Introduction

Bank Indonesia recently issued Regulation 21/1/PBI/2019 on Offshore Bank Debt and FX-Denominated Other Bank Liabilities (Regulation 21), which entered into force on 1 March 2019. The regulation is an umbrella regulation on the application of prudential norms, which aims to limit the exposure of Indonesian banks to offshore debt and foreign currency foreign currency (FX)-denominated liabilities.

Regulation 21 revokes Bank Indonesia Regulation 7/1/PBI/2005 on Offshore Loans in the Banking Sector, as amended by Bank Indonesia Regulation 16/7/PBI/2014 (collectively, the previous regulation), with the exception of Articles 6(1) and 7 thereof.

As with the previous regulation, Regulation 21 stresses the importance of compliance with prudential norms for maintaining macroeconomic and financial system stability.

However, while the previous regulation's scope was confined to offshore bank loans, Regulation 21 encompasses "offshore bank debt and FX-denominated other bank liabilities".

This article examines:

  • the key concepts of Regulation 21;
  • the scope of offshore debt and FX-denominated other liabilities in the banking sector; and
  • the application of prudential norms to short and long-term liabilities.

Regulation 21 also sets out detailed provisions on supervision and penalties.

Key concepts

Regulation 21 provides the following definitions:

  • A 'bank' is a conventional or Sharia-based bank or a Sharia unit of a bank as defined by the banking laws and regulations. This includes Indonesian branches of offshore banks and offshore branches of conventional or Sharia-based banks domiciled in Indonesia.
  • A 'resident' is a resident of Indonesia, as defined by the Foreign Exchange Law (24/1999) as a legal or natural person that is or plans to be domiciled in Indonesia for at least one year.
  • An 'offshore bank debt' is an FX or rupiah-denominated debt owed by a bank to a non-resident, including in respect of Sharia-compliant financing.
  • A 'short-term liability' is an offshore bank debt or FX-denominated other bank liability with an original maturity of up to one year.
  • A 'long-term liability' is an offshore bank debt or FX-denominated other bank liability with an original maturity of more than one year.
  • A 'domestic FX-denominated bond' is a foreign currency-denominated bond issued by a bank on the domestic bourse or sold by way of private placement to a resident.
  • A 'risk participation arrangement' refers to an assignment of risk relating to a credit or other facility based on a master risk participation agreement.

Although Regulation 21 does not specifically define the term 'FX-denominated other bank liabilities', it is explained in the body of the regulation and its elucidation, as discussed below.

Scope of offshore bank debts and FX-denominated other bank liabilities

Offshore bank debts Offshore bank debts consist of:

  • loan agreement-based debts;
  • debt securities, including:
    • letters of credit;
    • banker's acceptances;
    • bonds;
    • commercial papers;
    • promissory notes; and
    • medium-term notes;
  • demand, time and savings deposits and call money; and
  • other forms of debt.

FX-denominated other bank liabilities FX-denominated other bank liabilities consist of:

  • domestic FX-denominated bonds; and
  • risk participation arrangements.

To be categorised as an FX-denominated other bank liability, a risk participation arrangement must:

  • be conducted between a bank, as grantor, and a non-resident, as participant (the grantor sells the risk, while the participant buys or accepts the risk);
  • be accompanied by a flow of funds when the arrangement is funded by the non-resident; and
  • not involve an assignment of claims from the bank to the non-resident.

Should the bank subsequently assign a claim to the non-resident, the risk participation arrangement will be treated as an offshore bank debt owed by the bank's debtor to the participant. All such assignments of claims must be reported to Bank Indonesia.

Application of prudential norms

Regulation 21 stresses that prudential norms must be adhered to in respect of offshore bank debts and FX-denominated other bank liabilities.

The applicable prudential norms differ depending on whether the offshore bank debt or FX-denominated other bank liability is categorised as a short or long-term liability.

Short-term liabilities Short-term liabilities consist of short-term:

  • offshore bank debts;
  • domestic FX-denominated bonds; and
  • risk participation arrangements.

