1ad2894aaba040bd8eb1923fe8ee97a6BPI2013English

information :

Bank Licensing and Banking Information Departement

Information, Administration and Banking Publication Division

Jl. MH Thamrin No. 2, Jakarta 10350

Menara Radius Prawiro Lt. 11

Phone : 62-21-3817080, Fax : 62-21- 3523705

www.bi.go.id ,

e-mail :

publikasi- iadmp@bi.go.id

Indonesian Banking

Booklet

2013

Bank Licensing and Banking

Information Departement

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Indonesian Banking Booklet

2013

FOREWORD

This 2013 edition of Indonesian Banking Booklet is a publication media presenting a brief information concerning Indonesian banking. It is expected that this book will enable the readers to obtain a brief information on banking policy direction year 2013 as well as banking regulations issued by Bank Indonesia during year 2012.

In this Booklet edition, information on new regulations presented among others are concerning (a) bank business activities in the form of trust, (b) business activities and oice network based on bank core capital, (c) application of policy on vehicles and housing ownership inancing products for Sharia commercial banks and UUS, (d) shares ownershipof commercial banks, (e) obligation of minimum capital reserves in accordance with risks proiles and Fulillment of Capital Equivalency Maintained Assets (CEMA), and (f) several revisions of the previous banking regulations.

Furthermore, in the event clarity and understanding related to banking provisions is required, the readers may refer to the regulations issued by BI which among others can be obtained through BI website (www.bi.go.id).

Regardless of the limited information available in this IndonesianBanking Booklet, we still hope that the presented information can provide optimum beneits to the readers. Jakarta, April 2013

Bank Indonesia

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T A B L E O F C O N T E N T

FOREWORD TABLE OF CONTENT

I BANK INDONESIA

A. Mission and Vision of Bank Indonesia B. Strategic Values

C. Important Duties of BI D. Detailed Description of BI E. Organization of BI

II BANKING

A. Deinition

B. Operations of Banks

Conventional Commercial Banks Sharia Commercial Banks Conventional Rural Banks Sharia Rural Banks

Business Supporting Operations C. Prohibition of Bank Business Operations

Conventional Commercial Banks Sharia Commercial Banks Conventional Rural Banks Sharia Rural Banks

III REGULATION AND SUPERVISION OF BANKS

A. Purpose of Bank Regulation and Supervision B. Authority of Bank Regulation and Supervision C. System of Bank Supervision

D. Banking Information System to Support Bank Supervision Duties

E. Banking Investigation and Mediation

IV BANKING POLICY DIRECTION

A. Banking Policy Direction Year 2013 B. Progam of Financial Inclusion C. Basel II

D. Basel III

E. Global Financial Sector Reform F. BPD as Regional Champion Bank (BRC) G. Sharia Banking Development H. Development of Rural Banks

I. Eforts on Development to Micro, Small and Medium Enterprises (MSMEs)

J. Credit Bureau

v vi 1 3 3 3 4 4 9 7 9 9 11 13 13 14 14 15 14 15 15 17 19 19 20 22 25 29 31 33 40 44 47 49 53 61 67 75

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V KEY BANKING REGULATIONS

A. Regulations on Institution, Management and Ownership of Banks

1. Bank Establishment 2. Bank Ownership

3. Sole Proprietorship Policy In Indonesian Banks

4. Ownership of Commercial Banks Shares 5. Management of Banks

6. Foreign Workers Utilization and Transfer of Knowledge in Program in Banking

7. Fit and Proper Test in Conventional Commercial Banks and Rural Banks

8. Fit and Propher Test in Sharia Banks and Sharia Bussines Units

9. Merger, Consolidation and Acquisition of Banks

10. Establishment of Bank Oices 11. Conversion of Bank’s Name and Logo 12. Conversion of Business Operations of

Conventional Banks to Sharia Banks 13. Closing of Bank Branch Oices

14. Requirements for Non-Foreign Exchange Commercial Banks to Become Foreign Exchange Commercial Banks

15. Conversion of Business License of Commercial Banks to Rural Banks in the Context of Consolidation

16. Determination of Status and Follow-up of Bank Supervision

17. Folow-up Handling of Rural Banks under Special Supervision Status (DPK)

18. Follow-up Handling of Sharia Rural Banks under Special Supervision Status (DPK) 19. Bank Liquidation

20. Business License Revocation at the Request of Shareholders (Self Liquidation)

B. Regulation on Business Operations and Several Bank Products

1. Foreign Exchange Traders (PVA) for Banks 2. Purchase of Foreign Currency Against

Rupiah to Banks 3. Derivative Transactions

83 83 85 86 86 88 100 101 104 105 107 110 111 112 112 113 113 118 120 121 123 123 123 124 123 81 77

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4. Commercial Paper (CP) 5. Deposits

6. Trust

7. Regulation on Products of Sharia Banks and Sharia Business Units

8. Sharia Principles in the Activities of Collecting and Distributing Funds as well as Sharia Bank Services

C. Regulation on Prudentiality

1. Core Capital of Commercial Bank

2. Minimum Capital Adequacy Requirement (KPMM)

3. Net Open Position (NOP) 4. Legal Lending Limit (LLL) 5. Assets Quality

6. Allowance for Assets (PPA) 7. Debt Restructuring

8. Financing Restructuring for Sharia Banks and Sharia Business Units

9. Statutory Reserves (GWM)

10. Transparency of Bank Financial Condition 11. Transparency of Bank Product Information

and Utilization of Customer Personal Data 12. Prudential Principles in Equity Participation

of Commercial Banks

13. Prudential Principle in Asset Securitization Activities for Commercial Banks

14. Prudential Principle in the Implementation of Structured Product Activities for Commercial Banks

15. Prudential Principle in the Implementation of Agency Activities for Foreign Financial Product by Commercial Banks

16. Prudential Principle for Commercial Banks Outsourcing Partial Job Implementation to Other Parties

17. Application of Anti Fraud Strategy for Commercial Banks

18. Guidelines for Calculation of Risk-Weighted Assets (ATMR) for Credit Risk Using Standard Approach

19. Business Operations and Oice Network of Commercial Banks Based on Core Capital

D. Regulation on Bank Soundness Rating Assesment 126 127 128 128 128 129 131 132 134 138 143 144 145 146 147 147 148 149 150 151 154 155 156 158 125 124

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1. Conventional Commercial Banks 2. Sharia Commercial Banks 3. Conventional Rural Banks 4. Sharia Rural Banks

E. Regulations on Self Regulatory Banking (SRB)

1. Guideline on the Formulation of Bank Credit Policy (PPKPB)

2. Implementation of Good Corporate Governance (GCG)

3. Internal Audit Work Unit (SKAI) of Commercial Banks

4. Implementation of Compliance Function in Commercial Banks

5. Bank Business Plans

6. Application of Risk Management in the Utilization of Information Technology by Commercial Banks

7. Application of Risk Management to Commercial Banks

8. Application of Consolidated Risk Management to Banks Conducting Control to Subsidiaries

9. Application of Risk Management in Internet banking

10. Application of Risk Management to Banks Engaging Joint Marketing Activities with Insurance Companies / Bancassurance 11. Application of Risk Management in

Bank Acivities Related to Mutual Funds (Reksadana)

12. Risk Management Certiication for Managers and Oicers of Commercial Banks 13. Application of Risk Management for

Commercial Banks Conducting Prime Customer Services (LNP)

14. Application of Risk Management to Banks Providing Loans for Housing Ownership (KPR) and Motor Vehicle Ownership (KKB) 15. Application of Risk Management in Sharia

Banks

16. Application of Anti Money Laundering and Prevention of Terrorism Funding (APU and PPT) Programs

17. Settlement of Customer’s Complaints

159 158 161 161 162 162 166 164 164 165 167 168 169 170 170 171 171 172 173 175 175 177

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(PKE) Product for Sharia Banks and Sharia Business Units

F. Financing Regulations

1. Short Term Financing Facilities (FPJP) for Commercial Banks

2. Short Term Financing Facilities (FPJP) for Rural Banks

3. Short Term Sharia Financing Facilities (FPJPS) for Sharia Commercial Banks 4. Short Term Sharia Financing Facilities (FPJPS) for Sharia Rural Banks

5. Intraday Liquidity Facility (FLI) for Commercial Bank

6. Intraday Liquidity Facility (FLI) for

Commercial Bank Based on Sharia Principle (FLIS)

