while DPS in conventional commercial bank with Islamic Business Unit shall at least consist of 2 (two) persons or not more than 3 (three) persons. DPS shall be presided by a Chairman from a member of DPS, any member of DPS can only hold double positions as members of DPS in not more than 4 (four) other sharia financial institutions.

6. Islamic Banking Committee

In order to prepare BI Regulation in the sharia banking sector, BI has set up Islamic Banking Committee. Islamic Banking Committee is a forum consisting of the experts in the field of sharia muamalah and/or economist, financial experts, banking experts, who support BI in implementing MUI fatwa as the provisions that will be stipulated in BI Regulation. BI defines the duty, establishment procedures and committee membership, including other related matter that is deemed necessary to accelerate the implementation of the committee’s duties. Committees are fully responsible to BI. The budget and all operational cost related to the implementation of committee’s duties shall be


8�

included in BI budget. Committee members shall consist of the representatives of BI, Ministry of Religious Affair and relevant parties from the public within impartial composition and shall consist of not more than 11 (eleven) people.

7. Employing Foreign Worker and Transfer of Technology Program in Banking Sector

Bank has the right to employ Foreign Worker (TKA) in performing its business activity pursuant to the provisions of BI. This employment should be carried out by considering the availability of Indonesian workers. Banks are allowed to employ foreign worker for the following positions: a. Commissioner and Board of Directors;b. Executive Management; and orc. Expert/Consultant.

It is obligatory for Bank to have the approval of BI before appointing a Foreign Worker for the positions of Commissioner, Board of Directors and/or Executive Management. Recruitment of foreign worker for the position relevant to human resources and compliance is not allowed. Bank should submit the working plan of foreign worker recruitment to BI and should be included in the Bank Business Plan. Bank is required to guarantee a transfer of knowledge during the employment of the foreign worker. The transfer of knowledge can be implemented through: a. The appointment of 2 local co-workers for 1

foreign worker.b. Education and Training for the co-workers in

accordance with the qualification of foreign worker position.

c. Execution of education or training by the foreign worker during certain period particularly for the interest of bank employees, students, and/or the public.


2012

8�

8. Fit and Proper Test

Commercial Banks

The Fit and Proper Test shall be performed by BI to: a. Prospective Controlling Shareholders, candidates

of member of the Board of Commissioners and member of the Board of Directors;

b. Controlling Shareholders, member of the Board of Commissioners and member of the Board of Directors and Executive Officer; and

c. Parties that are no longer holding positions as referred to in letter b, but assumed to be involved or responsible for actions under the process of fit and proper test on bank or representative of foreign bank.

Parties under legal process and/or undergoing the process of fit and proper test of a bank, cannot be proposed to become prospective PSP, member of the Board of Commissioners or member of the Board of Directors.

Object of Fit and Proper Test Factors of Fit and Proper Test

Candidate Controlling Shareholders

Candidate Member of the Board of Commissioners and Member of the Board of Directors

Candidate Controlling Shareholders, Members of the Board of Commissioners, Members of the Board of Directors and Executive Officers

Financial Integrity and Feasibility

Finanacial Integrity, Compe-tence and Reputation

• Fit and Proper Test in the framework of reevaluation on Candidate controlling shareholders is performed in the event of any indication of problem related to financial integrity and/or feasibility.


86

Fit and Proper Test in the framework of reassessment of Controlling Shareholders, members of the Board of Commissioners, members of the Board of Directors and Executive Officer is conducted in the event of any indication related to integrity, financial feasibility, financial reputation and/or competence covering:

Indikator Dilakukannya Fit & Proper Test (Existing)

Menyembunyikan dan/atau mengaburkan pelanggaran dari suatu ketentuan atau kondisi keuangan dan/atau transaksi yg sebenarnya

Menyebabkan Bank mengalami kesulitan yg membahayakan kelangsunganusaha Bank/dapat membahayakan industri perbankan

Menolak memberikan komitmen dan/atau tidak memenuhi komitmen

PSP tidak melakukan upaya-upaya yang diperlukan apabila Bankmenghadapi kesulitan permodalan maupun likuiditas

Tidak mampu melakukan pengelolaan strategis dalam rangkapengembangan Bank yang sehat

Pelanggaran atau penyimpangan kegiatan kantor perwakilan bank asing

Diputus bersalah dalam Tindak Pidana Tertentu oleh pengadilan (inkracht)

Dinyatakan pailit dan/atau menjadi pemegang saham, anggota dewankomisaris atau anggota direksi yang dinyatakan bersalah menyebabkansuatu perseroan dinyatakan pailit

PSP yg dgn sengaja membiarkan Komisaris/Direksi yg Tidak Lulus masihmelakukan tindakan sebagai Komisaris atau Direksi setelah mendapatkanteguran 2 kali dari BI L

AN

GS

UN

G

TID

AK

L

UL

US1

4

3

2

5

6

7

8

9


Memiliki kredit macet

Lunas

Tidak Melunasi Diberikan kesempatan

melunasi dlm Jk. waktu tertentu

13

Memberikan keuntungan secara tidak wajar yang dapat merugikan atau mengurangi keuntungan Bank

Melanggar prinsip kehati-hatian di bidang perbankan dan asas-asas perbankan yang sehat

Tidak melaksanakan perintah Bank Indonesia untuk melakukan dan/atau tidak melakukan tindakan tertentu (CDO)

CDO dlm rangka penyelamatan

CDO dlm rangka perbaikan

Pengujian Signifikansi

Pelanggaran

10

11

12

Signiifikan

Tidak Signifikan

Indicator of Fit and Proper Test Implementation (Existing)

Verdict guilty in Certain Criminal Act by court (inkracht)

Declared bankrupt and/or served as a shareholder, member of the Board of Commissioners or the Board of Directors found at fault in the bankruptcy of a company.Controlling Shareholders intentionally allow disqualified member of the Board of Commissioners/Directors to perform his/her function after 2 written warnings from BI.

Concealing and/or obscuring violations to a certain provision or the actual financial condition and/pr transaction

Causing bank to be in difficulties jeopardizing bak business continuity/jeopardizing banking industry

Refusal for commitment and/or fulfill the commitment

Controlling Shareholders do not make any necessary effort to support Bank in capital or liquidity difficulties.

Incapable of performing strategic management in developing a sound bank.

Violation or deviation of activities of foreign bank representative.

DIS

QU

ALI

FIED

� ST

AG

ESFI

T &

PRO

ER T

EST

Object of Fit and Proper Test Factors of Fit and Proper Test

• Fit and Proper Test in the event of reevaluation of member of the Board of Commissioners, member of the Board of Directors and Executive Officer is performed in the event of any indication of problem related to integrity, compe-tence and/or finance.


2012

87


Menyembunyikan dan/atau mengaburkan pelanggaran dari suatu ketentuan atau kondisi keuangan dan/atau transaksi yg sebenarnya

Menyebabkan Bank mengalami kesulitan yg membahayakan kelangsunganusaha Bank/dapat membahayakan industri perbankan

Menolak memberikan komitmen dan/atau tidak memenuhi komitmen

PSP tidak melakukan upaya-upaya yang diperlukan apabila Bankmenghadapi kesulitan permodalan maupun likuiditas

Tidak mampu melakukan pengelolaan strategis dalam rangkapengembangan Bank yang sehat

Pelanggaran atau penyimpangan kegiatan kantor perwakilan bank asing

Diputus bersalah dalam Tindak Pidana Tertentu oleh pengadilan (inkracht)

Dinyatakan pailit dan/atau menjadi pemegang saham, anggota dewankomisaris atau anggota direksi yang dinyatakan bersalah menyebabkansuatu perseroan dinyatakan pailit

PSP yg dgn sengaja membiarkan Komisaris/Direksi yg Tidak Lulus masihmelakukan tindakan sebagai Komisaris atau Direksi setelah mendapatkanteguran 2 kali dari BI L

AN

GS

UN

G

TID

AK

L

UL

US1

4

3

2

5

6

7

8

9


Memiliki kredit macet

Lunas

Tidak Melunasi Diberikan kesempatan

melunasi dlm Jk. waktu tertentu

13

Memberikan keuntungan secara tidak wajar yang dapat merugikan atau mengurangi keuntungan Bank

Melanggar prinsip kehati-hatian di bidang perbankan dan asas-asas perbankan yang sehat

Tidak melaksanakan perintah Bank Indonesia untuk melakukan dan/atau tidak melakukan tindakan tertentu (CDO)

CDO dlm rangka penyelamatan

CDO dlm rangka perbaikan

Pengujian Signifikansi

Pelanggaran

10

11

12

Signiifikan

Tidak SignifikanProviding irregular profit that may jeopardize or decrease bank profits.

Violations on prudential principles in banking sector and the principles of sound banking

Failure in implementing the instruction of BI in conducting and/or not conducting certain action (CDO).

Bad debt

Indicator of Fit and Proper Test Implementation (Existing)

� ST

AG

ESFI

T &

PRO

ER T

EST

Test of violationsignificance

CDO interns ofimprovement

CDO interns of rescue

Opportunity forsettlement

withincertain period

Not Settled

Settled

Not Significant

Significant

BI performs fit and proper test based on evidence, data and information obtained from supervisory action or other information. Fit and proper test is conducted by taking into account the following measures:a. clarification of evidence, data and information

to the tested parties;b. determination and submission of temporary

results of the fit and proper test to the tested parties:

c. responses from the tested parties with regards to the temporary results of the fit and proper test;

d. determination and announcement of the final results of the fit and proper test to the tested parties.

The procedure mechanism of the fit and proper tes for PSP, members of the Board of Commissioners, members of the Board of Directors and the Executive Officer is as follows:


88

Process Fit and Proper Test (Existing)

BI classified the final result of fit and proper test into two ratings: qualified and disqualified.

Parties listed as Disqualified are prohibited to become:a. Controlling Shareholders or PSP or owner of

shares in banking industry; and/orb. members of the Board of Commissioners,

members of the Board of Directors and the Executive Officer of a banking industry.

Imposition on the above sanction will be applicable also to parties declared as disqualified in the relevant fit and proper test but they are still holding the positions of PSP, members of the Board of Commissioners, members of the Board of Directors and the Executive Officer of other banks.

In the event the bank is undergoing handling or rescue process by LPS, the fit and proper test shall be conducted on prospective members of the Board of Commissioners and/or members of the Board of Directors. The application for approval of the concerned prospective members of the Board of Commissioners and/or members of the Board of Directors will be submitted by LPS.


2012

8�

Islamic Banks and Islamic Business Unit

BI shall conduct fit and proper test to: a. Any candidate of PSP, members of Board of

Commissioners, members of Board of Directors and candidates proposed for the position of Directors of Islamic Business Unit.

b. PSP, members of Board of Commissioners, members of Board of Directors and Executive Officers of Sharia Bank in case of indication that the concerned person was involved in any violation or deviation, including fraudulence, embezzlement and/or deception related to Islamic Bank operational activities; and

c. Director of Islamic Business Unit or Exceutive Officer of Islamic Business Unit in case of any indication of the person’s involvement in any violation or deviation, including fraudulence, embezzlement, deception related to Islamic Business Unit operatio-nal activities.

The objective of fit and proper test is to have confirmation that:a. The candidate of PSP has integrity and financial

feasibilityb. The nominee of members of Board of Commissioners

and members of the Board of Directors has integrity, competence and financial reputation.

Candidates meeting the integrity requirement are parties who, at least:a. possess good character and strong moral values;b. are committed to comply with the applicable laws

and regulations;c. are committed to support the Board of Directors in

developing sound and sustainable Sharia bank;d. not included in the disqualified list (DTL) of the Fit

and Proper Test; ande. are not included in the list of current candidates

to perform fit and proper test as PSP, members of the Board of Commissioners, member of the Board of Directors, Executive Officers, Sharia Business Unit Directors with indication of involvement in any violation or deviation, including fraudulence,


�0

embezzlement and deception.

Candidates of PSP meeting the financial feasibility requirement are parties who have financial capabilities proved by among others:a. Possessing main sources of income eligible to support

mid-term and long-term business development of sharia bank;

b. Never been declared bankrupt and never been a shareholder or member of the Board of Commissioners or Board of Directors found at fault in causing a company and/or legal entity to be declared bankrupt based on court’s decision during the period of 5 (five) years preceding the date of nomination;

c. Not included on the list of bad debts/financing; and

d. Willingness to resolve any capital and liquidity difficulties faced by the Bank in the course of its business.

Based on its process, the outcome of fit and proper test, the outcome is classified into two predicates: a. Passing the test (Qualified); orb. Not passing the test (Disqualified)

Parties not meeting the requirements are prohibited to become:a. PSP and/or controller in all Sharia Banks;b. Holder of more than 10% share in all Sharia banks;

and/orc. Member of Board of Commissioners, member of

Board of Directors and/or an Executive Officer in all Sharia Banks.

�. Purchase of Shares in Commercial Banks

A natural person and/or legal entity may purchase shares in a bank, whether directly or through the stock exchange. Maximum ownership of shares acquired by a foreign citizen/foreign legal entity is 99% of the paid up capital of the bank. Ownership of a bank by an Indonesian legal entity shall not exceed the net worth of the legal entity concerned.


2012

�1

Any purchase of shares resulting in ownership of 25% or more of the total shares of the bank, or less than 25% but resulting in transfer of control of the bank, shall require approval from BI.

The Board of Directors of the bank shall inform BI in the event of the following:a. Direct purchase of bank shares resulting in

ownership falling to less than 25%;b. Purchase of shares through the stock exchange

resulting in ownership of bank shares of 5% up to less than 25%.

10. Merger, Consolidation, and Acquisition of Bank

Commercial Bank

Merger, Consolidation, and Acquisition of a Bank may take place at the initiative of the bank concerned, at the request of BI, or at the initiative of a special agency. Merger, Consolidation, and Acquisition must first be approved by BI.

Merger or consolidation may take place between a conventional bank and a Sharia Bank if the bank to result from the merger or consolidation is a Sharia Bank.

Acquisition of Commercial Banks may be made by individuals or legal entities by direct purchase or purchase of shares on the stock exchange resulting in transfer of control of the bank. Purchase of shares is deemed to bring about transfer in control of a bank in the event that shares ownership:a. Reaches 25% or more of the paid up capital of a

bank; orb. Is less than 25% of the paid up capital of a bank,

but directly or indirectly exercises control over the management and/or policies of the bank.

Rural Banks/Islamic Rural Bank

Merger, Consolidation, and Acquisition of a Rural Bank may take place at the initiative of the Rural Bank or by request of BI. Merger, Consolidation, and Acquisition must first be approved by BI.


�2

Merger or Consolidation may only take place between Rural Banks. Merger or Consolidation between a conventional Rural Bank and Islamic Rural Bank may only take place if the Rural Bank to result from the merger or consolidation is a Sharia Rural Bank.

Merger or consolidation of Rural Banks may take place:a. Between Rural Banks domiciled in the same

province; orb. Between Rural Banks in different provinces, insofar

as the offices of the Rural Bank to result from the merger/consolidation is located in the same province.

Acquisition of a Rural Bank may be conducted by a natural person or legal entity through takeover of shares resulting in transfer of control of the Rural Bank. Purchase of shares deemed to result in transfer of control is any transfer in which share ownership:a. Becomes 25% or more of the paid up capital of the

Rural Bank; orb. Is less than 25% of the paid up capital of the Rural

Bank, but directly or indirectly exercises control over the management and/or policies of the bank.

11. Establishment of Bank Offices

Bank is required to include the bank business plan any bank opening, change of status, change of address and/or closure to be implemented within one year. The submission of business plan must be accompanied by studies in accordance with the regulations concerning Commercial Bank.

Bank Indonesia is authourized to give instruction to the bank to postpone the plan of opening, change of status, and/or bank address, if there is a tendency of downgrade in bank soundness rating, bank financial condition and/or increase of bank risk profile based on BI evaluation.

Bank must disclosure the name and type of office at each of office.


2012

��

Branch Offices of Commercial Banks

Domestic

a. Opening of branch office is subject to a license from Bank Indonesia.

b. The Board of the Directors or the Executive Officer of the bank must submit the application for the opening of branch office to BI completed wtih supporting documents in accordance with the applicable regulations of Commercial Bank.

c. Any approval or refusal to bank application will be provided no later than 20 working days after the reception of the complete document.

d. The opening of bank branch office must be implemented no later than 30 (thirty) working days after the issuance of license by BI.

Overseas

a. The opening of overseas branch office (and representative office and other types of office both operational or non operational) is subject to license from BI. The implementation must be executed within a period of one year after the issuance of license by BI and may be extended for one year maximum based on acceptable reasons.

b. The opening of overseas branch office is also subject to license from the local authority of the foreign country.

c. License from BI will be issued after the bank has operated as foreign exchange bank for not less than 24 months, after including the opening in the annual business plan, meeting the requirements of soundness rating, meeting the capital adequacy and risk profile, and after having definite address or location of the operational office.

d. Any approval or refusal to bank application will be provided no later than 20 working days after the reception of the complete document.


��

Branch Offices of Rural Banks

a. Any Rural Bank may establish a Branch Office only in the same province as its head office.

b. The establishment of a Branch Office may only proceed pursuant to license from BI.

c. The Capital City Territory of Jakarta and Regencies or Municipalities of Bekasi, Bogor, Depok, Karawang, and Tangerang are stipulated as one provincial area for establishment of a Branch Office and also be in force for the opening of a Branch Office of Rural Bank in the area concerned emerging from a merger or consolidation.

d. Rated sound during the 12 monthe. CAR at a minimum of 10% during the last 3 month,

andf. Possessing a sufficient information technology.

