banking policy direction in 2011

2 0 11

Bank IndonesiaDepartment of Banking Research and Regulation (DPNP)Jl. MH. Thamrin No. 2, Jakarta, Indonesia - 10350Telephon : (+62-21) 2310108, ext.4798, 4794, 8623 and 7725Fax : (+62-21) 3518946 dan 3518629Email : [email protected]

Banking Supervision Report2011

Banking Supervision Report 2011iv

Foreword

Table of Contents Executive Summary Prospects and BankingPolicy Direction

Bank Structure and Performancein 2011

Banking Policy and Regulationin 2011

Bank Supervision Implementation

BI MissionTo achieve and maintain rupiah stability by maintaining monetary stability and by

promoting financial system stability for Indonesia’s long term sustainable development.

BI VisionTo be recognized, domestically and internationally, as a credible central bank

through the strength of our values and achievement of low, stable rates of inflation.

Strategic Values of Bank IndonesiaCompetency - Integrity - Transparency - Accountability - Cohesiveness.

Visi:“Menjadi lembaga bank sentral yang dapat dipercaya secara nasional

maupun internasional melalui penguatan nilai-nilai strategis yang dimiliki serta

pencapaian inflasi yang rendah dan stabil”

Misi:“Mencapai dan memelihara kestabilan nilai rupiah melalui pemeliharaan

kestabilan moneter dan pengembangan stabilitas sistem keuangan untuk

pembangunan jangka panjang yang berkesinambungan”

Nilai-nilai Strategis Organisasi Bank Indonesia:“Nilai-nilai yang menjadi dasar Bank Indonesia, manajemen dan pegawai untuk

bertindak dan atau berperilaku, yang terdiri atas Kompetensi, Integritas, Transparansi,

Akuntabilitas dan Kebersamaan”

This page intentionally blank

v

Foreword

Table of Contents Executive Summary Prospects and BankingPolicy Direction




We would like to express our sincere gratitude to God Almighty, for it is with His mercy and grace that

the 2011 edition of the Banking Supervision Report was compiled and published. Publication of the Banking

Supervision Report represents a form of transparency and accountability to the general public regarding the

supervision and regulation of banks pursuant to Act No. 23, 1999 on Bank Indonesia, subsequently amended

by Act No. 6, 2009. The scope of the Banking Supervision Report covers all types of bank in Indonesia, namely

conventional commercial banks, Islamic banks and rural banks.

This edition contains, among others, a profusion of information on the development and performance of the

banking sector, including a number of key performance indicators for 2011 in comparison to years previous. The

Banking Supervision Report also explains banking policy direction in 2011 as well as the regulations and policies

instituted during the reporting year. In addition, the banking supervision process conducted by Bank Indonesia

during 2011 is also reported alongside the results and follow-up actions required looking ahead. Furthermore,

the development of banking supervision is also detailed, including information system development, as well as

bank investigations and mediation. Analyses are presented in the final chapter regarding future prospects and

the direction of banking policy in 2012, namely to boost competitiveness, bolster resilience and nurture bank

intermediation.

One salient upshot of banking supervision in 2011 was sustainable bank performance. In general, growth in

deposits remained solid, of which the majority was used to finance credit extension. Meanwhile, the quality of

credit was maintained with non-performing loans remaining low. Accordingly, profitability was sufficient to buoy

bank capital. Notwithstanding, a number of incidents occurred in 2011 that attracted public scrutiny, including

fraudulent wealth management services, erroneous credit card billing and fraudulent SMS schemes exploiting

bank accounts. Consequently, Bank Indonesia in conjunction with the banking community implemented a number

of actions to resolve problems at the banks, restore public confidence and prevent any future reoccurrence of

similar issues.

In closing, we expect the 2011 Banking Supervision Report to function as a form of media to communicate

to our stakeholders what has been undertaken by Bank Indonesia during 2011 in terms of banking regulation and

supervision, as well as future banking policy direction. All comments are welcome and will be discussed further

in order to ensure the accuracy and functionality of the Banking Supervision Report.

Jakarta, 2nd May 2012

DEPUTY GOVERNOR OF BANK INDONESIAI

IA

Muliaman D. Hadad

Foreword

vii

Table of Contents

Foreword Executive Summary Prospects and BankingPolicy Direction

Bank Structure and Performance in 2011



Foreword ........... ................................................................................................. v

Table of Contents ........... ..................................................................................... vii List of Tables .......... ............................................................................................................................. ix List of Figures .......... ........................................................................................................................... x

Executive Summary ............................................................................................. 1

Chapter I Bank Structure and Performance in 2011 ............................................. 7 Bank Structure .................................................................................................................................... 9 Commercial Banks ....................................................................................................................... 9 Islamic Banking ............................................................................................................................ 11 Rural Banks (BPR) ......................................................................................................................... 12 Bank Performance .............................................................................................................................. 14 Commercial Banks ........................................................................................................................ 15 Islamic Banking ............................................................................................................................ 19 Rural Banks (BPR) ......................................................................................................................... 25 Box 1.1 MSME Credit and Small Loans (KUR) ......................................................................... 28

Chapter II Banking Policy and Regulation in 2011 ................................................ 33 Banking Policy Direction in 2011 ......................................................................................................... 35

Conventional Commercial Banks .................................................................................................. 35 Islamic Banks ................................................................................................................................ 35 Rural Banks (BPR) .......................................................................................................................... 37 Banking Regulation in 2011 ................................................................................................................. 38 Conventional Commercial Banks .................................................................................................. 38 Islamic Banks ................................................................................................................................ 41 Rural Banks (BPR) ......................................................................................................................... 43 Bank Indonesia Coordination and Participation with its Stakeholders ......................................... 46 Box 2.1 Public Education Program ......................................................................................... 51 Box 2.2 Transparent Publication of Prime Lending Rates ....................................................... 53 Box 2.3 LDR based Statutory Reserves ................................................................................... 57 Box 2.4 Rural Bank Business Model ....................................................................................... 59

Chapter III Bank Supervision Implementation and Follow-Up in 2011 .................. 61 Conventional Commercial Banks ........................................................................................................ 63 Islamic Banks ...................................................................................................................................... 65 Rural Banks (BPR) ............................................................................................................................... 67 Fit and Proper Tests ............................................................................................................................ 68 Conventional Commercial Banks ................................................................................................. 68 Islamic Banks ................................................................................................................................ 69 Rural Banks (BPR) .......................................................................................................................... 69 Banking Information System (BIS) ...................................................................................................... 70 Banking Investigations ........................................................................................................................ 70 Bank Mediation .................................................................................................................................. 73

Table of Contents

Banking Supervision Report 2011viii

Table of Contents





Box 3.1 Strengthening Banking Supervision based on Risk (Risk Based Bank Ratings) ................ 75 Box 3.2 Handling Cases of Fraud concerning Prime Customers and Credit Card Billing .............. 77

Chapter IV Prospects and Banking Policy Direction in 2012 .................................. 79 Challenges and Prospects .................................................................................................................... 81 Banking Policy Direction in 2012 ........................................................................................................ 82 Conventional Commercial Banks ................................................................................................. 82 Islamic Banks ................................................................................................................................ 82 Rural Banks (BPR) ......................................................................................................................... 85

ix

Table of Contents





Table 1.1 Number of Banks and Branch Offices ......................................................................................... 9Table 1.2 Number of Banks based on Core Capital ................................................................................... 10Table 1.3 New Islamic Rural Banks in 2011 ............................................................................................... 12Table 1.4 Development of the Islamic Bank Office Network ..................................................................... 12Table 1.5 The Office Network of Conventional Rural Banks ...................................................................... 12Table 1.6 The Development of Rural Banks ............................................................................................... 13Table 1.7 Mergers and Consolidations in the Rural Banking Industry ........................................................ 13Table 1.8 Licensing Data for 2011 ............................................................................................................. 14Table 1.9 Number of Rural Banks based on Typeof Legal Entity ............................................................... 14Table 1.10 Key Indicators for Commercial Banks ......................................................................................... 15Table 1.11 Key Indicators of Islamic Banks and Sharia Business Units ......................................................... 20Table 1.12 Key Indicators for Islamic Rural Banks ........................................................................................ 23Table 1.13 Credit based on Business Type and Usage ................................................................................. 26Table 1.14 Key Indicators of Rural Banks ..................................................................................................... 26

Table 2.1 Average Prime Lending Rates in the Banking Industry (%) ......................................................... 55Table 2.2 LDR of Conventional Commercial Banks ..................................................................................... 58

Table 3.1 Breakdown of Fit and Proper Tests for Conventional Commercial Banks ................................... 69Table 3.2 Investigation Statistics of Criminal Activity in the Banking Sector during 2011 .......................... 71Tabel 3.3 Pemenuhan Pemberian Keterangan Saksi dan Ahli BI ................................................................ 75Tabel 3.4 Jumlah Sengketa yang Diterima Bank Indonesia ........................................................................ 76

List of Tables

Banking Supervision Report 2011x

Table of Contents





Figure 1.1 Bank Composition by Bank Group in 2011 ............................................................................... 11Figure 1.2 Number of Banks ...................................................................................................................... 11Figure 1.3 Total Assets by Bank Group ...................................................................................................... 11Figure 1.4 Asset Composition by Bank Group in 2011 .............................................................................. 11Figure 1.5 Performance of Credit, Deposits and LDR ................................................................................ 15Figure 1.6 Credit Growth by Loan Type ..................................................................................................... 16Figure 1.7 Credit Growth by Economic Sector .......................................................................................... 16Figure 1.8 Non-Performing Loans ............................................................................................................. 17Figure 1.9 Deposit Growth by Component ............................................................................................... 18Figure 1.10 Composition of Deposits by Component in 2011 .................................................................... 18Figure 1.11 Average Lending Rates and Savings Rates of Commercial Banks ............................................. 19Figure 1.12 Credit by Sector (BUS and UUS) in 2011 .................................................................................. 21Figure 1.13 Income, Costs and Efficiency of BUS and UUS ......................................................................... 22Figure 1.14 Profitability of Islamic banks .................................................................................................... 22Figure 1.15 Composition of Islamic Rural Bank Financing in 2011 .............................................................. 23Figure 1.16 Financing based on Type in 2011 ............................................................................................. 24Figure 1.17 Financing based on Economic Sector in 2011 ........................................................................... 24Figure 1.18 Total Assets, Credit and Deposits ............................................................................................. 25Figure 1.19 Growth in Credit and Deposits ................................................................................................. 25Figure 1.20 Interest Rates ............................................................................................................................ 27Figure 1.21 Realisation of Small Loans ........................................................................................................ 29Figure 1.22 Small Loan Allocation by Economic Sector ............................................................................... 30Figure 1.23 Non-Performing Loans (NPL) and Non-Performing Guarantee (NPG) ...................................... 31

Figure 3.1 Cases of Tipibank by Type in 2011 ........................................................................................... 71Figure 3.2 The Handling of Criminal Cases (1999-2011) ........................................................................... 72

List of Figures

Executive Summary

Banking Supervision Report 20112

Executive Summary

Foreword Table of Contents Banking Policy and Regulationin 2011

Prospects and BankingPolicy Direction




3

Executive Summary





Banking structure and performance in 2011 was positive. In line with the 6.5% economic growth posted in

2011 in Indonesia, the banking sector continued to expand through new branch offices opened in various regions

across the archipelago. The total number of conventional commercial banks operating at yearend 2011 was 109.

Meanwhile, the number of Islamic banks in 2011 also increased in line with the establishment of new banks in

the form of Sharia Business Units (BUS) at conventional commercial banks as well as Islamic rural banks (BPRS).

The number of Sharia business units increased to 24, while Islamic commercial banks totalled 11 and Islamic

rural banks amounted to 155. In addition, the number of branch offices and service coverage of rural banks

continued to expand with rural bank branch offices totalling 1,223 and cash handling offices reaching 1,280.

In 2011, bank performance continued to improve. Ongoing global financial turmoil as a result of the

debt crisis in Europe and the languid US economy did not appear to generate any significant fallout in the

domestic banking sector. Accordingly, bank deposits grew robustly, of which the majority was used to finance

credit extension. Credit was expanded with due regard to the prevailing prudential corridor, thereby maintaining

a low non-performing loans ratio. Furthermore, bank capital was buttressed on the back of sound profitability.

