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.