Author: | Published: 9 Jul 2001
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Market structure and trends

The Indonesian banking and finance market can be divided into two main sectors, ie the banking sector and the non-banking financial institution sector. The banking sector is mainly regulated and controlled by Bank Indonesia, as the Indonesian central bank, and to certain extent the Indonesian Bank Restructuring Agency, Badan Penyehatan Perbankan Nasional (IBRA,or BPPN). The non-banking financial institution sector, which includes finance companies, securities companies and insurance companies, is mainly regulated by the Minister of Finance and, to a certain extent, the Capital Markets Supervisory Agency, Badan Pengawas Pasar Modal (Bapepam) for securities companies.

From the scope of their operations, Indonesian banks can be classified into two types, namely commercial banks and small credit or rural banks. Unlike commercial banks, which are eligible to carry out most general banking business, rural banks are limited to certain operations, and are not allowed, for example, to engage in foreign exchange transactions.

With regard to ownership however, Indonesian banks can be classified into four types, namely: (i) domestic banks which are 100% owned by Indonesian shareholders; (ii) joint venture banks, which are owned by Indonesian shareholder(s) and a foreign shareholder(s); (iii) state-owned banks, which are owned by the government of the Republic of Indonesia; and (iv) Indonesian branches of foreign banks, which maintain their status as foreign entities but are still subject to Indonesian banking regulations. The first three types of bank are generally established in the form of limited liability companies in accordance with Indonesian laws. See section 3 with respect to the share ownership of banks that are listed on an Indonesian stock exchange.

The Indonesian economic crisis, which began in the second half of 1997, has led to severe difficulties for the Indonesian banking industry. Many banks have suffered from serious problems, such as deterioration of loan portfolios, increasing numbers of non-performing loans, an insufficient capital adequacy ratio, and liquidity shortages. As a result, in November 1997, the government closed 16 banks due to their poor financial condition. In addition, in an effort to increase the performance of Indonesian banks, in December 1998 the government introduced the Bank Recapitalization Programme, which helped certain banks to reach a capital adequacy ratio of at least 4%, under the supervision and management of IBRA. Not all banks were able to increase their capital in compliance with the government regulations and consequently in March 1999 the government revoked the licences of 38 banks. It is expected that banks that are not able to meet or satisfy the CAR requirement will be liquidated or be forced to merge with another bank.

The main regulatory bodies and their powers

Bank Indonesia

Since the enactment of Law No. 23 1999, dated May 17 1999 on Bank Indonesia ("Bank Indonesia Law"), Bank Indonesia became the primary authority overseeing the Indonesian banking operations. Prior to the enactment of Bank Indonesia Law both Bank Indonesia and the Minister of Finance had the authority and responsibility to supervise banks.

Under the new law, the main objectives of Bank Indonesia are to stipulate and implement monetary policy, to regulate and maintain the soundness of the payment system and to regulate and supervise banks. In managing and supervising banks, Bank Indonesia determines regulations for granting and revoking the licence of a bank. In this regard Bank Indonesia has authority: to grant the licence for the opening, closure and removal of an Indonesian bank, including any branch of that bank whether inside or outside of Indonesia; to grant the licence for the opening, closure and removal of a branch or office in Indonesia by an overseas bank; to grant approval for change in share ownership and management of a bank; to grant the licence to a bank to carry out certain business. Bank Indonesia also has the authority to require banks to submit certain reports and to carry out audits and inspections of banks, and to issue regulations concerning the soundness, solvency and liquidity of banks. However, since 1998, IBRA has been involved in the supervision and management of certain banks, which were put under its supervision. Indonesian banks must, of course, comply with Indonesian laws and regulations issued by the government, including the Minister of Finance, but the minister no longer has the authority to supervise or to grant or revoke licences for the operation of banks.

Minister of Finance

As a government body, the Ministry of Finance has the authority to issue or revoke the licences of finance companies and insurance companies as well as to supervise their day to day operations. Securities companies are also subject to certain requirements imposed by the Minister of Finance.

Capital Market Investment Board (Bapepam)

Under Capital Market Law No. 8 1995, Bapepam is the government body authorized to issue business licences for securities companies. It also has the authority to supervise the operation of securities companies in general.

As the stock exchange authority, Bapepam also has the authority to supervise all companies whose shares will be or have been offered to the public through the stock exchange.