Banking policy and regulation in 2011 represented the foundation by which to increase and strengthen

the banking supervision function implemented by Bank Indonesia. Conventional commercial bank regulation

aimed to foster bank intermediation, enhance bank resilience as well as strengthen supervision and the

macroprudential function. Concomitant Islamic banking regulations were designed to harmonise the regulatory

framework with that of conventional banks, while relaxing certain regulations and enforcing others like Act No.

21, 2008, on Islamic Banking, in order to mandate Bank Indonesia as the regulator of the banking industry

with preparations for banking based on sharia principles. Furthermore, rural banking regulations were directed

towards strengthening capital and supporting infrastructure as well as improving the quality of supervision and

the competence of supervisors.

During the past year of 2011, Bank Indonesia promulgated an array of regulations for conventional commercial

banks, Islamic banks and rural banks. The regulations issued include new regulations as well as amendments to

existing regulations and/or previously rescinded regulations. In broad terms, the regulations aimed to support

economic growth and catalyse the real sector, expand customer protection, improve banking supervision,

comply with international supervisory standards, as well as foster micro, small and medium enterprise (MSME)

development, along with other institutional and prudential regulations. In the case of MSME policy, Bank

Indonesia conducted a range of research as policy guidelines to nurture MSME development and accelerate

credit allocation to the MSME sector (research-based policy). Bank Indonesia also provided training and technical

assistance in order to raise the eligibility and capability of MSME, broaden bank expertise concerning MSME, as

well as provide up-to-date information on MSME through the INFOUMKM section on the official Bank Indonesia

website. In addition, Bank Indonesia established and strengthened supporting institutions (among others by

creating regional credit guarantee companies) as well as introduced MSME credit ratings.

Banking supervision focused on three pillars during 2011, namely to encourage bank intermediation,

to enhance bank resilience and to strengthen the supervision function for conventional commercial banks,

Islamic banks and rural banks. Bank Indonesia favours risk-based bank supervision, which incorporates a strategy


Executive Summary





and methodology based on risk that permits bank supervisors to detect significant risks in a bank’s business

activity early, thereby allowing for appropriate and timely supervisory actions to be taken. Quality assurance is in

place to ensure the inputs, processes and outputs of risk-based bank supervision meet international standards,

thereby honing the quality of supervision (quality assurance) in order to continuously improve the efficacy of

bank supervision. Of the numerous aspects assessed, the level of soundness, risk profile, level of good corporate

governance, implementation of anti-money laundering and prevention of terrorism funding, as well as bank

supervision status all appeared to improve when compared to the previous year of 2010.

As part of the bank supervision process, to create a sound banking system, protect the interests of the

stakeholders and ensure compliance to prevailing regulations, good corporate governance is a prerequisite for

the banking industry. The realisation of good corporate governance is only possible if the banking industry

is owned and managed by those fulfilling fit and proper requirements. Therefore, in its first line of defence,

Bank Indonesia utilises fit and proper tests in its selection process of candidate commissioners, directors and

controlling shareholders. Fit and proper tests are compulsory for new entry as well as existing candidates.

In addition to policy, regulation and supervision, the information system that represents the backbone of

the supervision process was also addressed by Bank Indonesia. Bank Indonesia developed a Banking Information

System (SIP) to replace the more antiquated Bank Indonesia Banking Sector Management Information System

(SIM-SPBI) in order to meet the changing needs of the banking sector in terms of enhancing the quality of

information, particularly regarding the implementation of new regulations. Another important aspect that is

inextricably linked to the supervision process conducted at Bank Indonesia is investigation and mediation. Bank

Indonesia is fully aware that as the banking industry develops, so potentially do the opportunities, quality and

complexity. Under such circumstances, efforts to raise bank compliance to prevailing laws and regulations are

vital to protect the public’s funds as well as prevent the emergence of structural problems in the banking system

that could undermine the national economy. Meanwhile, Bank Indonesia began facilitating a mediation function

in 2006 in order to protect bank customers. Dispute resolution through bank mediation is only applicable

subsequent to a failed customer complaint settlement process by the related bank. Bank mediation also aims to

give smaller customers access to dispute resolution with a bank through a simple, cheap and prompt method.

A number of arduous challenges continue to mar the banking sector at the beginning of 2012. Externally,

the main threat stems form a potential further slowdown in the already protracted global economic recovery

process. Meanwhile, internally, the contribution made by the banking sector to national economic development

remains sub-optimal. A corresponding increase in the contribution to the national economy has not occurred

in harmony with asset growth in the banking industry, among others, due to unproductive bank assets from a

macro perspective in the form of excess liquidity placed in monetary instruments as well as tradable government

securities (SBN). Furthermore, the level of efficiency in the banking industry also remains relatively low. These

issues contribute to the relatively high lending rates offered by banks in Indonesia. Therefore, future banking

policy will continue to prioritise bank competitiveness, while strengthening bank resilience and encouraging

bank intermediation.

Chapter IBank Structure andPerformance in 2011





Bank Supervision ImplementationExecutive Summary

This page is intentionally left blank

9





Bank StructureCongruent to 6.5% domestic economic growth in 2011, the banking sector reinforced its position as a pivotal

element of the financial system in Indonesia by expanding its business interests through additional branch offices

in various regions of the archipelago. Nearly 1,000 new office units were reported in 2011 consisting of branch

offices, sub-branch offices and cash handling offices, dominated by foreign exchange banks, which aggressively

moved to expand their network coverage.

Table 1.1 Number of Banks and Branch Offices

State-owned Banks Total Banks 4 4 4 Total Branch Offices 3854 4189 4362

Foreign Exchange Banks Total Banks 34 36 36 Total Branch Offices 6181 6608 7209

Non-Foreign Exchange Banks Total Banks 31 31 30 Total Branch Offices 976 1131 1288

Regional Banks Total Banks 26 26 26 Total Branch Offices 1358 1413 1472

Joint-Venture Banks Total Banks 16 15 14 Total Branch Offices 238 263 260

Foreign Banks Total Banks 10 10 10 Total Branch Offices 230 233 206

Total Total Banks 121 122 120 Total Branch Offices 12837 13837 14797

Number of Conventional Commercial Banks 115 111 109Number of Islamic Banks 6 11 11

Bank Group 2009 2010 2011

Commercial Banks1

The number of conventional commercial banks operating at yearend 2011 totalled 109 compared to 111 in

the preceding year. The slight decline was attributable to a merger and business license revocation as follows:

1. The merger between PT. Bank OCBCNISP and PT. Bank OCBC Indonesia to become PT. Bank OCBCNISPTbk pursuant to Governor Decree No.12/86/KEP.GBI/2010, dated 22nd December 2010. However, the merger was executed in 2011.

1) Commercial banks here refer to conventional commercial banks and Islamic banks.






2. The business license revocation of PT. Barclays Bank Indonesia through Governor Decree No.13/48/KEP.GBI/2011, dated 7th July 2011.

In addition, a number of name changes also came into effect during 2011 as follows:

1. A change in the business license of ABN Amro Bank N.V. to The Royal Bank of Scotland N.V. through Governor Decree No.13/15/KEP.GBI/2011, dated 22nd February 2011.

2. A change in the business license of PT. Bank Pembangunan Daerah Sulawesi Selatan (Regional Bank of South Sulawesi) to PT. Bank Pembangunan Daerah Sulawesi Selatan and Sulawesi Barat (Regional Bank of South and West Sulawesi) through Governor Decree No.13/32/KEP.GBI/2011, dated 10th May 2011.

3. A change in the business license of PT. Bank UOBBuana to PT. Bank UOB Indonesia through Governor Decree No.13/34/KEP.GBI/2011, dated 19th May 2011.

4. A change in the business license of PT. Bank Swadesi, Tbk. to PT. Bank of India Indonesia, Tbk. through Governor Decree No.13/91A/KEP.GBI/2011, dated 17th November 2011.

5. A change in the business license of PT. Bank Kesawan to PT. QNBKesawan through Governor Decree No.13/102/KEP.GBI/2011, dated 12th December 2011.

6. A change in the business license of PT. ANZPanin Bank to PT. ANZ Indonesia through Governor Decree No.13/108/KEP.GBI/2011, dated 29th December 2011.

By the end of 2011, an additional four banks emerged with a core capital in the range of Rp1 trillion to Rp10

trillion, while one bank expandedits core capital to in excess of Rp10 trillion. Additional core capital was achieved

through supplementary paid-up capital from the banks’ owners as well as acquisitions by new investors.

Table 1.2 Number of Banks based on Core Capital

> Rp10 Trillion 8 6,61 8 6,56 9 7,50

Rp 1 T to Rp 10 T 33 27,27 40 32,79 44 36,67

Rp100 B to < Rp 1 T 69 57,02 74 60,66 67 55,83

< Rp100 B 11 9,09 0 0,00 0 0,00

Total 121 100,00 122 100,00 120 100,00

Core CapitalTotal banks Total banks Total banks% % %

2009 2010 2011

By bank group, the national banking industry did not experience any significant changes in composition

compared to 2010 due to little merger activity, changes in foreign exchange status or license revocations. Only

one bank had its licence revoked, which led to a slight decline in the total number of foreign exchange banks. The

banking industry remained dominated by foreign exchange banks with a share of 30% followed by non-foreign

exchange banks with 25%.

11





When observed in terms of asset composition, foreign exchange banks continued to dominate, followed by

state-owned banks, which despite numbering just four in total accounted for an impressive 36.67% of total bank

assets. In general, all bank groups experienced asset growth during the period from 2009 to 2011.

State-owned

Foreign exchange

Non-foreign exchange

Regional

Joint-venture

Foreign

22%

25%

12%8%

3%

30%

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

(Million Rp)

2009 2010 2011

State-owned Foreignexchange

Non-foreignexchange

Regional Joint-venture Foreign

5

10

15

20

25

30

35

40

Stateowned

Foreignexchange

Non-foreignexchange

Regional Jointventure

Foreign

Dec 2009 Dec 2010 Dec 2011

5%7%

31%

40%

3%

8% State-owned

Foreign exchange

Non-foreign exchange

Regional

Joint-venture

Foreign

Figure 1.1 Bank Composition by Bank Group in 2011

Figure 1.3 Total Assets by Bank Group

Figure 1.2 Number of Banks

Figure 1.4 Asset Composition by Bank Group in 2011

Islamic Banking

The number of banks undertaking business activity based on Islamic principles increased during the reporting

period in line with the establishment of new banks, sharia business units (UUS) at conventional commercial banks

as well as new Islamic rural banks. The number of sharia business units increased by one from 23 to 24, namely

UUS BPD Jambi, while no change was reported in the number of Islamic banks, which total 11. The number

of Islamic rural banks (BPRS) increased by five from 150 to 155, consisting of six new business licenses, one

conversion from a conventional rural bank, one merger and one BPRS license revocation. BPRS SyarifHidayatullah

in the operational area of Cirebon had its business license revoked, while the one merger was BPRS BerkahAmal

Salman absorbed into BPRS Al Salaam Amal Salman.






The establishment of new Islamic banks followed by an additional 338 Islamic bank branch offices in 2011

helped broaden service coverage. Of that total, 260 offices represented a new office network of BUS-UUS, while

78 made up a new network of Islamic rural banks. The majority of new branch offices were established in the

form of sub-branches (KCP). In addition to the Islamic bank office network, Islamic Service Units operating at

1,277 branches of conventional commercial banks also offer Islamic banking services.

Name of Bank Operational Area

PT. BPRS Way Kanan LampungPT. BPRS Oloan Ummah Sidempuan SibolgaPT. BPRS Dharma Kuwera Solo

PT. BPRS Kota Mojokerto Surabaya

PT. BPRS Mitra Harmoni Kota Bandung Bandung

PT. BPRS Gajahtongga Kotopiliang Padang

PT. BPRS Cahaya Hidup Yogyakarta

Table 1.3 New Islamic Rural Banks in 2011

Bank Group 2009 2010 2011

Islamic Commercial Bank 6 11 11 Islamic Business Unit 25 23 24 - Number of BUS and UUS branches 998 1477 1737 - Number of Islamic Service Units 1929 1277 1277 Islamic Rural Banks 138 150 155 - Number of Islamic Rural Banks branches 260 286 364

Table 1.4 Development of the Islamic Bank Office Network

Office Network 2009 2010 2011

Head Office 1.733 1.706 1.669 Branch Office 946 1.088 1.223 Cash Office 965 1.116 1.280 Total 3.644 3.910 4.172

Table 1.5 The Office Network of Conventional Rural Banks

Rural Banks (BPR)

The number of branches and service coverage area continued to expand, which further extended rural

banking services to micro and small enterprises (MSE). The number of branch offices reached 1,223 in 2011,

while cash handling offices totalled 1,280.