7. Emergency Financing Facility (FPD) for Commercial Banks

G. Regulations Related to Micro, Small and Medium Enterprises (MSMEs)

1. Credit Provision/Financing by Commercial Banks and Technical Assistance in the Context of Developing MSMEs 2. Business Plans

3. Legal Lending Limit

4. Risk-Weighted Assets for Billings to MSMEs and Retail Portfolio

5. Assets Quality Assessment

H. Other Regulations

1. Bank Indonesia Rupiah Deposit Facility (FASBI)

2. Bank Foreign Loans (PLN)

3. Interbank Financial Market Based on Sharia Principle (PUAS)

4. Certiication Body for Rural Banks/Sharia Rural Banks

5. Restriction of Rupiah Transaction and Foreign Currencies Loans Provision by Banks 6. National Clearing System (SKN) 7. Real Time Gross Settlement (RTGS) 8. Certiicates of Bank Indonesia (SBI)

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10. Government Securities (SUN) 11. Bank Secrecy

12. Human Resources Development in Banking Sector

13. Banking Mediation

14. Incentives in the Context of Banking Consolidation

15. Debtor Information System (SID) 16. Accounting Guidelines of Indonesian Banking (PAPI) for Conventional Commercial Banks

17. Accounting Guidelines of Indonesian Sharia Banking (PAPSI) for Sharia Banks and Sharia Business Units

18. Decision on the Utilization of Financial Accounting Standard in Rural Banks 19. Transparency of Prime Lending Rate (SBDK) Information

20. Rating Agency and Ratings Recognized by Bank Indonesia

I. Bank Reports

1. Periodic Report 2. Other Report

VI. OTHERS

A. Banking Popular Terminology

B. Banks Roles in the Prevention and Eradication of Money Laundering Crime (TPPU) based on The Act of the Republic of Indonesia No. 8 Year 2010 C. Types of Contract Sharia Banking Business

Operations

VII. APPENDIX LIST OF FIGURE

1. Bank Indonesia Organization Structure 2. Risk Based Supervision Cycle

3. Pillar of Financial Inclusion 4. Basel II

5. Minimum Standard of Rural Bank Organization Structure

6. APEX Cooperation Model of Rural Bank

189 189 190 190 191 192 192 193 194 194 195 197 195 201 197 203 205 208 213 211 5 21 36 40 63 66

B

AB 1

BANK

INDONESIA

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I. BANK INDONESIA

Bank Indonesia (BI) is the Central Bank of the Republic of Indonesia, an independent state institution whereas in carrying its duties and authorities is free from the intervention of the government and or other parties, with the exception of other matters explicitly stipulated in Act concerning BI.

A. Mission and Vision of BI

1. Mission

To reach and to maintain rupiah value stability through the maintenance of monetary stability and development of inancial system stability toward a long-term sustainable national building.

2. Vision

To become a Central Bank Institution that is credible both nationally and internationally through the strengthening of strategic values owned, as well as the achievement of inlation that is low and stable.

B. Strategic Values

Values which become the fundamentals of Bank Indonesia, the management and employees to act and behave to achieve its mission and vision comprising of Competency, Integrity, Transparency, Accountability, and Cohesiveness (KITA-Kompak).

C. Important Duties of BI1

1. Establish and implement policy on monetary; 2. Organize and maintain the smooth operations of the

payment system;

3. Regulate and Supervise banks2

Detailed Description of BI Duties

1. Establish monetary targets by taking into account inlation rate targets, conducting monetary control, extending credits or inancing to banks based on 1 _{Basic / Important Duties of BI based on Act No. 23 Year 1999 concerning Bank}

Indonesia, as last amended by Act No. 6 Year 2009.

2_{Act No. 21 Year 2011 dated 22 November 2011 concerning Financial Service} Authorities has been issued which among others govern the duty authorities on regulation and supervision of banks.

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Sharia Principles in order to overcome diiculties in a short-term funding, providing facilities of Government-funded emergency inancing in case a Bank experiencing inancial diiculties which has a systemic impact and potentially lead to a crisis endangering the inancial system, implementing foreign exchange rate policy, and managing foreign exchange reserves.

2. Determine the use of payment instruments, govern inter-bank clearing system, organize clearing activities, undertake inal settlement of inter-banks payment transactions, and issue, circulate, revoke, withdraw and annihilate Rupiah from circulation.

3. Grant and revoke licenses on institutional and certain business activities of banks, establish regulation, perform supervision of banks and impose sanctions to banks in accordance with the provisions of laws and regulations.

D. Organization of Bank Indonesia

BI is led by a Board of Governors consisted of one Governor, one Senior Deputy Governor, and no less than 4 or no more than 7 Deputy Governors nominated and appointed by the President with the approval of the People Representative Council (DPR). In a broad outline, BI duties are performed through 4 sectors (monetary, banking, payment system and internal management), Bank Indonesia Representative Oices (KPw) – Domestic and Overseas all of which are responsible to the Board of Governors.

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B

AB 2

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II. BANKING

Banking is everything pertaining to banks, covering institution, business activities, and also the nature and process in conducting their business operations.

In carrying out its duties, Indonesian Banking is based on economic democracy and utilizes prudential principle. Primary function of Indonesian banking is as the collector and distributor of public funds, also aims to support the implementation of national building in order to enhance the equalization of development and its results, economic growth and national stability, toward the improvement of the quality of people’s life.

The banking system has a strategic position, i.e. supporting the smooth operation of the payment system, implementing monetary policy and achieving inancial system stability. Hence, it requires banks that are sound, transparent and can be accounted for.

A. Deinition

1. Banks are business entities that collect funds from the society in the form of savings/deposits and distribute them to the society in the form of credits and or other form in order to improve the living standard of the people.

2. Conventional Banks are Banks that conduct their business operations conventionally and based on their type consist of Conventional Commercial Banks and Rural Banks.

3. Sharia Banks are Banks that conduct their business operations based on Sharia Principles and according to their type consist of Sharia Commercial Banks and Sharia People Financing Bank.

4. Sharia Principle is a principle in the Islamic Laws on banking activities based on fatwa (legal decision) issued by the institution that has the authority in giving fatwa in sharia ield.

B. Operations of Banks

Operations of Conventional Commercial Banks

1. Collecting funds from the society in the form of demand deposits (giro), time deposists, certiied deposits, savings, and/or other forms equivalent;

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2. Extending credits; 3. Promissory notes;

4. Purchasing, selling or guaranteeing upon own risk or for the interest and the order of their customers: • Drafts/Bills of exchange, including drafts accepted

by bank which validity period should not be longer than the common practice in the trading of such drafts;

• Promissory notes and other commercial papers which validity period should not be longer than the common practice in the trading of such notes; • State treasury bills and government securities; • Certiicates of BI (SBI);

• Bonds;

• Future trading securities with a validity period up to one (1) year;

• Other securities with a validity period up to 1 (one) year;

5. Transferring money both for own interest and the interest of customers;

6. Placing funds in, borrowing funds from, or lending funds to other banks, whether by using letters, telecommunication facilities, or sight drafts, cheques or other means;

7. Receiving payment of bills on securities and settling accounts with or between third parties;

8. Providing safe deposit boxes for valuable things and securities;

9. Undertakingcustodial activities for the interests of other parties based on contracts;

10. Undertaking placement of funds from customers to other customers in the form of commercial papers/ securities not listed in the stock exchange/market; 11. Conducting factoring activities, credit card businesses

and trustee services;

12. Providing inancing and or conducting other activities based on Sharia Principle, in accordance with the regulations stipulated by BI;

13. Conducting other activities normally undertaken by banks provided that such activities shall not be in contraventions with the Act concerning Banking and

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the applicable laws and regulations;

14. Conducting foreign exchange activities by complying with the provisions set by BI;

15. Conducting equity/capital participation in other banks or companies operating in inancial sector, such as leasing, venture capital, securities companies, insurance, and also clearing houses for settlements and custodians, in compliance with the regulations stipulated by BI;

16. Conducting activities of temporary capital investment based on Sharia Principles to overcome failures in credit and inancing (bad debts/inancing), on the condition that the temporary equity be withdrawn in due time, in compliance with the regulations stipulated by BI;

17. Acting as pension funds founders and managers in accordance with the provisions of the applicable laws and regulations of pension funds; and

18. Conducting bank business operations in the form of Custodial with Management/ Trust.

Operations of Sharia Commercial Banks

1. Collecting funds in the form of Demand Deposits, Savings, or other forms equivalent based on wadi’ah agreement or other agreements not in contravention with the sharia principle;

