Tier 1 bank capital

Author: | Published: 1 Dec 2005
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Pursuant to Bank Indonesia Regulation No. 7/15/PBI/2005 dated July 1 2005 and Circular Letter of Bank Indonesia No. 7/48/DPNP to all commercial banks in Indonesia (dated October 14 2005), all commercial banks are obliged to adjust their minimum Tier 1 capital. This capital consists of paid-up capital and disclosed reserves.

All commercial banks in Indonesia that provide payment services either conventionally or based on sharia principles (excluding branches of foreign banks) are obliged to comply with Tier 1 capital requirements equalling at least IDR80 billion ($7.9 million) by December 31 2007 or December 31 2008.

Commercial banks that already have Tier 1 capital of IDR80 billion must have IDR100 billion of Tier 1 capital by December 31 2010, or, at the latest, December 31 2011. After December 31 2010 all banks must have IDR100 billion of Tier 1 capital.

Limitation consequences

Banks unable to fulfill these Tier 1 minimums by 2008 and 2011 will have to limit their activities in the following ways:

  • they will be unable to conduct business activities as foreign exchange commercial banks;
  • they will be limited to providing facilities per debtor and/or per group of debtors to no more than IDR500 million, excluding the provision of funds to purchase Bank Indonesia certificates, and to the government and other banks as necessary;
  • the bank will only be able to take deposits of up to 10 times its Tier 1 capital; and
  • the bank could face the closure of its entire network of offices located outside the provincial territory of the bank's head office.

Further procedural actions

Commercial banks that fail to fulfill their minimum Tier 1 capital requirements must:

Announce limits on business activities

Failing banks must announce to the public the limits placed on its lending through newspapers widely circulated at the bank's principal office location. The news must also be announced through all its branch offices, with respect to:

  • termination of its business as a foreign exchange commercial bank;
  • limits on its fund provision per debtor and/or per group of debtor. These are subject to provisions on the minimum legal lending limit for credit, commercial paper, securities with the option to sell, claims acceptance, credit derivatives, administrative account transactions, derivatives claims, potential future credit exposures, temporary or permanent equity participation and other kinds of funding. This excludes the provision of funds to buy Bank Indonesia certificates or lend to the government and other banks; and
  • the address of each bank office that will be closed.

Settle positions affected by the limitation of business

Regarding the closure of the network of offices, the bank must provide a report to Bank Indonesia within seven days of the newspaper announcement, which must contain:

  • evidence of the announcement made to the public with respect to the limitation of business activities;
  • the method of settlement of its position for business activities being limited and closing of offices within the network;
  • a statement from the board of directors confirming that all matters related to customer and other third parties will be settled, and all claims in the future will be the responsibility of the board of directors for and on behalf of the bank.

Commercial banks with paid up capital in the amount of at least IDR3 trillion or sharia banks with paid-up capital of at least IDR1 trillion can continue their business without being subject to these limitations.

Non-compliance

The board of directors of commercial banks that have not complied with the Tier 1 capital requirements are obliged to develop an action plan and have it approved by the bank regulator. This plan must be delivered to Bank Indonesia by December 31 2005 for private banks and on February 28 2006 for public listed banks.

Sanctions

In the event that a bank fails to submit an action plan, the banks are subject to a fine of IDR1 million each day until it submits a plan. The maximum fine is IDR50 million.

For banks that fail to fulfill the minimum Tier 1 provisions and also fail to limit their business activities, the following sanctions apply:

  • a penalty of IDR5 million each day until compliance;
  • a prohibition on participation in clearing; and
  • restrictions on the bank's business activities.