13





The establishment of new rural banks outside the islands of Java and Bali increased. Bank Indonesia

continuously strives to nurture BPR growth evenly in all regions of Indonesia but primarily away from the

islands of Java and Bali due to the higher concentrations found there. Lower paid-up capital requirements are

applicable to areas outside of Java and Bali, which aims to spread the benefits of rural banking services to all

regions in the archipelago, particularly to micro, small and medium enterprises.

Of the 25 new rural banks, 23 are located outside the islands of Java and Bali. Furthermore, the mergers

of 23 rural banks operating on Java and Bali explain why the number of rural banks on these two islands

experienced a decline. In addition, Bank Indonesia was forced to revoke the business licenses of 14 rural

banks in 2011, 10 of which were located on Java and Bali.

Location of Rural Bank2009 2010 2011

Total % Total % Total %

Java-Bali 1.294 74,7 1.264 74,1 1.208 72,4 Outside Java-Bali 439 25,3 442 25,9 461 27,6 Total 1.733 100 1.706 100 1.669 100

Table 1.6 The Development of Rural Banks

Legal Entity2009 2010 2011

from to from to from to

Limited Company 52 6 26 4 2 1 Regional Company 23 4 5 1 53 6 Cooperative - - - - - - Total 75 10 31 5 55 7

Table 1.7 Mergers and Consolidations in the Rural Banking Industry

Policy to reinforce the structure of the rural banking industry was implemented by, among others,

encouraging mergers (combining two or more rural banks to maintain the business continuity of one of the

rural banks) and consolidation (combining two or more rural banks to form a new rural bank). In 2011, a

total of 55 rural banks were merged and consolidated into just seven rural banks. Of the total 55 rural banks,

local government owned 53 as regional companies (PD), of which 21 merged into three rural banks and

32 consolidated into another three rural banks. In addition, two rural banks were privately owned limited

companies that merged into one rural bank.






Currently, the number of limited company rural banks is on the increase in line with Bank Indonesia

policy to encourage the formation of limited company rural banks. Limited company rural banks are ideal

for the banking industry rather than regional companies (PD) and cooperatives. In the context of the rural

banking industry the form of legal entity reflects the ownership composition of the rural bank in question. For

instance, a PD rural bank is owned by the local government, while a limited company denotes that some or

all of the shares are privately owned.

License

Area Principle License

Business License

Merger

from to

Jabodetabek * - 1 - - Jawa Barat - 1 51 5 Jawa Tengah & DIY 1 - - - Jawa Timur - - 2 1 Bali & Nusa Tenggara 1 1 2 1 Sumatera 5 12 - - Kalimantan 5 2 - - Sulampua ** 1 8 - - Total 13 25 55 7

Table 1.8 Licensing Data for 2011

*) Jakarta, Bogor, Depok, Tangerang/Banten, Bekasi dan Karawang **) Sulawesi, Maluku dan Papua

Legal Entity2009 2010 2011

Total % Total % Total %

Limited Company 1.375 79,3 1.384 81,1 1.388 83,2 Regional Company 324 18,7 288 16,9 247 14,8 Cooperative 34 2,0 3,4 2,0 34 2,0 Total 1.733 100 1.706 100 1.669 100

Table 1.9 Number of Rural Banks based on Typeof Legal Entity

Bank PerformanceThe performance of the banking sector was positive during 2011. Anaemic global financial conditions

stemming from a protracted debt crisis in Europe and a sluggish US economy had no discernable impact on the

banking sector in Indonesia. Financial system stability was maintained, as reflected by the variety of positive

achievements attained by the banking industry throughout 2011. Bank deposits grew robustly, of which the

majority was used to finance credit growth. Credit expansion was undertaken paying due regard to the prevailing

prudential corridor, thereby maintaining non-performing loans at an acceptably low level. Furthermore, bank

capital was preserved at an adequate level buoyed by solid profitability.

15





Table 1.10 Key Indicators for Commercial Banks*

* Data includes conventional commercial banks and Islamic banks.** Excluding credit channelling.

Commercial Banks

The bank intermediation function improved during the reporting period, evidenced by increases in credit

allocation and deposits. Bank credit grew by 24.59% to Rp2,200.09 trillion, which exceed the 22.80% posted in

the preceding year. Improvements in economic conditions helped boost public demand for credit and credit

supply from the banks.

Despite solid credit growth, there remains ample room for further growth looking ahead. This is indicated

by aloan-to-deposit ratio (LDR) for 2011 in the range of 79.00% as well as the value of undisbursed loans totalling

Rp263.26 trillion and Rp422.48 trillion respectively for committed and uncommitted loans. Moreover, the

contribution of new bank loans was only 30% of GDP, which is comparatively small in contrast to other ASEAN

member countries in spite of a nominal uptrend over the past several years.

0

10

20

30

40

50

60

70

80

90

0

5

10

15

20

25

30

35

40

2004 2005 2006 2007 2008 2009 2010 2011

% %

Credit(left-hand scale)

Deposits(left-hand scale)

LDR(right-hand scale)

Figure 1.5 Performance of Credit, Deposits and LDR

2,534,11 3,008,85 3,652,83

1,973,04 2,338,82 2,784,91

1,437,93 1,765,84 2,200,09

17,42 17,18 16,05

* 3 ,31

2,56

2,17

* 0,33 0,26 0,39

2,60 2,86 3,03

86,63 86,14 85,42

72,88 75,50 79,00

Total Assets (T Rp)

Deposits (T Rp)**

Credit (T Rp)**

CAR (%)

NPL Gross (%)**

NPL net (%)**

ROA (%)

BOPO (%)

LDR (%)

Key Indicators Dec 2009 Dec 2010 Dec 2011






Growth in productive credit, namely working capital credit and investment credit, continued to dominate

overall credit growth. Investment credit posted significant growth at 33.21% compared to that recorded in

2009 and 2010 at 16.43% and 16.98% correspondingly. Impressive growth in investment credit was primarily

attributable to improvements in the national economy coupled with positive investor expectations as a result

of Indonesia’s upgraded status to investment grade affirmed by Fitch Ratings in December 2011. Propitious

domestic economic conditions further catalysed activity in the business community, thereby expanding the

share of micro and small enterprises in the national credit portfolio by 24.21%. Meanwhile, the 24.21% growth

reported in consumption credit originated from mortgages, motor vehicle loans, credit cards and multipurpose

loans.

2.7%

16.4% 19.0%

10.0%

25.2%

17.0%

22.9% 22.8% 21.4%

33.2%

24.2% 24.6%

0%

5%

10%

15%

20%

25%

30%

35%

WorkingCapital Credit

InvestmentCredit

ConsumptionCredit

Total Credit

2009 2010 2011

Figure 1.6 Credit Growth by Loan Type

26.07%

43.04%

25.12%

34.37%

18.73%

19.37%

26.70%

24.94%

31.08%

24.41%

24.59%

-50% 0% 50% 100% 150% 200%

2009

2010

2011

Total

Others

Social Services

Corporate Services

Transportation

Trade

Construction

Electricity

Industry

Mining

Agriculture

Figure 1.7 Credit Growth by Economic Sector

All economic sectors experienced positive credit growth in 2011. The strongest credit growth was reported in

the mining sector (43.04%), followed by electricity (34.37%) and social services (31.08%). Nominally, the largest

increases in credit stemmed from the others sector, industrial sector and trade sector. In addition, the following

sectors experienced larger increases in credit compared to the previous year, namely the manufacturing sector,

mining, agriculture, utilities (electricity, gas and water), construction and corporate services.

17





Encouragingly, non-performing loans trended downwards, despite increasing from the first until third

quarter of 2011, thanks to a dramatic decline in the final quarter in line with bank restructuring and write-offs.

At yearend 2011, the gross ratio of non-performing bank loans had dropped to 2.17% (the lowest in a decade) as

a result of improved credit quality followed by rapid credit growth.

0

10

20

30

40

50

60

0

1

2

3

4

5

6

2007 2008 2009 2010 2011

Rp T% PPAP

(right scale)

Nominal NPL (right scale)

NPL Gross(left scale)NPL Net

(left scale)

Figure 1.8 Non-Performing Loans

The composition of credit in earning assets reached a share of 64.47% in 2011, topping that recorded

in the preceding year at 63.84%. Meanwhile, another earning asset that also experienced an increase was

placements at Bank Indonesia (predominantly using the deposit facility). In contrast, placements in securities

(including SUN) underwent a decline.

Positive performance was further reported on all components of deposits, namely checking accounts,

savings accounts and term deposits. Deposits grew by 19.07% to Rp2,784.91 trillion. By component, checking

accounts grew 21.80%to Rp652.65 trillion, exceeding growth posted in 2009 and 2010 when just 8.35% and

15.02% growth was documented respectively. Term deposits grew 15.34% to Rp1,233.97 trillion, which was

less impressive than the growth registered in 2010 at 18.64% but higher than that in 2009 (9.34%). The growth

in savings accounts during the reporting period was 22.52%, surpassing that in 2009 and 2010 at 21.00%.

Holistically, term deposits continued to dominate bank deposits with a 44.31% share, shrinking slightly when

compared to the previous year at 45.74%. The growth in deposits was harmonious with the escalation in activity

in the business community as well as growing interest from the general public to deposit their funds at a bank.






From a capital standpoint, the capital adequacy ratio (CAR) of banks dropped from 17.18% in December

2010 to 16.05% at the end of 2011, however, this figure is well above the minimum threshold set at 8%. The

decline in CAR was principally due to a notable increase in risk-weighted assets resulting from credit expansion

by the banks and the inclusion of operational risk in the calculations. Solid bank profitability helped raise bank

capital by 25.51% to Rp412.19 trillion, which itself was dominated by higher quality tier 1 capital (core capital)

making up 89.56% of the total. The support of adequate capital was utilised as a buffer to help absorb potential

future risks.

The improvement in bank performance throughout 2011 boosted profits, with net profits for the year

reaching Rp75.02 trillion, exceeding the Rp57.31 trillion generated in 2010. The main source of profit stemmed

from interest income, as reflected by the increase in net interest income (NII). On average, monthly NIIwas

Rp14.89 trillion during 2011, which is higher than that logged in 2009 and 2010 at Rp10.77 trillion and Rp12.48

trillion respectively per month. Relatively high profitability was further indicated by an increase in the return on

assets (ROA) from 2.86% (2010) to 3.03% (2011). Meanwhile, in terms of efficiency, the BOPO efficiency ratio for

banks remained at a level of 85.42%.

The average savings rate offered on term deposits as well as the average bank lending rate tended to decline

over the reporting period, as evidenced by the banks’ response to Bank Indonesia policy and appeals for lower

rates. The average rate on 1-month rupiah term deposits dropped 24 bps to 6.40%. Accordingly, rupiah-based

lending rates also declined on all types of loan. The rate offered on working capital credit dropped 41 bps to

11.98%, investment credit declined 17 bps to 11.69% and consumption credit decreased 41 bps to 13.38%.

8.3%

21.4%

9.3%

12.5%

15.0%

21.1%

18.6% 18.5%

21.8%22.5%

15.3%

19.1%

0%

5%

10%

15%

20%

25%

30%

Demand Deposits Time DepositsSaving Third Party Fund

Dec 2009 Dec 2010 Dec 2011

44%24%

32%

Demand Deposits

Time Deposits

Saving

Figure 1.9 Deposit Growth by Component Figure 1.10 Composition of Deposits by Componentin 2011

19





Islamic Banks

In a similar vein as conventional banks, the performance of Islamic banks in 2011 was positive. Despite

the ongoing wave of global financial turmoil, Islamic banks have remained unexposed and unaffected by global

conditions due to their lack of exposure to domestic and global financial markets. Pursuant to Act No.21, 2008,

Islamic banks operate to store and allocate the public’s funds in order to support national development. In

addition, Islamic banks also have a social function as treasury receiving funds from zakat, infak, sedakah, grants

and other social funds and subsequently allocating the funds to zakat management organisations. Another social

function is storing wakaf funds and disbursing them to a wakaf manager.

