Indonesia’s central bank released on Monday a new rule that sets a minimum capital requirement for commercial lenders, in a move that is meant to reduce risk and at the same time strengthen the country’s banking system.
Under the new regulation, Bank Indonesia requires a minimum 8 percent capital adequacy ratio — which measures the lender’s financial strength — for banks with the soundest risk profile but it set a higher ratio for the riskiest. In the previous regulation, the ratio was set at 8 percent, regardless of the risk profile.
Bank Indonesia groups the country’s 120 commercial banks into five risk profiles. It usually updates a bank’s risk profile every 6 months but does not make the rankings or their specifications public to avoid a run on deposits at lower-ranked banks.
A minimum ratio of 9 percent to 10 percent is set for banks classified with a second-risk profile and at 10 percent to 11 percent for banks with a third-risk profile.
Banks with risk profiles ranked fourth and fifth must have a minimum ratio of 11 percent to 14 percent. These fourth and fifth-ranked banks are usually under special surveillance — requiring daily supervision by Bank Indonesia.
The central bank can also set the capital requirements arbitrarily outside the stated ranges, should it be deemed necessary.
To calculate the minimum capital based on risk profile, the central bank requires that a lender have an internal capital adequacy assessment process (ICAAP), which includes active supervision from the bank’s board; a capital adequacy assessment; monitoring and reporting; and internal control. Bank Indonesia said, though, that it might review the procedures for ICAAP.
With the new regulation Bank Indonesia said it expect banks that “are not only able to absorb loss potential from credit, market, and operational risks but also other risks including liquidity and material risks.”
The central bank would start implementing the minimum capital ratio based on risk profile in March, based on banks’ risk profile as of this month. Latest central bank data showed that 120 commercial banks’ capital adequacy ratio was at an average 17.4 percent at the end of September, up from 16.6 percent a year earlier.
For foreign bank branches operating in Indonesia, the central bank also set special requirement called capital equivalency maintained asset, or CEMA. The foreign branches must maintain CEMA based on two criteria — that it be at a minimum 8 percent of its total liability every month and that it must be at least Rp 1 trillion ($104 million).
The foreign branches should comply to the first CEMA requirement by June 2013 and to the second requirement by December 2017.
The move is seen as a response by the central bank to requests by local commercial banks to curb foreign banks’ expansion in the domestic market with the CEMA requirements. Ten foreign lenders, including Standard Chartered Bank and HSBC Holdings, operate in Indonesia.
Still, some bankers say that night be not enough.
The CEMA requirements are less stringent compared to similar requirements imposed on Indonesian lenders in neighboring countries such as Malaysia and Singapore, Zulkifli Zaini, president director of Bank Mandiri, was quoted as saying by Investor Daily.