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Indonesia plans tougher restrictions for foreign banks

Nurdianah Md Nur | July 21, 2014
If the new bill is passed into law, foreign banks need to transform into PT and ensure that its foreign ownership does not exceed 40 percent.

Indonesian lawmakers are considering a bill that will restrict the operation of foreign banks unless they become a legal entity in the form of Perseroan Terbatas (PT), according to Indonesian daily newspaper The Jakarta Post.

By becoming a PT, a foreign bank would operate as an independent company and would not be able to transfer money from its Indonesia branch to its overseas headquarters should there be liquidity issues in the offshore parent company. Since this hampers inter-office lending, some foreign banks might be reluctant to transform into a PT, thus negatively impacting new foreign investments in Indonesia's banking sector, said Joseph Abraham, the chairman of the Foreign Banks Association of Indonesia (FBAI).

Sigit Pramono, the chairman of the National Banks Association (Perbanas), however believes that the bill will better protect Indonesia's banking sector from overseas banking crises. "By becoming PT, our foreign banks would become more accessible to the central bank - the Otoritas Jasa Keuangan (OJT) -  therefore making it easier for the authority to perform its banking supervisory role," he told The Jakarta Post.

The bill also stated that maximum foreign ownership in banks would be capped at 40 percent to prevent foreigners from being controlling shareholders. This could discourage new foreign investments as the soon to be implemented global Basel III banking regulation requires any investor performing banking acquisition without acting as the controlling shareholder to deposit a significant amount to safeguard against banking management risks.

If the bill does come into effect, foreign banks operating under branch status must adjust with this law within five years. Deputy chairman of House of Representatives' Commission XI on finance and banking Harry Azhar Azis told The Jakarta Post that the banking bill could be passed into law as early as 30 September 2014.

 

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