Sound performance by Islamic banks was further demonstrated through strong gains in terms of

accumulating funds, the majority of which was used to extend financing. Financing was expanded with due

consideration paid to prudential banking as the policy direction of Bank Indonesia as well as sharia compliance

outlined by the National Sharia Board. Therefore, the ratio of non-performing financing remained under control

while holding steadfast in the corridor of business activity based on Islamic principles. Capital at Islamic banks

was also maintained, among others, supported by solid business profitability.

Islamic Banks (BUS) and Sharia Business Units (UUS)

The intermediation function of Islamic banks and sharia business units improved during 2011, as indicated

by increases in deposits held and financing allocated. Deposits grew expansively by Rp39.38 trillion (51.80%) and,

similarly, financing grew by Rp34.47 trillion (50.56%) compared to 45.43% in the previous year. Meanwhile, the

intermediation function in 2011, according to the financing-to-deposit ratio (FDR), surpassed that of conventional

banks amounting to 88.94%.

2006

(%)

WCC

19181716151413121110

987654

IC CC 1-Month Term Deposits

2007 2008 2009 2010 2011

Figure 1.11 Average Lending Rates and Savings Rates ofCommercial Banks






Financing dominated funds placed at Islamic banks compared to other types of placement, like placements

held at Bank Indonesia, other banks or securities. This is clearly evidenced by the 70.57% share of financing in

the total assets of Islamic banks and sharia business units, while for Islamic rural banks the share is more like

76.10%. Consequently, Islamic bank intermediation functioned well. Nominally, the increase in share was in

line with the rate of Islamic bank financing growth that achieved 49.96% (yoy), surpassing growth posted in the

previous year at 44.91%.

In addition to financing, Islamic banks also held placements at Bank Indonesia, amounting to 18.65% of their

total assets. Excluding checking accounts to meet the minimum statutory reserve requirement, in 2011 Islamic

banks placed Rp20.89 trillion in FASBIS and SBIS instruments as part of their liquidity management strategy. In

accord with the burgeoning placements in FASBIS and SBIS as secondary reserves, the liquid assets of Islamic

banks and sharia business units increased by 49.04% (yoy) to Rp30.99 trillion. This growth in liquid assets helped

strengthen the capacity of Islamic banks to cover potential withdrawals of deposits. This is also indicated by the

ratio of liquid assets to non-core deposits, which skyrocketed 155.28% to 159.12% in the same period. Such

conditions reflect the growing ability of Islamic banks to anticipate liquidity risk.

Nominally, consumption financing and working capital dominated Islamic bank financing (BUS and UUS)

with respective shares amounting to 41.94% and 40.62%. In terms of growth, however, consumption financing

grew most rapidly by 87.92% over the previous year. This increase was dominated by qardhgold-backed

transactions, better known among the general public as ‘Gadai Emas’ (Pawning Gold). Considering that Islamic

banks help stimulate real sector growth, Bank Indonesia re-evaluated the regulations concerning pawning gold

by prioritising the use of this product to meet the urgent needs of the community and to avoid providing any

space for speculative activity stemming from gold price hikes.

Key Indicators 2009 2010 2011

Total Assets (T Rp) 66,09 97,52 145,47Deposits (T Rp) 52,27 76,03 115,41iB Financing (T Rp) 46,88 68,18 102,65CAR (%) 10,77 16,25 16,63NPFs Gross (%) 4,01 3,02 2,52NPFs Net (%) 1,84 1,6 1,34ROA (%) 1,48 1,67 1,79BOPO (%) 86,63 86,14 85,42FDR (%) 89,70 89,67 88,94

Table 1.11 Key Indicators of Islamic Banks and Sharia Business Units

21





Agriculture

42,05%

2,14% 1,69%3,97% 2,32%

5,71%

9,53%

3,28%

24,97%4,35%

Construction

Social

Mining

Trade

Industry

Transportation

Electricity

World

Others

Figure 1.12 Credit by Sector (BUS and UUS) in 2011

By business sector, Islamic bank financing continued to concentrate in the corporate services sector as

well as the trade, hotels and restaurants sector with shares respectively amounting to 24.97% and 9.53%. The

performance of these two sectors was relatively good throughout 2011 as reflected by 9.41% growth (yoy) in

the trade, hotels and restaurants sector and 7.02% (yoy) in the corporate services sector. Compared to 2010,

the share of financing to these two sectors declined slightly and, in contrast, financing to a number of other

sectors increased. In general, more financing was allocated to the manufacturing industry, electricity, and

mining, which in 2011 were the most appealing sectors to all banks, Islamic and conventional alike. Islamic (BUS

and UUS) financing growth to these three sectors during the reporting period was 74.43%, 75.85% and 54.97%

respectively.

Financing from Islamic rural banks in 2011 was supported by new segments and expanding financing from

borrowed funds from Islamic commercial banks. One of the new financing segments that experienced robust

growth was multiservice financing, which reached Rp89.23 billion by yearend 2011. Sectorally, Islamic rural bank

financing was primarily allocated to the trade, hotels and restaurants sector with a share of 37.61% and the

others sector (including consumption financing) with a 34.76% share.

When observed by contract type, in general the financing allocated by Islamic banks and sharia business

units was still dominated by murabahah with a 54.90% share. Nonetheless, in line with recent efforts to enrich

sharia banking products, dynamic shifts are occurring in the various contracts. For Islamic banks and sharia

business units, the downward trend in the share of murabahah-based financing persisted. Similarly, the share of

financing based on profit sharing (mudharabah and musyarakah) also followed a downward trend from 34.11%

to 28.43%. Conversely, the share of qardh-based financing increased significantly from 6.94% in 2010 to 12.60%

in 2011, primarily on the back of gold-backed rahn transactions in line with rising gold prices.

In terms of revenue, the operational income of Islamic banks (BUS and UUS) increased significantly.

Operational income increased by 49.40% (yoy) to Rp14.95 trillion during the reporting period, ostensibly driven

by significant productive asset growth, which itself was reflected by a 44.30% jump in income from fund allocation

to Rp10.70 trillion. Another source of revenue that supported operational income growth was fee-based income,

which increased by Rp0.82 trillion (228.77%), predominantly from gold-backed rahn transactions (gadai emas).






Figure 1.14 Profitability of Islamic banks

Figure 1.13 Income, Costs and Efficiency of BUS and UUS

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

2

4

6

8

10

12

14

16(T Rp)

2009 2010 2011

Operational income(left scale)

profit sharing(left scale)

overheads(left scale)

profit sharing/operational income(right scale)

overheads/operational income(right scale)

0%

3%

6%

9%

12%

15%

18%

21%

24%

27%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2009 2010 2011

Profit of BUS and UUS(%, yoy) (left scale)

Profit of Islamic rural banks(%, yoy) (left scale)

ROE of BUS(right scale)

ROE of Islamic rural banks(right scale)

ROA of BUS and UUS(right scale)

ROA of Islamic rural banks(right scale)

The accomplishment of (increased) asset productivity and efficiency raised the net operational margin of

Islamic banks (BUS and UUS) from 1.73% (2010) to 1.94% (2011). The 2011 profits of BUS and UUS grew by

40.33% to Rp1.48 trillion. This increase in profit precipitated a corresponding increase in the return on assets

from 1.67% in 2010 to 1.79% in 2011. Meanwhile, in terms of the return on investment, the increase in profit

was not accompanied by an increase in ROE, which actually declined from 17.63% to 15.72%. This was caused by

additional paid-up capital at a number of Islamic commercial banks.

Islamic Rural Banks

The condition of Islamic rural banks during the past year of 2011 was sound with financial indicators

demonstrating positive growth, even exceeding that posted in the preceding year. Total assets of Islamic rural

banks increased 28.21% from Rp2.73 trillion (2010) to Rp3.50 trillion (2011). Meanwhile, the financing allocated

and deposits accumulated grew respectively by 29.61% and 30.63% on the strength of aggressive business

expansion in terms accruing funds (funding) and extending financing. In 2011, Islamic rural banks maintained a





23ix

Daftar Isi

Kata Pengantar Ringkasan EksekutifStruktur dan Kinerja

PerbankanKebijakan dan Regulasi

PerbankanPengawasan Perbankan

Prospek dan Arah Kebijakan Perbankan

Lampiran Glosari

Daftar Tabel1.1 Perkembangan Jumlah Bank dan Kantor Bank 11

1.2 Jumlah Bank Berdasarkan Modal Inti 13

1.3 Perkembangan Jumlah Bank Umum Syariah dan Jaringan Kantor 15

1.4 Pendirian BPRS Baru Tahun 2010 16

1.5 Perkembangan Jaringan Kantor BPR Konvensional 16

1.6 Penyebaran BPR 17

1.7 Perkembangan Merger dan Konsolidasi Industri BPR 18

1.8 Data Perizinan dan Pencabutan izin Usaha BPR Tahun 2010 18

1.9 Indikator Utama Bank Umum 23

1.10 Perkembangan Indikator Perbankan Syariah (BUS dan UUS) 28

1.11 Perkembangan Indikator BPRS 30

1.12 Perkembangan Kredit dan Kualitas kredit BPR 32

1.13 Indikator Utama BPR 33

2.1 Pokok-pokok Pengaturan dan Jadwal Implementasi Basel III 61

3.1 Realisasi Pemeriksaan Bank Umum Konvensional 2010 88

3.2 Uji Kemampuan dan Kepatutan Bank Umum Konvensional 93

3.3 Rekapitulasi Fit dan Proper test BPR Konvensional Tahun 2010 94

3.4 Statistik Investigasi Periode Januari - Desember 2010 95

3.5 Jumlah Sengketa yang Diterima Bank Indonesia 97





competitive level of profit sharing, which nurtured long-term customer loyalty and attracted new customers. In

addition, a relatively competitive murabahah financing margin helped BPRS financing flourish.


Total Assets (T Rp) 2,12 2,73 3,50Deposits (T Rp) 1,25 1,60 2,09iB Financing (T Rp) 1,58 2,06 2,67CAR (%) 30,00 27,50 23,50NPFs Gross (%) 8,12 6,50 6,11NPFs Net (%) 6,65 5,36 5,14ROA (%) 3,50 3,50 2,70BOPO (%) 77,00 78,10 76,30FDR (%) 126,47 128,47 127,71

Table 1.12 Key Indicators for Islamic Rural Banks

One reason for the increase in Islamic rural bank financing was expansion, as denoted by the financing-to-

deposit ratio (FDR) in 2011 totalling 127.71%, which was made possible by dynamic business expansion to new

financing segments as well as new financing funded by resources borrowed from Islamic commercial banks (BUS)

(executing). Financing based on sales as well as profit sharing remained the preferred transaction at Islamic rural

banks (BPRS). Murabahahcontinued to dominate the composition of financing with an 80.51% share. Meanwhile,

musyarakahdominatedfinancing based on profit sharing with a share of 9.22%, followed by mudharabah with a

2.83% share. In addition, multiservice financing also performed well amounting to some Rp89.23 billion, which

indicates that Islamic rural banks have successfully earned the trust of the general public to fund their health,

educational and religious needs.

Figure 1.15 Composition of Islamic Rural Bank Financing in 2011

Murabahah

Mudharabah

Musyarakah

Qardh

Multiservice

Others

80%

2,8%

9,2%

2,7%3,3% 1,4%





Bank Supervision ImplementationExecutive Summary Foreword

Working capital

Investment

Consumption

35%

55%

10%

Figure 1.16 Financing based on Type in 2011

Figure 1.17 Financing based on Economic Sector in 2011

0,09%

0,10%

1,26%

1,36%

3,44%

3,46%

8,37%

9,54%

34,76%

37,61%

0,00% 5,00% 10,00% 15,00% 20,00% 25,00% 30,00% 35,00% 40,00%

Trade, Restaurants and Hotels

Others

Corporate Services

Agriculture

Construction

Social Services

Transportation, Warehousing and Communications

Industry

Electricity, Gas and Water

Mining

Relatively high financing growth was accompanied by a decline in non-performing financing at Islamic rural

banks from 5.36% in 2010 to 5.14% in 2011. The NPF ratio of Islamic rural banks was lower than that of rural

banks nationally for the same period (5.22%). Increasing competition among customer businesses was partially

responsible for the small nominal increase in non-performing financing. Solid financing growth coupled with

a low NPF ratio allowed Islamic rural banks to post greater profits than in the previous year. The operational

income of Islamic rural banks increased 20.97% to Rp0.59 trillion in 2011. Meanwhile, the operational costs of

Islamic rural banks increased 22.12% to Rp299.247 billion in the same period. Consequently, 21.17% growth in

profits was recorded from Rp83.9 billion in 2010 to Rp101.66 billion in 2011.