Branch Office of Islamic Rural Banks (BPRS)

a. Establishment of BPRS Branch Office may only be conducted pursuant to a license from BI.

b. The establishment of branch office shall at least meet the following requirements:- Within the same province as the head office;- Already included in Islamic Rural Bank annual

work plan;- Supported by appropriate information system

technology; and- Providing additional paid-up capital of at

least 75% of Islamic Rural Bank tier-capital in accordance with the opening location of the branch office

c. BPRS with domiciliation in the province of Jakarta Raya and the Regency/municipalities of Bogor, Depok, Tangerang and Bekasi, are allowed to establish branch offices in the same province as the head office in the province, also allowed to establish offices in the province of Jakarta Raya and the the Regency/municipalities of Bogor, Depok, Tangerang and Bekasi.


2012

��

Islamic Business Unit (UUS)

a. Conventional Commercial Bank conducting business based on sharia principles shall open the Islamic Business Unit (UUS).

b. The Opening of UUS shall be organized subject to BI permit in the form business license. The working capital of Islamic Business Unit stipulated and preserved shall at least be amounting to Rp 100.000.000.000,- (one hundred billion) rupiah.

c. Islamic Business Unit may be separated from Commercial Bank in the event of:• Establishment of new Islamic Bank; or• Transfer of rights and obligation of Islamic

Business Unit to an existing Islamic Commercial Bank by meeting the prevailing requirements.

12. Conversion of Bank Name and Logo

The conversion of Bank Name shall be performed by complying to the prevailing regulations, including the regulation published by the Ministry of Industry and the Ministry of Law and Human Rights. After the issuance of document of approval for the conversion of bank name by relevant institutions, the related document shall be submitted to Bank Indonesia together with the application for bank name conversion.

The application must be submitted by the bank to Bank Indonesia no later than 30 working days after the conversion of name completed with the reasons for the conversion and the act of amendment of the articles of association approved by the authorised institution.

BI will grant approval for name converstion no later than 30 working days following the reception of the complete document. The conversion of bank name shall be announced in newspaper with national coverage no later than 10 working days after the date of approval.

Any change of Bank Logo shall reported to BI no later than 30 (thirty) working days before the conversion is performed and the implementation of logo converstion shall reported to BI no later than 10 (ten) working


�6

days after the implementation of the conversion by attaching the necessary documents, such as the design of the new logo.

1�. Conversion of Business Activities from Commercial Bank to Islamic Bank

Conventional Bank may convert its business to a Bank conducting Business Based on Sharia Principles while Bank conducting business based on Sharia principles is prohibitedto converts its business activities to Commercial bank.

The conversion of business activities of a commercial bank to bank conducting business based on Sharia principles is pursuant to a license from BI.

The conversion of business activities of commercial bank to bank conducting business based on sharia principles may be conducted by:a. Commercial bank to bank conducting business

based on sharia principlesb. Rural Bank to Rural Sharia Bank.

The conversion of commercial bank to bank conducting business based on sharia principles should be included in the business plan of the commercial bank. Commercial bank planning to convert its business activities to bank conducting business based on sharia principles should: a. Amend the articles of association of the bankb. Fulfill the required capital;c. Fulfill the requirements for the Board of Directors

and the Board of Commissionersd. Establish a Islamic Supervisory Board (DPS); ande. Submit initial financial report as a bank conducting

business based on sharia principles. Commercial bank converting its business activities

to bank conducting business based on sharia principles should:a. hold Minimum Capital Requirement (KPPM) ratio of

at least 8%; andb. possess a tier1 capital of minimum Rp 100 billion.


2012

�7

Rural bank planning to convert its business activities to a Islamic Rural Bank should comply with the provisions pertaining to capital as set forth in the provisions of BI related to Islamic Rural Bank.

The Board of Commissioners and the Board of Directors of Islamic Bank/Islamic Rural Bank should comply with the provisions set forth by BI pertaining to Islamic Bank/BPRS. Commercial/Rural bank converting its business activities to BPR/BPRS should set up a Islamic Supervisory Board.

A commercial bank having received an operating license for the conversion of its activities from BI shall clearly state: a. the words “Sharia” (Syariah) in the inscription of its

name.b. iB logo in the forms, bank draft, products, offices

and network of offices of Sharia Banks.

1�. Closure of Bank Branch Office

The closure of domestic bank branch office requires the approval of BI. The license of closing branch office shall be conducted in two stages, approval in principle and approval of closure. The application to have the approval in principle for the closure of bank branch office must accompanied by information related to measures to be taken in the settlement of all obligations of the branch office to customers and other parties. The application for approval of closure must be submitted no later than 6 months after the obtention of approval in principle and must enclose the documents proving that all obligations to the customers and other party both from asset and liability sides have been settled; and a letter from the Board of Directors stating that measures related to the settlement of the branch office to the customers and other parties have been conducted and bank will be responsible in case of future claim.

The closure of bank branch office that has been approved, must be implemented no later than 30 working days following the date of BI approval. The closure of bank branch office is subject to publication


�8

by Bank in newspaper having wide coverage at the location of the bank and must be implemented no later than 10 working days after the approval of BI.

1�. Requirements of Non-Foreign Exchange Bank to Foreign Exchange Status

The requirements for upgrading to Foreign Exchange Bank are:a. CAR in compliance with the 8% minimum during

the last month.b. Rated sound for the past consecutive 24 months.c. Minimum Rp 150 billion paid up capital.d. Completion of preparations for foreign exchange

operations including: organization, human resources, operational guidelines for foreign exchange activities, administration system, and control.

16. License Modification from Commercial Bank to Rural Bank in the framework of Consolidation

Modification on business license from Commercial Bank to Rural Bank can only be performed subject to the approval of the Governor of BI. This modification can be voluntary or mandatory. The change of license will be carried out voluntarily if there is a request from the commercial bank shareholder with tier capital less than Rp 100 billion or commercial bank shareholder that is still entitled to limit its activity.

17. Supervisory Actions and Designation of Bank Status

BI has the authority to determine the status of Bank supervision. Status of Bank supervision is classified into:a. Normal supervision;b. Intensive supervision; orc. Special surveillance.


2012

��

Bank is placed under intensive supervision if considered to have potential difficulties that might deteriorate enterprise viability providing that it has one or more of the following criteria: a. CAR > 8% but less than

CAR ratio considering loss potential in accordance with Bank risk profile determined by BI:

b. Tier 1 ratio less than certain percentage de-

termined by BI;c. Ratio of Statutory Re-

serves in rupiah > ratio determined for Bank Sta-

tutory Reserves, but facing basic liquidity problem;d. Credit ratio or non

performing loan on net basis more than 5% of the total credit or financing;

e. Bank Risk rating is high based on assessment towards composite risk;

f. Bank soundness Compo-site Rating 4 or 5

g. Bank soundness Compo-site Rating 3 with management factor rating 4 or 5.

Intensive Supervision Special Surveillance

Criteria

Bank is placed under special surveillance if considered to have potential difficulties that might deteriorate enterprise viability providing that it has one or more of the following criteria: a. Ratio CAR < 8%;b. Ratio of Statutory Re-

serves in rupiah is less than ratio determined for bank statutory reserves and based on BI assessment:- Bank is faced with basic

liquidity problem; or- Bank experiences a

deteriorating develop-ment in a short time; or

c. Exceeding the period of bank under intensive supervision.


100


BI determines a bank under intensive supervision no longer than one year after receiving BI notification.In the event that bank is determined to be under intensive supervision due to credit or financing complex problem the period under intensive supervision will be extended once and for a period of no longer than 1 year.

1. Instructing bank to conduct mandatory supervisory actionsa. Replacing the Board

of Commissioners and/or the Board of Directors

b. Writting-off non performing loan or financing and calculating bank loss with bank capital

c. Conducting merger or consolidation with other bank;

d. Transferring all or a part of bank activity management to other party;

e. Selling a part or all assets and/or bank

BI determines to place a bank under special surveillance no longer than 3 months after the date of BI notification.

1. Instructing bank to conduct mandatory supervisory actions:a. Replacing the Board

of Commissioners and/or the Board of Directors

b. Writting-off non performing loan or financing and calculating bank loss with bank capital

c. Conducting merger or consoli-dation with other bank;

d. Transferring all or a part of bank activity management to other party;

e. Selling a part or all assets and/or bank

Period

Supervisory Measures


2012

101


liabilities to other bank or other party;

f. Selling bank to buyer willing to take over all bank liabilities.

2. Instructing bank and/or shareholders to submit capital restoration plan;

3. Imposing the following prohibitions/restrictions:a. Prohibition in con-

ducting capital distri-bution;

b. Prohibition in con-ducting certain tran-saction with related party and/or other party determined by BI;

c. Restriction in the growth of assets, new fund participation, provision;

d. Restriction in the plan of enterprise or product expansion or new activities;

e. Restriction in the payment of salaries, remuneration or other similar form to the members of the Board of Commissioners and the members of the Board of Directors or compensation to other related party;

liabilities to other bank or other party;

f. Selling bank to buyer willing to take over all bank liabilities.

2. Instructing bank to continue supervisory action defined at the decision the bank was under intesive supervision.

3. Imposing the following prohibitions/restrictions:a. Prohibition in selling

or number of assets without approval of BI except for SBI or Islamic SBI, Current account with BI, Inter-bank claim, and SUN or Islamic SUN.

b. Instructing bank to report any change of bank shareholders less than 10%; and/or;

c. Prohibition to change the ownership of:1) Shareholder po-

ssessing shares equivalent or more than 10% and/or;

2) Controlling Share-holders including parties involved in the control of the bank in the structure of bank enterprise group;


102


f. Prohibition in conducting subordina- ted payment.

unless with approval of BI.

Bank and/or shareholders of the bank under special surveillance are obliged to add capital required during the period of special surveillance.

BI shall freeze certain enterprise activities of bank under special surveillance no longer than 1 (one) month during the period of special surveillance if:1. BI evaluates that bank

condition is deteriorating; and/or

2. Violation to banking provision performed by the Board of Directors, the Board of Commissioners and/or controlling share-holder.

BI shall make a notification:1. Bank determined with

the status under Special Surveillance and certain activities.

2. Corrective actions to be conducted by bank and/or prohibitions notified by BI to the bank.

The announcement will be published in 2 daily newspaper with wide coverage and at the homepage of BI. On the


2012

10�


contrary, in order to provide balanced information to the public, an announcement will be published by BI if the Bank condition has improved and no longer classified as Bank under Special Surveillance. Bank with certain activities under suspension is obliged to inform all its enterprise network about the suspended activities.

Bank that may not be recovered: Banks under special surveillance with the following

criteria:a. CAR Ratio < 2%;b. Statutory Reserves (GWM) in rupiah < 0%; or c. Exceeding special surveillance period, shall be determined by BI as bank that may not be recovered.

Bank with Systemic Impact In the event the bank under special surveillance

is reported to have systemic impact, BI will request authorized institution to make a decision based on the prevailing regulations to determine whether the concerned bank has systemic impact or not. In addition to this, BI will also notify the Deposit Insurance Corporation (LPS) about the bank condition.

In the event the Bank is determined as Bank with systemic impact and meets the criteria as defaulted bank, BI will request the relevant institution to take measures in handling the concerned bank.

If the bank is determined as bank with no systemic impact, the following procedures will be as described below.


10�

Bank with no Systemic Impact In the event bank under special surveillance has

no systemic impact and meets the criteria as defaulted bank, BI will notify and request the Deposit Insurance Corporation (LPS) whether to rescue the concerned bank or not.

In the event the Deposit Insurance Corporation (LPS) decides not to proceed with the rescue of the failed bank, BI shall establish the revocation of the operating license of the concerned bank after being advised by LPS. LPS will conduct further settlement of the bank in accordance with the prevailing laws and regulations.

18. Follow Up Action to Rural Bank Under Special Surveillance

BI shall define Rural Bank under special surveillance (BPR DPK) in response to 1 of the following criteria:a. CAR ratio < 4%b. Average Cash Ratio during the last 6 months <

3% BI will make announcement on the decision of BPR

under special surveillance status to the concerned BPR. In addition, BI will also inform the LPS about the BPR under special surveillance status completed with the description regarding the condition of the concerned BPR.

In the framework of special surveillance status BI will require the BPR and/or BPR shareholders to take the following actions:a. Increasing the capitalb. Writing off non performing loan and calculating

the rural bank loss and its capital,c. Replacement of members of the Board of Directors

and/or the Board of Commissionersd. Performing merger or consolidation with other

BPRe. Selling BPR to a buyer willing to take over all BPR

obligationsf. Handing over the management of a part or all

activities of BPR to other party;


2012

10�

g. Selling a part or all properties and/or obligations of BPR to other party; and/or

h. Freezing certain activities during the time defined by BI.

BPR under special surveillance having a Minimum Capital Requirement Ratio < 0% and/or an average CR of < 1% in the last 6 months is prohibited to conduct activities related to fund collection and disbursement. If during DPK stipulation, the BPR meets the criteria of Minimum Capital Requirement Ratio and CAR, the prohibition for fund collection and disbursement is applicable since the Rural Bank is determined by DPK.

The duration of special surveillance is decided not longer than 180 days since the decision of BPR to be under special surveillance from BI. This term will be extended 1 (one) time with a maximum of 180 days since the end of the special surveillance term providing that the BPR succeed to fulfill the defined requirement.

BI will determine that the Rural Bank will be released from the status of under special surveillance providing that: a. Minimum Capital Requirement Ratio of at least

4%b. Average Cash Ratio during the last 6 months is <

3% During the period specified as under special

surveillance, BI may make announcement to Deposit Insurance Agency (LPS) and require the LPS to decide whether to rescue the Rural Bank or not providing that concerning rural bank under special surveillance meet the following criteria:a. The Rural bank has a Capital Adequacy Ratio of <

0% and/or the average Cash Ratio during the last 6 months is < 1 %; and

b. Based on BI assessment, the Rural Bank will not be able to increase the Capital Adequacy Ratio to at least 4% and the average Cash Ratio during the last 6 months is at least 3%.

Upon the time expiration of under special surveillance, BI will announce the LPS and require LPS to


106

decide whether to save or not the Rural Bank meeting the following criteria:a. Capital Adequacy Ratio is less than 4%, and/or b. Average Cash Ratio during the last 6 months is less

than 3%. In the event where LPS decides not to rescue

the Rural Bank, BI shall establish a revocation of an operating license of the Rural Bank concerned after the announcement by LPS.

1�. Follow Up Action to Islamic Rural Bank Under Special Surveillance

a. BI shall define an Islamic Rural Bank under special surveillance (BPRS DPK) in response to 1 of the following criteria:• CAR ratio < 4%• Average Cash Ratio during the last 6 months <

3%b. BI will inform Deposit Insurance Agengy (LPS)

about the Islamic Rural Bank determined under special surveillance including the condition of the concerned Islamic Rural Bank.

c. BPRS under special surveillance with the following criteria:• Minimum CAR Ratio < 0% and/or

• an average CAR of < 1% in the last 6 months Shall be prohibited to conduct activities related to

fund collection and disbursement. This prohibition for fund collection and disbursement shall be applicable upon the determination of the Islamic Rural Bank status until the revocation of this status. The duration of special surveillance is no longer than 180 days since the determination of BI that the Islamic Rural Bank is under special surveillance. This term is subject to be extended 1 (one) time with a maximum of 180 days upon the determination of BI that the Islamic Rural Bank is under special surveillance.a. During the period specified as under special

surveillance, BI may make announcement to LPS and require the LPS to decide whether to rescue the


2012

107

Islamic Rural Bank or not providing that concerned Islamic Rural Bank under special surveillance meets the following criteria:• The Islamic Rural bank has a Capital Adequacy

Ratio of < 0% and/or the average Cash Ratio during the last 6 months is < 1 %; and

• Based on BI assessment, the Islamic Rural Bank does not have the capability to increase Capital Adequacy Ratio to at least 4% and the average Cash Ratio during the last 6 months is at least 3%.

b. Upon the expiring period of under special surveillance, BI will inform LPS and will require LPS to decide whether to save the concerned Islamic Rural Bank or not.

c. In the event that LPS decides not to rescue the Islamic Rural Bank, BI shall conduct a revocation of operating license to the concerned Islamic Rural Bank following the announcement of LPS.

20. Bank Liquidation

Bank Liquidation is the settlement of all bank rights and obligations arising from the revocation of business license and the dissolution of bank legal entity. The surveillance and implementation of bank liquidation with business license being revoked after October 2005 will be performed by LPS.

21. Revocation of Business License at The Request of Shareholders (Self Liquidation)

a. Bank having the right to apply for business license revocation following the request of shareholders shall be Bank that is not under special surveillance of BI as regulated in BI Regulation concerning the follow up and determination of Bank status.

b. Revocation of Business license at the request of Shareholders shall only be performed by BI providing that Bank has fulfilled its liabilities to all customers and other creditors.

c. Revocation of Business license at the request


108

of Shareholders shall be performed in 2 (two) steps: a. the approval of preparation of business license revocation, b. decision of business license revocation.

d. The Board of Directors of the bank must submit application for approval of the preparation of business license revocation to BI and must be accompanied by related documents according to the prevailing regulations.

e. Then, BI will publish the approval letter for the preparation of business license revocation and will require the bank to stop all bank business activities, make announcement related to the dissolution of bank legal entity and the plan to fulfill bank liabilities in two local newspapers with the largest coverage no later than ten working days after the date of the letter of approval of preparation of bank business license revocation; after the fulfillment of all bank liabilities, and the appointment of public accountant for the verification on the settlement of bank liabilities.

f. After the settlement of bank liabilities, the Board of Directors of the bank will proceed with the application for the revocation of bank business license to BI accompanied by the relevant report (in accordance with the regulations). If the revocation of business license is approved, BI will issue the Authorization Letter of Bank Business License Revocation and requires the bank to proceed with the dissolution of legal entity in compliance with the prevailing regulations.

g. Since the issuance of Business license Revocation, if there are still deferred liabilities in the future, all the referred liabilities shall be the responsibility of bank shareholders.