Indonesian Banking Restructuring Agency (IBRA)

IBRA was established on January 26 1998, by a Presidential Decree, as the government agency to restructure the Indonesian banking industry. IBRA was established for a term of five years commencing in February 1999, which term may be extended by the government as it deems necessary. As a special government agency, the law has granted IBRA certain extraordinary powers, including judicial powers, which are necessary to reach its objectives.

The general objectives of IBRA are to help the Indonesian banking industry to recover through bank restructuring and corporate debt restructuring, and to optimize the return of the state funds which were lent by Bank Indonesia to banks (known as the Bank Liquidity Support Loans) when the banks faced liquidity problems prior to their transfer to IBRA. To achieve these objectives, IBRA may restructure or sell non-performing loans that have been transferred from the banks to IBRA, monitor or sell the assets of banks which are placed under its supervision, including borrowers' assets that have been provided to the banks as collateral, and conduct the recapitalization or merger of banks, and as the last resort, to close banks that cannot continue to operate viably.

Types of financial institutions and key legislation/regulatory developments


Banking business is mainly regulated under Law No. 7 1992, on Banking, as amended by Law No. 10 1998, dated November 10 1998, on Amendment to Banking Law (the "Banking Law") and the Bank Indonesia Law, which is applicable to Bank Indonesia.

Bank Indonesia is the authorized institution to issue or revoke licence of a bank. It also has the authorization to impose a number of supervision requirements and restrictions on the operation of the banks' businesses. An Indonesian bank may not be involved in, among other things, holding shares in other companies, except in companies involved in the area of finance (including banks) or shares taken by the bank temporarily in connection with the collateral granted to the bank. Banks are also restricted from engaging in the insurance business or in any operation prohibited by the Banking Law, such as acting as an underwriter for the issuance of commercial paper, or participating in the trading of shares on a stock exchange.

Securities companies

A securities company may engage in business as an underwriter, a broker or an investment manager. Securities company operations are regulated under primarily the Capital Market Law, Law No. 8 1995.

Finance companies

A finance company is an entity specifically established in the field of financing which provides funds or capital goods but without taking any deposit from the public. Finance companies are regulated primarily under the Decision of the Minister of Finance 448/KMK.017/2000, dated October 27 2000 on Finance Companies. A Finance Company may engage in factoring, leasing, credit cards, and consumer financing.


An insurance company's business is regulated primarily under the Insurance Law, Law No. 12 1992. The Ministry of Finance is the government body authorized to issue and revoke insurance licences as well as to supervise the management and the operation of insurance companies.

Establishing an operation

General overview

Under the Banking Law and Bank Indonesia Law, any party engaged in banking, which is defined to include deposit taking and the use of the deposits for lending, must obtain a licence for this purpose from Bank Indonesia. Bank Indonesia approval is also required in order to open branch offices and overseas representative offices. Indonesian banks are subject to a number of restrictions on the operation of their businesses and the conduct of their corporate affairs.

Under Bank Indonesia Decision Letter No. 32/50/KEP/DIR, dated May 14 1999, anyone purchasing bank shares must: (i) not appear in the list of "flawed persons" in the field of banking, as determined by Bank Indonesia; and (ii) be considered to be a "fit and proper person" as determined by Bank Indonesia. The concept of a "fit and proper person" is very broad, and encompasses an assessment of a person's good character and morals, adherence to the prevailing laws and regulations and a demonstrated commitment to developing a healthy banking system.

The approval of Bank Indonesia is required for any person to purchase shares in the bank, either directly or through a stock exchange, where the purchase is of 25% or more of the bank's issued shares, or such other proportion as results in a transfer of control of the bank to that person. Bank Indonesia may then (or at any other such time as it deems appropriate) undertake an assessment of that person in accordance with the fit and proper test. The concept of "person" for this purpose includes natural persons, corporations and corporate groups.

Bank Indonesia can force the divestment of any shares purchased in violation of the limits on ownership which requires the purchaser of those shares to transfer them to another party that meets the relevant requirements, within 90 days of an announcement by Bank Indonesia that such a violation has occurred. If such a transfer is not made within the specified period, the purchaser of the shares will be prohibited from acting as a shareholder and cannot list the shares. Divestment would also be required in a case where an existing shareholder is subsequently deemed not to be a fit and proper person.