In terms of financing type, 54.93% of rural Islamic banking finance was allocated as working capital to small

and medium businesses. Meanwhile, based on economic sector, 37.61% of Islamic rural bank financing was

extended to the trade sector as well as restaurants and hotels, followed by 34.76% to the others sector.

25





Rural Banks (BPR)

The rural banking industry managed to grow amid increasingly tight competition. The ever-expanding

number of micro-finance institutions had no discernable effect on BPR performance. In 2011, the rural banking

industry developed naturally, with total assets increasing by 21.99% from Rp45.74 trillion to Rp55.78 trillion,

while credit grew 21.44% from Rp38.84 trillion to Rp41.10 trillion. Furthermore, growth in deposits achieved

22.03% from Rp31.31 trillion to Rp38.21 trillion. In a similar vein, rural banks maintained a loan-to-deposit ratio

(LDR) at a level of 78.54%. Meanwhile, ongoing efforts to gradually raise rural bank capital since 2006 have

forced rural banks to augment their paid-up capital according to their location. Paid-up capital increased 16.00%

from Rp4.75 trillion to Rp5.51 trillion in 2011, which raised core capital by 17.10% from Rp6.45 trillion to Rp7.55

trillion. The additional capital helped boost the competitiveness of rural banks, particularly in terms of allocating

financing to micro and small enterprises.

The majority of credit extended by rural banks is to micro, small and medium enterprises (MSME) as their

primary market. Currently, credit from rural banks is grouped according to business type using the criteria for

MSME as stipulated in Act No. 20, 2008, on Micro, Small and Medium Enterprises.

Figure 1.18 Total Assets, Credit and Deposits Figure 1.19 Growth in Credit and Deposits

Dec-2009

Total Assets Credit Deposits

Dec-2010 Dec-2011

60.000

(B Rp)

50.000

40.000

30.000

20.000

10.000

-

- 5,00 10,00 15,00 20,00 25,00 %

2009

2010

2011

Deposits Credit

In line with efforts to expand the role of rural banks in micro financing, the majority of BPR loans are used to

fund productive sectors in the form of working capital credit. The share of working capital credit reached 47.60%

(Rp19.55 trillion), followed by consumption credit accounting for 46.70% (Rp19.17 trillion) and investment credit

with 5.80% (Rp2.36 trillion). Based on business scale, rural bank loans to micro, small and medium enterprises

reached Rp20.51 trillion (49.90%) of total credit equalling Rp41.09 trillion.







Total Assets (T Rp) 37,56 45,74 55,78Deposits (T Rp) 25,55 31,31 38,21Credit (T Rp) 28,00 33,84 41,10CAR (%) 24,17 30,01 28,68NPLs Gross (%) 6,90 6,12 5,22NPLs Net (%) 3,97 4,25 3,67ROA (%) 3,09 3,16 3,32BOPO (%) 81,82 80,97 79,47LDR (%) 109,58 108,09 107,57

Table 1.14 Key Indicators of Rural Banks

Congruous with the improvement in economic conditions subsequent to the economic debacle in 2008,

the rural banking industry has successfully raised the quality of credit it allocates. This was demonstrated by

a decline in the gross NPL ratio of rural banks from 6.12% in 2010 to 5.22% in 2011. In fact, this is the lowest

gross NPL ratio recorded in the past decade. The low level of NPL reduced the burden of reserves that must be

maintained by rural banks, thereby allowing the banks to focus more on credit expansion.

Table 1.13 Credit based on Business Type and Usage

6,12

6,12

5,22

5,22

Credit CategoryPosition (B Rp) Growth (%) Share (%)

By Business type* a. micro b. small c. medium d. large (non-MSME)By Usage a. Working capital b. Investment c. Consumption

*) For 2010 and 2011 data, the criteria for credit based on business type were adjusted according to the MSME criteria stipulated in Act No. 20, 2008, on MSME.

The interest rates offered by rural banks have steadily declined over the past three years. Average rates in

2011 were 30.56% (credit), 5.21% (savings) and 10.25% (term deposits), which were above the average rates

offered by conventional commercial banks. This was due to high transaction costs, like marketing costs and credit

monitoring, as a result of the high volume of borrowers but with relatively small loans. Other factors that have

led to higher lending rates are the relatively high cost of funds and overheads.

27





Figure 1.20 Interest Rates

0

5

10

15

20

25

30

35

40

%

Jun

-200

8

Aug

-200

8

Oct

-200

8

Dec

-200

8

Feb

-200

9

Apr

-200

9

Jun

-200

9

Aug

-200

9

Oct

-200

9

Dec

-200

9

Feb

-201

0

Apr

-201

0

Jun

-201

0

Aug

-201

0

Oct

-201

0

Dec

-201

0

Feb

-201

1

Apr

-201

1

Jun

-201

1

Aug

-201

1

Oct

-201

1

Dec

-201

1

Savings Term Deposits Allocated Credit






MSME Credit

In January 2011, statistics for MSME credit acknowledged the definition of MSME pursuant to Act

No. 20/2008, which defines micro, small and medium enterprises as productive businesses based on their

assets and turnover (previously defined by the credit ceiling and included consumption loans). MSME credit

statistics present productive credit data for conventional commercial banks, conventional rural banks and

Islamic rural banks. However, during the transition phase MSME credit statistics are presented alongside

MSE credit data (based on credit ceiling) for comparison.

MSME credit growth in 2011 was supported by conducive economic conditions, reflected by the

realisation of Rp85.59 trillion in MSME loans and credit growth amounting to 21.71% (yoy) from Rp394.30

trillion in 2010 to Rp479.89 trillion in 2011. In comparison, when using data based on the credit ceiling, MSE

credit growth at the end of December 2011 equalled 23.93%, up from Rp961.71 to Rp1,191.86 trillion.

The contribution of MSME credit to total bank credit was 21.24%, while the portion of MSE credit to

total bank credit was 52.74%. The difference in the two values stems from the exclusion of consumption

credit in the MSME credit data pursuant to Act No. 20/2008. Based on segment, MSME credit is dominated

by medium enterprises (47.11%), while MSE credit is led by small loans (43.23%). By loan type, nearly all

MSME credit is allocated in the form of working capital credit, while MSE credit favours consumption loans.

By sector, most MSME credit is extended to the trade sector as well as the manufacturing industry, whereas

MSE credit (consumption and productive) seems to favour the trade sector and industry.

Based on bank groups, foreign exchange banks, state-owned banks and regional development banks all

extend MSME and MSE loans. Nevertheless, in December 2011 the respective market share of these three

types of bank underwent a change, where the share of foreign exchange banks and regional development

banks declined respectively from 38.09% and 13.01% to 36.87% and 6.53% and the share of state-owned

banks swelled from 34.87% to 46.40%. This serves as an indication that state-owned banks are favouring

productive MSME loans. Another type of bank that also experienced a slight increase in share of MSME

credit was rural banks, expanding from 3.40% to 4.53%.

Referring to the quality of credit, non-performing MSME loans in December 2011 were noted at 3.63%,

while the NPL ratio for MSE credit was even lower at 2.39%. This disparity was attributable to the exclusion

of consumption credit from MSME data. The highest non-performing MSME loan ratio was ascribed to small

businesses (4.89%). When compared to the position in December 2010 at 4.18% and 2.73% respectively, the

NPL ratios for MSME and MSE credit have improved.

Box 1.1 MSME Credit and Small Loans (KUR)


29





Small Loans (KUR)

The realisation of small loans allocated by 19 banks in 2011 exceeded the predetermined target of

Rp20 trillion by 145.02%, reaching Rp29 trillion in December 2011. Therefore, overall the total realisation

of small loans since the program was launched in 2007 is Rp63.42 trillion.

Figure 1.21 Realisation of Small Loans

2007

30,00

Trillion Rp

Realisation

Target

18,00 18,00 18,00 18,00

29,00

20,0017,23

20,00

10,00

25,00

15,00

5,00

0,00

20082009

20102011

11,48

4,730,98

The number of borrowers at the end of December 2011 totalled 5,722,470; up 1,909,912 on the

previous year. The average size of micro loans was Rp5.63 million per borrower, while the average retail

loan was Rp83.09 million. The trade sector dominated the allocation of small loans up to 2011 with 60.51%

of the total, while credit to priority sectors like agriculture, fisheries and the manufacturing industry only

accounted for 19.51%. Consequently, the Small Loans Policy Committee set a target of 25% loan allocation

to priority sectors.







The majority of small loans are concentrated on the island of Java, accounting for 51.81% of the total,

followed by Sumatera (22.04%), Sulawesi (9.88%), Kalimantan (9.18%), Bali NTT and NTB (4.44%) and Papua

Maluku (2.65%).

In terms of credit quality, the ratio of non-performing small loans in 2011 was 2.10%, which is lower

than that reported in 2010 at 2.31%. NPL data is sourced from small loan realisation reports submitted by

the banks to Bank Indonesia through the Monthly Commercial Bank Report (LBU). Banks also submit an NPL

report directly to the Small Loans Policy Committee (Coordinating Ministry for Economic Affairs). The NPL

position in December 2011 was equal to that reported in the monthly commercial bank report, however,

NPL according to the Coordinating Ministry for Economic Affairs in quarter I-2011 was slightly off. This was

primarily due to efforts by the affected banks to improve their small loan realisation data in their monthly

reports as a follow-up to the “KURLBU Clinics”intensively organised by Bank Indonesia. Looking ahead,

in order to maintain the accuracy of small loan data reported by banks in their monthly reports to Bank

Indonesia, each month Bank Indonesia will periodically monitor the data submitted in the monthly reports

and compare it to the figures released by the Coordinating Ministry for Economic Affairs. Meanwhile, the

non-performing guarantee (NPG), which is the ratio of claims paid against the small loans guaranteed by the

Deposit Insurance Corporation, was 3.20% in December 2011, down from 4.06% in the previous year. This

was principally due to new small loans allocated.

Figure 1.22 Small Loan Allocation by Economic Sector

Trade 60,51%

Agriculture15,87%

Fisheries 1,14%

Mining 0,07%

Industry 2,50%

Construction 1,95%

Electricity,Gas and Water 0,04%

Undefined 10,36%

Others 0,00%

Household Services 0,00%Social services 2,00%

Healthcare Services 0,19%

Education Services 0,03%

Financial Services 0,87%

Transportation 0,96%

Accommodation 0,50%

Government ADM 0,01%

Real Estate 2,94%


31





Figure 1.23 Non-Performing Loans (NPL) and Non-Performing Guarantee (NPG)

2010

7%

6%

5%

4%

3%

2%

1%

0%

NPG NPL (LBU) NPL (MENKO)

20111 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

2,10%

2,03%

2,74

%

2,93

%

2,90

%

3,26

%

3,42

%

3,30

%

3,46

%

3,54

%

3,15

%

3,20

%

3,93

%

3,61

%

3,53

%

3,50

%

3,45

%

3,40

%

3,28

%

3,34

%

3,30

%

3,24

%

3,24

%

3,20

%

3,14

%

4,06

%


This page is intentionally left blank

Chapter IIBanking Policy andRegulation in 2011


Banking Policy and Regulation in 2011

Foreword Table of Contents Bank Structure and Performance in 2011




35





Banking Policy Direction in 2011The direction of banking policy set by Bank Indonesia at the beginning of 2011 is the foundation upon which

to improve and strengthen Bank Indonesia regulations. The regulations aim to encourage the intermediation

function, enhance bank resilience and reinforce supervision and the macroprudential function. Regulations are

refined and amended as required for conventional commercial banks, Islamic banks and rural banks.

Conventional Commercial Banks

During 2011 Bank Indonesia implemented a number of policy measures that can be grouped into four

pillars, namely:

1. Policy to expand the bank intermediation function in order to boost the efficacy and transparency of intermediation, as well as broaden public access to financial services, especially the unbanked. Contained within this pillar is policy to ensure the transparent publication of prime lending rates as well as commitment to persevere with the financial inclusion program.

2. Policy to enhance bank resilience in order to safeguard bank soundness in the face of competition through more transparent management practices that refer to the principles of good governance. This policy includes an amendment to the calculation of capital to take better consideration of risk, requiring banks to apply an anti-fraud strategy, applying prudential principles when outsourcing and better risk management when serving prime customers.