2. Collecting funds in the form of investment of Demand Deposits, Savings, or other forms equivalent based on mudharabah agreement or other agreements not in contravention with the sharia principle;

3. Distributing proit sharing inancing based on mudharabah and musyarakah agreements, or other agreements not in contravention with the sharia principle;

4. Distributing inancing based on murabahah, salam, and istishna’ agreements, or other agreements not in contravention with the sharia principle;

5. Distributing inancing based on qardh agreement or other agreements not in contravention with the sharia principle;

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to customers based on ijarah agreement and/or lease purchase in the form of ijarah muntahiya bittamlik or other agreements not in contravention with the sharia principle;

7. Conducting debts taking-over based on hawalah agreement or other agreements not in contravention with the sharia principle;

8. Conducting debit cards business and/or inancing cards based on the sharia principle;

9. Purchasing, selling, or guaranteeing on own risk, any third party securities issued based on the real transactions in accordance with the sharia principle, among others ijarah, musyarakah, mudharabah, murabahah, kafalah, or hawalah agreements;

10. Purchasing securities/commercial papers based on the sharia principle issued by the government and/or BI;

11. Receiving payment of bills on securities and conducting settlement with or between third parties based on the sharia principle;

12. Undertaking custodial activities for the interest of other parties pertaining to an agreement based on the sharia principle;

13. Providing safe deposit box for valuable things and commercial papers based on sharia principle;

14. Transferring money, both for own interests and customers’ interests based on the sharia principle; 15. Undertaking trusteeship functions based on wakalah

agreement;

16. Providing letter of credit or bank guarantee based on the sharia principle;

17. Conducting other activities normally undertaken in the ields of banking and social provided that it is not in contravention with the sharia principle and pursuant to the provisions in the laws and regulations; 18. Conducting foreign exchange operations based on

the sharia principle;

19. Conducting capital/equity participation activities in Sharia Commercial Banks or inancial institutions that conducting business activities based on the sharia principle;

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20. Conducting temporary capital participation activities based on the sharia principle to overcome inancing failures, with the requirement to withdraw its participation;

21. Acting as the founder and caretaker of pension funds based on the sharia principle;

22. Conducting activities in capital market as long as not in contravention with the sharia principle and the provisions of laws and regulations in capital market ield;

23. Organizing activities or bank products based on the sharia principle using electronic facilities;

24. Issuing, ofering, and trading short-term securities based on the sharia principle, both directly and indirectly through money market;

25. Issuing, ofering, and trading long-term securities based on the sharia principle, both directly and indirectly through capital market; and

26. Providing products or conducting other sharia commercial banks activities based on the sharia principle.

Operations of Conventional Rural Banks

1. Collecting funds from the society in the form of deposits comprising of time deposits, savings, and/or other forms equivalent;

2. Extending credit;

3. Placing its funds in BI Certiicates (SBI), time deposits, certiicates of deposit, and/or savings in other banks.

Operations of Sharia Rural Banks

1. Collecting funds from the public in the form of: • Deposits in the form of savings or equivalent

based on wadi’ah agreement or other agreements not in contravention with the sharia principle; and • Investment in the form of deposits or savings or other forms equivalent based on mudharabah agreement or other agreements not in contravention with the sharia principle;

2. Distributing funds to the communities in the form of: • Proit sharing inancing based on mudharabah

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agreement or musyarakah;

• Financing for buy and sell transaction based on the agreements of murabahah, salam, or istishna; • Financing based on qardh agreement;

• Financing of moveable or immovable goods leasing operations to customers based on ijarah agreement or lease purchase in the form of ijarah muntahiya bittamlik; and

• Debts takeover based on hawalah agreement; 3. Placing funds in other Sharia Banks in the form of

deposits based on wadi’ah agreement or investment based on mudharabah agreement and/or other agreements not in contravention with the sharia principle;

4. Transferring money, both for own interest and for customers’ interests through the account of Sharia Banks (BPRS) in the Sharia Commercial Banks (BUS), Conventional Commercial Banks, and Sharia Business Units (UUS); and

5. Providing products or conducting other Sharia Bank business activities in accordance with the Sharia Principle based on BI approval.

Supporting Business Operations

Business Supporting Operations are other activities conducted by banks outside business operations of the Banks. The business supporting operations among others are related to human resources, risk management, compliance, internal audit, accounting and inance, information technology, logistic and security.

C. Prohibition of Bank Business Operations

Prohibition of Business Operations of Conventional Commercial Banks

1. Conducting capital investments, except for conducting operations as referred to in No. 15 and 16 of Conventional Commercial Bank business activities described above;

2. Conducting insurance business;

3. Conducting other businesses apart from those referred to in letter B above.

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Prohibition of Business Operations of Sharia Commercial Banks

1. Conducting business activities in contravention with the sharia principle;

2. Conducting trading activities of shares directly in the capital market;

3. Conducting equity participation, except for as referred to in number 19 and 20 of the Sharia Commercial Bank business operations;

4. Undertaking insurance business activities, with the exception as marketing agent of sharia insurance products.

Prohibition of Business Operations of Conventional Rural Banks

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

2. Conducting foreign exchange business operations other than as foreign exchange traders (PVA);

3. Conducting capital investments;

4. Conducting insurance business operations;

5. Undertaking business operations other than activities as referred to in letter B above.

Prohibition of Business Operations of Sharia Rural Banks

1. Conducting business operations in contravention with the sharia principle;

2. Accepting deposits in the form of demand deposits and participating in the payment traic;

3. Conducting forex business operations except for money changer operations subject to BI approval; 4. Conducting insurance business activities except as

marketing agents of sharia insurance products; 5. Conducting capital investments, except for institutions

that are established to resolve Rural Banks liquidity problems; and

6. Conducting other business aside from activities of Sharia Banks business as referred to in letter B above.

B

AB 3

REGULATION AND

SUPERVISION OF

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III. REGULATION AND SUPERVISION OF BANKS

BI shall grant and revoke licenses of institutions and certain business activities of banks, set regulations, conduct supervision of banks and also impose sanctions on the banks.

A. Purpose of Bank Regulation and Supervision

Regulation and Supervision of banks is directed at the optimization of Indonesian banking function in order to create a sound banking system comprehensively or individually, and to be able to preserve public interests well, develop reasonably and beneicially for the national economy.

B. Authorities of Bank Regulation and Supervision

1. Right to license, i.e. the authority to set up licensing procedures and establishment of a bank, including granting and revoking license of bank businesses, granting the opening, closing and moving of bank oices, granting approvals on ownership and management of banks, granting permission to banks to run certain business activities.

2. Right to regulate, namely to set up regulations involving the aspects of business and activities of banks to create a sound banking in order to meet banking services desired by the society.

3. Right to control, namely:

a. Direct supervision of banks (on-site supervision) consists of general audit and special audit with the objectives to obtain an overview of bank inancial condition and to monitor compliance level of banks toward the prevailing regulations, and also to know the existence of unsound practices that might endanger the survival of banks.

b. Indirect supervision (of-site supervision) namely supervision through monitoring tools such periodic reports submitted by banks, audit result reports and other information.

4. Right to impose sanctions, namely to impose sanctions in accordance with the provisions of the laws and regulations to banks in the event a bank is not fully or not in compliance with the regulations. This action contains elements of coaching in order that banks

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operate in accordance with a sound banking principle.

C. System of Bank Supervision

In carrying its duties on bank supervision, currently BI performs its system on supervision using 2 approaches, i.e.:

1. Compliance Based Supervision, i.e. monitoring of bank compliance with the regulations related to the operations and management of banks in the past with the purpose to ascertain that the banks in question have operated and been managed well and properly in accordance with the prudential principle. Supervision to the fulillment aspect of compliance is an integral part of Bank Supervision implementation based on Risk.

2. Risk Based Supervision, i.e. supervision of banks using strategy and methodology based on risk which allows Bank supervisors to detect any signiicant risk early and take supervisory measures appropriately and timely.

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Figure 2 - Risk Based Supervision Cycle

Supervision/Audit of Banks based on risk is conducted against following risk types:

Bank Risk Types

Credit Risk Risks arising due to counterparty _{failures in meeting its obligation}

Market Risk

Risks arising due to market adverse movement of th e portfolio owned by the Banks which can be detrimental to the banks. Market variables are among others interest rate and exchange rate.

Liquidity Risk

Risks that among others are due to the Banks failure to meet the obligations already due.