2012

10�

B. Regulations Pertaining to Business Operations and Bank Product

1. Money Changer’s License for Bank

Money Changer’s activity for banks is subject to approval of BI. Commercial banks operating conventional banking services or based on sharia principles, Rural Banks and Rural Bank Sharia are allowed to conduct activities as Money Changer subject to the following requirements: a. CAR is in accordance with the applicable

provisions:b. Money Changer activities are included in the

Business Plan for commercial banks and not foreign exchange bank and the Working Plan and Working Plan Implementation Report for Rural Bank and Rural Bank Sharia; and

c. Submission of Operational Readiness Plan. In addition to the above stated requirements, Rural

Bank and Rural Sharia Bank are obliged to fulfill the following conditions: a. Adequate soundness rating for the last 12 months;

andb. Fulfillment of the required paid up capital and

management.

2. The Purchase of Foreign Currency Versus Rupiah To Banks

Customer or Foreigner may conduct purchase of foreign currency versus Rupiah to banks. The purchase of above USD 100.000 or equivalent per month per customer or foreigner may only be performed by underlying and not more than the underlying nominal of the transaction. The purchase of foreign currency versus rupiah by Customer or Foreigner to banks without any underlying may not exceed USD 100.000 or equivalent per month per customer or foreigner. The purchase of foreign currency versus rupiah by customer includes spot transaction, forward transaction and other derivative transactions. The purchae of foreign


110

currency versus rupiah by Foreign Party includes spot outright transaction.

�. Derivative Transactions

Bank will be able to conduct derivative transaction at its own interest or for the interest of customer. In derivative transaction Bank is obliged to conduct market to market and to implement risk management in accordance with the prevailing provisions. Bank can only perform derivatives transaction related to derivative of exchange rates, interest rates, and/or the combination of exchange rates and interest rates. The concerned transaction is allowed insofar as not being structured product related to the transaction of foreign exchange towards rupiah. Bank is prohibited from maintaining any position in derivative transactions conducted by party related to bank and prohibited to provide credit facilities and or overdraft for the interest of derivative transaction to customers including fulfilling deposit margin in the framework of margin trading transaction. Bank is also prohibited to conduct margin trading in foreign currency to rupiah for its own interest or for the interest of customer.

�. Commercial Paper (CP)

BI has issued regulations stipulating that CP issued and traded in the banking system may only be issued by an Indonesian company not comprising a bank with a maximum term of 270 days, rated investment grade by the domestic rating agency (currently Pefindo), with at least adequate repayment capacity. A Bank operating as arranger, issuing agent, payment agent, securities dealer, or investor in CP activities shall be rated sound in both rating and capital for the latest 12 months. Banks are prohibited from: a. Acting as arranger, issuing agent, payment agent,

or investor for CP issued by:• Any company that is a member of the same

corporate group as the bank;


2012

111

• Any company with borrowings classified as Doubtful or Loss.

b. Acting as underwriter for issue of CP.

�. Deposits

a. Demand deposits Demand deposits are accounts that may be

drawn by means of check, non-negotiable clearing payment order (bilyet giro), other payment order, or bookkeeping transfer. Banks are prohibited from opening accounts for customers whose names are recorded on any current blacklist.

Demand deposit at a sharia bank can be based on wadi’ah or mudharabah. For demand deposit based on wadi’ah, the bank is not permitted to promise compensation or bonus. For a demand deposit based on mudharabah, the customer is obliged to maintain a minimum demand deposit balance that is determined by the bank and can not withdraw funds except in the event of the closure of the account. Payment of profit to a client of a mudharabah demand deposit is calculated based on the lowest balance at the end of each reporting month.

b. Time Deposits Time deposits are deposit funds that may only

be drawn at an agreed term based on an agreement between the depositor and the bank. Commercial banks and rural banks may issue deposit slips for funds held in time deposits. Interest on time deposits is subject to final withholding of income tax.

Time deposit at a sharia bank are based on mudharabah with the stipulation that the bank is not permitted to reduce the portion of customer profit without the approval of the customer and cover deposit costs using the profit ratio of the bank.


112

c. Negotiable Certificates of Deposit Negotiable certificates of deposit are deposit

funds held in the form of time deposits for which certificates are freely negotiable. A commercial bank may issue negotiable certificates of deposit under terms and conditions that include the following:• May only be issued as bearer instruments in the

rupiah currency• Par value no less than Rp 1 million• Tenor of no less than 30 days and no more than

24 months• Interest earned by the customer is subject to

income tax withheld by the bank.

d. Savings deposits Savings deposits are deposits that may be

withdrawn only under certain agreed terms, but which may not be drawn by check, non-negotiable clearing payment order (bilyet giro), and/or other equivalent instrument. The terms and conditions for operation of savings deposits include the following:• Banks may only accept savings deposits in the

rupiah currency• Interest is set at the discretion of the individual

bank• Interest earned on savings deposits is subject to

withholding of income tax. Savings deposit at a sharia bank can be based on

wadi'ah or mudharabah. For wadi'ah savings, the bank is not permitted to promise compensation or bonus to a customer. With respect to mudharabah savings, the customer is obliged to invest a minimum amount of the funds as determined by the bank and can not make a withdrawal except when closing the account.


2012

11�

6. Product of Islamic Bank and Islamic Business Unit (UUS)

Islamic Bank and UUS shall report the plan of launching new product to BI. Those Products should be stipulated in The Codification Book of Sharia Banking Products as regulated in BI Circular Letter. If the Bank will release new product that is not included in the The Codification Book of Islamic Banking Products, then the Bank shall be subject to approval from BI. The report of planning of new product launching shall be submitted not later than 15 (fifteen) days before the release of those new products. Meanwhile, for every new product in need of approval, BI will grant an approval or disapproval upon the request not later than 15 (fifteen) days after the fulfillment of all requirements and complete reporting documents have been received. Bank shall report the realization of new product release not later than 10 (ten) days after the release of the new product.

In accomodating market demand by taking into account sharia principles and prudential principle, BI has published a regulation in the form of Circular Letter governing provision related to Gold Backed Qardh Financing.

7. The Implementation of Sharia Principles in Fund Mobilization, Fund Distribution and Islamic Banking Services.

Business activity in mobilizing fund, fund disbursement and Bank services based on Sharia principles conducted by Bank, shall be classified as Banking Services. In delivering the concerned Banking services, Bank shall have the obligation to fulfill Sharia principles. The fulfillment of sharia principles will be performed in compliance with the basic principle of Sharia Law, such as the impartial and equality principle (‘adl wa tawazun). Utilization (maslahah), universalism (alamiyah) also entailed gharar, maysir, riba, zalim and illegal object (haram).


11�

The compliance to Sharia principles is conducted as follows:• Mobilizing fund by using among other the facilities

of Akad Wadi’ah and Mudharabah;• Fund disbursement/financing by using among

other the facilities of Mudharabah, Musyarakah, Murabahan, Salam, Istishna’, Ijarah, Ijarah Muntahiya Bittamlik and Qardh agreement;

• Service delivery by using among other Kafalah, Hawalah and Sharf agreement.

In case of any dispute between bank and customer, the settlement can be conducted by, among other, musyawarah, banking mediation, sharia arbitrage or legal institution.

C. Prudential Regulations

1. Minimum Tier One Capital For Commercial Banks The increasing diversity and complexity of Bank

business may potentially carry risk for Banks. The greater risk needs to be matched by higher levels of the capital needed by Banks to absorb possible losses. Accordingly, Banks are now required to possess the minimum stipulated Tier I capital to support their business activities. Tier 1 Capital is paid up capital and disclosed reserves as referred to in the BI regulatory provisions concerning the minimum capital adequacy requirement for commercial Banks. Banks are required to comply with tier 1 capital of no less than Rp 80 billion on December 31, 2007 and shall subsequently be required to comply with tier 1 capital of no less than Rp 100 billion on December 31, 2010. Board of Directors of Bank shall develop a plan for compliance with minimum tier 1 capital with approval from the General Meeting of Shareholders. The plan for compliance with minimum tier 1 capital shall be disclosed in the business plan of the Bank. Any Bank not complying with the minimum tier 1 capital shall be required to limit its business activities as follows: not conduct business as a foreign exchange Commercial Banks; limit provision


2012

11�

of funds per debtor and/or debtor group to a ceiling or outstanding credit of no more than Rp 500 million; limit the maximum deposit funds that may be accumulated by the bank to 10 times tier 1 capital; and close down the entire Bank office network located outside the provincial territory of the head office of the bank.

2. The Minimum Capital Adequacy Requirement

Conventional Commercial Bank

Bank is obliged to provide minimum capital amounting to 8% of the Risk Weighted Assets (ATMR). Bank possessing and/or performing control on subsidiary company, those obligations will be applicable to bank as individual and bank as consolidated with its subsidiary. In anticipating the loss in accordance to Bank risk profile, BI has the right to require Bank to preserve the minimum capital amounting to larger than 8% of ATMR. ATMR consists of: ATMR for a credit risk; ATMR for operational risk, and ATMR for market risk. Every Bank has the obligation to calculate ATMR for credit risk and ATMR for operational risk. ATMR for market risk shall be calculated by bank fulfilling certain criteria are follows:

a. Bank as individual subject

- A Bank with total assets ≥ 10 (ten) trillion rupiah;

- Foreign Exchange Bank with financial instrument position in the form of Securities and/or derivatives transaction in trading book ≥ 20 (twenty) billion rupiah;

- Non-foreign exchange Bank with position of financial instrument in the form of Securities and/or interest rate derivatives in trading book ≥ 25 (twenty-five) billion rupiah.

b. Bank Consolidated with Subsidiary Company

Foreign Exchange Bank consolidated with subsidiary company possessing a financial instru-ment position in the form of securities including


116

financial instrument exposed by equity risk and/or derivatives transaction in trading book and/or financial instrument exposed by commodity risk in trading book and banking book amounting to ≥ 20 (twenty) billion rupiah for Foreign Exchange Bank, while for Non-foreign exchange Bank amounting to ≥ 25 (twenty five) billion rupiah.

Rural Banks

Banks are required to comply with the minimum 8% CAR calculated by comparison of capital with risk-weighted assets. Components of bank capital consist of Tier I capital and Tier II capital that maximal 100% of Tier I capital. Risk-weighted assets are calculated according to the risk weighting for each assets account on the balance sheet.

Islamic Commercial Bank and Islamic Rural Bank

Commercial Banks based on sharia principles and Sharia Rural Banks are required to set aside minimum capital at 8% of risk weighted assets. Islamic Business Units are required to set aside the minimum capital in respect of riskweighted assets of business based on sharia principles. If the minimum capital of an Islamic Division is less than 8% of riskweighted assets, the head office of the conventional commercial bank hosting the Islamic Business Units shall make up the shortfall in minimum capital in order to reach 8% of risk-weighted assets. The Risk-Weighted Asset for BUS consists of the Risk-Weighted Asset of credit risk and market risk, while the Risk-Weighted Asset of BPRS is only related to credit risk. The Risk-Weighted Asset is calculated based on the risk weight of each balance sheet asset and the administrative account as follows: • Balance sheet assets which are weighted based on

risk degree of provision of fund or claims adhering to each asset item;

• Certain items in the list of commitment and contingency requirements (off-balance sheet account) which are weighted and based on risk


2012

117

degree of provision of fund or claims adhering in each item after calculated by conversion factor weight.

�. Net Open Position (NOP)

Overall Net Open Position is the sum of the absolute value of the net difference between assets and liabilities in all foreign currencies recorded in the balance sheet plus the net difference between claims and liabilities, comprising both commitment and contingencies, in all foreign currencies recorded in off balance sheet accounts, all of which are expressed in rupiah.

Bank is required to manage and maintain Net Open Position at the end of the working day of no more than 20% of capital overall. In addition to managing and maintaining NOP at the end of working day, bank is also required to maintain no more that 20% of capital every 30 minutes from the opening of bank treasury system up to the closure of bank treasury system. `

Maintenance of NOP at the end of working day shall be calculated on a consolidated basis as follows: • Bank with Indonesian legal entity encompasses all

domestic and overseas branch offices.• Branch office of a foreign bank encompasses all

offices of the bank in Indonesia. Violations of NOP are subject to administrative

sanction in the form of written warning, impact on management factor in bank quality rating and risk profile assessment for Compliance Risk in bank soundness rating and Fit and Proper Test on the Board of Directors and/or Executive Officer of the bank.

�. Legal Lending Limit (LLL)

Commercial Bank Legal Lending Limit

a. For non-connected partiesb. Lending funds for an individual debtor not

connected with the bank is set not more than 20% of the bank capital, while the Legal Lending Limit for one group of debtors not connected with the bank is not more than 25% of the bank capital.


118

c. For connected partiesd. Portfolio of lending funds for connected parties

with the bank o\is not more than 10% of bank capital.

e. Lending funds is categorized as lending in excess of the legal lending limit if caused by the condition as follow: • Decreasing capital of the Bank• Changing of exchange rate• Changing of normal value• Merger,changing of structure of owner, and/or

changing of management that causes changing of connected parties and/or group of debtor.

• Changing of regulation.f. For Violations of the legal lending limit and lending

in excess of the legal lending limit, Banks are required to submit action plan to BI and getting sanctions applied in bank rating.

Rural Bank Legal Lending Limit

a. Maximum Lending Limit for credit is calculated based on debit credit balance. Maximum Lending Limit for Inter-Bank Fund Placement in other Rural Bank is calculated based on nominal Inter-Bank Fund Placement.

b. For Non-Connected Parties Fund placement for party not connected to Rural

Bank is determined maximum 20% of Rural bank capital. Meanwhile placement of fund for the same group of borrowers not connected to the rural bank is set at maximum 30% of Rural Bank capital. Fund placement for party not included in the group of borrowers and not connected to the bank will be using nucleus-plasma partnership pattern or PHBK pattern with conditions according to prevailing provisions.

c. For party connected to Rural Bank Lending Fund to the party connected to the bank

is set at maximum 10% of rural bank capital and the placement should be approved by one member


2012

11�

of Board of Directors and one member of Board of Commissioners.

d. Placement in other rural banks Inter-Bank Fund Placement in other non-connected

Rural Bank is maximum 20%.e. Lending Fund in the form of credit. Lending Fund by

Rural Bank is categorized as an excess Legal Lending Limit if caused by the following conditions:• Decrease of Rural Bank capital• Merger, consolidation, change of ownership

structure and/or management causing change of connected party and/or group of borrowers;

• Amendment of regulationf. Rural bank conducting violation or excess in legal

lending limit is obliged to submit action plan to BI. Rural bank conduction violation of Legal Lending Limit is liable to sanction related to soundness rating as stipulated in the prevailing laws.

Provision on Maximum Limit of Fund Distribution (BMPD) of Islamic Rural Bank

Maximum limit for fund distribution is the maximum percentage (realization) of fund distribution to Islamic Rural Bank capital including financing and fund placement in other banks. Any violation of BMPD is the exceeding difference of fund distribution at the time of realization on Islamic Rural Bank capital with the applicable BMPD.

The BMPD for financing is calculated based on the types of agreement (akad) to be used, namely: a. Financing based on murabahah, istishna’ and

multiservices is determined based on the balance of basic price;

b. Financing based on salam is calculated based on cost;

c. Financing based on mudharabah, musyarakah and qardh is calculated based on debit credit balance, and

d. Financing using ijarah or IMBT is calculated based on the cost balance of ijarah asset or IMBT


120

deducted by the accumulation of amortization or asset amortization

Other BMPD calculations: a. Inter-bank fund placement in the form of savings,

is performed based on the highest balance of the reporting month

b. Inter-bank fund placement in the form of time deposit is performed based on the nominal value as stated on all time deposit bilyets in the same Islamic rural banks.

c. BMPD for Fund Placement to each and/all Connected Party/ies is 10% (ten percent) of the capital of Islamic Rural Bank.

d. BMPD for Fund Placement to each Fund Borrower but Not Connecte Party is 20% (twenty percent) of the capital of Islamic Rural Bank

e. BMPD for Fund Placement to a group of Borrowers but Not Connected Party is 30% (thirty percent) of the capital of Islamic Rural Bank, with financing to each of borrower not exceeding 20% (twenty percent) of the capital of Islamic Rural Bank. Included in the meaning of one group of borrowers are non bank borrowers having relation with the management, ownership or financial with bank as the borrower.

An excess of BMPD is the exceeding difference between the percentage of Fund Placement that has been realized to the capital of Islamic Rural Bank at the reporting date with the allowed Legal Lending Limit and the Fund Placement does not constitute any violation to the Legal Lending Limit.

�. Earning Assets Quality

Asset Quality for Commercial Bank

In the effort to expedite financing facility, modifications have been made to assessment of asset quality for commercial bank by focusing the attention to prudential principles factor and risk management. It is obligatory for bank to set up the same quality to several earning assets in financing 1 debtor. The same


2012

121

quality is also applicable to earning assets provided by more than 1 bank. The provisions are applicable to: a. Earning asset provided by bank amounting to more

than 10 billion rupiah to 1 debtor or 1 project; b. Earning asset provided by bank amounting to more

than 500 million rupiah up to Rp 10 billion to 1 debtor included in the 50 largest debtors of the bank; and/or

c. Earning asset provided based on a joint financing agreement to 1 debtor or 1 same project.

In case of difference on the assessment of earning asset for 1 debtor, the lowest value of earning asset quality will be applied.

Earning Assets Quality for Rural Banks

Rural Bank plays an important role in supporting the development of micro, small and medium enterprises (UMKM) and must always comply with the basic principles of sound financing. In providing financing facility to UMKM, Rural bank must focus the attention to prudential principles. Rural Bank is required to set up the same asset quality to several earning assets in financing 1 (one) debtor in the same Rural bank. The provision concerning Earning Asset Quality has been improved and adapted to the Financial Accounting Standard for the Entity without Public Accountability (SAK-ETAP) for Rural Banks and the Rural Banks Accounting Guidelines (PA BPR).

