Bank Indonesia loosens ‘single presence policy’

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Bank Indonesia (BI) Governor Darmin Nasution said there were more than 10 banks that had weak health condition and lacked good corporate governance. If they remain in such condition until the end of next year, they must divest their stakes according to the new ownership rule.

The central bank supported local banks being consolidated through mergers or acquisitions, and would loosen its “single presence policy” which requires majority shareholders to own only one bank, Darmin added.

There are currently 120 commercial banks operating in the country, and BI aims to reduce the number to improve banks’ capacity to absorb shocks and to make them more competitive in the regional banking industry ahead of the ASEAN economic integration in 2015.

“It is our move to speed up efforts in eliminating unhealthy banks that will trouble us at times of shocks,” Darmin told reporters after Friday prayers.

BI recently announced a 40 percent ownership cap in local banks, but sound banks are allowed to have ownership above the maximum level if they meet requirements set by the central bank.

While the regulation is not retroactive, existing banks with health and good corporate governance levels below grade two by the end of 2013 will be subject to these rules.

Darmin said the new rules were enough to support bank consolidation, as banks were no longer required to merge upon acquisitions. They could acquire other banks to add specialties, he said.

“Banks could be merged, or be acquired by big national banks. That is why in the regulation the single presence policy is no longer strictly implemented,” he explained.

Darmin declined to disclose the names of the less healthy banks that will need to divest their stakes, but Fitch Ratings has estimated that it would likely be small to medium-sized banks.

“This is notably because of a concentrated shareholder structure, especially family owned, which has been cited as one factor behind bank failures in Indonesia in the past,” the ratings agency wrote in a recent statement.

The latest banking regulation is part of a series of regulations to strengthen the banking industry in Indonesia, after bouncing back from mass bankruptcies during the 1997/1998 Asian financial crisis.

BI will also issue a new regulation in September that will require banks to have multiple licenses to conduct certain business operations in Indonesia, including opening new branches, Darmin said.

With the new multiple licensing regulation, banks would be required to open branches in underserved areas for every number of branches opened in big cities, he said. Banks will also have to receive the highest health level measured by BI to freely open new branches, while those with lower health levels will be limited in expanding.

“The regulation is not [retroactive]; it will apply to future licenses,” Darmin told reporters. “Previously, foreign banks could only open in 14 big cities. Of course they are happy, as that is where the profit is. In the future, if you want to open branches in profitable areas, you must also do so in underserved areas.”

Only 50 percent of Indonesia’s population of about 240 million people has access to banking services because of the absence of banks in more remote areas due to high costs and high risk, according to BI data.

The country currently has only a single license allowing banks to offer a full range of services and open as many branches as possible, while in other countries in the region, such as Singapore and Malaysia, multiple licenses are required.