Method of application and procedure for decision

A bank can only be established and carry on its business with a licence from the board of governors of Bank Indonesia. The licence is issued in two stages, namely a preliminary licence granted to allow the relevant company to prepare for the establishment of the bank and a business licence.

Process for a preliminary licence

An application must be submitted by at least one of the prospective owners, to the board of governors of Bank Indonesia, together with draft Articles of Association, ownership information, list of members of the board of commissioners and directors, which include certain personal information, the bank's organizational structure and human resources, business plan for the first year, evidence of capital payment, and various statements from the proposed founders regarding sources of capital.

Process for a business licence

The application must be submitted by an entity which has obtained a preliminary licence from Bank Indonesia, together with the Deed of Establishment, ownership information, list of members of the Boards of Commissioners and Directors, accompanied by their specific personal data, any amendments to the application for a preliminary licence, evidence of full payment of the minimum paid-up capital, evidence of operational capability, and various required statement from bank's shareholders and the members of board of commissioners and directors.

Approval or rejection for the application for a preliminary licence will be given at the latest 60 days from the receipt of completed application documents.

The preliminary licence is given for one year and cannot be used to engage in banking operation, which can only be carried out once a business licence is issued. If the relevant party does not apply for a business licence within this one-year period, the board of governors of Bank Indonesia will simply revoke the preliminary licence.

A bank that has been granted a business licence by the board of governors of Bank Indonesia must, at the latest 10 days after its business has started, report to Bank Indonesia that its business is in operation. The board of governors of Bank Indonesia will revoke the business licence if the bank concerned does not submit this report.

There is no statutory cost or fees stating in the regulation for applying these licences.

Related aspects to the bank's business operations

Legal lending limit

Under its Decision Letter No. 31/177/KEP/DIR, dated December 31 1998, Bank Indonesia imposes limits on the percentage of a bank's credit that may be extended to any customers that are affiliates of the bank or to a single customer (including individual borrowers and borrowers within the same corporate group) that is not an affiliate of the bank. A bank may not extend credit in excess of 10% of its capital to its affiliates; or, to any single borrower or group of borrowers that are affiliated among themselves, amounts in excess at any time more than: (i) 30% up to December 31 2001; (ii) 25% up to December 31 2002; and (iii) 20% from January 1 2003 onwards, of the amount of the bank's capital.

The determination of whether a borrower is an affiliate of the bank or whether a group of borrowers are part of the same group is based on a number of factors, inter alia, if:

  1. 25% or more of the shares in the company are controlled by another company or individual, or those shares are held jointly by members of the same family;
  2. one company owns 25% or more of the shares of two or more relevant companies;
  3. two or more companies have common management;
  4. in the absence of the ownership and/or management relations: (i) one company acts as the guarantor of the credit facility of the other; or (ii) one company provides financial assistance to the other, thereby obtaining control of the businesses of the company to which it provided assistance.

Bank Indonesia requires banks to submit monthly reports to specify any violations of the legal lending limits and the amount of the funds extended to affiliates and non-affiliates. Any violations of legal lending limits arising from the change in exchange rates and/or decrease in capital in the credits already extended are not considered to be violations of the legal lending limits.

Foreign exchange limitation

Under Law No. 24/1999 and Bank Indonesia Regulation No. 1/9/PBI/1999, on the Flow of Foreign Exchange Flow and the Exchange Rate System, foreign currency is freely transferable within or outside Indonesia. However, Bank Indonesia has the authority to request information and data concerning the foreign exchange operations of its citizens and legal entities domiciled, or planning to be domiciled, in Indonesia.

Every Indonesian resident is obliged to give information and data on the flow of foreign exchange which takes place directly or through other parties stipulated by Bank Indonesia; and banks and non-bank financial institutions (including insurance companies, securities companies, joint venture companies and finance companies) are obliged to submit to Bank Indonesia reports and data on their foreign exchange transactions made on their own or their customers' behalf.

Any transactions (receiving from/making payment abroad in Rupiah or foreign currency, receiving from/paying to non-Indonesian residents in Indonesia in Rupiah or foreign currency, or receiving/paying to Indonesian residents in Indonesia in foreign exchange) of more than $10,000 or its equivalent must be reported to Bank Indonesia. On January 12 2001, Bank Indonesia's board of governors issued a Decision Letter prohibiting Indonesian residents from transferring Rupiah to non-residents.