Banks must observe a daily limit on short-term liabilities of 30% of their capital. This limit also applies in the case of long-term liabilities whose original maturity has been shortened to one year or less.

However, the following are exempt from the 30% limit:

  • short-term offshore bank debts owed to a controlling shareholder based on an emergency liquidity loan;
  • short-term offshore bank debts owed to a controlling shareholder based on a loan to be on-lent to the real sector;
  • up to 100% of the declared operating funds of the Indonesian branch of an offshore bank;
  • liabilities owed by banks to non-residents based on hedging transactions;
  • demand, savings and time deposits held by foreign country representatives and international institutions;
  • demand deposits held by non-residents for investment activities in Indonesia, including direct investments and share purchases, Indonesian corporate bonds, Indonesian government securities and securities issued by Bank Indonesia;
  • demand deposits held by non-residents to accommodate the proceeds of the sale or divestment of direct investments, shares, Indonesian corporate bonds, Indonesian government securities and securities issued by Bank Indonesia;
  • demand deposits held by non-residents and non-controlling shareholders for on-lending to infrastructure projects;
  • demand deposits held by non-residents to accommodate the proceeds of rupiah bonds issued by a supranational agency to finance infrastructure projects; and
  • demand or time deposits held by non-residents that are used to temporarily accommodate injections of bank capital, as referred to in the Financial Services Authority (OJK) regulations on minimum capital requirements.

In addition, Bank Indonesia may provide individual exemptions in cases of emergency.

Specific rules for branches of offshore banks An Indonesian branch office of an offshore bank must:

  • inform Bank Indonesia of its declared operating funds and changes thereto; and
  • maintain a minimum daily operating funds balance of 90% of its declared operating funds.

A branch office may also have a daily operating funds balance that exceeds 100% of its declared operating funds, in which case the excess should be treated as a short-term liability.

Long-term liabilities Long-term liabilities consist of long-term:

  • offshore bank debts;
  • domestic FX-denominated bonds; and
  • risk participation arrangements.

Banks that intend to incur a long-term liability must first submit a market entry plan to Bank Indonesia for approval.

For a market entry plan to be submitted to Bank Indonesia, it must be incorporated in the bank's business plan. However, exceptions to this rule apply in case of:

  • long-term liabilities in the form of a subordinated loan based on an OJK recommendation; and
  • long-term liabilities that are:
    • essential for addressing a pressing problem at the bank or satisfying the requirements set out by the relevant authority; and
    • based on information or a recommendation from the relevant authority.

The elucidation on Regulation 21 defines the 'relevant authority' as the OJK or the Deposit Insurance Agency.

A Bank Indonesia approval for a market entry plan remains valid for three months from its date of issuance. Where the bank fails to enter the market within three months, the approval will lapse and the bank must apply for a new approval before entering the market.

A bank is prohibited from incurring a long-term liability that exceeds the quantum stated in the Bank Indonesia approval.

Reports must be submitted to Bank Indonesia on market-entry realisation within seven days of market entry or the settlement date, depending on the type of offshore bank debt or FX-denominated other bank liability that is incurred.

Bank Indonesia may impose ceilings on the long-term liabilities of banks, having regard to:

  • the findings of debt-sustainability analyses;
  • the balance of payments situation;
  • monetary conditions;
  • the adequacy of foreign currency reserves; or
  • other such matters as may be deemed important by Bank Indonesia.

Miscellaneous

The requirements set out in Regulation 21 are not applicable to bank liabilities relating to international trade (with the exception of pre-shipment financing facilities), provided that such liabilities are supported by sufficient underlying transaction evidence.

For further information on this topic please contact Monic Nisa Devina or Maher Asmoro Putra Sasongko at Ali Budiardjo, Nugroho, Reksodiputro by telephone (+62 21 250 5125) or email ([email protected] or [email protected]). The Ali Budiardjo, Nugroho, Reksodiputro website can be accessed at www.abnrlaw.com.

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