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COVID-19: The catalyst for accelerating bank consolidation
It is no secret that the OJK has encouraged bank consolidation, given the number of banks that crowd the industry, some of which (especially the smaller ones) may be vulnerable to financial stress or pressure.
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Hard cash: Finance Minister Sri Mulyani Indrawati (left) and State-Owned Enterprises Minister Erick Thohir announce the government’s placement of Rp 30 trillion (US$2.12 billion) in state banks on June 24. The funds will be channeled as loans to businesses to boost the real sector. (Antara/Sigid Kurniawan)
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s the rampaging COVID-19 pandemic continues to disrupt – and even paralyze – Indonesia’s economy and adversely affect financial stability, it has (or will) eventually taken a toll on the banking industry. The soaring number of non-performing loans or restructured loans would have negatively impacted banks’ cash inflows, triggering the pressing concern of the banks’ liquidity, and in turn, the banks’ financial soundness. While large banks may find a way to withstand the COVID-19 storm, small and medium-sized banks might find it harder to do so.
The government reacted rightly and quickly – in less than a month after it confirmed the first COVID-19 positive case – by issuing Regulation in Lieu of Law (Perppu) No. 1/2020 on state finances and the stability of the financial system policies for the mitigation of the COVID-19 pandemic and/or to deal with threats that are potentially harmful to the national economy and/or the stability of the financial system (GRL 1/2020). The Perppu has been approved by the House of Representatives to become Law No. 2/2020.
Read also: Jokowi changes 2020 state budget again, with deficit at 6.34% of GDP
Learning from past financial crises and knowing that bank failure may lead to economic depression, Article 23 of Law 2/2020 authorizes the Indonesian Financial Services Authority (OJK) to be more involved in the business affairs of banks, among other things, by instructing the banks to conduct mergers, consolidation, acquisitions and/or integration (mandatory corporate actions).
In executing the mandate, the OJK then further regulates the legal landscape for mandatory corporate actions through Regulation No. 18/POJK.03/2020 on written instruction for the mitigation of bank problems (OJKR 18/2020). OJKR 18/2020 came into force on April 21, 2020.
Through OJKR 18/2020, the OJK wields power to force banks to initiate mandatory corporate actions if, based on the OJK’s assessment, the banks are suffering from a financial problem which may disrupt their business, and are deemed incapable of handling existing or future economic pressures. It will be the same case if the relevant controlling shareholders of the banks are incapable of strengthening their banks’ financial capability.
Moreover, the OJK may also instruct banks to accept (by becoming a counterparty of) the mandatory corporate actions if those banks, after the conclusion of such corporate actions, were found to satisfy the two criteria. First, for conventional banks and sharia commercial/rural banks, a soundness level of at least a composite rating –3 or PK-3. PK-3 means that a bank is reasonably sound to withstand significant adverse effect from the business conditions and external factors. Secondly, for rural banks, the minimal soundness level should be “reasonably sound” – which means having a credit score of between 66 and 81.