Rural Bank is required to set up the same Earning Asset Quality to several earning asset accounts used to finance 1 (one) Debtor in the same Rural Bank. In case of any difference in the earning asset quality on several earning assets accounts for 1 (one) debtor in the same Rural Bank, the bank is required to set up the quality of each earning asset based on the lowest value. Provisions related to credit restructuring are:1. Bank is obliged to impose loss arising from credit

restructuring, after taking into account PPAP surplus following credit quality upgrade after restructuring.


122

2. PPAP surplus following restructured credit quality upgrade, after taking into account the loss arising from the concerned credit restructuring, may only be recognized as revenue after the reception of 3 (three) principal installments on the restructured credit.

Rural bank is required to apply Credit Restructuring accounting, including but notlimited to acknowledgement on losses originating from the Credit Restructuring,in accordance with applicable Financial Accounting Standard and Accounting Principles of Indonesian Banks. Regulations related to Fore closed Collateral:1. Collateral takeover must be accompanied by a

statement of collateral submission or a power of attorney to sell from debtor and a proof of settlement from Rural Bank to the debtor.

2. Rural Bank is obliged to conduct repayment on foreclosed collateral no later than 1 (one) year since the takeover.

3. If during 1 (one) year period the Rural Bank fails to settle the repayment of foreclosed collateral, the value of foreclosed collateral recorded in Rural Bank balance sheet must be taken into account as substracting factor of Tier 1 capital of Rural Bank in the calculation of Minimum Capital Adequacy Requirements.

4. In the event of degrading of foreclosed collateral value following re-appraisal, the rural bank is obliged to recognize the degrading value as loss, and

5. In the event of upgrading of foreclosed collateral value following re-appraisal, the rural bank may not recognize the upgrading value as revenue.


2012

12�

Asset Quality for Islamic Bank and Islamic Business Unit

Placement and/or provision of Bank funds shall be made on the basis ofprudential principles and shall comply with sharia principles. Bank management is required to rate, monitor, and take anticipatory measures to ensure that Assets quality continues to be Current. Quality rating shall be conducted on Earning Assets and Non-earning Assets.Bank is required to determine a same quality on several Earning Assetsaccounts used to finance 1 (one) customer in 1 (one) same bank.The rating of the same quality shall also be inforce on Earning Assets in the form of provision of funds or claims extendedby more than 1 (one) Bank conducted based on a joint-financing agreementand/or syndication.


12�

Assets Quality for Islamic Rural Banks (BPRS)

Islamic Rural Banks are prohibited in conducting fund placement in the form of time deposit at conventional commercial banks and/or in the form of saving and time deposit at sharia rural banks. Placement by Islamic rural bank may only be conducted at conventional bank in the form of current deposit/saving in the case of fund transfer for Islamic rural banks and Islamic rural bank customers and shall be classified as non productive asset.

6. Provision for Assets Losses

Banks are required to set aside provision for Assets Losses to cover risk of loss on placement of funds, comprises general provision and special provision.

Conventional Commercial Banks

Conventional Commercial Banks are required to set aside provision for assets losses in respect of earning assets and non earning assets. Provision for Assets Losses shall comprise: general reserves and special reserves for earning assets; and special reserves for non earning assets. General reserves shall be set aside at no less than 1% of earning assets classified as current not including SBI, SUN, and earning assets backed by cash collateral.

Special reserves shall be set aside at least to:a. 5% of assets classified Special Mention, after

deduction for collateral value;


2012

12�

b. 15% of assets classified Sub-standard, after deduction for collateral value;

c. 50% of assets classified Doubtful, after deduction for collateral value;

d. 100% of assets classified Loss, after deduction for collateral value.

In the event collateral will be used as PPA allowance, the calculation of collateral at least performed by:a. Independent Appraiser for earning assets to debtor

or creditor group with the amount of > 5 (five) billion Rupiah;

b. Bank Internal Appraiser for earning assets to debtor or creditor group with the amount up to 5 (five) billion Rupiah.

Appraisal on the concerned collateral shall be conducted since beginning of allocation of the earning assets.

Collateral eligible for deduction from provision for assets looses is stipulated as follows:a. Securities and shares actively traded on a stock

exchange in Indonesia or rated investment grade and bound under pledge;

b. Land, residential property, and buildings bound under deed of mortgage;

c. Machine considered as one unit with the land and bound with liability right

d. Aircraft or ships with dimensions exceeding 20 cubic meters, bound under hypothec; and/or

e. Motor vehicles and inventory bound under fiduciary transfer.

f. Warehouse receipt bound with guarantee right Provision for Assets Losses (PPA) for Islamic

Commercial Banks

Bank is required to establish PPA on earning assets and non-earning assets. PPA comprises general; reserves and special reverses for earning assets and special reserves for non-earning assets. General reserves of PPA shall be no less than 1% of total earning assets classified current, not including BI wadiah certificate and


126

securities and/or claims issued by government based on sharia principle. For special reserves are stipulated as stated in regulation of allowance for earning assets losses for commercial banks.

Obligation to establish PPA shall not be in force on earning assets in the form of Ijarah Muntahiyah bit Tamlik. Bank is required to establish amortization for Ijarah.

Collateral eligible for deduction from provision for assets losses is determined as follows: a. Cash collateral in the form of current deposit, saving

deposit, guarantee deposit and/or gold blocked in the concerned bank and completed with a power attorney for disbursement;

b. Guarantee from the Government of Indonesia in accordance with the applicable rules and regulations;

c. Securities and/or claim issued by the government;d. Islamic Securities with investment grade and actively

traded in a stock exchange;e. Land and/or non property buildings and machinery

bound under deed of mortgage;f. Aircraft and ships with dimension exceeding 20

cubic meters;g. Motor vehicles and inventory bound under fiduciary

transfer;h. Warehouse receipt bound with guarantee right.

Provisions for Earning Asset Losses for Rural

Bank

Exception on establishment of general PPAP for Earning Asset in the following forms:1. Placement of Rural Bank in SBI ; and2. Credit guaranteed by cash collateral such as BI

Securities, government bonds,savings and/or time deposit blocked at the concerned rural bank with a power of attorney to disburse and precious metals.

Types of collateral to support credit disbursement for MSME and the calculation of collateral value considered eligible for deduction from provision for assets looses are stipulated as follows:


2012

127

1. Gold.2. Warehouse receipt.3. Land and/or building with proof of ownership in

the form of letter (Letter C) or equivalent including sale-purchase deed.

4. Business Property/stall/kiosk/use rights/rights to work.

5. Part of fund guaranteed by BUMN/BUMD offering services as credit guarantor.

BI has the authority to conduct reevaluation or not to accept collateral value that has been calculated in the establishment of provision of assets losses if the bank fails to comply with the prevailing regulations.

Rural Banks are required to form general reserves of provision for assets losses and special reserves of provision for assets losses. General reserves of provision for assets shall be set aside at no less than 0.5% of earning assets classified as current not including SBI, government bonds, savings and/or time deposit that has beeen blocked by the concerned bank completed with a power of attorney to disburse and precious metals. The special PPAP shall be at a minimum of:a. 10% of earning assets with a quality of substandard

after deducted by collateral value;b. 50% of earning assets with a quality of doubtful

after deducted by collateral value; andc. 100% of earning assets with a quality of loss after

deducted by collateral value. Collateral value taken into account as subtracter

in the establishment of PPAP shall be maximum at the amount of:a. 100% of liquid collateral, comprising SBIs, saving

deposits, and time deposits which are blocked at the concerned bank equipped with a power of attorney to disburse, gold, and precious metal.

b. 85% of market value for collateral in the form of gold jewellery

c. 80% of mortgage value for collateral comprising land, building, and house with a right of ownership


128

certificate (SHM) or a right to build certificate (SHGB) bound with mortgage;

d. 70% of warehouse receipt that has been appraised less than or up to maximum 12 months and in line with the Act and the prevailing regulations and procedures;

e. 60% of tax object sale value for collateral comprising land, building, and house with a SHM or SHGB, right to use without mortgage;

f. 50% of tax object sale value for collateral comprising land with ownership evidence in the form of custom land title letter C equipped with latest tax statement (SPPT);

g. 50% of market value, rental fee or transfer price for collateral in the form of business property/kiosk/stall/righst to use/rights to exploit equipped with owner evidence or rights to use issued by valid management or issued by the authority;

h. 50% of market value for collateral in the form of motor vehicle, ship or motor boat equipped with owner evidence and bound in accordance with applicable stipulations;

i. 50 % of warehouse receipt that has been appraised more than 12 months or up to 18 months and in line with the Act and the prevailing regulations and procedures;

j. 50 % for part of funds guaranteed by BUMN/BUMD conducting business as credit guarantor;

k. 30 % of market value for collateral comprising vehicle, ship or motor boat including proof of ownership and the power of attorney to sell that has been validated by a notary;

l. 30 % of warehouse receipt that has been appraised more than 18 months but not exceeding 30 months and in line with the Act and the prevailing regulations and procedures.

Provision for Assets Losses for Islamic Rural Bank

Islamic Rural Bank is required to establish PPA on earning assets and non-earning assets. PPA comprises


2012

12�

general; reserves and special reverses for earning assets and special reserves for non-earning assets. General reserves of PPA shall be no less than 0.5% of total earning assets classified current, not including BI wadiah certificate and securities and/or claims issued by government based on sharia principle. For special reserves are stipulated as stated in regulation of allowance for earning assets losses for rural banks. Obligation to establish PPA shall not be in force on earning assets in the form of Ijarah Muntahiyah bit Tamlik. Bank is required to establish amortization for Ijarah or Ijarah Muntahiyah bit Tamlik. Collateral that might be taken into account as subtracting element in the establishment of PPA shall consist of:a. Guarantee from Indonesian Government or Local

Goverment or State-Owned Enterprises/Regional-Owned Enterprises;

b. Cash collateral including current deposit, saving deposits, guanrantee deposits and/or gold which are blocked at the concerned bank equipped with a power of attorney to disburse;

c. Land and/or building not for residential purpose and machine considered as one unit and bound by liability right;

d. Warehouse receipt ;e. Business property/stall/kiosk managed by mana-

gement agency;f. Vehicle and ship fulfilling certain requirements.

7. Debt Restructuring

Restructured Credit Quality is determined as follows: a. Maximum Substandard for credit classified as

Doubtful or Loss before restructuring;b. Unchanged, for credit classified as Current or

Substandard before restructuring. Bank is required to take charge of any loss arising

from debt restructuring, after calculated by provision of PPA and may only acknowledged as revenue after payment of principal on restructured debt.


1�0

8. Financing Restructuring for Islamic Bank dan Islamic Business Unit (UUS)

Banks can perform financing restructuring by applying prudential principles. Bank shall take the necessary measures in order to keep that the financing quality after being restructured is classified as current. Banks are prohibited to perform financing restructuringwith the objective of avoiding:a. Degrading of the classification of financing quality;b. Larger allowances for assets losses (PPA); or c. Acknowledgement of margin revenue decist or

ujrah acrually. Financing restructuring can only be performed

based on written application by the customer. Financing restructuring can only be performed for customer fulfilling the following criteria:a. Customer experiencing the declining of payment

capability; andb. Customer having good business prospect

and capable of fulfilling the obligation after restructuring.

Financing restructuring shall be supported with the necessary analysis and evidence that are well-documented. Bank is obliged to have policy and written SOP concerning financing restructuring.

�. Statutory Reserves (GWM)

Conventional Commercial Bank

Bank shall fulfill the statutory reserves in rupiah, while the Foreign exchange Bank besides having the obligation to fulfill the statutory reserves in rupiah, is also obliged to fulfill the statutory reserves in foreign currency. Statutory reserves in rupiah consist of Prime Statutory Reserves, Secondary Statutory Reserves and LDR Statutory Reserves. The fulfillment of statutory reserves in rupiah shall be implemented as follows:a. Primary Statutory Reserves in rupiah at 8% of DPK

in rupiah; b. Secondary Statutory Reserves in rupiah at 2.5% of

DPK in rupiah; and


2012

1�1

c. LDR Statutory Reserves in rupiah is calculated between the parameter of low disincentive or parameter of high disincentive and the difference between LDR Bank and LDR Target by taking into account the difference between Bank Minimum Capital Adequacy Requirements (KPMM) and Incentive Minimum Capital Adequacy Requirements (KPMM).

Statutory Reserves in foreign currency is determined at 8% of DPK in foreign currency with the following fulfillment:a. From March 1, 2011 to May 31, 2011 the Statutory

Reserves in foreign currency is determined at 5% of DPK in foreign currency.

b. From June 1, 2011 the Statutory Reserves in foreign currency is determined at 8% of DPK in foreign currency.

Percentage of GWM as stipulated, are adjustable from time to time, by considering the economic condition and the direction of BI policy.

Sanction will be imposed to bank violating the statutory reserves in foreign currency in the form of payment in rupiah using the middle rate of BI on the day of violation.

Islamic Bank and Islamic Business Unit

Bank shall preserve GWM in rupiah and in addition, foreign exchange Bank shall preserve GWM in foreign currency. GWM in rupiah is defined at 5% of DPK in rupiah, and GWM in foreign currency is defined at 1% of DPK in foreign currency. In addition to those regulations, bank possessing financing ratio in rupiah on DPK less than 80% and:a. Possessing DPK ≥ 1(one) trillion rupiah to 10 (ten)

trillion rupiah shall be entitled to additional GWM in rupiah amounting to 1% of DPK in rupiah;

b. Possessing DPK in rupiah ≥ 10 (ten) trillion rupiah to 50 (fifty) trillion rupiah shall be entitled to additional GWM in rupiah amounting to 2% of DPK in rupiah;


1�2

c. Possessing DPK in rupiah ≥ 50 (fifty) trillion shall be entitled to additional GWM in rupiah amounting to 3% of DPK in rupiah.

Bank possessing financing ratio in rupiah at DPK in rupiah amounting to 80% or more; and/or Bank possessing DPK in rupiah up to 1 (one) trillion), shall not be imposed an additional GWM liabilities as stipulated.

10. Transparency of Bank Financial Condition

Commercial Bank

Commercial Banks are required to disclose their financial condition to BI and the public in monthly, quarterly, and annual reports as part of strengthening the transparency of bank financial condition and promotion of market discipline. In addition to the financial statement, banks are also required to provide BI with reports on related party transactions and reports on provision of funds, commitments, and other equivalent facilities from any companies within the same business group. Other than submitting quarterly published report, Islamic Commercial Banks are also required to provide information on quarterly profit sharing distribution and for the position of June and December to disclose the report on sources and use of qardh fund and the fund related to zakat, infaq and shodaqoh (ZIS) as well as the statement of change of restricted investment fund (if any). To ensure broader distribution of information to the public, Commercial Bank monthly and quarterly published financial statements are posted on the BI homepage and the quarterly financial statement in particular must also be published in the media.

Rural Bank and Islamic Rural Bank In an effort to guarantee the transparency of the

financial condition of a bank, Islamic Rural Banks are required to produce and submit financial statements including:a. Annual Financial Statement,


2012

1��

b. Quarterly Financial Statements. The Annual Financial Statement covers: general

information (management, ownership, business development, etc.) and annual financial statements (balance sheet, profit/loss statement, cash flow statement, etc.) For Islamic Rural Banks that have total assets above Rp10 billion, the Annual Financial Statement must be audited by a Public Accountant.

A Islamic Rural Bank must announce its Quarterly Financial Statements for the reporting periods ended the months of March, June, September and December. Announcement of the quarterly financial statements can be done through the local daily newspaper or posted on the announcement board in the office of the Islamic Rural Bank.

11. Transparency in Bank Product Information and Use of Customer Personal Data

Banks are required to implement transparency in bank product information and use of customer personal data into a written policy and procedures. Banks are required to provide complete, clear written information in the Indonesia language on the characteristics of each bank product. If the Bank intends to provide and/or distribute personal customer data to other parties for commercial purposes, Banks are required to obtain written consent from customers. In addition to quarterly financial reports, islamic rural banks are also required to provide information on quarterly profit sharing distribution and for the position of June and December to disclose the report on sources and use of qardh fund and the fund related to zakat, infaq and shodaqoh (ZIS) as well as the statement of change of restricted investment fund (if any).

12. Prudential Principles in Equity Participation by Commercial Banks

Equity Participation must be conducted on the basis of prudential principles. Equity Participation is permitted if:


1��

a. The CAR of the bank complies with the regulatory requirement;

b. The equity participation does not impact the sustainability of bank operations and does not result in material increase in the risk profile of the bank;

c. The bank has an adequate internal control system for equity participation activities;

d. The pla.n for equity participation is stated in the Annual Business Plan;

e. The bank is not under intensive supervision, unless the bank has been placed under that status by reason of being a systemically important bank and/or exerting major influence in the national economy;

f. The bank is not under special surveillance as prescribed by the applicable legal provisions;

g. The bank has not been subject to administrative sanctions comprising the suspension of specific business activities during the last 12 months imposed by BI and/or other authority.

Equity Participation is permitted only for long-term investment and may not be intended for sale and purchase of shares. The total value of all equity participation shall not exceed 25% of bank capital.

Quality of Equity Participation is classified according to the applicable BI regulations. Quality of Temporary Equity Participation is stipulated as follows:a. Current, if not exceeding a term of 1 year;b. Sub-Standard, if more than 1 year but not exceeding

4 years;c. Doubtful, if more than 4 years but not exceeding 5

years;d. Loss, if the Temporary Equity Participation has not

been recovered even though the debtor company has booked cumulative profit.

