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Small banks could be forced to merge under new regulation, OJK says
The Perppu allows for stricter enforcement against violations of merger instructions from the OJK, including imprisonment.
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Bank Indonesia (BI) Governor Perry Warjiyo (center), accompanied by senior deputy governor Destry Damayanti (left) and deputy governor Erwin Rijanto, gives a press statement regarding measures to maintain monetary and financial stability amid the COVID-19 pandemic at the BI headquarters in Jakarta. (Antara/Indrianto Eko Suwarso )
T
o help protect financial institutions from collapse during the COVID-19 pandemic, President Joko “Jokowi” Widodo recently signed Government Regulation in Lieu of Law (Perppu) No. 1/2020 that will, among other measures, authorize the Financial Services Authority (OJK) to force small and struggling banks to consolidate.
While this authority was actually given to the financial agency in the OJK Regulation (POJK) No. 41/POJK.03/2019, the Perppu allows for stricter enforcement against violations of merger instructions from the OJK, including imprisonment. Under the POJK, penalties are limited to administrative sanctions.
“Perppu No. 1/2020 will form the legal foundation to grant the government, the OJK, Bank Indonesia and the Deposit Insurance Corporation (LPS) authorities that have not been established under current laws. Therefore, we could take preemptive measures to mitigate economic pressures on the financial and real sector,” the OJK said in a statement issued on April 2.
Economists have expressed support for the new regulation, saying it was needed to strengthen Indonesia’s banking sector amid the COVID-19 pandemic. Without such a policy, small banks could face collapse as the worsening economic situation creates financial difficulties.
Center for Reform on Economics (Core) Indonesia research director Piter Abullah told The Jakarta Post on April 2 that the push for bank consolidation was necessary at this time because the number of bad loans “will certainly increase” amid the worsening economic outlook.
“One way to deal with that pressure is to consolidate banks,” Piter said, adding that consolidation would increase the capital of small banks, many of which operate with limited resources.
According to OJK data, the majority of Indonesia’s banks are placed in the BUKU II category for banks with core capital between Rp1 trillion (US$60.3 million) and Rp 5 trillion. Of the country’s 110 banks, 61 conventional and sharia banks were listed under the BUKU II category as of December, last year.