3. Policy to strengthen the supervision function, which aims to improve the efficacy of banking supervision, primarily in terms of the quality of the early warning system. Therefore, regulations pertaining to the reports banks submit to Bank Indonesia were amended. Meanwhile, the introduction of a regulation on setting the supervision status of a bank and the necessary follow-up measures has imposed a time limit on each level of bank supervision status in order to enhance the effectiveness of problem bank resolution.

4. Measures to strengthen macroprudential policy. This policy aims to bolster financial system stability through the application of better macroprudential surveillance. This policy has included raising the minimum statutory reserve requirement for foreign exchange and linking the reserve requirement to the loan-to-deposit ratio.

Islamic Banks

Islamic banking regulations in 2011 continued to focus on harmonisation with conventional banking

regulations, as well as relaxing certain regulations while implementing Act No.21, 2008, on Islamic Banking,

which tasks Bank Indonesia as the regulator of the banking industry with preparing bank financing based on

sharia principles. Islamic banks are still considered an infant industry when compared to conventional banks

in terms of supporting the Indonesian economy. Nonetheless, the challenges as well as the strategies required

by the Islamic banking industry differ from those of conventional banks. The Islamic banking industry requires






support to find and train competent human resources in order to expedite Islamic banking development, reinforce

industry infrastructure and develop the market. Islamic banking policy also intends to enhance the quality of the

supervision system as well as strengthen capital and industry structure. In general, Islamic banking policy in 2011

consists of the following salient measures:

1. Ameliorating the quality of human resources

During 2011, a variety of training programs were organised by Bank Indonesia to raise the competence of human resources in the Islamic banking industry. The programs include, among others, consumer and retail banking training for Islamic commercial banks (BUS), sharia business units (UUS) and Islamic rural banks, training and certification of the Sharia Supervisory Board and training for Islamic bank supervisors. Training of teachers and lecturers across the archipelago was also conducted through a training-of-trainers (TOT) program in order to raise the understanding of teachers/lecturers regarding Islamic banking. In addition, Bank Indonesia hosted a link-and-match program between Islamic banks as the end user and educational institutions/universities as the suppliers of human resources in order to foster the availability of human resources suitable to the needs of the Islamic banking industry.

2. Enhancing the quality of the supervision system

A sound supervision system, achievable through refinements to supervision infrastructure, is required in order to strengthen bank supervision and raise the analytical proficiency of bank supervisors. To this end, the following was implemented in 2011: (i) refining the Islamic monthly bank report (LBUS) along with applying a new report structure; (ii) applying an early warning system for Islamic rural banks as an early detection instrument to help supervisors monitor the performance of Islamic rural banks; and (iii) implementing a panel system in the Islamic banking supervision system that aims to hone supervision quality (quality assurance) and hence boost the efficacy of supervision.

3. Strengthening Industry Infrastructure

Industry infrastructure is strengthened through the active contribution and involvement of Bank Indonesia in the International Islamic Liquidity Management (IILM) Corporation as a means to provide infrastructure for regional and global Islamic liquidity instruments. In addition, Bank Indonesia has collaborated with stakeholders in the Islamic banking industry through working groups and others to develop products in conjunction with the National Sharia Board and the IAI, as well as the futures market to launch sharia compliant commodities and supporting infrastructure to meet the liquidity requirement of the Islamic banking industry.

4. Strengthen Industry Capital and Structure

Policy to strengthen capital is implemented, among others, through a review to investigate the optimal level of Islamic rural bank capital to maintain sustainable business continuity looking ahead. In addition, Bank Indonesia also helps facilitate investors wishing to place their funds in the domestic Islamic banking industry. The Islamic banking industry is further reinforced through development synergy and integration for all Islamic business units in terms of their parent conventional bank as the most prolificowners of BUS and UUS.

5. Islamic banking market development

The market development program organised by Bank Indonesia in 2011 is a follow-up to the Market Development Strategic Plan (MDSP). The program includes: (i) broadening the service network and raising the quality of Islamic banking services. Bank Indonesia encourages cooperative synergy between

37





Islamic banks and their parent conventional banks through the development of an integrated strategy; (ii) conducting intensive socialisation activities and public education (iB Campaign) by Bank Indonesia through a variety of communication media, including print media, electronic, online and hosting other events; and (iii) encouraging Islamic banks to serve the corporate market segment and productive MSME sectors through a community-based approach consisting of business gathering and focus groups, among others, undertaken with entrepreneurs in the property sector, mining sector, franchise business and corporate issuers.

Rural Banks (BPR)

In order to reinforce the capital structure and supporting infrastructure of rural banks as well as raise the

quality of supervision and supervisor competence, a number of measures were introduced in 2011 relating to

policy direction as follows:

1. Launched a rural bank business model set of guidelines

The rural bank business model represents a part of Bank Indonesia policy to foster the establishment of rural banks that are sound, stable and can play a role in regional economic development. Meanwhile, for existing rural banks, the business model can serve as a reference for rural bank management practices and sound business operation.

2. Launched a set of guidelines for a Generic Model Apex bank

This book details desirable forms of cooperation between commercial banks and rural banks that aim to empower MSME, increase bank financing to MSME and narrow the competition among commercial banks and rural banks on the micro-finance market. Bank Indonesia maintains policy to establish and strengthen Apex institutions for rural banks in rural areas in order to support rural banking industry development. The function of an Apex bank is to pool funds as well as provide financial and technical assistance, for which a commercial bank with a head office or branch office in the local area is expected to fulfil the role. Policy to develop Apex banks is congruent with another Bank Indonesia policy to recognise regional banks as Regional Champions (BRC), one indicator of which is the function played by a regional bank as an Apex bank. The Generic Model Apex book was launched to provide a set of guidelines for commercial banks that are interested in becoming Apex banks and also for rural banks that become members of an Apex institution. The book comes in two broad sections, namely the operation of an Apex bank and a mechanism to set up an Apex bank.

3. Reviewed paid-up capital and the division of operational areas for rural banks

A review was performed in order to evaluate the prevailing requirements for paid-up capital, bearing in mind that the current requirements were put in place in 2004. Notwithstanding, current economic conditions have evolved dramatically compared to those in 2004. This will have an impact on changes in revenue and the prices of goods and services, including the funding requirement of rural banks. On the other hand, competition among financial institutions has also increased, thereby bringing to the fore the importance of strengthening rural bank capital as micro-finance institutions.

4. Launched a pocket book and revised the technical guidelines for rural bank inspections

The publication of this book aims to improve the quality of rural banking supervision and supervisor competence. It constitutes a revision to the previous guidelines and can be used as a basic reference for the inspection of rural banks.






In terms of MSME development, Bank Indonesia also supports research and training and facilitates MSME

development through policy and strategy to ‘broaden MSME access to banks’ and strategy to ‘encourage banks

to finance MSME’. This policy aims to raise the eligibility and capability of MSME to meet the banks’ requirements

(bankable), while concomitantly boosting economic capacity in the local environs. In addition, to encourage

banks to become more accessible to MSME, Bank Indonesia furnishes the banks with incentives to allocate

credit to the MSME sector through the promulgation of banking regulations and the provision of supporting

infrastructure.

Banking Regulation in 2011Conventional Commercial Banks

Conventional commercial banks play an essential role in the financial sector considering their large asset

capitalisation. Accordingly, Bank Indonesia issued regulations to expand the intermediation function and boost

efficiency, especially at conventional commercial banks, in order to support economic growth and catalyse the

real sector as follows:

• Bank Indonesia Circular No.13/5/DPNP, dated 8th February 2011 regarding the transparent publication of prime lending rates

The objectives of this circular were to: (i) promote transparent bank product characteristics including explaining the benefits, costs and risks involved to the customer; and (ii) endorse good governance and nurture healthy competition in the banking industry through improved market discipline.

Meanwhile, Bank Indonesia promulgated an array of regulations to enhance customer protection as

follows:

1. Bank Indonesia Circular No.13/28/DPNP, dated 9th December 2011, on the application of an anti-fraud strategy for commercial banks

The background to this regulation is as follows:

a. To strengthen the internal controlat a bank and as a follow-up to Bank Indonesia Regulation No.5//8/PBI/2003, dated 19th May 2003, concerning the application of risk management by commercial banks.

b. To disclose the variety of fraud cases in the banking sector that are detrimental to customers and/or the bank.

c. To guide banks towards controlling fraud through efforts not only focused on prevention but also detecting and investigating cases of fraud as well as improving the system as part of an integral strategy to control fraud.

2. Bank Indonesia Circular No.13/29/DPNP, dated 9th December 2011, on the application of risk management by commercial banks serving prime customers


a. The ever-increasing innovation in banking services to provide products and/or activities suitable to the needs of the banks’ customers, among others, the proliferation of prime customer services offered to certain customers.

b. Potential risk stemming from prime customer services, principally involving operational risk, legal risk and reputation risk.

39





Therefore, Bank Indonesia requires banks to prepare a written policy covering: (i) prime customer requirements; (ii) the scope of bank products and/or activities; (iii) the scope of privileges enjoyed by prime customers; and (iv) the name of the service and group of prime customers.

3. Bank Indonesia Regulation No.13/25/PBI2011, dated 9th December 2011, concerning prudential principles for outsourcing by commercial banks

The goal of this regulation is as follows:

a. To ensure banks concentrate on their core business and optimise their function as an intermediation institution in line with the increasing complexity and variety of business activities in the face of rapid development in the business community and tight competition from other financial institutions.

b. To ensure banks apply prudential principles and risk management when outsourcing, thereby minimising the risks that may emerge.

c. To clarify who is responsible for what in the event of outsourcing and to ensure customer protection.

Furthermore, in a bid to enhance the bank supervision function in order to maintain national banking system

stability, Bank Indonesia also refined the banking supervisory framework with the following regulations issued

in 2011:

1. Bank Indonesia Regulation No.13/1/PBI/2011, dated 5th January 2011, on assessing the soundness level of a bank


a. Changes in business complexity and the risk profile, the application of consolidated supervision and a change in the approach to assess a bank’s conditions implemented internationally that affect the soundness level of a bank.

b. The assessment of bank soundness was refined to incorporate a risk-based approach in order to boost the efficacy and accuracy of assessing a bank’s level of soundness in the face of the changes mentioned in point a.

2. Bank Indonesia Regulation No.13/3/PBI/2011, dated 17th January 2011, on setting bank supervision status and determining follow-up supervisory actions

This regulation reemphasises the criteria for intensive bank supervision based on measurable criteria like financial conditions (capital, liquidity and non-performing loans) as well as other aspects including the level of soundness and risk profile. Bank Indonesia also imposed a time limit on each status of bank supervision in order to expedite the resolution of problem banks and create financial system stability, requiring concrete measures from the owners and shareholders to resolve the outstanding issues. Failure to do so will result in a further downgraded supervision status if the time limit is overrun or if conditions at the bank deteriorate

further.

In 2010, Bank Indonesia also amended a number of regulations as follows:

1. Bank Indonesia Regulation No.13/2/PBI/2011, dated 12th January 2011, on implementation of the compliance function at commercial banks

The most salient features of this regulation are as follows:

a. The compliance function is part of the risk-management framework and uses compliance risk management through coordination among related work units.

b. Implementation of the compliance function emphasises an active role to be played by all elements of






the organisation from the compliance officer, to the head of the compliance unit and the compliance work unit in order to manage compliance risk.

c. Promote a culture of compliance in order to manage compliance risk.

d. Independent organisational elements of the compliance function to boost the effectiveness of task implementation and to avoid potential conflicts of interest.

2. Bank Indonesia Regulation No.13/10/PBI/2011, dated 9th February 2011, which is an amendment to Bank Indonesia Regulation No.12/19/PBI/2010 on the reserve requirement for commercial banks in rupiah and foreign exchange

The background and objective of this regulation are as follows:

a. The deluge of foreign capital inflows triggered an abundance of bank liquidity in the form of foreign exchange. This inundation of foreign capital was short term in nature and led to excess liquidity with the potential to spark exchange rate instability and disrupt macroeconomic stability.

b. Therefore, the management of foreign exchange liquidity by banks required strengthening together with better management of foreign capital flows by Bank Indonesia through policy to raise the statutory reserve requirementfor foreign exchange as follows:

1) From 1st March 2011 until 31st May 2011, the reserve requirement was set at 5% of deposits denominated in a foreign currency.

2) From 1st June 2011, the reserve requirement is set at 8% of deposits denominated in a foreign currency.

