Tighter rules on finance companies

Tighter rules on finance companies

JAKARTA (JP): The government announced a set of regulations
here yesterday in an unprecedented move to curb the activities of
finance companies and to cool down the overheating economy.

One of the regulations, which took effect on Thursday,
stipulates the closing of leasing, factoring and consumer finance
activities to new comers.

Director General for Financial Companies of the Ministry of
Finance Bambang Subianto told a press conference that the
government has stopped issuing new licenses to finance companies
except those to be engaged in venture capital.

"Applications which have now been filed by 17 companies for
operations in the financial sector are automatically turned
down," he told the conference, which was also attended by senior
officials of Bank Indonesia, the central bank.

There are at least 253 non-bank finance companies at present,
comprised of 197 domestic firms, 54 foreign joint ventures and
two state-owned companies.

The non-bank finance companies, which last year financed a
total of Rp 14 trillion (US$6.07 billion), enjoyed more freedom
and less restrictions than banks in financing activities.

Last year, the volume of the credits provided by the finance
companies grew by over 80 percent as compared to the 25 percent
growth booked by commercial banks.

The finance companies, which are mostly owned by commercial
banks, are often abused by the banks to break their legal lending
limit requirements, according to financial analysts.

Yesterday's regulations also included the appointment of the
central bank to supervise the finance companies, including
leasing and factoring firms, which were previously solely
supervised by the Ministry of Finance.

Boediono, Bank Indonesia's managing director for macro-economy
and statistics, told newsmen at the press conference that the new
regulations will enable the central bank to control the monetary
system more effectively, particularly in checking the money
supply at an appropriate level.

Overheating

Last week, the central bank announced its plan to raise the
bank reserves requirement, beginning February next year, to three
percent of assets from two percent at present,.

The increase in the reserves requirement, which will
automatically curb the expansion of bank credits, was issued amid
the government's concern over the country's economic overheating.

Bambang said that the central bank will be in charge in
supervising the finance companies' offshore loans, lending
activities, promissory notes and financial reports.

The finance companies, including factoring and leasing firms,
according to the regulations, are allowed only to raise loans of
up to 15 times of their equity. Loans from domestic banks are
limited only to five times of their equity.

The finance companies are also restricted from issuing
promissory notes except when they are used as collaterals for
their creditors. They are also restricted from providing equity
for non-financial companies, while their equity participation in
each of non-financial firms is not allowed to exceed 20 percent
of their paid-up capital. The total amount of their equity
participation is limited to a maximum of 40 percent of their
equity.

In addition, Bambang said, the finance companies are required
to submit their monthly financial reports, half-yearly reports on
business activities as well as audited financial reports to the
central banks.

He said that the finance companies whose loans have exceeded
the limit are no longer allowed to raise new loans or to roll
over the existing lending activities if their outstanding loans
are still above the limit.

The finance companies whose equity participation has already
surpassed the limit or those which have direct investment in non-
financial firms, are given two years to adjust their direct
investment to the new regulation.

The adjustment period for publicly-listed companies is set at
three years. (hen)