Bank's statutory reserve

Under to its Decision Letter No. 30/89A/KEP/DIR, dated October 20 1997, Bank Indonesia requires Indonesian banks to maintain statutory reserves placed with Bank Indonesia at least 5% in Rupiah and 3% in foreign currency of total liabilities vis-à-vis third parties of the banks concerned.

Under Bank Indonesia's Decision Letter No. 30/271/KEP/DIR, dated March 6 1998, the penalty for a shortfall in statutory reserves may range from 150% to 400% of the average overnight Jakarta Inter-bank Offered Rate (JIBOR).

A bank must also settle any negative balances at the latest before the next clearing submission day. Failure to do so can result in a bank being suspended from any further clearing business and being subject to a penalty equal to the amount that should have been paid times 500% of the average overnight JIBOR.

Offshore loan reporting requirement

On October 2 and 9 2000, the board of governors of Bank Indonesia issued Regulation No. 2/22/PBI/2000 and Circular Letter No. 2/20/DLN, which, inter alia, revoked previous decisions of Bank Indonesia requiring banks to submit plans to Bank Indonesia on an annual basis for approval in order to obtain off-shore loans, and replaced those requirements with an obligation to report to Bank Indonesia the obtaining of any off-shore loan. The previous requirements, most recently set forth in Bank Indonesia's Decision Letter No. 29/12/KEP/DIR, dated March 26 1997, had imposed significant restrictions on the ability of Indonesian banks, including their offshore branches, to obtain foreign currency loans or deposits to fund the foreign currency borrowing requirements of their customers.

Financial services online/e-banking

Indonesian banking regulations have not yet specifically regulated the offering of banking products and services via the internet. The only regulation that may be considered as related to internet or online banking services is Decree of the Directors of Bank Indonesia No. 27/164/KEP/DIR, dated March 31 1995, and Circular of Bank Indonesia No. 27/9/UPPB, dated March 31 1995 (ITS Banking Regulations). These regulations are applicable to banks in conducting online banking services, such as ATM, electronic fund transfer and home banking services. The requirements are mostly related to the maintenance, operation, security and management of the information technology system used by the banks concerned.

Buying financial institutions


Indonesian banks may offer up to 99% of their shares to the public through the stock exchange; the remaining 1% of the shares, which is not offered to the public, must be owned by Indonesian parties. Foreign investors may, however, buy 100% of the bank's listed shares.

Under Bank Indonesia Decision Letter No. 32/50/KEP/DIR, dated May 14 1999, the source of funds to buy shares in an Indonesian bank cannot be from a loan or other type of financing arrangement from Indonesian banks or other parties in Indonesia, or from money laundering. and anyone purchasing bank shares must: (i) be those of integrity and not on Bank Indonesia's black list; and (ii) according to Bank Indonesia, be considered to be a "fit and proper person". The concept of a "fit and proper person" is very broad, and encompasses an assessment of a person's good character and morals, adherence to the prevailing laws and regulations and commitment to developing a healthy banking system.

The approval of Bank Indonesia is required for any person to purchase shares in the bank, either directly or through a stock exchange, where the purchase is of 25% or more of the bank's issued shares, or such other proportion as results in a transfer of control of the bank. The transfer of a bank's shares through the stock exchange, which are not intended to be registered in the bank's share register, does not need to be approved by Bank Indonesia. This requirement is in line with the requirement imposed by the Capital Market Supervisory Board (Bapepam), which requires a report to Bapepam of any transfer of 5% or more of shares in a public company.

If the parties who buy the shares do not fulfil the criteria set out by Bank Indonesia, the shares must be transferred to another party within 90 days after Bank Indonesia notifies the shareholders that the criteria have not be met. If such a transfer is not made within the specified period, the purchaser of the shares will be prohibited from acting as a shareholder and cannot list the shares. Divestment would also be required in a case where an existing shareholder is subsequently deemed not to be a fit and proper person.

Securities companies

Under the Decree of the Minister of Finance No. 90/KMK.01/2001, dated February 20 2001, the shares of a joint venture securities company may be owned by foreign legal entities engaged in finance, other than securities, up to a maximum of 85% of the paid-up capital. Foreign legal entities engaged in the securities business, which have obtained a licence or are under the supervision of the capital market regulator in their country of origin, may own up to a maximum of 99% of the paid-up capital.