3. Bank Indonesia Circular No.13/6/DPNP, dated 18th February 2011, concerning the calculation of risk-weighted assets to ascertain credit risk using the standard approach

This circular was issued to improve regulations relating to the calculation of risk-weighted assets in order to ensure that the statutory reserve requirement better reflects the risks faced by a bank, which is also in accord with international standards.

4. Bank Indonesia Circular No.13/8/DPNP, dated 28th March 2011, concerning fit and proper tests

This circular forms part of Bank Indonesia Regulation No.12/23/PBI/2010 on fit and proper tests issued on 29th December 2010.

The promulgation of this circular supersedes Bank Indonesia Circular No.6/15/DPNP, dated 31st March 2004, which was rescinded and is no longer effective.

5. Bank Indonesia Regulation No.13/19/PBI/2011, dated 22nd September 2011, which is an amendment to Bank Indonesia Regulation No.8/12/PBI/2006 on the periodic reports of commercial banks

The background behind this regulation is as follows:

a. The need to expedite the delivery time of various reports contained within the periodic reports of commercial banks in order to optimise the usefulness of other reports that have already been streamlined.

b. The need to refine the report format of the weekly balance sheet position and maturity profile.

c. The need for additional new reports, like: (i) the calculation of risk-weighted assets to determine credit risk based on the standard approach; and (ii) the publication of prime lending rates.

d. The need to refine a number of rules in the regulations for commercial bank reports in order to align them with other regulations concerning reports.

41





6. Bank Indonesia Circular No.13/23/DPNP, dated 25th October 2011, which amends Circular No.5/21/DPNP on the application of risk management by commercial banks

The scope of this regulation covers the following:

a. A change in the risk rating from three to five.

b. The inclusion of the risk profile in the assessment of bank soundness utilising a risk-based bank rating.

c. The requirement for banks to assess their consolidated risk profile.

7. Bank Indonesia Circular No.13/26/DPNP, dated 30th November, which amends Bank Indonesia Circular No.18/8/DPNP, dated 28th March 2011, regarding fit and proper tests

The aim of this regulation is to refine the implementation of fit and proper tests based on Bank Indonesia Regulation No. 12/23/PBI, dated 29th December 2011, in order to create good governance in the banking sector.

8. Bank Indonesia Regulation No.13/27/PBI/2011, 28th December 2011, which amends Bank Indonesia Regulation No.11/1/PBI/2009 on commercial banks

This regulation intends to enhance good corporate governance, including the application of risk management, expand the role of banks to become more accountable in their submission of information to Bank Indonesia as well as harmonise with Bank Indonesia Regulation No.12/23/PBI/2010 on fit and proper tests and Bank Indonesia Regulation No.13/2/PBI/2011 on the compliance function of commercial banks.

9. Bank Indonesia Circular No.13/30/DPNP, dated 16th December 2011, which is the third amendment to Bank Indonesia Circular No.3/30/DPNP, dated 14th December 2001, regarding the quarterly and monthly financial statements of commercial banks as well as other certain reports submitted to Bank Indonesia

The objective of this regulation is to synchronise Bank Indonesia regulations with accountancy standards prevailing in Indonesia, which themselves are already in line with International Financial Reporting Standards (IFRS).

10. Bank Indonesia Circular No.13/31/DPNP, dated 22nd December 2011, on rating agencies and ratings recognised by Bank Indonesia

This circular relates to the implementation of Bank Indonesia regulations that gauge the use of ratings for bank exposure, for instance asset quality, and regulations concerning guidelines on the standard method to calculate the capital adequacy of commercial banks incorporating market risk as well as guidelines on the calculation of risk-weighted assets for credit risk using the standard approach.

Due to prevailing circumstances, a regulation was necessary to cover the variety of refinements, among others, additional assessment criteria for the inclusion on Bank Indonesia’s list of approved rating agencies, a mechanism to strike rating agencies off the list and a mechanism to publish the list.

Islamic Banks

The Islamic banking supervision system is geared towards meeting international supervisory standards in

the form of effective regulations that are increasingly compatible with international standards, supported by

a comprehensive supervisory infrastructure and efficient mechanism. The regulations compiled and refined in

2011 are as follows:

1. Bank Indonesia Regulation No.13/5/PBI/2011, dated 24th January 2011, regarding the maximum fund allocation limit for Islamic rural banks with the technical details contained within Bank Indonesia Circular






No.13/17/DPbS, dated 30th May 2011

The goal of this regulation is to expand the application of prudential principles in the allocation of funds, achieved by broadening the portfolio, thereby avoiding a concentration of risk on individual customers or certain groups of customer.

In the implementation of this regulation, Bank Indonesia Decree No. 31/61/KEP/DIR, dated 9th July 1998, is revoked and therefore no longer applicable to Islamic rural banks.

2. Bank Indonesia Regulation No.13/6/PBI/2011, dated 24th January 2011, on follow-up actions for Islamic rural banks under special surveillance with the details stipulated in Bank Indonesia Circular No.13/2/DPbS/, dated 31st January 2011

The objective of this regulation is to nurture public confidence in the Islamic rural banking industry. To this end, efforts are required to restore Islamic rural banks with systematic and ongoing problems in order to foster sound industry growth.

This regulation supersedes Bank Indonesia Regulation No.7/34/PBI/2005on follow-up actions for Islamic rural banks under special surveillance and is therefore no longer applicable to Islamic rural banks. Meanwhile, implementation of this regulation remains valid as long as it is consistent with the rules stipulated therein.

3. Bank Indonesia Regulation No.13/9/PBI/2011, dated 8th February 2011, on financing restructuring for Islamic banks and sharia business units with the technical details found in Bank Indonesia Circular No.13/16/DPbS, dated 30th May 2011 for Islamic rural banks and Circular No.13/18/DPbS, also dated 30th May 2011 for Islamic banks and sharia business units

The aim of this regulation is to maintain business continuity and financing quality as well as minimise the risk of loss. Islamic banks and sharia business units are required to maintain financing quality, possibly through financing restructuring for customers with prospective businesses and/or repayment capacity.

This regulation amends Bank Indonesia Regulation No. 10/18/PBI/2008 on financing restructuring for Islamic banks and sharia business units as well as Bank Indonesia Circular No. 10/35/DPbS, dated 22nd October 2011.

4. Bank Indonesia Regulation No.13/13/PBI/2011, dated 24th March 2011, on the assessment of asset quality at Islamic banks and sharia business units with the technical details contained within Bank Indonesia Circular No.13/10/DPbS, dated 31st January 2011

The objective of this regulation is to apply risk management that allows Islamic banks and sharia business units to absorb potential expected losses. The stipulations relating to financing quality in this regulation have changed little form the previous regulation, with the exception of mudharabahfinancing due to the possibility of no principal instalments; therefore, the quality classification of mudharabahand musyrarakah will be separated into those with principal instalments and those without.

This regulation supersedes Bank Indonesia Regulation No.8/21/PBI/2006 on the assessment of asset quality at commercial banks that conduct their business activity based on Islamic principles and amends Bank Indonesia Regulation No.9/9/PBI/2007 and Bank Indonesia Regulation No.10/24/PBI/2008, which it self amends Bank Indonesia Regulation No.8/21/PBI/2006 on assessing the asset quality of commercial banks that conduct their business activity based on Islamic principles.

5. Bank Indonesia Regulation No.13/14/PBI/2011, dated 24th March, on the assessment of asset quality at Islamic rural banks and implemented through Bank Indonesia Circular No.13/11/DPbS, dated 13th April 2012

The objective of this regulation is to apply risk management that allows Islamic rural banks to absorb potential

43





expected losses. The stipulations relating to financing quality in this regulation have changed little form the previous regulation, with the exception of mudharabah financing due to the possibility of no principal instalments; therefore, the quality classification of mudharabah and musyrarakah will be separated into those with principal instalments and those without. An additional clause in this regulation states that in the event two or more parameters in the assessment return varying degrees of quality for an account then the lowest quality level is the one used.

This regulation revokes Bank Indonesia Regulation No.8/24/PBI/2006 on the assessment of asset quality at rural banks based on Islamic principles.

6. Bank Indonesia Regulation No.13/23/PBI/2011, dated 2nd November 2011 on the application of risk management by Islamic banks and sharia business units

This regulation is designed to accommodate the business characteristics of Islamic banks (BUS) and sharia business units (UUS), which differ somewhat from conventional banks, and also to meet Article 38 of Act No.21, 2008, on Islamic Banking. The application of risk management at Islamic banks and sharia business units is aligned with the aims, business policies, scale and business complexity as well as capability of the respective Islamic bank or sharia business unit.

With the introduction of this regulation, Bank Indonesia Regulation No.5/8/PBI/2003 on the application of risk management at commercial banks, and Bank Indonesia Regulation No.11/25/PBI/2009, which amends Bank Indonesia Regulation No.5/8/PBI/2003 on the application of risk management at commercial banks, are no longer applicable to Islamic banks or sharia business units.

7. Bank Indonesia Circular No.13/15/DPbS, dated 30th May 2011, on the monthly reports of Islamic rural banks

The purpose of this regulation is to align with the new regulation, for instance the definition of MSME as stipulated in Act No.20, 2008, align the criteria for economic sectors and provide additional information and report formats.

This regulation revokes Bank Indonesia Circular No.7/13/DPbS, dated 11th April 2005, and Bank Indonesia Circular No.9/17/DPbS, dated 8th August 2007, which amends Circualr No.7/13/DPbS concerning the monthly reports of Islamic rural banks.

Rural Banks (BPR)

Regulations are required to support rural banks and ensure that credit allocated to micro, small and medium

enterprises adheres to prudential principles, thereby expanding the role rural banks play in supporting MSME

development. To this end, Bank Indonesia issued the following regulations in 2011 pertaining to rural banks:

1. Bank Indonesia Regulation No.13/26/PBI/2011, dated 28th December 2011, which amends Bank Indonesia Regulation No.8/19/PBI/2006 on earning asset quality and loan loss provisions

This regulation, among others, requires rural banks to put in place policy guidelines and lending procedures that aim to enhance adherence to prudential principles in terms of stimulating MSME development in order to maintain credit quality to the MSME sector.

This regulation is congruous with prevailing Financial Accountancy Standards for Non-Public Entities (SAK-ETAP) and the BPR Accountancy Guidelines (PA BPR).

This regulation is an amendment to Bank Indonesia Regulation No.8/19/2006on earning asset quality and loan loss provisions for rural banks.






2. Bank Indonesia Circular No.13/14/DKBU/2011 on the prevention of money laundering and the fundingof terrorism for (Islamic) rural banks

This regulation aims to prevent occurrences of money laundering and funding terrorism through rural banks and forms part of the risk management strategy for rural banks. The circular refers to the international standards recommended by the Financial Action Task Force (FATF) on Money Laundering, which represent the minimum standards that must be met by (Islamic) rural banks when formulating their own implementation guidelines to prevent money laundering and the funding of terrorism, as well as an assessment mechanism for the implementation of such a program.

MSME Policy

Micro, small and medium enterprises (MSME) play a critical role in the growth and development of the

national economy. Hitherto, however, MSME continue to confront a number of challenges, like asymmetric

information between MSME and the banking sector. Asymmetric information can be observed from two sides,

namely demand and supply. Demand-side constraints include MSME limitations in terms of submitting adequate

and transparent financial information, which leads to difficulties for the lender in obtaining comprehensive

information about the financial condition and business activity of the respective MSME. Meanwhile, the supply-

side constraints include bank reluctance to extend loans to the MSME sector due to a lack of information on

MSME, limited collateral and the absence of a loan guarantor.

Consequently, Bank Indonesia promulgated a number of regulations to overcome the challenges mentioned,

among others, through research-based policy to stimulate MSME development and accelerate credit allocation

to the MSME sector. The following research was conducted in 2011, among others:

1. Research on the lending model of small businesses through conventional or Islamic practicesforpotentially fundable commodities in order to catalyse MSME development. The research material was expanded in 2011 to include aspects of marketing. Conventional lending model research focused on six commodities/business types, namely cultivating soft-shell crabs, crackers made from catfish skin, ready-to-eat prawn and fish crackers, potato cultivation, oyster mushroom cultivation and alkali treated carrageenan chips from seaweed. Meanwhile, lending model research based on an Islamic model focused more on oil palm commodities and auto repair businesses.