Operational Risk

Risks that among others are due to the inadequacy and or non-functioning of the internal process, human errors, system failures or external problems that afected bank operations.

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Bank Risk Types

Legal Risk

Risks due to legal aspect weaknesses. The juridical aspect weaknesses are among others due to lawsuits, inexistence of supporting laws and regulations or weaknesses in the agreement such as validity of contract terms are not met and imperfect binding of collateral agreement.

Reputation Risk

Risks that among others are due to negative publications related to bank business activities or negative perceptions against banks.

Strategic Risk

Risks that among others are due to the inappropriate determination and implementation of bank strategy, wrong business decisions or lack of bank responses to external changes

Compliance Risk

Risks due to non-compliance with or not implementing laws and regulations and other prevailing regulations.

D. Banking Information System in order to Support Bank Supervisory Duties

1. Banking Information System (SIP)

SIP is an information system utilized by bank supervisors to conduct analysis activities on the condition of banks, to expedite obtaining information on bank inancial condition (including Bank Soundness Rating), to improve security and integrity of data and banking information. SIP is developed in order to support commercial bank supervisory duties through quality information, based on the following principles:

• SIP is directed as a business tool as well as a quick presentation media of information up to the strategic level.

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• SIP provides information in macro, individual bank, or other information related to business environment of banks.

• SIP integrates data currently scattered in diferent systems.

The function of Supervision Management Information System (SIMWAS) that had been used so far to support supervisory duties is gradually replaced by SIP since the beginning of year 2012.

Information System that has not been integrated into SIP is Information System of Bank under Investigation (SIBADI). SIBADI is information system to support the implementation of investigation duties against criminal banking, and also duties related to mediation activities between customers and banks. SIBADI also provides data/information on alleged perpetrators of criminal banking to support the process of it and proper test.

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

In order to implement duties in supervising Rural Banks, BI has developed and implemented an information system (SI) with reporting and data processing procedures as follows:

Online reporting system enables Rural Banks to submit online periodic reports to BI in order to enhance reporting efectiveness and eiciency both from the sides of Rural Banks and BI. Four types of period reports submitted online are: Monthly Reports, Credit Provision Maximum Limit (BMPK), Debtors Reports (SID) and Rural Bank Publication Financial Reports. Data processing system developed in order to

eliminate repetition of data input, so as minimizing human errors and data inconsistencies. Data of Rural Banks periodic reports received by BI through the reporting system, then being processed for the purpose of monitoring or statistics as supporting documents for developing policy on Rural Bank industry.

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To support transparency to the public and the interests of the stakeholders, BI facilitates the presentation of Rural Bank Publication Financial Reports, Rural Bank industry data and Rural Bank addresses through BI website (www.bi.go.id).

Furthermore, in order to improve supervisory quality of Rural Banks, the development of SI Rural Banks shall be directed into a more focused monitoring system, meaning ofsite or onsite supervision against the condition faced by Rural Banks. Development of Early Warning System (EWS) of Rural Banks shall be conducted to support ofsite monitoring of Rural Banks condition, to complement the assessment of soundness rating that is conducted periodically. Meanwhile, in order to support onsite monitoring, a tool has been developed to help supervisors in conducting inspections to Rural Banks.

BI always make improvements to the information system related to the supervision of Rural Banks in accordance with the supervisory needs, and it is expected that the developed system becomes the information window that present the real condition of Rural Banks, as material in determining any development to be done.

3. Debtor Information System (SID)

SID is a system that provides debtors information, both information on individuals and business entities, developed to support duties and functions of BI in the ields of Monetary, Financial System Stability and Banking Supervision, as well as to support operational activities of Financial Institutions, especially which related to risk management. Information compiled in SID covers basic data of debtors, management and owners of business entities, information on facilities of funds provision received by debtors (credits, credit management, securities, irrevocable L/C, bank guarantees, participation, and/or other claims), collateral, guarantor, and inancial statements of debtors. SID utilizes web-based technology that

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can be accessed in real time and online through the network of BI extranet.

E. Banking Investigation and Mediation

1. Policy Related to Banking Investigation

Bank has the potential to be used as a facility and/or target to enrich oneself, families or certain groups by committing to banking crimes (Tipibank), which eventually can disrupt the operations and posing reputation risk to the banks. The said Tipibank acts might be committed by the members of Board of Commissioners or Board of Directors, Shareholders, Bank staf/employees, ailliated parties with the Banks, or other parties.

In line with the basic duties that have been implemented by Bank Indonesia, in order to govern and monitor banks, BI might ind deviations that have Tipibank indications. However, BI does not have the authority to conduct investigation and prosecution of alleged criminal banking crimes that has become BI indings. BI only has the right to investigate of an alleged Tipibank, and then reports it to the investigators. Therefore, BI in coordination with the state police and attorney general of the Republic of Indonesia conduct the handling of Tipibank embodied in a Memo of Understanding.

In order to smoothen, expedite, and optimize the handling of alleged Tipibank, and also by the growing complexity of problems and handlings of the alleged Tipibank, BI has taken strategic measures to establish cooperation with other institutions, namely:

a. On 19 December 2011 a Memo of Understanding has been signed between BI, the State Police of the Republic of Indonesia and the Attorney General’s Oice concerning Coordination in the Handling of Criminal Acts in Banking Nos.13/104/KEP.GBI/2011, B/31/XII/2011 and Kep-261/A/JA/12/2011, equipped with Implementation Guidelines Nos. 13/10/ KEP.DpG/2011, B/4768/XII/2011/Bareskrim, Kep-04/E/EJP/12/2011 and Juk 12/F/Fsp/12/2011 on Implementation Procedures of Coordination in the Handling of Banking Criminal Acts. This Memo of

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Understanding is to replace the Joint Decree (SKB) Year 2004 between the Attorney General of RI, the State Police Chief, and the Governor of BI. Some key points set out in the said Memo of Understanding and its Implementation Guidelines are concerning the scope of coordination, organization and tasks of the Coordination Team, and also implementation of the coordination.

b. Agreement between BI and the Deposit Guarantee Agency Nos.14/1/KEP.DpG/2012, KEP.001/KE/I/2012 dated 4 January 2012 concerning Mechanism of the Handling of Alleged Banking Criminal Acts to Banks which Licenses Have Been Revoked. Several key points set out in the said Agreement are the completeness of supporting documents, assistance during the investigations, discussion of investigation results, development of tipibank handling, and inancing of the investigations.

With the Memo of Understanding, it is expected that the handling of Tipibank can be done more rapidly and optimally through the coordination in the following matters:

• Discussion on the alleged banking crimes; • Reporting of the alleged banking crimes; • Provision of Witnesses;

• Provision of Experts; • Blocking of Accounts;

• Coniscation of money and documents; • Exchange of information, etc.

With the coordination of this Tipibank’s handling, it is expected that law enforcement eforts in the ield of banking will be optimized and be able to provide a deterrent efect for the perpetrators of Tipibank, and eventuallycan realize a sound and resilient banking system.

2. Policy related to Banking Mediation

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based on PBI No.8/5/PBI/2006 concerning Banking Mediation as has been amended by PBI No.10/1/ PBI/2008. The main purpose of this banking mediation process is to help settling disputes between customers and banks. Should this process not be implemented, it would potentially be detrimental to customers’ interests and could afect the reputation of the banks. Banking mediation is also directed to facilitate small-scale customers in accessing the eforts to settle disputes with banks through a simple, afordable, and fast method.

Along with the progress of banking transactions which are becoming easier and faster, potential problems arising from the transactions in question also increases. One of the problems is characterized with the used of an account opened with incorrect identity to accommodate the crime fraud through the fund transfer facilities. To follow up on the above issue, banking facilitated by BI developed “Bye Laws on the Blocking of Customers’ Deposit Accounts” (Bye Laws). The said Bye Laws are intended to facilitate Banks in the handling of frauds using fund transfer means and also in order to provide protection to victimized customers. Furthermore, in connection with the enactment of Act No. 10 Year 2008 concerning Prevention and Eradication of Money Laundering (UU TPPU), BI again facilitated banking to make changes to the Bye Laws harmonized with UU TPPU. One of the materials for change is the synchronization of Bye Laws terminologies with UU TPPU.

To follow-up the proliferation of texting through Short Message Services (SMS) to public, which has been suspected to be one mode of fraud using a bank account which is allegedly opened by incorrect identity, BI has requested commitments from banking to conduct follow-ups on any account used for fraud and determine the most appropriate efort in providing protection to the customers.

