The country's central bank, Bank Indonesia (BI), said Tuesday it would introduce a new regulatory package for the banking industry, including a cap on corporate bond holdings, aiming to reduce credit risks and increase lending.
The soon to be implemented package will support the economy by encouraging banks to disburse more loans amid current unfavorable global conditions, BI deputy governor Muliaman D. Hadad said in a press conference.
Under the new regulations, BI will cap bank corporate bond holdings at 60 percent of their capital. Banks already holding bonds greater than 60 percent of their capital have three years to unload them to comply.
BI acknowledges corporate bond holdings at banks are beneficial, serving as a source of long-term funding.
"Banks need long-term funding to be able to disburse loans for long-term investment projects, such as infrastructure, which are essential to reduce unemployment and poverty," Muliaman said.
To further boost bank lending, BI will loosen up certain risk-factors to be considered in the calculation of the capital adequacy ratio (CAR), a measure used to determine a bank's health.
The higher the CAR -- which compares a bank's capital with its risk-weighted assets, including loans -- the healthier the bank.
By relaxing the CAR calculation, BI aims to provide more room for banks to boost loans without having to worry too much about it hurting their CAR.
Another regulation will allow banks to lend up to 30 percent of their capital to companies whose shares are at least 40 percent publicly-owned. The companies must not be affiliated with the banks.
At the conference, Muliaman also said by January 2009, banks with capital above Rp 1 trillion (US$108.75 million) should implement the Basel II Accord principles, an international standard of banking practices aimed to prevent financial and operational risks.
Banks with capital below Rp 1 trillion need to implement the Basel II from June 2009.
Basel II uses a "three-pillar" concept -- setting minimum capital requirements, conducting supervisory review and exercising market discipline -- to promote greater stability in the financial system.
According to BI, the banks' current capital calculation is prone to capital arbitrage, making banks more risk-sensitive.
Detailed points for each pillar will come with the official launch of the package.
BI is also to simplify regulations on the banks' restructuring relating to new branches, operational cooperation between banks and self-liquidation. It will also prohibit stakeholders from being involved in bank operations.
The government expects a 22 to 24 percent increase in bank lending from the Rp 1,045.7 trillion recorded at the end of 2007. This increase will support its economic growth target of 6.2 percent.
