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OJK targets ‘zombies’, ‘parasites’ in rural bank scrutiny
The initial purpose of rural lenders, namely to serve small businesses, has been hampered by the broader market coverage of major banks and digital financial services, experts say.
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A branch of rural lender Bank Eka in Lampung is pictured in an undated photo. (Bank Eka/-)
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nalysts have expressed support for a clampdown by the Financial Services Authority (OJK) that could expedite consolidation of the banking industry through tighter scrutiny of small, local banks, commonly referred to as rural banks.
They argue that the OJK measures, based on recently issued rules, are necessary to improve the performance of the lenders.
Given that the initial raison d'être of rural banks, namely to serve small businesses and individuals in villages, is now largely covered by major commercial banks and digital financial services, the experts suggest that rural banks identify specific market niches to remain relevant.
Two regulations issued by the OJK over the past three months lay out stricter benchmarks for rural banks. Failure to achieve compliance with financial metrics including the capital adequacy ratio could cause the lenders to lose legal protection afforded to them under the so-called rehabilitation status and prompt a downgrade to resolution status.
If a bank falls into resolution status, the Deposit Insurance Corporation (LPS) will decide on whether to save it or not.
The new regulations are based on the Financial Sector Omnibus Law enacted in January of last year, which increases fundraising options for rural banks, including going public on the Indonesia Stock Exchange (IDX), but also requires better governance.
As a result, some rural banks in the country have been encouraged to merge with other players, especially those belonging to the same owners. Those that fail to achieve a satisfactory financial state are to be wound down.