B

AB 4

BANKING POLICY

DIRECTION

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IV. BANKING POLICY DIRECTION A. Banking Policy Direction in 2013

In Year 2012, BI has formulated banking policy in three (3) corridors which are interrelated. Those three corridors are (1) maintaining inancial system stability, (ii) strengthening resilience and competitiveness of banking, and (iii) strengthening intermediation function.

Responses to the policy on the First Corridor, i.e. maintaining inancial system stability is implemented by issuing regulations on macro prudential, in the form of: Policy on interest rate and exchange rate, Loan to Value (LTV) and Down Payment (DP) for Public Housing Loans (KPR) and Motor Vehicles Loans (KKB) intended to mitigate potential risks in the inancial system, due to a too rapid credit growth in the consumptive sectors. To avoid any regulatory arbitrage, LTV regulation for sharia banks and sharia business units (UUS) is also applied with a special treatment to inancing product of Musyarakah Mutanaqisah (MMQ) and Ijarah Muntahiyah bit Tamlik (IMBT).

BI has also made improvements to the regulation on Minimum Capital Adequacy Requirement (KPMM) of Commercial Banks. A bank is required to have a minimum capital reserve in accordance with its risk proile in the range of between 8% and 14%. This number can be set up bigger, if based on BI assessment the current minimum capital adequacy is still insuicient to anticipate the risks faced. A Foreign Bank Branch Oice (KCBA) operating in Indonesia is also required to maintain minimum Capital Equivalency Maintained Assets (CEMA). This CEMA is an allocation of capital in the form of a certain amount of operating funds which must be placed in inancial assets that also must meet certain requirements. BI also has developed a crisis management protocol for exchange rate and banking, and improved facilities on short-term funding. This crisis management protocol of BI has been integrated with the national crisis management protocol. In the Second Corridor, i.e. strengthening resilience and competitiveness of banking has been done by BI through

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(i) arranging bank ownership structure, (ii) adjusting activities of business and network expansion of bank oices based on capital. The structuring of bank ownership has a philosophy and spirit to enhance the governance and soundness of banks. Banks that have good ratings in governance and soundness (ranking 1 and 2) shall be given exceptions, as long as such good ratings can be maintained continuously. Meanwhile, the adjustment of business activities and network expansion of bank oices are highly required to enhance banking resilience and competitiveness. BI will issue a policy on “Regulation of Business Activities and Network Expansion of Bank Oices Based on Capital”, which will also be completed with an improvement on sole proprietorship in Indonesian banking (Single Presence Policy); this improvement shall be done by opening options for the formation of a holding company. With this option, strategic investors that already become the controlling shareholders in a bank may become controlling shareholders in other banks, without any obligations to conduct a merger or consolidation among banks owned.

The Third Corridor ensuring that the function of

intermediation is on the right track, where on each bank business group a “productive credit target” will be set that must be met by each bank, including the commercial banks obligation in channeling credits to MSMEs at a minimum of 20% from their total credits, which regulation has already been issued in December 2012.

Stepping in 2013, the economy of the developed countries will enter the new normal era; two big risks need to be aware of in this era, in which if these risks could not be mitigated, they would add to the complexity in the management of macro policy. First, it is the risk that might still resurface from the European crisis management. Second, it is the risk of iscal clif in USA if a political compromise could not be reached on tax increases prevention and budget spending cuts.

Policy direction in the future, BI will continue conducting calibration of policies mixture consisted of instruments of interest rate, exchange rate and macroprudential.

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National banking industry needs to be continuously pushed to strengthen the resilience, eiciency and its role in the intermediation. Including in this strengthening of intermediation is the expansion of public access to banking services, with a more afordable cost through an inclusive inancial program. In the future, the inclusive inancial program must be done from two sides simultaneously, i.e. from the supply side and from the demand side. From the supply side, expansion of banking service access with afordable cost and provision of banking products to suit people with low income. Also ahead, eforts to expand access to banking services in a non conventional way shall be conducted, through the utilization of information technology, telecommunication and agencies cooperation, or known as branchless banking, so that banking services can reach all levels of society without having to present the bank physical oice. BI also observes the need to optimizing the strength of middle class society through the eforts to accelerate the birth of new entrepreneurs, through the cooperation with the universities and the private sectors. BI will design entrepreneurship training programs for college students, former Indonesian Migrant Workers (TKI) as well as the public. Currently, credit schemes for novice entrepreneurs (start up credit) are also being designed that will involve technical institutions and other parties in the framework of coaching, mentoring, and guaranteeing and also the process of credit collateral eligibility, such as land certiicates. Meanwhile, to reduce obstacles associated with high interest rates on micro credit segment, BI will encourage healthy competition in the micro segment among others through publications of Basic Interest Rate of Micro Credit (SBDKM).

B. Progam of Financial Inclusion

Financial industry that rapidly growing during the last several decades, in fact still leaves some people not having access to the most basic inancial services. Based on the World Bank publication in 2008, in most developing countries, more than half of the population does not have accounts in inancial institutions. As a matter of fact,

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most countries in Africa, only less than one ifth of the households there have accounts in inancial institutions, whereas, access to this inancial service is a critical aspect in the eforts to alleviate poverty.

Root of the Problems

Problems that cause diiculties of public access to the inancial services in general can be divided into two major parts, namely from the supply side and the demand side.

1. Supply Side.

a. Geographical Condition. Apart from the problems that occurred naturally, for instance people living in remote areas, Leyshon & Thrift study (1994) mentioned that inancial crises and deregulations have contributed to the impediment of public access to inancial services. Economic crises have forced investors to withdraw their funds from the developing countries resulting in the closure of oices massively. Furthermore, deregulation era which has motivated tighter competitiveness, forced banking to increase eiciencies so that they became very selective in choosing customers and closing their branch oices in the areas that considered less proitable.

b. Design and Service Patterns. For example, in savings product where its administration cost considered too costly for the low income communities or the non-availability of daily credit service for micro traders, causing them to still using credit service from shark loans which installments are collected directly from the traders. Aside from that, banks usually prefer credits in bulk rather than small-scale credits required by MSMEs.

c. Information gap. The gap of information between what is required and Bank procedure, or Bank product with what generally known by MSMEs. This is the gap that requires a bridge between the public, MSMEs in particular, with inancial institutions, especially banking, so that the problems can be identiied and problems solutions can be adjusted with the real problems.

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2. Demand Side

a. Education. The level of education and low knowledge often causes the communities not able to obtain inancial services. For instance, incapability in making inancial statements and or business prospect analyses becomes public constraints in obtaining Bank credits. Besides, low knowledge of insurance beneits also causes the low penetration of insurance product for the low income communities.

b. Legal Issues or Formalization Gap. The relationship between Bank and its customers in general is arranged formally with strict legal requirements. However, generally, micro enterprises are diicult to meet the formal requirements of the bank such as business licenses, collateral in the form of certiicates, so that enventually the poor communities unable to obtain access to adequate credits.

c. Reluctance in obtaining inancial services might be due to the beliefs of some people that Bank interests are usury, which is forbidden in the Islamic world, so that inancial services based on sharia which are free from usury will be the solution.

Access to Financial Services

World Bank report quotes inal report of the World Bank Year 1955, that there are at least 4 types of inancial services which considered vital for people existence, i.e. services of funds deposit, credit facility, payment system and insurance including pension funds. These four aspects become the must-have basic requirements of any human being in order to have a better life.

Although various models of informal micro inance and many spontaneous institutions are in existence to serve low income communities especially in the developing countries, and yet, partial alternative inancial institutions, such as this informal micro inance can only meet a fraction of the community needs. Therefore, a good cooperation between formal inancial institutions, particularly banking,

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and this micro inancial institution becomes one of the successful keys to realize inclusive inancial institutions for the whole society.

National Strategy of Financial Inclusion

The enhancement of public access to the said inancial institutions is naturally a complex problem so that it needs a cross sectoral coordination involving banking authorities, non-bank inancial services and other concerned institutions toward poverty alleviation and education. Therefore, a comprehensive policy is required in the national strategy of Indonesia. In this connection, 6 pillars of policy in inancial inclusion are formed as referred in below illustration.