Finance Companies

Under the Decree of the Minister of Finance No. 448/KMK.017/2000, dated October 20 2000 on Finance Companies foreign investors may hold up to 85% of a finance company's paid-up capital. The sale and purchase of shares of a finance company does not require approval from the Minister of Finance or any other governmental authority. However, the finance company itself must report to the Minister of Finance any changes on its shareholdings composition after the sale and purchase of the shares takes place. This report might, conceivably, trigger the minister requiring the purchase to sell the shares if the purchase does not meet the requirements to be a shareholders of a finance company, eg that shareholders must: (i) not be recorded in the records of any bank as a non-performing debtor; (ii) be of integrity, as determined by the Minister of Finance; (iii) never have been convicted a crime. In addition, there is a prohibition on using borrowed funds to purchase shares of a finance company.

Insurance companies

Under Article 8 of the Law No. 2 of 1992, dated February 11 1992, on Insurance Business (Insurance Law), a local insurance company and a foreign insurance company may establish a joint venture insurance company, whereby at the time of its establishment, the foreign insurance company's direct participation or shareholdings may not exceed 80%.

However according to the government Regulation No. 63 of 1999, dated February 2 1999, during the running of the joint venture insurance company, foreign participation can be above 80%, provided that the amount of the Indonesian party's paid up capital is not be reduced, although its percentage can be decreased as a result of the issuance of new shares.

Approval from the Minister of Finance will be required for a foreign insurance company to acquire shares of an existing local insurance company. As a result of this acquisition, the status of the existing local insurance company will become a joint venture insurance company. Any amendment to the insurance company's shareholding must be reported to the Ministry of Finance.

Competitive regulations

There are no laws or regulations addressing, specifically, competition among banks or other financial institutions except, of course, those relating to limitations on a bank or financial institutions business activities as discussed above. However, in 1999, Indonesia enacted Anti-Monopoly Law. Law No. 5, year 1999, which applies to all businesses. The law was enacted to create an atmosphere conducive to business by regulating sound business competition and to guarantee equal business opportunities for large, medium and small businesses. The Anti-Monopoly Law applies to every individual or business entity, whether in the form of a legal entity or non-legal entity, established and domiciled or doing business within the jurisdiction of the Republic of Indonesia, which does business in the economy. A business that has a market share of 50% or more is presumed to have a monopoly.

Consequences of non-compliance

The Anti-Monopoly Law provides for the establishment of an independent Competition Supervisory Commission which has wide functions and extensive powers. The Commission will examine any non-compliance with the law, and any mergers, acquisitions and consolidations that have the potential to violate the law.


A company may appeal a decision of the Commission to the Indonesian District Court within 14 days of receiving the decision. Any party that objects to the District Court's decision has 14 days to make a request for appeal or cassation (Kasasi) to the Supreme Court, who will issue the final and binding decision.

Continuing bank supervision

Bank Indonesia regulations require all banks to submit monthly reports on the results of their operation and their financial position, weekly reports on their financial and liquidity positions, quarterly financial report and an annual audited financial statement with Bank Indonesia. The financial statement must also be published in a newspaper. In addition to periodic audits, Bank Indonesia is also entitled to conduct inspections and investigations, and to request additional information or reports as needed to ensure compliance with the prevailing regulations. Bank Indonesia may appoint a public accountant to act on its behalf in performing the audit of a bank.

Bank Indonesia rates Indonesian banks each year as sound, fairly sound, less sound or insolvent. The ratings, however, are only intended to assist the bank's management and are therefore not published to the public. The ratings are mainly based on the quality of the assets, the management, the earnings and liquidity and compliance with the various regulations.

Disclosure requirements

Bank's management

A commercial bank is managed by its directors (at least three directors) under the supervision of a board of commissioners (at least two commissioners). Foreign shareholder(s) can place foreign bankers as directors or commissioners provided that at least one member of the board of commissioners and at least one director is an Indonesian citizen.

Bank Indonesia must approve candidates for appointment as commissioners and directors before they are appointed. A director of a bank is not permitted to also act as a commissioner or as a director or to hold any other executive position in another bank, company or institution while he/she is serving as director of a bank. In addition, directors of a bank are not permitted, individually or collectively, to own more than 25% of the issued capital of any other company.