BI may order the bank to take remedial measures and/or recommend that the competent authority take corrective actions and/or freeze part or all of the business activities of the investee if in the opinion of BI


2012

1��

the business of the investee:a. reflects an unsound financial and non-financial

condition; and/orb. negatively impacts the financial and non-financial

condition of the bank.

1�. Prudential Principles in Asset Securitization for Commercial Banks

Underlying reference assets for asset securitization shall comprise financial assets in the form of credit, claims arising from securities, future receivebles, and other equivalent financial assets. Underlying reference assets shall fulfill the following criteria: have cash flow; are owned by and under the control of the originator; and freely transerable to issuer. In asset securitization, a Bank may function as: originator; credit enhancer; provider of liquidity facility; servicer; custodian bank; investor.

1�. Prudential Principles in Structured Product for Commercial Banks

Structured product is bank product presenting a combination of 2 or more financial instruments in the form of non derivative and derivative financial instruments or derivative and derivative and at least has the following characteristics:a. Value or cash flow resulting from the product is

related to one or a combination of basic variables such as interest rates, foreign exchange rates, commodities and/or equity; and

b. The pattern of change in the value or cash flow of the product is not regular, compared to the pattern of change in the basic variables as referred to in point (a) above, thus resulting in a change in the value or cash flow which does not reflect the pattern of overall change in the basic variables in a linear way (asymmetric payoff), which is characterized by, among other things, the existence of:• Optionality, such ascaps, floors, callars, step up/

step downand/orcall/put features;


1�6

• Leverage;• Barriers, such asknock in/knock out; and/or• Binary or digital ranges.

The meaning of derivative in this provision includes embedded derivatives.

Structured Product Activities include activities and/or processes that are conducted in relation with planning, development, issuance, marketing, offering, sales, operation, and/or cessation of activities related to Structured Products.

Commercial banks may only provide Structured Products after obtaining: a. In-Principle Approval; and b. an Effective Statement for every issuance of each

type of structured product from BI. Foreign Trade Bank can only perform structured

product transaction related to basic variables such as exchange rate and/or interest rate. Non-Foreign Exchange Bank can only perform structured product transaction related to basic variable such as interest rate. Bank is obliged to include activities related to structured products plan in bank business plan. Bank is obliged to apply risk management in an effective manner in conducting structured product activities. Bank is prohibited to use words ”deposit”, “deposit”, “protected”, “demand deposit”, “saving”, and/or other words that will give customers a perception that the Bank provides full protection to structured product return on capital, when at maturity date the structured product issued by Bank is not supported by full protection on capital in the original currency.

1�. Prudential Principles in Implementing Agency Activity of Foreign Financial Products by Commercial Banks

A Bank may only conduct activities related to Agency of Foreign Financial Products subject to BI approval in principle. To become an agent of Securities Foreign Investment Instrument, in addition to the previous mentioned requirements, the bank must comply


2012

1�7

with the provisions defined by relevant authority of Indonesian capital market. Bank is prohibited to act as subagent in conducting Agency of Foreign Financial Products. Bank in Indonesia may act as agent of Foreign Financial Product that at least fulfills the following requirements:a. Having been registered and/or having met the

provisions from relevant authority in the country of origin of the publisher;

b. Having been reported to BI by the bank. Other than fulfilling the above mentioned

requirements, Foreign Financial Products in the form of Non-Securities Investment Instrument allowed for sale by bank must be structured product and must meet the following requirements: a. Published by an overseas bank with branch office in

Indonesia;b. Related to basic variables such as exchange rates

and/or interest rates; andc. Not the combination of various instruments

with derivative transactions of foreign currency to rupiah in the framework of speculative yield enhancement.

Foreign Financial Product is not included in the government insurance program because it is not in the form of bank saving.

16. Prudential Principle for Commercial Banks Submitting A Part of the Work to a Third Party

In conducting outsourcing activity, bank is required to apply prudential principles and risk management, and be responsible on the work outsourced to a Service Company.

Oursourcing related to supporting job shall at least fulfill the following criteria: a. Low risk; b. Does not require high competence qualification in

the field of banking; and c. Not directly related to the process of decision

making that may influence bank operation.


1�8

Outsourcing agreement with Service Provider shall at least fulfill the following requirements: a. Indonesian legal entity;b. Having a valid business license from the competent

authority complying to the business activity; c. Having a good financial performance and reputation

and adequate experience;d. Having human resources that support the

implementation of work being outsourced; ande. Having the necessary facility and means required in

the outsourcing. BI has the authority to terminate Outsourcing activity

conducted by bank if the outsourcing considred to be potentially dangerous for bank business continuity.

17. Implementation of Anti Fraud Strategy for Commercial Banks

Bank is required to have and to apply anti Fraud strategy in compliance with both internal and external atmosphere, complexity of business activities, potential, type and risk of Fraud and supported by competent resources. Anti Fraud strategy is a part of strategic polices which are applied in Fraud controlling system. Banks with anti Fraud strategy but has not fulfilled the minimum requirements are required to adapt and improve the existing strategy and to submit the monitoring of anti Fraud strategy application to BI.

In controlling the risk of Fraud, it is necessary for the bank to apply Risk Management with the reinforcement in certain aspects and must at least include Management Active Supervision, Organization Structure and Responsibility as well as Control and Monitoring. Anti Fraud strategy has 4 pillars as follows: 1. Prevention: accommodating apparatus that may

minimize any potential Fraud that must at least include anti Fraud awareness, identification of insecurity, and know your employee.

2. Detection: accommodating apparatus in the framework of identifying and finding Fraud


2012

1��

incident in bank operational activity, that must at least include policies and mechanism related to whistleblowing, surprise audit, and surveillance system.

3. Investigation, Reporting and Sanction: accommo-dating apparatus in the framework of collecting information, reporting system and sanction imposition on fraud in bank business activities, that at least covers the standard of investigation, reporting mechanism and sanction imposition.

4. Monitoring, Evaluation and Follow Up: accommodating apparatus in the framework of monitoring and evaluating Fraud incident and conducting the necessary follow up activity based on the result of evaluation, at least including monitoring and evaluation on Fraud incident as well as follow up mechanism.

18. Guidelines for the Calculation of Risk-Weighted Assets for Credit Risk Using Standardized Approach

This provision is the amendment of regulation related to the calculation of Risk-Weighted Asset in order to have a Minimum Capital Adequacy Requirements that better reflects the risk encountered by bank and to be in line with the prevailing international standard.

Basic prinsciple in this regulation include but not limited to: a. Credit Risk includes Credit Risk due to debtor’s

failure, counterparty credit risk, and settlement risk.

b. The formula used in calculating Risk-Weighted Asset is Net Claim x Risk Weight.

c. Risk weight is defined based on: (i) debtor’s rating or counterparty’s rating, in accordance with portfolio category; or (ii) certain percentage for certain type of claim.

d. Portfolio category includes : (i) Claims on Sovereign; (ii) Claims on Public Sector Entities; (iii) Claims on Multilateral Development Banks and International


1�0

Institutions; (iv) Claims on Bank; (v) Claims Secured by Residential Property; (vi) Claims Secured by Commercial Property; (vii) Employees’ or Retiree’s Credit; (viii) Claims on Micro and Small Businesses and Retail Portfolios; (ix) Claims on Corporate; (x) Past Due Loan; (xi) Other assets.

e. The rating used is the latest rating published by rating institution recognized by BI in compliance with prevailing regulation. Domestic rating is used to determine risk weight of claim in rupiah and international rating to determine risk weight of claim in foreign currency. Claims in the form of securities uses SSB rating, while claims in forms other than SSB will use debtor’s rating.

f. Credit risk mitigation (MRK) techniques recognized are: (i) MRK Technique - Collateral; (ii) MRK Technique – Guarantee; (iii) MRK Technique– Insurance or Credit Insurance.

D. Regulations of Bank Soundness Rating

1. Conventional Commercial Bank

Banks are obliged to maintain and/or improve Bank Soundness Rating by applying prudential principles and risk management in implementing their business activities. Banks are required to conduct evaluation related to risk-based bank rating both individually or consolidated. Banks are obliged to perform self assessment on Bank Soundness Rating at least every semester for the position of end of June and December. Whenever necessary, banks are required to update self assessment of Soundness Rating. BI shall conduct assessment on Soundness Rating and an updated bank soundness rating based on examination results, bank regular reports, and/or other information.

In the framework of bank supervision, in the event of any diffrence between the result of Bank Soundness Rating performed by BI and the result of self assessment performed by the concerned bank, the result of


2012

1�1

PK

PK-1

PK-2

PK-3

PK-4

PK-5

Criteria

Bank is in excellent condition and capable to withstand any significant negative impact from any change in business conditions and other external factors.

Bank is in sound condition and is capable to withstand any significant negative impact from any change in business conditions and other external factors.

Bank is in fairly sound condition and is capable to withstand any significant negative impact from any change in business conditions and other external factors.

Bank is in poor condition and and is less capable to withstand any significant negative impact from any change in business conditions and other external factors.

Bank is in unsound condition and and is not capable to withstand any significant negative impact from any change in business conditions and other external factors.

Soundness Rating performed by BI will be considered valid.

Assessment of Bank Soundness Rating includes the following aspects:• Risk Profile;• Good Corporate Governance (GCG);• Earnings; and• Capital

Composite Rating of Bank Soundness Rating is determined based on comprehensive and structured analysis on each factor rating by taking into account the materialistic and significance of each factor and by considering bank capability in encountering significant change of external condition. Composite Rating categories are as follows:


1�2

CompositeRating

PK-1

PK-2

PK-3

PK-4

Criteria

Indicates that a bank and UUS is classified as very good and able to overcome any negative impact of the economy or financial industry.

Indicates that a bank and UUS is classified as good and able to overcome any negative impact of the economy or financial industry, but the bank and UUS still has minor weaknesses that can be strengthened through routine action.

Indicates that a bank and UUS is classified reasonably good, but a number of weaknesses were found that could cause the composite ranking to deteriorate if the bank and UUS does not immediately take corrective action.

Indicates that a bank and UUS is classified as not good and sensitive to any negative impact of the economy or financial industry or a bank and UUS has serious financial

2. Islamic Commercial Bank The assessment of the soundness rating of BUS

covers the assessment of such factors as capitalization, asset quality, management, profitability, liquidity and sensitivity to market risks.• The assessment of the ranking of the financial

components or ratios contributing to the factors of capitalization, asset quality, management, profitability, liquidity and sensitivity to market risks is calculated quantitatively.

• The assessment of the ranking of components contributing to management is accomplished through the analysis of supporting indicators and elements of judgment.

• Based on the results of the assessment of the ranking of the financial factors and management factor, a Composite Ranking (PK) is determined as follows:


2012

1��

�. Rural Bank In essence, rating of banks takes place through a

qualitative assessment of the various aspects affecting the condition and growth of a bank, covering Capital, Assets Quality, Management, Earnings, and Liquidity (CAMEL). Important aspects of the rating are described as follows:• The outcome of the rating is expressed as one of four

levels: Sound, Fairly Sound, Poor, and Unsound.• The weighting of each CAMEL factor for Commercial

Banks and Rural Banks is as follows:

• Enforcement of regulatory provisions in which sanctions are linked to Commercial Bank rating apply to violation and/or lending in excess of the Legal Lending Limit violation of applying know your

WEIGHT

CompositeRating

PK-5

Criteria

weaknesses or there is a combination of various unsatisfactory factors, and that if effective action is not taken, these factors have the potential to cause difficulties that could endanger the continuity of operations.

Indicates that a bank and UUS is very sensitive to any negative impact of the economy or financial industry, and is experiencing difficulties that endanger the continuity of operations.

No CAMEL FACTOR WEIGHT

1 Capital

2 Assets Quality

3 Management Quality

4 Earnings

5 Liquidity

30%

30%

20%

10%

10%


1��

CompositeRating

PK-1

PK-2

PK-3

PK-4

Criteria

Indicates that bank is in excellent condition due to a very good management.

Indicates that bank is in good condition due to a good management.

Indicates that bank is in fairly sound condition due to a fairly good management.

Indicates that bank is not in good condition due to poor management.

customer (KYC) principle, violation of transparency in bank product information and use of the customer personal data

• Factors that would result in downgrading of bank rating to unsound include: internal conflicts, interference by parties outside the bank’s management, window dressing, bank-within-bank practices, suspension from clearing, and other banking practices that would jeopardize the sustainability of bank operations.

�. Islamic Rural Banks

Assessment of Soundness Rating of Islamic Rural Banks will cover evaluation on the following factors: capitalization, asset quality, profitability, liquidity and management. Quantitative and Qualitative assessment will be imposed on capitalization, asset quality, profitability and liquidity while management factor will be evaluated according to qualitative aspect. Qualitative assessment will be conducted by considering relevant supporting and/or comparative indicators. Pertaining to the output of financial factor rating and assessment of management factor rating, a Composite Rating was therefore defined which represents the final rank of Bank Soundness Rating. Composite Rating is determined as follows:


2012

1��

E. Self-Regulatory Banking (SRB) Regulations

1. Guidelines for Formulation of Bank Credit Policy

Banks are required to institute written credit policy guidelines elaborating at least the following key points stipulated in the Guidelines for Formulation of Bank Credit Policy:a. Prudential principles in credit operations.b. Organization and management of credit

operations.c. Credit approval policy.d. Credit documentation and administration.e. Credit control and settlement of problem loans.

Banks are required to maintain consistent compliance with the formulated Guidelines on Bank Credit Policy.

2. Implementation of Good Corporate Governance (GCG)

Commercial Bank

This regulation is aimed at strengthening the internal affairs of the national banking system to face increasingly complex risks, to protect stakeholders and improve compliance with the laws and regulations in force and with prevailing ethical values of the banking industry. In this regulation, GCG are the rules of management based on principles of transparency, accountability, responsibility, independence and rightness.

The basis of implementation of GCG is realized through the implementation of the duties and responsibilities of the Board of Commissioners and

CompositeRating

PK-5

Criteria

Indicates that bank is in an extremely unsound condition due to a very weak and poor management.


1�6

Board of Directors, the thoroughness and execution of duties of committees and work units to perform their function of control of a bank’s internal affairs, application of rules of compliance, internal and external auditors, application of risk management, including internal control systems, availability of funds for related parties and the availability of large sums of funds, strategic bank plans, and the transparency of financial and non financial affairs. Every bank is obliged to perform a self-assessment of compliance with GCG, product routine reports concerning compliance with GCG, which shall then be evaluated by BI.

Islamic Bank and Islamic Business Unit

The application of GCG principles for Islamic Bank should at least be realized in the implementation of tasks and responsibilities by the Board of Commissioner and the Board of Directors; completeness and implementation of tasks of committees and the function performed by BUS internal control; implementation of tasks and responsibilities of Sharia Supervisory Board; the application of compliance, internal and external audits; minimum limit of fund disbursement; and transparency of BUS financial and non financial condition.

GCG application for Islamic Business Unit should at least realized in the implementation of Sharia Business Unit Director; implementation of tasks and responsibilities of Sharia Supervisory Board; fund disbursement to core customer and fund saving by core depositors; and transparency of financial and non-financial condition of Islamic Business Unit.

�. Internal Audit Unit at Commercial Banks

Commercial Banks are required to establish an Internal Audit Unit as part of the application of Standard Practices for the Bank Internal Audit Function. The Internal Audit Unit is a unit directly responsible to the president director. The Internal Audit Unit has the following tasks and responsibilities:


2012

1�7

a. Assist the president director and board of commissioners in their supervisory tasks by elaborating in operational terms the planning and implementation of audit and the monitoring of audit findings;

b. Conduct analysis and evaluation in finance, accounting, operations, and other activities through on-site examination and off-site supervision;

c. Identify all possibilities for improving efficiency in the use of resources and funds;

d. Provide objective recommendations for improvement and information on activities examined at all levels of management.

�. Compliance Implementation of Commercial Bank

The Board of Directors is required to develop and implement Compliance Culture in all levels of organization and bank enterprise activities and to ensure the implementation of Bank Compliance Function. Bank Compliance Function includes:a. Realization of Compliance Culture at all levels of

organization and bank enterprise acitivities;b. Management of compliance risk faced by Bank;c. Ensuring that policy, provision, system and

procedures as well as enterprise activities performed by bank are in compliance with the BI regulations and other prevailing laws and regulations including Sharia Principles for Islamic Commercial Bank and Islamic Enterprise Units; and

d. Ensuring compliance of the bank with its commitment to BI and/or other supervisory authority.

Banks are required to appoint Director in charge of Compliance Function and to set up compliance working unit. Director in charge of compliance function and compliance working units in Islamic Commercial Bank and/or Commercial Bank possessing Islamic Enterprise Units are obliged to coordinate with Islamic Supervisory Board related to the implementation of Compliance Function with Sharia Principles.


1�8

Director in charge of Compliance Function is required to meet independence requirements, President Director and/or Vice-President Director is not permitted to have double position as Compliance Director. Director in charge of Compliance Function is not permitted to be in charge of the following functions: enterprise and operations; risk management that requires decision making for bank enterprise activities; treasury; finance and accounting; logistics and supply of goods/services; information technology; and internal audit.

�. Business Plan and Annual Budget

Commercial Bank

Bank must set up a realistic Enterprise Plan every year by taking into account: a. External factors affecting the continuityof the banks

operation;b. Prudential principles;c. Risk management application; andd. Sound banking principles..

In addition to Enterprise Plan, commercial bank having Islamic Enterprise Unit, is obliged to prepare a special Enterprise Plan consolidated with the Enterprise Plan for Commercial bank.