Figure 3 - Pillar ofFinancial Inclusion

Description of the above pillars is as follows:

One of the protection forms for consumers is by providing inancial education to the society as relected inthe First

Pillar, namely the pillar of inancial education. Financial

education is an activity to enhance public knowledge to inancial poducts and services. The improvement of knowledge becomes one of the pillars in the activities of inancial inclusion, considering one of the reasons why the community does not interact with inancial institutios is the lack of public understanding in inancial products and

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services. Some activities have been conducted by BI related to inancial education, among others are: “Ayo Ke Bank” (Let’s Go to the Bank) campaign, provision of information website and consumer education as well as the inclusion of inancial education in the curriculum of elementary and junior high schools (SD and SMP) in Bandung, Semarang, Surabaya, Medan, Makassar, Banjarmasin and Palu as pilot projects. In year 2013, education activities to the communities will continue to be conducted, focusing on the above seven pilot project regions at a minimum. Education on banking and entrepreneurship are also conducted to Indonesian Labors in foreign countries (TKI). Joint campaign of the whole Indonesian banking will also continue to be conducted through a save student movement and a banking product of Tabunganku (my Savings).

Second Pillar is public inancial facilities that explor the role

of the Government through direct or indirect inancing in order to encourage community economic empowerment. The products including in this pillar are among others Cash Direct Assistance (BLT), Social Assistance (Bansos), Aspiring Family Program (PKH), Public Health Insurance (Jamkesmas), Rice for the Poor (Raskin), and other forms of subsidy. Channelling of this government support basically takes into consideration the principles of prudential, right on target, and beneits of such budget allocations.

Third Pillar is related to the mapping of inancial

information (inancial eligibility), in which one of the public constraints in connecting with inancial services is due to individual issues of the communities such as legality issues. This is relected by the fact that many MSMEs are still not incorporated and do not have business licenses which are prerequisites for credit provision by Banks. Hence, this pillar aims to enhance the feasibility of the poor productive from not feasible to become feasible and then bankable at the inal stage. This pillar consists of several aspects, among others to enhance community capacities, introduce alternative security system and simpler credit services, and also identify potential customers. In this case, BI has developed MSMEs cluster and also conducted initiation of credit rating formulation of MSMEs as well as

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Financial Identity Number (FIN).

To motivate public access toward inancial services, a study is required upon the provisions that can support public easy access to inancial services, which covered in

the Fourth Pillar, namely policies/supporting regulations.

In this pillar, the Government and BI will make eforts to provide supports in a policy in the form of regulations issuance that can facilitate the communities in obtaining inancial services. BI in year 2012 has issued multilicense provision. Meanwhile, the policies that will support the facilitation of inancial services among others are policies of branchless banking and credit start-up.

Fifth Pillar observes the importance of facilitating

intermediation and distribution which emphasizes on the eforts to increase awareness of inancial institutions toward the community groups’ potential to get inancial services. BI, in its efort to enhance the facilitation of intermediation, in cooperation with Indonesian banking has developed “TabunganKu” product which is a form of savings with a low administration cost. Eforts to increase the outreach of formal inancial institution services to the community groups in rural areas are conducted through branchless banking in which one of them contains the possibility of a mobile money application in Indonesia, whereas cellular phones can be used as a means of saving money in the form of an account at a particular bank. It is expected that remote areas can still get services of banking facility through the concept of branchless banking without having to establish Bank oice infrastructures. On the credit distribution side, expansion of credit extension outreach shall be conducted through the concept of credit start-up and land certiication.

Consumer protection is one of the advantages to be gained by public if they are associated with formal inancial institutions compared to if they get connected with informal inancial service providers, given that formal inancial service providers have regulator which implements governance and supervision including regulation on protection for their consumers. This thing is relected in the Sixth Pillar of consumer protection. For instance, for bank customers, BI has required banks to

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communicate with any prospective customer the beneits, risks and costs contained in a inancial product, and also to follow-up their customers’ complaints with clear process and deadline of settlement as well as to facilitate the communities whose problems cannot be resolved by banks through the work unit that handles banking mediation in BI.

Cross Pillar

The achievement of efectiveness in the implementation of the above six pillars, cannot be separated from a number of factors which together can be seen as cross-pillar activitie. Those activities are among others a) Improvement of supporting infrastructures (physic and communication and information technology), b) Availability of database (supply and demand sides) that supports the process of policy decision on inancial inclusion, c) Encourage the establishment of credit bureau institutions that supports inancial inclusion policy.

By the enhancement of public access toward this inancial service provision, the low income communities can also enjoy services such as deposits/savings. From the deposit pattern of the low income people, inancial institutions will know their customers better, so that it can open inancing opportunities for prospective customers. Aside from that, the easy access to payment system services will also afect to the smoothness of economic transactions, even toward the communities in remote areas. Buying and selling process can be done more smoothly, and the communities can use advanced technology such as cellphone to pay the purchase of raw materials from farmers in remote areas. Farmers wouldnot have to sell their agricultural produce with low prices due to limited cash brought by the collector traders, as payment can be made using e-money now. This kind of things will support the increase of economic activities that can improve living standard of the communities. That is also the case with insurance services; the availability of micro insurances will help the communities anytime they must deal with problems that can be covered by their insurances. Those things are expected to strengthen the society condition so

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Pillar 1 - Minimum Capital Requirements

Pillar 1 determines minimum capital requirements (capital adequacy) which are associated with credit risk, market risk and operational risk. In this case, banks must maintain capital adequacy to cover risks faced. According to Basel II documents, bank capital ratio, or the ratio between that they still continuously perform and participate in the activities of economy.

C. Basel II

Capital is one of the main focuses of all bank supervisor authorities in conducting prudential principle. Therefore, one of the regulations that need to be developed to strengthen banking system and becomes the bufer against potensial loss is a regulation on capital adequacy. Considering the important role of bank capita, Basel Committee on Banking Supervision (BCBS) has issued a concept of capital framework that becomes the international standard. The initial concept of bank capital framework was issued in year 1988 which was then reined in year 2006 by the issuance of International Convergence on Capital Measurement and Capital Standard (A Revised Framework) document or better known as Basel II. Basel II is intended to enhance the resilience and soundness of inancial system by focusing on the risk-based capital calculation, supervisory review process and market discipline. In general, Basel II framework consists of three pillars, i.e. Pillar 1: capital adequacy (minimum capital requirements); Pillar 2: supervisory review process; and Pillar 3: market discipline.

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regulatory capital and weighted average assets according to risk (ATMR) should not be less than 8%.

Pillar 1 of Basel II introduces several alternatives approaches in calculating capital charges of credit risk, market risk and operational risk. Those approaches started from a simple approach to complex approach and can be adjusted according to the level of complexity of the products and activities of the bank. For the initial stage, banks should use the simple approach to calculate capital charges of credit risk, market risk and operational risk. Bank may use a more complex approach provided that the bank is ready and able to conduct capital charges calculation with a more complex approach and also has been granted approval from the supervisory authority.

Pillar 2 - Supervisory Review Process

Pillar 2 requires a review process conducted by supervisors to ensure that bank capital is adequate to fully cover the bank risks. In accordance with the four (4) principles of Pillar 2, banks must own a process to assess capital adequacy comprehensively which related to the risk proile and strategy to maintain their capital adequacy or known as Internal Capital Adequacy Assessment Process – ICAAP (Principle 1). On the other hand, supervisors will review adequacy of evaluation process conducted by banks or referred to as Supervisory Review and Evaluation Process – SREP (principle 2). Meanwhile, according to principle 3, supervisors expect banks to operate above the minimum regulatory capital ratio and in accordance with principle 4 supervisors may conduct intervention to prevent declining capital below the minimum level required and then request banks to take immediate actions in the event the capital cannot be maintained.

In performing SREP as referred to in Principle 2 stated above, supervisors may calculate bank capital adequacy toward:

1. Risks that still cannot be fully measured in Pillar 1 due to the use of standard approaches by bank, for instance concentration risk;

2. Risks that have not been calculated in Pillar 1, among others, liquidity risk, interest rate risk in banking book,

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reputational risk and strategic risk. Some of the said risks cannot be measured quantitatively so as to be more like qualitative interpretations including risks from bank external factors that might arise due to the policy, and economic or business conditions.

Pillar 3 - Market Discipline

To complete the other two pillars, Pillar 3 of Basel II determines a disclosure requirement that makes it possible for market participants to assess primary information concerning risk exposures, process of measuring risks and capital adequacy of banks. In principle, pillar 3 aims to encourage the creation of a sound banking business environment, among others by increasing transparency to public so that the public can participate in supervising bank business activities.

