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Indonesia bill to compel foreign banks to become PTs

Publication Date : 22-01-2013

 

Indonesia's House of Representatives has completed a draft of the new banking bill, described by various analysts as “reciprocal”. It has been specifically developed to target foreign banks operating here.

A copy of the draft, seen by The Jakarta Post yesterday, stipulates that all foreign banks operating in Indonesia under branch status must convert into legal entities (PT).

If the bill is passed into law, it will apply retroactively, and existing foreign banks will have to convert if they want to continue operating in Indonesia, according to Harry A. Aziz, deputy chairman of House Commission XI on finance and banking.

Currently, at least 10 foreign banks operate in Indonesia as branches, including Citibank, Standard Chartered, Bank of America, Bank of China Ltd., Deutsche Bank, Bangkok Bank, Bank of Tokyo Mitsubishi and HSBC.

“We’re not against foreign banks here. It’s just about time we had a law to support our national interest,” House legislator Maruarar Sirait said when asked about the rationale behind the bill.

Following a series of new banking regulations in November, BI was criticised for not requiring foreign lenders to become PTs as they have been in Singapore since July 2012. In response, BI Governor Darmin Nasution said that the central bank did not have any authority in the absence of supporting law.

Representatives of foreign lenders have been quick to criticise the bill, which they claim will spawn inefficiency.

Fauzi Ichsan is an economist with UK-based Standard Chartered. In his opinion, forcing foreign lenders to become PTs might degrade their risk profile, driving up funding costs.

As branches, banks can borrow dollars from their headquarters without being charged risk premiums.

“If the bank becomes a legal entity, it will be charged a risk premium according to the risk status of Indonesia,” he said yesterday.

Nevertheless, if the regulation passes into law, it should not deter foreign lenders who are still optimistic about Indonesia’s banking potential.

Besides regulating the operation of foreign banks, the new bill stipulates that no investor can take a controlling share in more than one bank, contradicting the single presence policy unveiled by BI in November, which allows investors to hold 25 per cent of shares in two or more banks as long as they form a holding company to oversee the operations.

The bill will affect the plan by Singapore’s DBS Group Holdings Ltd. to acquire Bank Danamon for US$7.2 billion.

Should the acquisition proceed, DBS will have control of two banks, already controlling PT Bank DBS Indonesia. If the bill becomes law, DBS will have no choice but to merge the two banks.

Bahana Securities banking analyst Teguh Hartanto heaped praise on the bill. By allowing investors to have a controlling share in one bank only, the bill will strengthen Indonesia’s domestic banking industry by forcing banks to merge, he said.

There are currently 120 commercial banks operating in Indonesia, a figure that analysts consider is too high and breeds inefficiency in the industry, making industry supervision difficult.

 

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