Enterprise Plan shall at least cover the following:a. Executive summaryb. Management policies and strategiesc. Risk management implementation and current

performanced. Financial projection and assumptions usede. Ratio projection and certain items;f. Fund collection plang. Funds disbursement planh. Capital plani. Organization and Human Resources development

plan j. New product and activity development k. Change and/or development of Office Network

Planl. Other information


2012

1��

Bank will be allowed to make a change in the Enterprise Plan in the event of: a. External and internal factors that significantly affect

Bank operation; and/or b. Any factor that, based on BI consideration, will

significantly affect Bank performatnce. Any change of Enterprise plan shall only be

conducted once and not later than June of the current year.

Rural bank

a. Rural Bank must formulate a realistic business plan and annual budget, stating at least the following:• Plan for funding• Plan for fund channelling, consist of working

capital credit, investment credit, and consumption credit

• Balance sheet and income statement projections in 2 (two) semesters

• Human resources development plan; and• Action for improving bank performance, consist

of resolution of non performing loan, plan for recover of financial loss, and others.

b. Business plan should be arranged by the board of director or the executive officer in equal level and should be approved by the board of commissioners.

c. The board of directors is required to implement the business plan and the board of commissioners is required to supervise its implementation.

d. The business plan must be submitted to BI no later than one month after the end of calender year. The report of business plan realization by bank on quarterly basis and the report of business plan supervisory by bank on semi annual basis.

6. Application of Risk Management in The Use of Information Technology by Commercial Banks

Banks are required to apply effectively risk management in the use of Information Technology.


1�0

This application should at least cover: a. Active supervision of Board of Commissioners and

Board of Directors;b. Adequacy of policy and procedures in the use of

IT;c. Adequacy of identification, measurement,

monitoring and risk control in the user of IT, and d. Internal control system for the use of IT.

It is obligatory for Banks to set up Information Technology Steering Committee. This committee is responsible for providing recommendations to Board of Directors who are less involved:a. IT Strategic Planning in complying with its strategic

planning of business activities;b. Compatibility of the approved IT with IT Strategic

Planning;c. Conformity between IT projects implementation

and the agreed project planning;d. IT conformity with the requirements of management

information system and banking business activities;e. Effectiveness of measures in minimizing risk of

bank investment on IT sector with the objective of providing in reaching the goal of bank business;

f. Monitoring IT performance and its enhancement;g. Resolving IT related problems, which are difficult

to solve by the user’s working unit and performing work effectively, efficiently and timely.

7. Application of Risk Management for Commercial Banks

BI has made amendment on regulations concerning Risk Management based on several backgrounds as follows:a. A change in risk rating categories from 3 ratings to

5 ratingsb. Determination of risk profile as one of the factors

in Bank Soundness Rating by using risk approach (Risk-Based Bank Rating)

c. Bank is obliged to conduct consolidated risk profile assessment.


2012

1�1

Bank is obliged to implement risk management effectively, both for individual bank or consolidated bank. The implementation of risk management shall include but not limited to: a. active supervision by the Board of Commissioners

and the Board of Directors;b. adequacy of policies, procedures and establishment

of limits;c. adequacy of risk identification, measurement,

monitoring and controlling process as well as Risk Management information system; and

d. comprehensive internal control system. Commercial bank is obliged to implement risk

management principle for 8 types of risk: credit risk, market risk, liquidity risk, operational risk, legal risk, reputation risk, strategic risk and compliance risk. Islamic Bank is obliged to implement risk management involving at least 4 types of risk including credit risk, market risk, liquidity risk and operational risk.

In performing Risk Profile assessment, Bank is required to comply with BI regulation concerning Commercial Bank Soundness Rating. Bank is obliged to submit Risk Profile Report to BI in individual or consolidate manner on quarterly basis for March, June, September and December.

In addition to Risk Profile Report, bank is obliged to submit the following reports in the framework of application of Risk Management:a. Report of new Products and Activities.b. Other reports in the event of any potential condition

that may give rise to significant loss in bank financial condition.

c. Other report related to the application of risk management, among other, report of risk management for liquidity risk.

Other reports related to certain product publication or activities such as report of activities related to mutual fund.Report on joint-marketing with insurance company (bancassurance).

In addition, in certain condition BI may oblige bank to submit report related to the application of risk


1�2

management for liquidity risk beyond the determined period and/or or reports other than those mandatory periodically.

In implementing risk management process and system, bank shall be required to set up:a. Risk Management Committee comprising at least

the majority of the members of the Board of Directors and the related Executive Officer.

b. Risk Management working unit that will be independent and directly responsible to the President Director or especially assigned Director.

Bank is also obliged to possess written policies and procedures in order to manage inherent risk on new banking products and activities.

8. Consolidated Application of Risk Management by Banks that Control Subsidiaries

Considering that a bank can be exposed to risks directly from its business operations, or indirectly from the business operations of a subsidiary company, every bank is obliged to apply consolidated risk management with respect to its subsidiaries, and to insure that the prudential principles that apply to a bank also apply to its subsidiaries. This obligation is not applicable to subsidiaries that are owned due to loan restructuring. Based on this regulation, various rules of prudential principles must be fulfilled / taken into account by a Bank, either individually or on a consolidated basis with respect to a subsidiary, including: Risk Weighted Assets (ATMR), Minimum Capital Adequacy Ratio (KPMM), Assessment of Earning Assets Quality, elimination of assets write-offs (PPA) and the calculation of the Maximum Legal Lending Limit. The same principles apply individually and on a consolidated based to the assessment of soundness, risk profiles, and the application of bank status (in follow up to surveillance). With respect to a bank that has a subsidiary involved in the insurance business, prudential principles are not applied, but the bank is still responsible to evaluate and submit reports on the application of risk management


2012

1��

conducted separately. A bank is also responsible to submit a list of nominee managers proposed in a General Meeting of Shareholders who shall manage a subsidiary to BI and a list of the names of managers who hold the posts of managers of a subsidiary at the end of December 2006. This regulation is effective in phases commencing from December 2006.

�. Application of Risk Management in Internet Banking

Banks providing internet banking services are required to ensure effective application of risk management in their internet banking activities, covering the following:a. Active oversight by the Board of Commissioners

and Board of Directorsb. Security control systemc. Risk management with particular focus on legal risk

and reputation risk. Application of risk management shall be set out in

a written policy, procedures, and guidelines formulated with reference to the Guidelines for Application of Risk Management in Banking Services over the Internet issued by BI.

To improve effectiveness in application of risk management, banks are required to conduct a regular evaluation and audit of internet banking activities.

10. Application of Risk Management on Bank Engaging in Joint-Marketing Activity with Insurance Company/Bancassurance

Banccassurance is a collaboration between Bank and insurance company in the framework of marketing insurance product through Bank activities. The collaboration is classified into 3 following enterprise types:a. Referenceb. Distribution Cooperationc. Product Integration


1��

Bank conducting bancassurance activities must comply to prevailing provisions related to banking and insurance such as BI regulations concerning risk management, bank secrecy, transparency especially those involving bancassurance.

In implementing bancassurance, bank is not permitted to undertake the risk arising from the insurance product that will be the responsibility of the insurance company acting as the bank’s partner.

11. Application of Risk Management for Banks Conducting Activities Related to Mutual Funds

In response to the steadily expanding involvement of Banks in activities related to mutual funds, there is growing awareness that these activities not only yield benefits but also incur various potential risks for Banks. In this regard, Banks need to strengthen the effective application of risk management through the implementation of prudential principles and protection of customer interest. The scope of Bank activities related to mutual funds covers activities of Banks as investors, Banks as mutual fund sales agents, and Banks as Custodian Banks. The most important task that a Bank is required to perform in support of effective application of risk management is to: a. Ensure that any investment manager acting as

partner in activities related to mutual funds is registered and licensed by the capital market authority in accordance with the applicable regulatory provisions;

b. Ensure that the mutual fund concerned has received a statement of effective registration form the capital market authority in accordance with the applicable regulatory provisions;

Identify, measure, monitor, and control risks arising from activities related to mutual funds.

In the implementation of prudential principles, Banks are prohibited from any action,whether directly, that may cause a mutual fund to acquire characteristics resembling thoseof Bank products, for example, savings deposits or time deposits.


2012

1��

12. Risk Management Certification for Management and Officers of Commercial Banks

In implementing an effective and well planned Risk Management, Bank is required to fill up the positions of Board of Directors and Bank Managers with human resources having competence and expertise in Risk Management confirmed by risk management certficate issued by Profession Certification Agency. Holding risk management certification for the Board of Directors and Bank officers is one of the important aspects in competence assessment in fit and proper test. Bank is obliged to set up plan and conduct human resources development program in enhancing competence and expertise in the field of risk management. The human resources development program must be disclosed in the bank business plan. Risk management certificate was established using 5 levels based on bank hierarchy and organizational structure from level 1 to level 5. Risk Management certification may only be performed by Profession Certification Agency acknowledged by BI. Risk Management Certificate issued by international or other overseas agency may be considered to be recognized equivalent to the Risk Management Certificate published by Profession Certification Agency if the agency issuing the certificate is internationally recoqnized and accepted and the issuance of the certificate is not older than 4 (four) years.

1�. Application of Risk Management to Commercial Bank Offering Prime Customer Services (LNP)

Prime Customer Services (LNP) is a part of bank activities in providing services related to products and/or activities with certain privileges for Prime Customer. Prime Customer is an individual fulfilling certain criteria or requirements set forth by the bank in order to obtain bank services/use facilities with more privileges compared to other regular customer.

Bank offering LNP is required to possess written including but not limited to:a. Prime Customer Requirements, by determining


1�6

certain criteria/requirements to be fulfilled by the customer.

b. Scope of bank products and/or activities by taking into account BI regulation and other related rules and regulations.

c. The scope of privileges of Prime Customer by complying to BI regulations and other related rules and regulations.

d. Brand Name and Grouping of Prime Customers by clearly determining the difference of privileges for each group of Prime Customer.

In offering Prime Customer Services bank must apply the risk management on the following aspects:a. Supporting aspect of privilege service that must at

least include the application of Risk Management for: (i) human resources; (ii) LNP operation; (iii) products and/or activities offering; (iv) information technology.

b. Aspects related to transparency, education and customer protection. Bank is required to implement at least the following issues: (i) explaining LNP specification; (ii) confirming the explicit relation between Bank and Privilege Customers; (iii) confirming the authority of transaction agents; (iv) regular information.

Bank is obliged to manage the data, document or letters related to the activities of Privilege Customer in Prime Customer Service.

1�. Application of Risk Management to Bank Offering Mortgages (KPR) and Motor Vehicle (KKB) Loans

In line with the excessive growth of mortgages (KPR) and motor vehicle loans (KKB), banks need to enhance prudential principle in disbursing these loans which are considered risk potential for banks. From macro prudential point of view, the extremely high growth of KPR may lead to the rise of price of property asset that does not reflect the real price (bubble) thus will increase credit risk for bank with high exposure of property credit. Therefore in order to maintain productive economy and


2012

1�7

to encounter future challenge in financial sector, it is deemed necessary to set up new regulation that may bolster financial sector resilience and to minimize any potential precarious sources, including the growth of KPR and KKB with excessive rates. The policy was set by the regulation concerning the amount of Loan to Value (LTV) for KPR and Down Payment for KKB.

LTV was set at a maximum of 70% for housing loans with building criteria of 70 m². The LTV regulation does not affect the implementation of government housing programs.

Down Payment (DP) on motor vehicle loans has been set up as follows: a. A minimum DP of 25% for two-wheeled motor

vehiclesb. A minimum DP of 30% for four-wheeled vehicles

for non commercial purposec. A minimum DP of 20% for commercial vehicles

of four wheels or more, providing that one of the following requirements is fulfilled:• A public or goods transportation vehicle licensed

by the relevant authority to conduct specific activities, or

• A vehicle declared by an individual or legal entity, licensed by the relevant authority, used to support the operational activities of the corresponding business.

LTV ratio for KPR and the magnitude of DP for KKB may be adjusted from time to time in accordance with the latest economic development. This Circular Letter will be in force in March 2012, while the provisions related to the magnitude of LTV for KPR and DP for KKB will be effective on June 15, 2012.

1�. Application of Risk Management for Islamic Bank

In conducting its business activities bank is always encountered by risks that are closely related to its function as financial intermediation institution. The rapid development of external and internal environment of Islamic banking has led to a more


1�8

complex business risks. Bank is required to be able to adapt with the environment through the application of risk management in compliance with Sharia Principles.The principles of risk management applied to Islamic banking in Indonesia are directed to be in line with the basic regulations published by Islamic Financial Services Board (IFSB).

The application of risk management for Islamic bank must comply with the business size and complexity as well as the capacity of the bank. BI sets forth risk management as the minimum standard to be fulfilled by Islamic Bank and Islamic Business Unit in order that Islamic banking may develop it in accordance with the needs and challenges encountered in a sound and istiqomah manner and in compliance with Sharia principles.

16. Application of Anti Money Laundering and Prevention of Terrorism Financing Program (APU and PPT Program)

Bank is required to apply Anti Money Laundering and Prevention of Terrorism Financing Program or APU and PPT (previously known as the application of Know Your Customer – KNC) as the effort of preventing and combating money laundering and terrorism financing. The program is a part of the entire application of bank risk management. The application of APU and PPT program must at least include: a. Active Supervision of the Board of Commissioners

and the Board of Directors;b. Policies and procedures;c. Internal control;d. Management information system; ande. Human resources and training.

In applying APU and PPT program, Bank is obliged to have written policies and procedures that at least include:a. Request of information and documents;b. Beneficial Owner;c. Document verification;


2012

1��

d. A simpler CDD (Customer Due Dilligence);e. Termination of relationshipand rejection of

transaction;f. High risk area and PEP;g. CDD implementation by a third party;h. Updating and monitoring;i. Cross Border Correspondent Banking;j. Fund transfer; andk. Document management.

Bank is obliged to implement CDD procedures in the event of: a. conducting business relationship with potential

customer; b. conducting business relationship with a Walk in

Customer (WIC);c. doubting the information provided by Customer,

power of attorney and/or, Beneficial owner, ord. Suspicious financial transaction related to money

laundering and/or terrorism financing. In preventing the use of bank as media or target

of money laundering or terrorism financing involving bank’s internal party, bank is required to apply screening procedures in the framework of new employee recruitment. This is due to the use of banking service as the media of money laundering and terrorism financing that may involve the bank’s employee. Consequently it is considered necessary for the bank to apply Know Your Employee (KYE) in order to prevent or to detect any indication of money laundering by screening procedures and monitoring employee’s profile.

In applying APU and PPT programs, commercial bank is required to submit the following documents to BI:a. Guidelines for the Implementation of Anti Money

Laundering and Combating The Financing of Terrorism Program and the action plan for the implementation of the guidelines no later than 12 months after the enactment of BI Regulation; and

b. Report of data updating activity at the end of the year with the first one to be submitted at the end of 2010.


160

The evaluation of the application of APU and PPT programs shall be taken into account in bank soundness rating through management factor. In the event that the assessment result obtained is 5, in addition to the inclusion in the assessment of bank soundness, imposition on administrative sanction in the form of degrading of soundness rating and dismissal of the Board of Directors through the mechanism of Fit and Proper Test.

17. Resolution of Customer Complaint Bank is required to resolve each complaint submitted

by customer or representative of customer. Bank is required to have a unit or function especially established in each Bank Office to handle and resolve customer complaint. To resolve complaint, bank is required to determine the following issues in the written policies and procedures:a. receipt of complaint;b. handling and resolution of complaint; andc. monitoring of complaint handling and resolution.

A bank shall resolve a complaint no later than 20 (twenty) working days after the date of receipt of written complaint. In terms of certain condition, the bank may extend the period up to maximum 20 working days.

F. Funding Regulations

1. Short Term Funding Facility (FPJP) for Commercial Banks

Bank experiencing the short-term funding difficulties can obtain FPJP by fulfilling the specified requirements. The FPJP is referred to short-term funding difficulties experienced by Bank, due to lower cash-in flow in comparison with cash-out flow (mismatch) in rupiah in such way that bank shall not fulfill the GWM in rupiah. A Bank that can submit the FPJP application shall possess minimum positive capital adequacy ratio (CAR). FPJP ceiling is granted based on assumption of liquidity required until the Bank fulfills the GWM according to


2012

161

the prevailing laws. The withdrawal of FPJP shall be at the same amount as the need of the bank to fulfill the GWM. FPJP shall be secured by rural banks by high quality collateral with adequate value.Those collateral as referred to are SBI, and/or credit assets. Commercial Banks that needs FPJP shall submit written application to BI. The term of each FPJP is 14 (fourteen) calendar days, and consecutively extendable within the period of not longer than 90 (ninety) calendar days. Bank shall submit the remedial action plan in order to overcome liquidity difficulty not later than (five) days after the FPJP withdrawal. BI determines that the Bank receiving FPJP shall be classified as under special surveillance.

2. Short Term Funding Facility (FPJP) for Rural Banks Rural Bank that are experiencing difficulties in short-

term funding can submit the FPJP application insofar as fulfilling the criteria as follows:a. Holding Bank Rating at least during last 6 (six)

months as sound;b. Holding Cash Ratio during last 6 (six) months in an

average at least 4,05%;c. Holding capital adequacy ratio (CAR) minimum at

amount 8%; andd. Holding negative-daily cash flow during the last 14

(fourteen) calendar days. FPJP ceiling granted maximum in accordance with

the need of rural bank for short-term funding in order to achieve the cashier necessities ratio at the value of 10%. FPJP shall be secured by rural banks by high quality collateral with adequate value. Those collateral as referred are SBI, and/or credit assets. Rural Banks requiring FPJP shall submit written application to BI. The duration of each FPJP is 30 (thirty) calendar days, and extendable consecutively within the entire duration not longer than 90 (ninety) calendar days.