Several main prerequisites in order that the objectives can be achieved are, among others:

1. Availability of adequate information for public regarding bank condition; and

2. Public ability in assessing bank condition through analyses on the available information.

Implementation of Basel II in Indonesia

Framework of Basel II (Pillar 1, Pillar 2, and Pillar 3) in Indonesia has been implemented in full since December 2012. Some regulations related to the implementation of the Basel II among others are:

Pillar 1

1. Circular Letter (SE) No. 13/6/DPNP concerning Guidelines on Calculation of Risk-Based Weighted Assets (ATMR) for Credit Risk using standard approach. The regulation has come into force as of January 2012, requiring banks to compute credit risk exposure using the standard approach.

2. Calculation of Market Risk is stipulated in SE No. 14/21/ DPNP concerning Revision on SE No.9/33/DPNP of BI dated 18 December 2007 concerning Guidelines on Standard Method Utilization in the Calculation of Capital Adequacy Requirements for Commercial

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Banks by Taking into Account Market Risks. Besides, for banks that will use an internal model, regulation on the said matter is stipulated in SE No. 9/31/DPNP concerning Guidelines on Internal Model Utilization in the Calculation of Capital Adequacy Requirements for Commercial Banks by Taking into Account Market Risks.

3. Meanwhile, calculation of operational risk is stipulated in SE No. 11/3/DPNP concerning Calculation of ATMR for Operational Risk Using Basic Indicator Approach.

Pillar 2

In relation to pillar 2 (Supervisory Review Process), Bank Indonesia has issued a provision that requires banks to provide minimum capital according to their risk proiles. The said provision is stipulated in Bank Indonesia Regulation (PBI) No. 14/18/PBI/2012 on Minimum Capital Adequacy Requirement (KPMM) for Commercial Banks based on Risk Proiles and Fulillment of Capital Equivalency Maintained Assets (CEMA), entered into force as of December 2012. Through the said provisions, banks are required to provide minimum capital based on risk proiles with the following ranges:

1. Bank with a risk proile3 _{of rating-1, a minimum capital}

of 8%

2. Bank with a risk proile of rating-2, a minimum capital of 9% up to < 10%

3. Bank with a risk proile of rating-3, a minimum capital of 10% up to < 11%

4. Bank with a risk proil of rating-4 or 5, a minimum capital of 11% up to 14%

Pillar 3

In order to increase market discipline, BI has issued PBI No. 14/14/PBI/2012 concerning Transparency and Publication of Bank Reports and SE No. 14/35/DPNP concerning Annual Reports of Commercial Banks and Speciic Annual Reports Submitted to BI. In the abovementioned

3 _{What it means by risk proile is a Bank risk proile as stipulated in the}

regulation of Bank Indonesia concerning Assessment of Commercial Bank Soundness Rating.

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regulations, more comprehensive disclosures are regulated, i.e. concerning risk exposures owned by banks, risk mitigations conducted, and capital adequacy of banks, in line with the requirement in Pillar 3 of Basel II.

With the issuance and application of the said regulations, implementation of Basel II comprehensively can be achieved, so that Indonesian banking industry that is more sound, more capable to survive crisis condition, and more competitive in global inancial industry, can be created. This will further encourage the improvement of a sound Indonesian inancial system.

D. Basel III

In order to respond to 2008-2009 global inancial crises, the Leaders Summit in year 2008 held in Washington D.C. has agreed on 50 steps of the world economic rescue or known as Washington Action Plans (WAP). To follow-up the said rescuing measures, G-20 has given a mandate to Basel Committee on Banking Supervision (BCBS) to formulate a package of global inancial reformation4 _which

aims to enhance the resilience both at micro level and at macro level. The resilience enhancement at micro level shall be carried out by improving quality and quantity of bank capital as well as the resilience and adequacy of bank liquidity. Meanwhile, the resilience enhancement at macro level is conducted by applying conservation bufer, leverage ratio that can help mitigating risks that disrupt inancial system, countercyclical capital bufer to reduce procyclicality and also requires banks or inancial institutions that are systemic in nature to provide bufer. In accordance with BCBS documents, Basel III framework will start being applied in January 2013 gradually until it reaches its full implementation in January 2019.

4 _{BCBS has issued two (2) documents as parts of global inancial reformation}

package, i.e. A Global Regulatory Framework for More Resilient Banks and Banking System, and International Framework for Liquidity Risk Measurement

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In general, the coverage of Basel III is as follows:

1. Strengthening of Global Capital Framework

Enhancement of capital quality, consistency and transparency

• Capital requirement of Tier 1 increasing from 4% to 6%, with CET1 capital increasing from 2% to 4.5%.

• Tier 1 capital must be dominated by common stocks and retained earnings.

• Other core capital components consist of subordinated instruments, non-cumulative dividends/coupons, do not have maturity date and do not have insentive for buy-back.

• Innovative capital that has incentive for buy-back with feature such as step-up will be removed gradually.

• Tier 2 capital shall be harmonized • Tier 3 capital will be removed. • To improve market discipline,

transparency aspect of bank capital will be increased by requiring disclosure of all capital elements.

Expansion of risks coverage in the framework of bank capital

• Banks must determine capital needs for credit risks of the counterparties by using stressed input.

• Banks will be imposed with capital charges for loss potential due to market value.

• Strengthening of standard for collateral management and initial margining

• Development of standard for inancial market infrastructures, including central counter-parties for derivative OTC transactions.

• Enhancement of credit risk management of the counterparties, including the set up of wrong way risk and backtesting exposures of counterparties credits.

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1. Strengthening of Global Capital Framework

Application of leverage ratio

• Limit excessive leverage in banking sector for mitigating risks that can disrupt inancial and economic system.

• Introduce additional safeguards from risk models and setting faults. • Bank must have leverage ratio of no

less than 3%.

Countercyclical Capital Bufer

• Bufer will be in the range of 0% - 2.5% from the common equity or other capital instrument types that absorbs the loss.

• To anticipate loss arising from excessive credit growth.

Conservation Bufer

• To absorb loss at the time of crises. • Banks will be requested to prepare

2.5% bufer so that the total minimum common equity of banks is 7%.

• Banks that are not able to meet capital conservation bufer will face limitation of dividend payment, stocks distribution, and bonus.

2. Global Liquidity Standard

Liquidity Coverage Ratio

Liquidity Coverage Ratio (LCR) is a ratio to ensure adequacy of liquid assets with high quality to meet 30-day liquidity needs of banks at the time of crises.

Net Stable Funding Ratio

Net Stable Funding Ratio (NSFR) is a ratio to measure long term resilience of banks, namely availability of fund sources of banks that is more stable to support sustainable structural business activities.

Monitoring Tools

• Development of matrix that must be considered as minimum information types that can be used by supervisors to catch liquidity risks proiles. • Liquidity monitoring matrik focuses

on maturity mismatch, funding concentration, and unencumbered asset available.

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Preparation of Basel III Implementation in Indonesia

As one of BCBS members, BI participates in the global QIS (Quantitative Impact Study) that sofar has been conducted for the data position of Desember 2010, Juni 2011, Desember 2011 and Juni 2012, followed by the selection of 2 big banks to be the the respondents. The study result indicates that the fulillment level of the 2 respondent banks to the standard capital and liquidity, consistently above the minimum number required. This is caused by, among others, components of Indonesia’s banking capital dominated by common equity, and most the regulatory adjustment currently governed by BI is more conservative compared with what required by Basel III. The leverage ratios of both respondent banks are also above the minimum limit of 3%, so that the capital of the banks is considered able to cover assets risks of the banks. On liquidity side, LCR and NSFR levels of both banks are also above the threshold of 100%.

To complete the implementation of Global QIS toward the 2 respondent banks and also in order to prepare the implementation of Basel III in Indonesia, BI also conducts domestic QIS toward all conventional commercial banks by using BCBS template, particularly which related to capital and leverage, as well as capital level analysis of the entire banking using data of Commercial Bank Monthly Reports (LBU).

BI also has issued Consultative Paper (CP) of Basel III which already uploaded into BI website and communicated to banking sector and related work units in BI in order to get responses and inputs.