Members of the board of commissioners are only permitted to act as members of the board of commissioners in one other bank. As a commissioner may otherwise serve as a commissioner, director or as an executive officer in not more than two non-bank companies.

Change of control

Bank Indonesia Decree No. 32/50/KEP/DIR, dated May 14 1999 regarding the Requirements and Procedures for the purchase of Shares of Commercial Banks (Decree 32/50) sets certain requirements applicable to the shareholders of a Bank, ie they: (i) are not included on Bank Indonesia's negative list in banking sector; (ii) are of a good integrity (to Bank Indonesia's point of view); (iii) are of good moral conduct; (iv) comply with the prevailing laws and regulations; (v) have commitment to the development of sound bank's operations; and (vi) are fit and proper to be the shareholders of the bank.

The purchase of 25% or more of the bank's capital or less that that percentage if the purchase will result in a change of control to the purchaser must be approved by Bank Indonesia.

Cross border supervision

Under Bank Indonesia Law, Bank Indonesia is allowed to cooperate with other central banks, organization and another international institutions. Bank Indonesia may closely monitor and supervise all Indonesian banks' branch offices abroad, with the cooperation of the host country banks supervisory authority. The operations of foreign banks' branch offices in Indonesia are not subject to Bank Indonesia's supervision. However, they must adhere to the applicable Indonesian laws and regulations in some instances.

When a bank becomes insolvent

Relevant legislation

The procedure for liquidating a bank is regulated under Government Regulation No. 25/1999, dated May 3 1999, on Dissolution and Liquidation of Banks (GR 25).

Under GR 25, if a bank is insolvent and endangers its own operations, Bank Indonesia may revoke its licence. Within 60 days of the revocation of the bank's licence, BI may request the board of directors of the relevant bank to convene a general meeting of shareholders and to cause the shareholders to approve the dissolution of the bank and appointment of a liquidation committee.

If, however, the shareholders fail to adopt such a resolution, BI may request the Court to issue an order to dissolve the bank, to appoint a liquidation committee, to implement the liquidation procedure set out in GR 25 and to order the liquidation committee to be accountable to BI directly. The liquidation process must be completed within five years of the appointment of the liquidation committee. If by that time the liquidation has not been completed, the bank's assets will be sold through public auction.

Article 1 (3) of Indonesia's Bankruptcy Law specifically provides that only Bank Indonesia may petition for a bank to be declared bankrupt. This provision of the Law was tested in May and June of 2001 when a creditor of Bank Danamon petitioned the Commercial Court in Jakarta to have the Bank declared bankrupt. The Commercial Court dismissed the petition on the grounds, inter alia, that the creditor, based on Article 1 (3) of the Bankruptcy Law, did not have standing to seek to have the Bank declared bankrupt.

Triggers and types of proceedings

Bank Indonesia evaluates the capital adequacy ratio every three months and if a bank's capital falls below 4% Bank Indonesia may require the shareholders to inject additional capital until it reaches the capital adequacy requirement. If the shareholders fail to inject sufficient capital or take other remedial action required by Bank Indonesia, Bank Indonesia may close all of the bank's offices and suspend all of its banking operations. Thereafter, the bank's management must convene a general meeting of shareholders to approve the dissolution of the bank and to establish a liquidation committee. If the directors fail to convene such a meeting or the shareholders fail to approve the resolution and appoint the liquidation committee, Bank Indonesia may request the relevant district court to dissolve the bank based on a court order as discussed above.

Power of authorities to intervene

In addition to the measures mentioned above, Bank Indonesia may require the shareholders to change the management of the bank, or require the bank to write off its bad loans and account for its losses with its capital, or require the merger or consolidation of the bank with another bank, or offer the bank's shares to a third party who is willing to assume the bank's liabilities, or require the bank to transfer the management of its activities to third party, or to sell the bank's assets to a third party.

Alternatively, if supervision of the bank is transferred to IBRA, IBRA, based on Article 37A of the Banking Law and on Government Regulation No. 17 1999, may take over the authority of the management and the shareholders of the bank (including the right and authority of the general meeting of shareholders), assign the management of the bank and the management of bank's assets to third parties, sell or transfer the assets of the bank as well as the assets of certain shareholders of the bank wherever they are located or require the controlling shareholders to inject additional capital into the bank.