�. Short Term Financing Facility (FPJPS) for Islamic Banks

A Sharia Bank experiencing short term funding difficulty may obtain FPJPS facility providing that


162

the bank holds a positive ratio of Minimum Capital Requirement. The ceiling of FPJPS is determined based on the amount of estimated liquidity required until the bank meets the statutory reserves (GWM) in rupiah currency in accordance with the prevailing provisions. FPJPS disbursement is granted based on mudharabah agreement and liable to be guaranteed by appropriate high quality collateral.

�. Short Term Financing Facility (FPJPS) for Islamic Rural Banks

A Islamic Rural Bank experiencing a short term funding difficulty may obtain FPJPS facility providing that the bank meets the following criteria:a. Holding soundness rating not less than Composite

Rating 3 during the last 2 periods;b. Holding management factor assessment not lower

than C rating during the last 2 periods; andc. Possessing a negative daily cash flow during the last

14 calendar days. The ceiling of FPJPS is not more than equivalent to

the short term funding facility needed by Sharia Rural Bank in order to reach Cash Demand Ratio of 10%. FPJPS is granted based on mudharabah agreement and is obliged to be guaranteed by high quality collateral.

�. Intraday Liquidity Facility (FLI) for Commercial Banks

FLI is the funding facility extended by BI to Banks in their capacity as members of the BI-RTGS System and members of the SKNBI,that is performed by repurchase agreement (repo) of negotiable instruments, repayable on the same day as the day of use. A Bank may obtain an Intraday Liquidity Facility, whether in the form of FLI-RTGS or FLI-Kliring, after signing an Agreement for Use and Collateral Security of Intraday Liquidity Facility and submit the required supporting documents to BI.

A Bank may use an Intraday Liquidity Facility subject to meeting the following requirements:a. Holding securities that can be repurchased to BI,

in the form of SBIs and/or GS; SBN and/other


2012

16�

securities specified by BI.b. Bank is not under suspension as member Bank of

the BI-RTGS and/or member of the BI-SSSS, and/or terminated as clearing Bank; and

c. Recently holding the active status as member of the BI-SSSS.

6. Intraday Liquidity Facility (FLIS) for Commercial Banks Based on Sharia Principles

FLIS is funding facility provided by BI for banks in their capacity as members of BI-RTGS and SKNBI systems by repurchase agreement of securities repayable on the same day as the day of use.

Bank may use FLIS in the form FLIS-RTGS or FLIS-Clearing subject to the following requirements:a. Holding BI repo securities in the form of SBIS, SBSN

and/or other sharia securities issued by BI.b. Active membership status of BI-SSSS.c. Active membership status of BI-RTGS and/or not

under suspension as member of SKNBI.

7. The Emergency Financing Facility (FPD)

FPD is funding facilities from BI that is decided by Financial System Stability Committee (KSSK) that is guaranteed by government to Bank experiencing deficit of liquidity holding systemic impact and potentially lead to crisis, nevertheless it still fulfills the solvability rate. In case bank shall not obtain fund to solve the liquidity straits, Bank have the rights to submit the application to obtain FPD from BI by fulfilling following requirements: a. Bank experiencing lack of liquidity but holding

systemic impact;b. Bank Capital Adequacy Ratio (KPMM) is positive;

andc. Bank is holding an asset that can be used as

collateral. FPD shall grant to bank with Indonesian legal

entity. Bank receiving FPD shall submit action plan, the realization of action plan and daily liquidity report to BI.


16�

Bank receiving FPD will be classified to status of “under special surveillance”. The status will end as soon as the Bank receiving FPD had settled the FPD amortization liabilities, and fulfilled the requirements as stipulated in the prevailing BI Regulation.

G. Related to MSMEs Regulation

1. Technical Assistance

BI provides technical assistance in the form of training to banking, financing institutions and Business Development Service Provider (BDSP) with the objective of enhancing knowledge and capability and to support bank and UMKM financial institutions in credit disbursement and financing. Technical assistance will also be provided in the form of information services to the public.

The training subjects include SMEs Development Strategy, SME Development Survey using Rapid Rural Appraisal (RRA) method, UMK Credit Facility Analysis, SMEs Non Performing Credit Handling and Credit by Group with Bank Communication Development Pattern and Non Governmental Organization (PHBK). Training on financial aspect for BDSP has the objective of improving the knowledge and capability of BDSP in order to facilitate SMEs access in financing and to become the bank partners in developing SMEs through fund disbursement from banks or financial institutions to SMEs.

2. Business Plan

Bank is obliged to submit credit disbursement plan including SMEs credit based on economic sectors, types of use and provinces as well as its realization report.

�. Legal Lending Limit

Credit financing for customer through funding institution using channeling method will be excluded from group of borrowers providing that it complies to the prevailing requirements. Moreover, credit facility


2012

16�

with nucleus-plasma partnership pattern with nucleus company provides credit guarantee to the plasma company is excluded from group of borrowers providing that it complies with the prevailing requirements.

�. Risk-Weighted Assets for Claim to Micro, Small and Retail Portfolio

In line with the provision regarding the guidelines in calculating Risk-Weighted Asset for credit risk using standard approach, risk weight for claim to micro, small and retail portfolio fulfilling certain criteria is set 75%.

�. Assessment on Asset Quality

Quality determination may only be based on the timely principal payment and/or interest for credit and other financing facilities provided by each Bank to 1 (one) debtor or 1 (one) project amounting to Rp 1 billion or less, credit/other funding facilities provided by bank to SMEs debtors pertaining to certain requirements, and credit/other funding facilities for debtors with location of business activities in certain areas amounting to Rp 1 billion or less. On the other hand, with reference to collateral to be used as subtracting factor for asset losses, the collateral assessment for earning assets for debtor or group of borrowers amounting to maximum Rp 5 billion may be performed by bank internal appraiser.

H. Other Regulation

1. BI Rupiah Deposit Facility (FASBI)

FASBI is a facility provided by BI for banks to place their funds in BI. The tenor of FASBI shall be a maximum of 7 days beginning on the settlement date until the maturity date. FASBI may not be traded, pledged as collateral, or redeemed prior to maturity.

2. Bank Foreign Borrowings

A bank may take both short term and long term foreign borrowings in which the bank is required to


166

apply prudential principles. Bank intending to proceed with market entry in order to obtain long term foreign borrowings must have prior approval from BI and the plan must be included in the bank business plan. Bank is required to limit the daily balance of short term foreign borrowings to no more than 30% of Bank Capital.

�. Interbank Money Market Based on Sharia Principles (PUAS)

Market players have used Interbank Mudharabah Investment Certificate (SIMA) in PUAS transaction. In the effort of supporting PUAS development, BI has made improvement in regulation related to PUAS and SIMA including but not limited to the participation of Foreign Bank, the role of money market brokers in PUAS transaction, mechanism of PUAS instrument ownership transfer before maturity, and imposition of sanction. The regulation related to SIMA gives alternatives to bank pertaining to assets to be used as underlying before the publication of SIMA thus facilitates bank in determining profit sharing ratio of the determined asset (not as financing pooling).

In addition, BI also published regulations concerning sharia-based commodity futures certificate (SiKA). SiKA is the certificate issued based on sharia principles by Islamic Bank or Islamic Business Unit in PUAS transaction as the proof of sale and purchase by deferred payment on commodity transaction in markets. SiKA is published using Murabahah agreement.

�. Certifying Institution for Rural Bank

a. The objectives for establishing the certifying institutions are:• To ensure the quality of the certifying system;• To ensure the implementation of the certifying

system; and• To improve the quality of performance and

professionalism of BPR’s human resources. b. The requirements that must be fulfilled by the

certifying institutions are:


2012

167

• Having a vision and mission to improve and develop human resources in BPRs to support the creation of sound, healthy and efficient industrial condition for BPRs;

• Constituting the minimum bodies that consist of: Certifying Board, National Curriculum Committee, and management.

• Having and conducting its duties based on its competence and commitment to manage, determine, and organize the certifying system.

�. Restrictions on Rupiah Transactions and Foreign Currency Loans By Banks

Banks are prohibited and/or restricted and/or exempted in regard to conducting certain transactions with foreign parties, are:a. Foreign citizen;b. Foreign legal entity or other foreign institution;

excluding branch office of a foreign bank in Indonesia, Foreign Direct Invesment (FDI) company; or Foreign legal entityor foreign institution engenged in not for provit activities;

c. Indonesian citizen with permanent residence in another country and not domiciled in Indonesia;

d. Overseas bank office of Bank having its head office in Indonesia;

e. Overseas corporate office of a company incorporated in Indonesia.

The prohibited transactions are as follows:a. Provision of credit and overdrafts in Rupiahs/foreign

currencies;b. Placements in rupiah;c. Purchase of rupiah-denominated securities issued

by foreign parties;d. Interoffice accounts in rupiahs;e. Inter office accounts in foreign currency for provision

of credit outside Indonesia;f. Equity participation in rupiahs;g. Rupiah transfer to an account held by foreign

parties and/or joint account held by a foreign party


168

and non-foreign party at a domestic banks;h. Rupiah transfer to an account held by a foreign

party and/or joint account held by foreign party and non-foreign party at an overseas bank.

Banks are prohibited from conducting rupiah transfers to non foreign parties outside Indonesia.

The restricted transactions are as follows:a. Foreign exchange selling derivative transactions

against rupiahs;b. Foreign exchange buying derivative transactions

against rupiah. Exemptions to prohibitions and restrictions on

transactions are as follows:a. The prohibition on provision of credit shall not apply

to: syndicated credit that meets some requirements; credit card; consumption credit used in Indonesia; intraday rupiah and foreign currency overdraft; overdrafts in rupiah and foreign currency due to imposition of administration charges; negotiation by foreign parties of claims from the agency appointed by the government for management of banks assets within the framework of Indonesian bank restructuring, for which payment is guaranteed by a prime bank.

b. The prohibition on purchase of securities in rupiah shall not apply to: purchase of securities related to merchandise export from Indonesia, merchandise imports into Indonesia, and domestic trade; purchase rupiah-denominated bank drafts issued by overseas banks for the account of Indonesian overseas workers in which the rupiah funds are received by non foreign parties within Indonesia.

c. The prohibition on rupiah transfers shall not apply if conducted: as part of an economic activity in Indonesia; or between accounts held by the same foreign party.

d. The restrictions on foreign exchange derivative transaction against rupiahs shall not apply in the case of derivative transactions conducted for hedging purposes as part of: investment in Indonesia with a


2012

16�

time frame of no less than 3 months; merchandise exports from Indonesia and merchandise import into Indonesia by means of letter of credit (L/C); and/or domestic trade means of domestic letter of credit (SKBDN).

6. National Clearing System

Clearing is the exchange of paper instruments or electronic financial data among clearing members, whether in favor of members or in favor of customers of members, with settlement calculations completed at a specified time. The BI National Clearing System (SKNBI) is the BI Clearing system that covers debit clearing and credit clearing with settlement conducted on a nationwide basis. Settlement during debit clearing and credit clearing is conducted by the National Clearing Operator on the basis of the results of net multilateral calculation and the novation principle and is final and irrevocable. Settlement also takes place on the basis of same-day settlement. Debit notes issued by a Bank for processing in debit clearing in the SKNBI are restricted in amount to no more than Rp 10 million per debit note. Credit transfers processed in credit clearing are restricted to no more than Rp 100 million per transaction.

7. Real Time Gross Settlement (RTGS)

To support the achievement of an efficient, expeditious, secure, and reliable payment system for upholding financial system stability, BI has implemented the BI Real Time Settlement system (BI-RTGS). BI-RTGS is a system for electronic funds transfer among Members in the rupiah currency with settlement processed on an individual per transaction basis.

8. BI Certificates (SBI)

SBI are Rupiah-denominated securities issued by BI in recognition of short-term debt and comprise one of the instruments used in Open Market Operations. The term of SBIs is at least 1 month and no more than 12


170

months. SBI are issued in scrip less form and traded using the discount system. SBI may be held by banks and other parties as stipulated by BI, and are negotiable. SBI may be purchased on the primary market and traded on the secondary market under repurchase agreements (repo) or in outright purchase/sale.

�. BI Certificates on Sharia Principle (SBIS)

SBIS are rupiah denominated securities on sharia principles for short term issued by BI. SBIS is one of the instruments used in open market operations in framework of monetary stability based on sharia principle. SBIS issued under Ju’alah principle.

BI stipulates and gives reward on maturity for issued SBIS. SBIS may be purchased by BUS and UUS.

10. Government Securities (SUN)

SUN consists of Treasury Bills and Sovereign Bonds. Treasury Bills are issued with a maturity up to 12 (twelve) months, with interest payment using the discounts system. Sovereign Bonds are issued with a maturity of more than 12 (twelve) months, with variable rate, fixed rate, and/or interest payment using the discounts system. Any person, company, business partnership, association, or organized group may purchase SUN by take place the placement of bids with BI through bidders consisting of Banks, Money Market Brokerage Companies, and Securities Companies fulfilled the criteria by Minister of Finance.

11. Bank Secrecy

Bank secrecy covers everything pertaining to information on depositors and their deposit funds. Information on customers other than depositors does not come under the scope of information that must be kept confidential by banks. This provision also applies to affiliated parties.

The bank secrecy provisions do not apply to:a. Matters pertaining to taxationb. Settlement of bank claims placed in the hands of

the State Receivables and Auction Agency (BUPLN)/


2012

171

State Receivables Committee (PUPN)c. Judicial process in criminal proceedingsd. Judicial process in civil proceedings between banks

and customerse. Exchange of interbank informationf. Request, approval, or power-of-attorney of a

depositor drawn up in writingg. Request by legal heir of deceased depositorh. For purposes of examination pertaining to money

laundering. Implementation of the provisions in letters a, b,

and c, shall require prior written order or approval for waiving of bank secrecy from the management of BI, while implementation of the provisions in letters d, e, f, g, and h shall not require such order or approval.

12. Human Resources Development at Banks

Banks are required to provide education and training funds to develop professional human resources at bank. For Commercial Banks, education and training funds are stipulated at no less than 5% of human resources budget. For Rural Banks, the funds are stipulated at no less than 5% of actual expense incurred for human resources throughout the previous year. In case of the education and training funds have not fully used by the end of the current year, the fund shall be added into the funds for the following year. Education and training may be implemented by the following means:a. organized by the bank it self;b. participate in education and training provided by

another bank;c. work together to organize education with another

bank; ord. assign human resources to participate in education

and training provided by a banking educational institution.

The education and training plan shall be approved by the Board of Commissioners or supervisory board and shall be reported to BI in the annual business plan.


172

1�. Banking Mediation

Disputes between a customer and a bank wherein the financial claims of the customer are not fulfilled by the bank during negotiations can be submitted for settlement through banking system mediation. Banking mediation may be implemented for each dispute with financial claims of a maximum IDR 500 million. Customer may not submit any financial claim due to immaterial loss. The implementation of banking mediation function shall be conducted within a period of 30 working days and may be extended to the next 30 working days based on the agreement between bank and customer. The result of mediation will be realized in the form of agreement to mediate signed by customer or its representative and bank.

1�. Incentives in The Framework of Bank Consoli-dation

Consolidation is a consolidation of two or more banks by establishing a new bank and dissolving all of those banks without prior liquidation. BI grants incentives to banks implementing merger or consolidation, in the forms of: a. Ease in the extension of license to become a foreign

exchange bank;b. Temporary relaxation from obligation to meet the

rupiah minimum reserve requirement;c. Extension of time period allowed to settle excess of

the legal lending limit arising from the merger or consolidation;

d. Ease in the extension of license to open a Bank branch office; and/or

e. Partial reimbursement of consultant’s fees for due diligence work performed;

f. Temporary respite for the implementation of BI provisions in the which governs the Good Corporate Governance for banks.

Bank which plans to implement merger or consolidation is required to submit application of incentive use plan proposed by the Board of Directors


2012

17�

of respective bank. The Bank’s incentive use shall be submitted to BI no later than 6 months prior to the implementation of the merger or consolidation.

1�. Debtor Information System (SID)

The reporting party shall submit Debtor report to BI in a complete, acurate, actual, whole and in a timely manner every month at the end of the month position. Debtor report shall be prepared in compliance with the debtor report compiling guidance as stipulated by BI. In a framework to guarantee the accuracy, completeness, actuality of the report, and the submission of debtor report in a timely manner as well as the security acceptance of debtor information, the reporting party shall compile regulations, system, and procedures regulated in the written rules approved by the Board of Director of the reporting party.

The party that shall be eligible as SID reporting party is commercial bank and rural bank possessing a total assets of 10 (ten) billion rupiah during 6 (six) consecutive months. Voluntary member shall be applicable to rural banks that do not have a total assets complying to the requirements of The reporting party, Non Financial Institution (LKNB) and Inter-lending Cooperatives.

The party possessing the right to solicit SID output is Debtor Information, including The reporting party, Debtor, and other parties in the framework of the prevailing regulation.

BI shall conduct supervision to the fulfillment of the liabilities of the reporting party related to SID implementation.

16. Indonesian Banking Accountancy Guide for Conventional Commercial Banks

Pursuant to the application of Statements on Financing Accounting Standard (PSAK) no. 50 regarding Financial Instrument: Presentation and Disclosure and PSAK No. 55 regarding Financial Instrument: Acknowledgement and Measurement, BI conducts adjustment from Indonesian Banking Accountancy


17�

Guide (PAPI) 2001 to PAPI 2008. PAPI 2008 is a reference in preparing and presenting bank financial report. Considering that PAPI is the implementation guide of PSAK, for subjects not included in PAPI will still refer to the applicable PSAK.

17. Guidelines for Islamic Banking Accountancy (PAPSI) for Islamic Bank and Islamic Business Unit.

In view of the importance of banking information in establishing a sound Islamic banking BI collaborates with Indonesian Accountant Association in setting up guidelines for the preparation of Islamic banking financial report of Islamic banking with the publication of the Guidelines for Islamic Bank Accounting (PAPSI) in 2003 which is the technical elaboration the PSAK No. 59 of 2002 concerning Islamic Banking. BI started the adjustment process of PAPSI in 2011 to be adjusted to the amendment of Islamic PSAK No. 101 tp 109 by focusing on each transaction based on the agreement used. The PSAK was published by the Council of Islamic Accountancy Standard of Indonesian Accountant Association (DSAS IAI).