E. Global Financial Sector Reform

Crises have given a priceless lesson learned in the aspect of global inancial sector regulation. It is clearly deined that global inancial sector is based on less efective regulation regime in responding to systemic risks. On the other hand, ramiication of the crises is not easy to detect rapidly due to information asymmetry. Global inancial markets and institutions promptly transmitted crises from one economy to another economy due to integrated global inancial markets. Meanwhile, big inancial institutions

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operating globally (systemically important inancial institutions) as a matter of fact do not have adequate capital bufer to absorb loss they experienced. One of the causes is the weakness of capital regulation regime which tends to amplify procyclicality. In relation to the said matter, G-20 has initiated a global inancial sector reform as one of the important responses against global inancial crises. Since the referred Washington Action Plan (WAP) agenda runs ambitiously relected by the tight deadline of completion. From the many initiatives, the most important reformation agenda is the reform of global liquidity and capital regulation regimes, and also mitigation of procyclicality normally called Basel III. Meanwhile, crises resolutions for inancial institutions with systemic impacts are also to be strengthened. This reform shall also touch the enforcement of over-the-counter (OTC) inancial market, enhancement of supervisory intensities, and expansion of boundaries in inancial sector regulations to eliminate fragmentasi between the sectors of banking, capital market, and non-bank inancial institutions. Further, agenda of inancial sector reform was born, which is a follow-up action since the G-20 meeting in Washington DC, London dan Pittsburgh. Indonesia as the member of G-20, Financial Stability Board (FSB) and Basel Committee on Banking Supervision (BCBS) has a commitment to support this reform which consists of the following agenda:

1. Strengthening the global capital regimes and banking liquidity standards as well as mitigation of procyclicality normally called “Basel III” (Building High Quality Capital and Liquidity Standards – Basel III as referred to in item D)

2. Regulations on inancial institutions which have systemic impacts (Addressing systemically important inancial institutions and cross-border resolutions) 3. Compensation scheme reformation for executives

in inancial institutions (Reforming compensation practices)

4. Improving over-the-counter derivative markets 5. Strengthening adherence to international standards 6. Strengthening accounting standards

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7. Developing macro-prudential policy frameworks and tools

8. Harmonizing regulations on markets and inancial institutions (Diferentiated nature and scope of regulation)

9. Regulation on Hedge Funds 10. Regulation on Credit Rating Agencies 11. Establishment of Supervisory Colleges

12. Reactivating securities markets with a stronger prudential base (Re-launching securitization on sound basis)

F. BPD as Regional Champion (BRC)

The manifestation of Indonesia’s Banking Architecture requires a bigger role of BPD (Regional Development Bank). This is considering that there is still some space for BPD to develop more optimally. From the total assets side, BPD segment has reached 9.62% from the national banking total assets, while from the sides of credits and portion funds collection, BPD just reached 8.47% and 11.14% respectively from the total credits and funds collected by National Banking Third Party Funds. Based on the parameter, at a glance, it can be concluded that in terms of scale, the role of BPD will be sharper if the bank focus its operations in each region as the Agent of Regional Development.

Program on the strengthening of BPD covered in BPD Regional Champion (BRC) program which is a program to motivate BPD in order to be more efective in implementing its function as agent of development in the regions, including its implementation strategy. The formulation of BPD blueprint to become Regional Champion is based on several considerations, among others:

1. The condition of BPD capital which is still low compared with the average capital in banking industry that potentially weaken BPD resilience in facing competition with other bank groups in the region. 2. BPD services that do not meet public expectations and

the low awareness of BPD Brand can cause products and services ofered by BPD less attractive and might lead to the decrease of customers’ trust.

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3. Quality and competency of the human resources that still do not meet expectations in anticipating market developments, and therefore cannot optimize regional economic potentials.

4. Distribution of credits to productive sectors is still relatively low and tends to provide consumption credits to the staf of regional governments leading to an unoptimal role of BPDin the inancing of real sector in the regions. This shall potentially result in inancing of productive sector by other banks, making it more diicult for BPD to become the hosts in the regions. In general, implementation of BRC program in its development is an efective media to motivate banks to transform themselves in order to be more competitive and have bigger role in the society and in the regions. Nevertheless, the success of BRC program will determined by the awareness and strong commitment of the Shareholders including DPRD, Management (Board of Directors and Commissioners) and human resources of BPD to transform themselves from the comfort zone to the competition.

Several Agenda to sharpen BRC program among others:

1. Agenda of BPD Capital Strengthening

The strengthening of BPD capital should become one of the main priorities given the majorities of BPD (16 out of 26 BPD) have not achieved minimum target of core capital of Rp. 1 Trillion. The fulillment of core capital can be achieved either organically or non organically. For any BPD that its core capital is near the threshold range, organic fulillment might be possible to be reached. However, for any BPD which core capital is quite far from the threshold, it requires a non-organic capital fertilization, i.e. additional paid-up capital from the owner or strategic investors.

2. Agenda of Expansion of Public Financial Access

Expansion of public inancial access is one of the real deal of BPD role in serving the public needs. In many Regional Development Banks located in provinces that have big remote areas this is more relevant. Therefore, it requires eforts in increasing penetration

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Topic Regulation No.

- SE BI No.11/33/DPNP dated 8 December 2009 concerning Revision of SE BI No.11/4/ DPNP dated 27 January 2009 concerning Implementation of Guidelines on Indonesian Banking Accounting

16. Guidelines on Sharia Banking Accounting (PAPSI) for Sharia Banking and Sharia Business Units

SE BI No.5/26/DPB S dated 27 October 2003 concerning the Implementation of Guidelines on Sharia Banking Accounting 17. Decision on the

Utilization of Financial Accounting Standard for Rural Banks

SE BI No.11/37/DKBU dated 31 December 2009 concerning the Decision on the Utilization of Financial Accounting Standard for Rural Banks

18. Transparency on Credit Basic Interest Rate

SE BI No.15/1/DPNP dated 15 January 2013 concerning the Transparency on Credit Basic Interest Rate

19. Rating Agencies and Ranking Recognized by BI

SE BI No.13/31/DPNP dated 22 December 2012 concerning Rating Agencies and Ranking Recognized by BI

20. Special Treatment toward Bank Loans for Certain Areas in Indonesia affected by Natural Disasters

PBI No.8/15/PBI/2006 dated 5 October 2008 concerning Special Treatment toward Bank Loans for Certain Areas in Indonesia affected by Natural Disasters

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Topic Regulation No.

I. Reports of Banks 1. Commercial

Banks

- SE BI No.13/12/PBI/2011 dated 17 March 2011 concerning the Amendment of PBI No.5/26/PBI/2003 on Monthly Reports of Sharia Commercial Banks - SE BI No.13/15/DPbS dated 30 May

2011 concerning Monthly Reports of Sharia Rural Banks

- SE BI No.3/30/DPNP dated 14 December 2001 as last revised by SE BI No.13/30/DPNP dated 16 December 2011 concerning the Third Revision of SE No. 3/30/DPNP dated 14 December 2001 concerning Quarterly and Monthly Publication Financial Statements of Commercial Banks, and Specific Reports Submitted to Bank Indonesia.

- PBI No.13/19/PBI/2011 dated 22 September 2011 concerning the Amendment of PBI No.8/12/PBI/2006 concerning Periodic Reports of Commercial Banks

- PBI No.13/8/PBI/2011 dated 4 February 2011 concerning Daily Reports of Commercial Banks

- SE BI No.14/8/DPNP dated 6 March 2012 concerning the Second Revision of Bank Indonesia Circular Letter No. 8/15/ DPNP dated 12 July 2006 concerning Periodic Reports of Commercial Banks - PBI No.14/12/PBI/2012 dated 15

October 2012 concerning Reports of Commercial Banks’ Head Office

- SE BI No.14/31/DPNP dated 31 October 2012 concerning Reports of Commercial Banks’ Head Office

- SE BI No.14/35/DPNP dated 10 December 2012 concerning Annual Reports of Commercial Banks and Specific Annual Reports Submitted to Bank Indonesia

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Topic Regulation No.

- SE BI No.14/39/DPM dated 28 December 2012 concerning the Amendment of SE BI No.13/3/DPM dated 4 February 2011 concerning Daily Reports of Commercial Banks - SE BI No.13/3/DPM dated 4 February

2011 concerning Daily Reports of Commercial Banks

- SE BI No.11/2/DSM dated 22 January 2009 as last revised by SE BI No. 14/5/DSM dated 27 January 2012 concerning the Second Revision of SE BI No. 11/2/DSM dated 22 January 2009 concerning Monthly Reports of Commercial Banks

2. Rural Banks - SE BI No.12/15/DKBU dated 11 June 2010 concerning the Second Revision of SE BI No.8/7/DPBPR dated 23 February 2006 concerning Monthly Reports of Rural Banks

- SE BI No.13/15/DPbS dated 30 May 2011 concerning Monthly Reports of Sharia Rural Banks

NEED DATA

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