BI to increase bank capital requirements 10-fold

BI to increase bank capital requirements 10-fold

Dadan Wijaksana, The Jakarta Post, Jakarta

The central bank laid out on Friday a blueprint for the
banking sector, which includes higher minimum capital
requirements -- a move which could lead to more bank mergers in
the future.

Under the new measures, outlined in "The Indonesian Banking
Landscape", banks have seven years to meet the new requirement,
which increases the minimum capital requirement from Rp 10
billion (about US$1.2 million) currently to Rp 100 billion.

"This forms a significant part of this program, as part of
gradual efforts to improve the financial soundness of the banking
system," Bank Indonesia's governor Burhanuddin said.

In case they fail to meet the requirement, the central bank
will only allow them to operate in limited areas, which
Burhanuddin referred to as "community banks."

As many small banks operating in the country are still
struggling to improve their capital health, the new ruling may
force them to seek mergers to boost their capital.

Currently, there are 138 banks operating in the country, with
55 of those that have capital below the new requirement. The 55
banks include a foreign bank, 4 joint-venture banks (foreign and
local), 41 private local banks and 9 provincial banks,
Burhanuddin said, while refusing to name them.

The Indonesian Banking Landscape was the latest measure
introduced by Bank Indonesia to help improve the financial health
of local banks, as many are still suffering from the devastating
crisis.

The Landscape aims to build a sound, strong and efficient
banking industry in stages within ten years. A resilient banking
industry is expected to become a key element in promoting
economic growth and supporting financial stability in the
country.

As the financial crisis clearly exposed the vulnerability of
the country's banking industry to external shocks, the central
bank said the new ruling provided a policy direction to minimize
impacts that may arise in any recurrence of crisis.

Under the program, in the next 5 to 10 years, banks in the
country would be divided into four groups in terms of assets, he
added.

The first group would consist of two or three banks with
international standards with the capital of at least Rp 50
trillion. National banks with a capital of between Rp 10 trillion
to Rp 50 trillion are categorized in the second group. Three to
five banks are expected to join this group.

The third group would comprise of 30 to 50 banks with a
capital of Rp 100 billion to Rp 10 trillion. The last group with
a capital of below Rp 100 billion would be categorized as
community banks or rural banks.

The application of international best practices, including the
25 Basel Core Principles for effective banking supervision would
also be accelerated under this program.

Main goals of the Indonesian Banking Landscape

1. Creating sound banking structures that promote national
economic growth and international competitiveness;
2. Establishing effective regulatory system capable of
anticipating developments in the domestic and international
financial markets;
3. Setting up of independent and effective system for bank
supervision;
4. Strengthening of internal conditions in the banking industry;
5. Creation and reinforcement of the supporting infrastructure
for the banking industry; and
6. Protection and empowerment of customers.