Status of creditors/depositors

Based on the decision of the Minister of Finance No. 179/KMK/0.17/2000, dated May 26 2000, the government has proved a guarantee to persons having deposits in Indonesian banks. The existence of the guarantee is automatically extended to every six months, unless the Minister of Finance, prior to the end of the six-month period, announces that the guarantee will not be extended.

Capital requirements and bank secrecy

Minimum paid-in capital

Under the prevailing regulations a commercial bank is required to have a minimum paid-in capital of Rp3 trillion ($267 million). In addition, Bank Indonesia required all banks to have capital adequacy ratio of at least 4% by December 31 1998, or, with respect to any bank participating in the Bank Recapitalization Programme by the date the Bank Recapitalization Programme for the relevant bank is completed. In February 1999 Bank Indonesia issued an additional regulation that requires Indonesian banks to increase the minimum risk-weighted capital adequacy ration to 8% by the end of 2001. The capital adequacy ratio is calculated by dividing the "total capital" by its risk-weighted assets.

Capital adequacy requirements (CAR)

In 1991, Bank Indonesia introduced minimum capital adequacy requirements, which were based on the Bank for International Settlements standards set forth in the Basle Accord of 1988. CAR is an obligation of the bank to maintain minimum capital at a certain percentage of the risk-weighted assets, as stipulated by Bank Indonesia. Bank Indonesia has in the past several years, further modified these requirements and related calculations.

A bank's CAR is calculated by dividing its "total capital" by its risk-weighted assets. Under Bank Indonesia regulations, total capital includes both core (Tier I) capital and supplementary (Tier II) capital. Tier I capital consists of: (i) paid-in capital; (ii) share agio (any amounts paid to the bank in consideration for the issuance of the banks shares that exceeds the par value of those shares); (iii) donated capital; (iv) provisions from retained net earnings; (v) appropriated reserves; (vi) retained earnings net of taxes (including those from previous years of which shareholders have not determined the utilization); and (vii) 50% of the net income for the fiscal year; less 100% of the net loss for the fiscal year.

Tier II capital consists of: (i) fixed assets revaluation reserves, (ii) provisions for productive assets write off; (iii) certain types of loans that have characteristics similar to equity; and (iv) subordinated loans (to a maximum of 50% of Tier I capital). For the purpose of calculating CAR, Tier II capital may only be counted to the extent that it does not exceed 100% of Tier I capital. Risk-weighted assets consist of all the assets on a bank's balance sheet together with certain off-balance sheet items weighted by certain percentages depending on the risks associated with the type of asset.

Bank Indonesia requires banks to maintain their CARs to 4% and achieve a CAR of 8% by the end of 2001.

Bank secrecy

Under the Banking Law, banks must keep secret all information on depositors and their deposits. Bank Indonesia Regulation No. 2/19/PBI/2000, dated September 7 2000, defines bank secrets as everything related to information on savers and depositors; information on customers, other than savings customers and depositors, is not regarded as information subject to bank secrecy requirements.

In addition, the requirements of bank secrecy do not apply to savings and depositors with respect to disclosure of information required in relation to taxation of interest, settlement of bank receivables that have been entrusted to the State Receivership and Auction Agency/the State Receivables Committee, criminal and civil legal proceedings, legal proceeding of civil cases between the bank and its customers, exchange of information between banks, disclosures made upon the written request or with the approval of the savings customers or of a person having a valid power of attorney of the savings, customer, and upon the request of legitimate heirs of depositors.

Information may only be exchanged between banks by the directors of the banks, or an officer appointed in accordance with the internal policy of the banks concerned. This regulation stipulates that information may be exchanged by a commercial bank to another commercial bank, or by a rural bank to another rural bank. The exchange of information permitted is that information required for smoothness and protection of banks operation, eg to prevent double credits or to find out the amount and status of credits obtained by a customer from another bank.

Hadiputranto Hadinoto & Partners

The Jakarta Stock Exchange Building,
Tower II, 21st Floor,
Sudirman Central Business District
Jl. Jenderal Sudirman Kav. 52-53,
Jakarta 12190, Indonesia

Tel: +6221 515 5090
Fax: +6221 515 4840