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New Regulations Enhance Operational Efficiency and Governance of Indonesian Commercial Banks

Overview

The Indonesian government has introduced new regulations aimed at enhancing the operational efficiency and governance of commercial banks in the country. The regulations, which came into effect on December 15, 2017, aim to improve the financial stability and resilience of commercial banks by strengthening their internal controls, risk management practices, and corporate governance.

Strengthening Governance

Commercial banks are required to strengthen their governance practices by implementing good corporate governance principles. The regulations require:

  • A minimum of three directors, one of whom must be independent from the controlling shareholder(s)
  • Each director must pass Bank Indonesia’s (BI) fit and proper test requirement and be domiciled in Indonesia
  • More than 50% of all members of the Board of Directors (BoD) to have a minimum of five years’ experience as a bank’s executive officer
  • Establishment of at least three working units:
    • Internal audit unit
    • Risk management unit and risk management committee
    • Compliance unit

Capital Requirements

The regulations also set out capital requirements for commercial banks, including:

  • A minimum issued and paid-up capital of IDR 3 trillion (approximately US$220 million)
  • Maintenance of a minimum capital in accordance with their risk profile, as determined by BI
  • Risk-Based Capital Adequacy Requirements (CAR), which requires commercial banks to maintain a minimum capital equal to:
    • 1.8% of their weighted assets by risk for those with a high risk profile
    • Up to 14% for those with a low risk profile

Macroprudential Intermediation Ratio

BI has introduced the Macroprudential Intermediation Ratio (MIR), which requires commercial banks to maintain a minimum ratio of loan channelled by a Commercial Bank in Rupiah and foreign currency against certain qualified corporate commercial papers owned by the Commercial Bank.

Conclusion

The regulations aim to enhance the financial stability and resilience of commercial banks, improve their governance practices, and strengthen their risk management processes. The implementation of these regulations is expected to have a positive impact on the overall financial system and stability of Indonesia’s economy.