The Jakarta Post
A regulation to force small and struggling banks to consolidate would be the last resort in efforts to safeguard Indonesia’s financial industry amid heightening economic risks, according to Financial Services Authority (OJK) chairman Wimboh Santoso.
He said during a teleconferenced meeting with House of Representatives Commission XI overseeing financial affairs on Tuesday that the “preemptive measure” was aimed at preventing the financial sector situation from worsening and to safeguard public confidence during times of crisis.
“This is just in case [we need it]. It doesn't mean that we have to do it,” Wimboh said, adding that the mechanism would only come into play if there was a foreseeable possibility of widespread collapse among Indonesia's financial institutions.
“If it’s only one or two institutions and they do not cause negative sentiment in the financial sector, of course, we can still handle this with business-as-usual ways,” he added.
Article 23 of the Government Regulation in lieu of law (Perppu) No. 1/2020 states that the OJK has the authority to “give written orders to financial service institutions to conduct merger, consolidation, acquisition, integration and/or conversion processes”.
Failure to follow the instruction of the OJK by a corporation could lead to imprisonment and a fine of at least Rp 1 trillion (US$61.4 million). The sanctions are stricter compared with only administrative ones regulated in an OJK regulation in 2019.
President Joko “Jokowi” Widodo signed the Perppu, which activates crisis protocols and provides leeway for his administration to afford the fight against the COVID-19 pandemic, among other things, as the disease has disrupted business activity and hit the country’s vulnerable population.
Wimboh stressed that other measures, such as stake sales and purchases and allowing Bank Indonesia (BI) to act as the lender of last resort, would be taken first before resorting to the merger scenario.
Acting as the lender of last resort means that the central bank offers loans to banks and other financial institutions that are experiencing financial difficulties or are considered highly risky and near collapse.
Previously, experts and economists expressed confidence that forced mergers would only be used as a last resort. Institute for Development of Economics and Finance (Indef) deputy director Eko Listiyanto said there were other methods for rescuing nonperforming banks, such as management restructuring.
“In a worst-case scenario where banks fail, the OJK could merge the banks in accordance with the new regulation,” Eko said.