18. Determination of Financial Accountancy Standard for Rural Bank

In the framework of enhancing transparency of financial condition of rural bank and the preparation of relevant, comprehensive, reliable and comparable financial report, rural bank is obliged to prepare and present financial report based on SAK relevant to rural bank. Considering the complexity of PSAK 50 and 55 and the possibility of application difficulties on SME, in May 2009, Indonesian Accountant Association published Financial Accounting Standard, Entity without Public Accountability to be used by SME. In view of Rural Bank Characteristics as referred to in Banking Act have limited business activities and referring to the consultation with:a. The application of PSAK 50/55 – Financial

Instrument, replacing PSAK 31, is considered not in compliance with Rural Bank operational


2012

17�

characteristics and requires important expenses compared to the benefit to be obtained;

b. DSAK-IAI stated that SAK ETAP would be applicable for entities possessing significant public accountability, providing that the authority is still in charge of the use of the concerned SAK ETAP.

1�. Information Transparency on Prime Lending Rate

The regulation concerning information trans-parency on prime lending rate has the objective of enhancing transparency related to the characteristics of banking products including benefit, cost and risk in order to provide clear information to the customer as well as to improve good governance and to boost healthy competition in banking industry through a better market discipline.

The calculation of Prime Lending Rate involves the calculation of 3 components: (1) Cost of Fund for Credit, (2) Overhead cost spent by bank in providing loan; and (3) Profit margin determined for lending activities. In prime lending rate calculation, bank does not take into account the component of risk premium of individual borrower. Prime lending rate is the lowest interest rate used by bank as the basis in determining credit interest rate applicable for bank customers.

Bank is required to report to BI with regards to prime lending rate calculation based on 3 (three) types of loans, (1) corporate loan; (2) retail loan; and (3) consumption loan (mortgage and non-mortgage). Non-mortgage consumption loans do not include the provision of funds through credit cards and unsecured loans. Classification of types of loan is based on the criteria determined internally by the bank. Furthermore, prime lending rate is calculated yearly in the form of percentage (%). Report on prime lending rate calculation must be submitted to BI every month through Commercial Bank Monthly Report (LBBU). However, whenever necessary BI may require the report periodically or anytime outside the time frame of report submission.


176

Banks with total assets of Rp10 trillion or moreaccording to their monthly statement on and/or subsequent to February 28, 2011 are obliged to publish their prime lending rate according to the following provisions: (1) notice boards at each bank’s office and on bank website, for the first time it must be published no longer than 1 month starting from bank’s position is recorded to have a total assets of Rp 10 trillion or more in their monthly statement; and (2) an announcement in anewspaper for the first time accompanying the corresponding quarterly financial statement at the same period as monthly financial statement when the bank is recorded to have a total assets of Rp 10 trillion or more. A bank is still required to publish prime lending rate data even if its assets subsequently drop below the Rp10 trillion thresholds.

20. Rating Agencies and Ratings Acknowledged by Bank Indonesia

Rating agencies acknowledged by BI are rating agencies that comply with the following eligibility criteria: (i) evaluation criteria and (ii) publication media and its coverage of disclosure.

Evaluation criteria to be fulfilled include independence, objectivity, disclosures, transparency, resources and credibility of rating agency. Publication media and coverage disclosure regulate the obligation of rating agencies to have a website and disclose all information liable for publication. Pertaining to the list of rating agencies and ratings acknowledged, BI conducted an updating on the list based on evaluation and monitoring results on its compliance with the stipulated eligibility criteria.

A rating agency may be removed from the list of rating agencies and ratings recognized by BI based on: (i) BI evaluation results, if the rating agency is no longer in compliance with the stipulated eligibility criteria or conducts other violations: and/or (ii) demand of rating institution. The elimination of rating institution based on own request may be conducted by fulfilling certain


2012

177

procedures and the rating institution must have settled all its obligations.

List of rating institutions and ratings acknowledged by BI is published in the website of BI (www.bi.go.id). Bank is obliged to perform rating and shall be fully responsible for the use of rating results by the rating institution acknowledged by BI.

Type of Report Commercial Bank Rural Bank

1.Regular Reports

a. Daily Period

b. Weekly Period

c. Monthly Period

• Report on PUAB transactions, PUAS transactions, securities transactions in secondary market, and foreign exchange transactions.

• Report on Net Open Position• Cash Flow Projection • Part of balance sheet report• Interest rate and margin of

mudharabah investment time deposit report

• Report on Derivative

Transactions • Third Party Funds Report• Third Party of Government

Report• Weekly Balance Sheet Report• Cash Flow Report

• Monthly Report • Monthly Published Statement

on the BI homepage• Foreign Exchange Flows

Report

• Monthly Report• Legal Lending

Limit Report• Debtor Informa-

tion Report

I. Bank Reports


178


d. Quarterly Period

• Report of Provision of Funds • Debt/financing Restructuring

Report• Debtor Information Report• Legal Lending Limit Report• Maturity Profile Report• Compliance Director Progress

Report• Market Risk Report• Core depositor and debtor

report.• Minimum Capital Require-

ment taking account of market risk Report

• Mudharabah investment Report (for sharia commercial bank)

• Report on Structured Product Transaction

• Report on Risk Weighted Assets for credit risk using Standard Method

• Report on Calculation of Prime Lending Rate

• Published Financial State-ment

• Bank Business Plan Progress Report

• Report on resolution of customer complaint

• Report Profile Risk• Report on Rating System ( if

needed)• Report on consolidation risk

profile

• Published Financial Statement

• Report on resolution of customer complaint


2012

17�


e. Semi-Annually Period

f. Annually Period

• Report on Financial Statement of subsidiaries

• Report on Bank Transaction with special relationship

• Distribution of Profit Sharing for Customers

• Report on Risk Weighted Asset for credit risk using consolidated bank standard method

• Report pertaining to the implementation of activities as Mutual Fund Sales Agent Representative

• Report of Supervision of The Board of Commissioners related to Bank Business Plan

• Report on Implementation and Principal Result of Internal Audit

• Report on implementation working plan of Compliance Director

• Report on implementation working plan of Compliance Director

• Report Sources and Uses of funds Qardh, Consolidated Sources and Uses of Zakat funds, Infaq, Shodaqah (ZIS)

• Self assesment of Bank Soundness Rating

• Business Plan Report• Annual Financial Statement

• Bank Business Plan Progress Report

• Rural Bank Business Plan


180


g. Three Year Period

• Annual Report• Foreign Borrowing Report• IT Technology Report• Good Corporate Governance

report • Report on structure of

business group• Report of Outsourcing Plan• Report of Troubled

Outsourcing• Report of Customer’s Data

Update• Report of Customer’s Data

Update Realization

• Report on External Party Reassessment of Bank Internal Audit Performance

• Reports pertaining to bank licensing and establishment of offices

• Reports pertaining to bank management

• Reports pertaining to bank operational

• Special report pertaining to bank supervision

• Suspicious Financial Transaction report (to PPATK)

• Report pertaining to product and bank activities.

• Annual Financial Statement

• Report on structure of business group

• Reports pertaining to bank licensing and establishment of offices

• Reports pertaining to bank mana-gement

• Reports pertain-ing to bank operational

• Special report pertaining to bank supervision

• Suspicious Finan-cial Transaction report (to PPATK)

2. Other Report

CHAPTER

VI

OTHERS


2012

18�

VI. OTHERS

A. Banking Popular Terminology

Terminology Description

Collateral

Automated Teller Machine

Bilyet

Cheque

National Black List

Bank Guarantee

Debit Card

Credit Card

A guarantee submitted to bank by debtor in exchange with the use of credit or financing facility.

Machine with computer system activated using coded bank magnetic card. Customers will be able to save and withdraw cash, to make intra-account transfer and other routine transactions.

Form, notes and any other written evidence that proves a transaction, providing payment information or instruction.

A written instruction given by customer to bank for the withdrawal of a certain amount of fund under the name of the customer or the bearer.

A list consisting of the collection of Bank Individual Black Lists (DHIB) available in BI based on the data received from the Office for National Black List Management (KPDHN) accessible by banks.

Rental agreement between rental object including ownership of payment guarantee given to the party receiving the guarantee, in case the guaranteed party fails to fulfill his obligation.

Bank card that may be used to pay a transaction and/or withdraw fund at the expenses of the account holder by using a Personal Identification Number (PIN).

Card issued by bank or credit card provider giving the right to the person, whose name is printed on the card, based on


18�


Safe Deposit Box

Deposit Insurance Agency (LPS)

PIN (Personal Identification Number)

Transfer/Remittance

Disqualified List

Customer Due Diligence (CDD)

certain requirements to use it as a payment instrument by installment on goods or services, or for cash withdrawal within the credit limit as stipulated by the bank or credit card provider.

Service related to depository box rental to keep properties or securities especially designed and made of steel, with fire resistant material and not easy to unload and placed in a sturdy space in order to keep the safety of the goods and provide security to the user.

Legal entity conducting activities related to guarantee of customer’s saving.

A password provided for card holders (credit card, ATM, debit card, etc.) with code numbers given by bank or financing company or set up by card holder.

Services related to money transfer from one account holder to other account holder or the same account holder, from one city to other city or to the same city, in rupiah or foreign currency.

The list managed by BI containing all parties classified as disqualified in the fit and proper test for shareholder, controlling shareholder, member of the Board of Commissioners, member of the Board of Directors and executive officer.

Activities such as identification, verification and monitoring performed by bank to ensure that the transaction complies with customer’s profile. CDD must be conducted at the time of:


2012

18�


Enhanced Due Dilligence (EDD)

Politically Exposed Person (PEP)

Walk In Customer (WIC)

a. conducting business relationship with potential Customer;

b. conducting business relationship with Walk In Customer;

c. bank is in doubt of the information provided by the Customer, proxy receiver, and/or Beneficial Owner, or

d. unusual financial transaction related to money laundering and/or terrorism financing.

A more comprehensive CDD action conducted by Bank when performing transaction with Client classified as high risk including Politically Exposed Person against the possibility of money laundering and terrorism financing.

People who are entrusted to hold a public authority, among others, State Administrators as referred to in the prevailing law and regulations concerning State Administrators, and/or people registered as members of political parties having influence on policies and operations of such political parties, both Indonesian and foreign citizens.

User of bank service having no account at the bank and not included in the party receiving order or assignment from Customer to conduct transaction in the name of the Customer.


186

1. Money Laundering Money laundering is the acts of placement, transfer,

payment, expenditure, endowment, donation, safekeeping, cross border smuggling, exchange, or other act in respect of assets known or reasonably suspected to be the proceeds of crime with the intent of concealing or disguising the origin of these assets so that they purportedly originate from legitimate activities.

2. Suspicious Financial Transactions are:a. transactions inconsistent with the profile,

characteristics, and customary pattern of transactions of the customer;

b. customer transactions that may be reasonably suspected of being conducted to circumvent the reporting requirements for such transactions that apply to Providers of Financial Services in compliance with the Law of the Republic of Indonesia No. 8 of 2010.

c. transactions concluded or aborted transactions using assets suspected to originate from the proceeds of crime; or

d. financial transaction required by Financial Transaction Reporting and Analysis Center (PPATK) to be reported by reporting party due to assets presumed to be obtained from proceeds of crime.

3. Proceeds of crime Proceeds of crime are assets obtained from the

following criminal acts: corruption, bribery, smuggling of merchandise/human labor/immigrants, banking crimes, capital market crimes, insurance crimes, narcotics, psychotropic drugs, human trafficking,

B. Role of the Bank in Prevention and Combatting Money Laundering based on Act of the Republic Indonesia No. 8 of 2010


2012

187

weapons smuggling, kidnapping, terrorism, theft, embezzlement, fraud, counterfeiting, gambling, prostitution, tax evasion crimes, forest crimes, environmental crimes, maritime crimes, or other crimes punishable with imprisonment of 4 years or more, committed within the territory of the Republic of Indonesia or outside the territory of the Republic of Indonesia and also proscribed as criminal acts under Indonesian law.

4. The reporting party includes:a. Provider of Financial Services: bank, financing

company, insurance company and insurance broker company, financial institution of pension fund, securities company, investment manager, custodian, trustee, postal service as provider of current account, money changer, card provider, e-money and/or e-wallet, cooperatives conducting savings and loan activity, pawn, company dealing in commodity futures trading, or organizer of money transfer activity.

b. Other providers of goods and/or services: property company/agent, vehicle trader, trader of precious stones and jewelery, trader of art pieces and antiques, or auction house.

5 Obligation to Report by Financial Services Provider (PJK)1. PJK is required to submit report to PPATK for the

following issues:a. Suspicious Financial Transaction,b. Cash financial transaction in a cumulative

amount of Rp 500 million or an equivalent amount in foreign currency, performed in single or multi transactions during 1 working day, and/or

c. Financial transaction of fund transfer from and to overseas.


188

2. The submission of report of suspicious financial transaction is conducted no later than 3 working days after the indication of suspicious transaction by the financial services provider

3. The submission of report of suspicious financial transaction performed in cash must be conducted no later than 14 working days after the cash transaction.

4. The obligation to report by Financial Services Provider in the form of bank will be excempted from the provision of bank secrecy.

6 Supervisor of compliance to the obligation to report for reporting party shall be performed by Supervision and Regulation Institution and/or PPATK.

In case supervision of compliance to the obligation to report is not performed or as long as there is no Supervision and Regulation Institution, the supervision on compliance to the obligation to report will be performed by PPATK.

7 In the event the Supervision and Regulation Institution finds that suspicious transaction is not reported by the reporting party to PPATK, the Supervision and Regulation Institution will directly report the findings to PPATK.

8 Supervision and Regulation Institution is obliged to report to PPATK any activity or transaction of the reporting party identified or presumed directly or indirectly with the aim of conducting money laundering activity.

9 Financial Services Provider is obliged to terminate its business relationship with the user of services if:a. the user refuses to comply with the principle of

knowing the servicer user, orb. financial services provider is doubtful about the

information provided by the service user.


2012

18�

Thenceforth, financial services provider is obliged to report the termination of business relationship to PPATK as suspicious financial transaction.

10 Financial Service Provider may postpone the transaction no later than 5 working days starting from the postpone of the transaction. Postponement is conducted in the event that the service user:a. Conducts suspicious transaction using assets

presumed to originate from the proceeds of crime (as referred to previously)

b. Opens an account to collect assets presumed to originate from the proceeds of crime (as referred to previously)

c. Identified and/or presumed to use fraud document.

The postponement of transaction shall be recorded in the minutes of the transaction postponement. Financial Service Provider is obliged to report the minutes of transaction postponement to PPATK by enclosing the report of transaction within maximum 24 hours starting from the postponement of transaction.

Thenceforth, PPATK is required to ensure that the postponement of transaction is conducted in accordance with the Indonesian Law No. 8 of 2010.

In the event that transaction postponement has been conducted up to the fifth day, the financial service provider shall decide to perform or to refuse the transaction.


1�0

C. Type of Agreement in Islamic Banking Business Activities

Akad Description

Mudharabah

Musyarakah

Murabahah

Salam

Istishna’

Ijarah

An investment from a fund owner (malik, shabibul maal or Islamic Bank) to a fund manager (‘amil, midharib or Customer) to conduct a specific enterprise, with a distribution of profit sharing method or net revenue sharing method between those two parties based on a ratio agreed in advance.

An investment from a fund/capital owner to mix the fund/capital into a specific enterprise,with a sharing of profit to be based on a ratio agreed in advance, while losses shall be borneby all fund/capital owner based on proportionof respective fund/capital

A sale and purchase of goods amounting to the cost price of the goods plus a margin ofprofit as agreed.

Sale and purchase of goods by ordering with specific requirement and with a full paymentof the price in advance.

Sale and purchase of goods by ordering to make the goods in specific criteria and condition and to be paid as agreed.

A leasing agreement between a leasing objectowner including ownership on using right onthe leasing object, between a leasing objectowner and a lessee to acquire repaymentservices from the leasing object on leasing.


2012

1�1

Akad Description

Ijarah Muntahiyah Bit Tamlik

Qardh

Wadi’ah

A leasing agreement between a leasing objectowner and a lessee to acquire repaymentservices from the leasing object on leasing with an option of transferring the ownershipof leasing object either through sale and purchase or donation (grant) at a specifiedtime as agreed.

An agreement on lending and borrowing of funds without any repayment service requiringthe debtor to repay the principal all at onceor in installments in a specified term.

an agreement for the placement of funds or goods, made between an owner of funds or goods and a party receiving the placement and entrusted with the keeping of these funds or goods.

CHAPTER

VII

APPENDIX


2012

1��

VII. APPENDIX

LIST OF REGULATIONS

Draft 1

120

TOPICS NUMBER OF REGULATIONS

Draft 1

120


1�6

Draft 1

121



2012

1�7

Draft 1

122


Draft 1

122


1�8

Draft 1

123

Draft 1

123


Draft 1

123


2012

1��

Draft 1

124



200

Draft 1

125



2012

201

Draft 1

126


Draft 1

126

Draft 1

126


202

Draft 1

127



2012

20�

Draft 1

128


Draft 1

128


20�

Draft 1

129


Draft 1

129


2012

20�

Draft 1

130


Draft 1

130


206

Draft 1

131


Draft 1

131


2012

207

Draft 1

132


Indonesian Banking Booklet · Closure of Bank Branch Office 97 ... Product of Islamic Bank and...

Documents

Transcript of Indonesian Banking Booklet · Closure of Bank Branch Office 97 ... Product of Islamic Bank and...