2. Bank Indonesia conducted research on a number of leading commodities, products and business types as well as research into leading regional sectors as well as MSME development in remote borderland areas in order to provide comprehensive information to relevant stakeholders concerning leading and potential products in specific areas/provinces, to provide inputs regarding leading regional sectors and develop potential economies and MSME in borderland areas left behind by development.

3. Research entitled ‘Seeking Effective Financing for the Agricultural Sector’ was conducted in conjunction with the University of Indonesia’s Faculty of Economics. The research includes a case study of credit allocation programs, namely the Food and Energy Credit program (KKPE) and credit for bovine husbandry (KUPS). The research revealed the following information: (i) the factors that affect the credit allocation programs; (ii) the suitability of credit schemes; (ii) the positioning of credit schemes with other financing programs; and (iv) the ideal funding scheme for the agricultural sector.

4. Research entitled ‘mapping and identifying the capacity building needs of microfinance institutions in West Java’ aims to illustrate the latest conditions and performance of microfinance institutions that can be used

45





in future policymaking for microfinance institutions.

5. A review on the social impact of rural banking service innovation as part of the Microfinance for Decent Work program, in conjunction with the ILO, which was followed-up by family financial education to ensure better financial management in order to raise the borrowers’ level of wellbeing and the quality of rural bank

loans in general.

Other activities performed by Bank Indonesia include training and providing technical assistance, which

aims to improve the eligibility and capability of MSME, as well as expand bank expertise on MSME. Some of the

more salient efforts undertaken in 2011 include the following:

1. Training provided to the banks and the banks’ partner financial consultants (KKMB).

Bank Indonesia provided technical assistance covering credit risk management to the commissioners, directors and operational managers of small-scale rural banks (total assets of less than Rp 5 billion) in the Jabodetabek region. A total of 58 rural banks participated in this training during 2011.

2. Real sector and MSME development through national and regional cluster development programs.

The national cluster development program involves two commodities that contribute plentifully to inflation, namely cayenne chilli peppers and shallots. Meanwhile, regional clusters tend to focus on industry (embroidered textiles, convection and embroidered bags) and wide-ranging agricultural activities (seaweed, rice, chilli peppers, mushrooms, maize, cocoa, coffee, catfish, cattle and others). Technical assistance, on the other hand, is provided through socialisation activities, focus group discussions, training in good agricultural practices, training of trainers, expositions, bank intermediation bazaars, comparative studies as well as

facilitating partnerships and strengthening groupings.

In addition, Bank Indonesia provides updated information through the INFOUMKM section on the official

Bank Indonesia website (www.bi.go.id) launched on 17th August 2011 to replace the DIBI menu. The official

website is a means by which to disseminate information on MSME characteristics to the banking community

and other external parties. INFOUMKM provides information, among others, on potential MSME commodities

in specific areas, the financing structure of leading commodities, the development structure of MSME clusters,

government credit schemes, financial business consultants, testimonials and the business profiles of feasible

micro, small and medium enterprises. Another activity organised by Bank Indonesia in 2011 was a ‘rural bank

market assault’, consisting of road shows in centres of MSME economic activity, which aim to encourage rural

banks to actively socialise their presence and products in centres of MSME activity.

Meanwhile, Bank Indonesia strategy to encourage the banking sector to finance micro, small and medium

enterprises was achieved through bank incentives. Strategy is implemented through the establishment of new

supporting institutions and/or strengthening existing ones as follows:

a. Expediting the establishment of regional credit guarantee companies (PPKD) through active participation in the socialisation of PMK No.99/PMK.010/2011, which amends PMK No.222/PMK.010/2008 on credit guarantee companies and credit refinancing companies, coordinated by the Capital Market and Financial Institution Supervisory Board of the Ministry of Finance, the Coordinating Ministry for Economic Affairs, the Ministry of Cooperatives and SME, and the Ministry of Home Affairs.

b. Planning the implementation of credit ratings for MSME in preparation for the inauguration of the ASEAN Economic Community in 2015 as a multiyear project that began in 2010. The trial phase commenced in 2011.






Bank Indonesia Coordination and Participation with its Stakeholders

A. Coordination with the Real Sector

Bank Indonesia has and continues to coordinate with a variety of third parties as well as playing an active

role in the programs and activities organised by related institutions in order to enhance the effectiveness of Bank

Indonesia policy in general and the banking sector in particular, as well as to encourage the implementation

of programs organised by other institutions that promote domestic economic growth. Referring to the real

sector, Bank Indonesia conducts two types of activity, namely monitoring potential sources of financial system

vulnerability stemming from the real sector and advancing the bank intermediation function.

In 2011, discussions were held with a number of business associations like the textiles association, automotive

and spare parts, rubber, sugar, machinery, footwear, food and beverages, as well as electronics. In broad terms,

the topics discussed with the different business associations covered the following:

a. A meeting with Gaikindo (The association of Indonesia Automotive Industries), the automotive association, the automotive spare parts association and the association of exporters subsequent to the tsunami and nuclear reactor leak in Fukushima in March 2011 in order to monitor the performance of the automotive sector, heavy machinery and components of machinery in Indonesia due to close linkages with the Japanese spare parts industry as well as raw materials from Japan. In addition, Japan is one of five main export destinations from Indonesia, therefore the impact on Indonesian export sustainability requires close monitoring.

b. A meeting with the associations for food and beverages, the electronics sector and retail sector in order to assess the impact of food price hikes on household and corporate credit risk.

A meeting was also organised between entrepreneurs and the banking sector, including relevant ministries/

technical agencies, in order to expand bank intermediation. The activities included a workshop themed with

financing fishing, at which the prospects of the fishing industry were explained along with an introduction to a

new financing scheme offered to fishermen using their insured fishing vessels as collateral.

B. Coordination and the Active Participation in Credit Allocation Programs

Bank Indonesia participates in facilitating the expansion of small loans (KUR) pursuant to Presidential

Instruction No.3, 2010, which stipulates that the governor/regent/mayor must coordinate with their local

Bank Indonesia office when planning to expand the allocation of small loans. In addition, as a follow-up to the

memorandum of understanding between the Governor of Bank Indonesia and the Minister for Agriculture,

signed on 16th March 2011, Bank Indonesia is tasked with expediting credit allocation programs (food and energy

(KKPE), bovine husbandry (KUPS) as well as bioenergy development and plantation revitalisation (KPEN RP))

through a number of activities like socialisation, research, evaluation and monitoring of the credit programs.

Bank Indonesia also cooperates with the Ministry of Marine Affairs and Fisheries in order to enhance

synergy in the Minapolitan Program. Minapolitan is a concept of marine and fisheries development based on

a regional management approach to promote the maritime and fisheries sector while adhering to principles of

integration, efficiency and acceleration. The goal of the program is to raise fish production, productivity and the

quality of fish products, while boosting the income of fishermen and related entrepreneurs as well as developing

47





integrated Minapolitan production centres as the hubs of regional economic growth. Collaboration will continue

with the implementation of a pilot project to finance fishing in the area of Jabodetabek.

Furthermore, Bank Indonesia closely cooperated with the Government to strengthen the efficacy of Bank

Indonesia policy and foster MSME development as follows:

1. As a counterparty of the Credit/Financing Guarantee Policy Committee for micro, small and medium enterprises and cooperatives in order to communicate and expand the allocation of small loans (KUR). The role of Bank Indonesia is to encourage the government at the local level to actively compile a plan, conduct monitoring activities and evaluate the allocation of small business loans through a variety of fora. In addition, Presidential Instruction No.3, 2010, on equitable development legally paved the way for Bank Indonesia in local communities.

2. Strengthen coordination and facilitate joint programs with the government in order to catalyse real sector development as follows:

a. Development of a trading house. Bank Indonesia intermediates between the banking sector, the trading house and suppliers.

b. Optimisation of warehousing receipts, namely the planned promulgation of regulations as well as encouraging the government to set up production facilities and socialise the new regulations.

c. Compilation of a credit scheme, among others: (i) a housing credit scheme in conjunction with the Ministry of Public Housing; and (ii) a credit scheme coupled with technical assistance to develop credit in the fisheries sector in conjunction with the Ministry of Marine Affairs and Fisheries.

d. Optimisation of the One Village One Product (OVOP) program. Bank Indonesia provides technical assistance as a facilitator between banks and the respective clusters.

3. Research an ideal lending model for marine and fish products in conjunction with the Ministry of Marine Affairs and Fisheries.

4. Join the Credit Program Evaluation and Monitoring Team, for which Bank Indonesia will monitor and evaluate credit programs.

C. Coordination with the Deposit Insurance Corporation (DIC)

Bank Indonesia issued policy supported by the optimisation of coordination and cooperation with related

institutions and agencies in order to enhance bank resilience and maintain financial system stability. One form of

commitment that has emerged from the ongoing cooperation between Bank Indonesia and the Deposit Insurance

Corporation is a joint set of implementation guidelines, (JukLak) No.13/3/KEP.DpG/2011 and No.KEP.011/KE/

I/2011, on coordination and information exchange to support the effective implementation of BI and DIC tasks,

signed on 26th January 2011.

The JukLak is a follow-up measure to cooperation set forth in the Joint Decree by the Governor of Bank

Indonesia and Board of Commissioners of the Deposit Insurance Corporation No.11/55/KEP.GBI/2009 and

No.KEP.026/DK/X/2009 regarding coordination as well as data and information exchange in order to support

the efficacy of task implementation at Bank Indonesia and the Deposit Insurance Corporation. The scope of

coordination and cooperation detailed in the joint decree is briefly as follows:

1. Coordination in the implementation of deposit insurance, consisting of institutionally updating the banks,






jointly socialising the regulations relating to deposit insurance, follow-up monitoring of bank liabilities, as well as determining an ideal interest rate in order to pay out insurance claims.

2. Coordination concerning the handling of troubled banks, which involves the coordinated submission of bank data as well as joint inspections/examinations by Bank Indonesia and the Deposit Insurance Corporation for banks under special surveillance.

3. Coordination relating to the resolution and/or handling of bank defaults, which is split into three categories as follows: (i) the resolution of bank defaults without systemic impact; (ii) the handing over of bank defaults without systemic impact; and (iii) the resolution of bank defaults with systemic impact.

4. Coordination relating to follow-up actions for a bank that has had its business license revoked, which covers information, banking regulation for reconciliation and verification, preparation of the balance sheet for bank closures, a mechanism to handle allegations of banking crime, as well as international requests to prevent a bank that has had its business license revoked from operating abroad.

5. The handling of other tasks, like cooperation when exchanging data and information using information technology, including data and information encryption.

D. Coordination and Cooperation with the Indonesian Financial Transaction Reports and Analysis Centre (PPATK)

The goal of the agreement is to determine preventative efforts and measures towards the eradication

of money laundering andfunding of terrorism in terms of linkages between the tasks and authority of Bank

Indonesiain the monetary sector, banking sector and payment system, including internal control, and the tasks

and authority of the Indonesian Financial Transaction Reports and Analysis Centre with an aim to prevent and

eradicate money laundering and the funding of terrorism. Cooperation between Bank Indonesia and PPATK in

terms of their respective tasks and authority is conducted in the form of exchanging legal data and information,

formulating legal requirements, implementing audits, socialisation activities, education and training, assigning

Bank Indonesia staff to work at PPATK, research and the development of an information technology system.

E. Coordination and Cooperation with Law Enforcement

In its task implementation as bank supervisor, Bank Indonesia can uncover allegations of criminal activity in

the banking sector (tipibank). Notwithstanding, Bank Indonesia does not have the authority to undertakecriminal

investigations; therefore, the handling of alleged criminal activity in the banking sector is coordinated between

Bank Indonesia, the police department and the judiciary. To this end, the governor of Bank Indonesia, the

head of the police department and the attorney general signed three memorandums of understanding on 19th

December 2011 between Bank Indonesia, the National Police Department and the Attorney General (No.13/104/

KEP.GBI/2011, No.B/31/XII/2011 and No.Kep-261/A/ JA/12/2011) regarding the coordinated handling of criminal

activity in the banking sector, which amends the jointdecrees of the attorney general, the head of the police

department and the governor of Bank Indonesia, No.KEP-902/A/J.A/12/2004; No.POL:SKep/924/XII/2004;

No.6/91/KEP.GBI/2004, dated 20th December 2004, concerning the joint handling of criminal activity in the

banking sector.

49





Bank Indonesia also played a role in combatting alleged illegal public fund accumulation. Bank Indonesia

fulfils this role by coordinating with a number of related agencies through the task force for handling alleged

illegal activity when accumulating public funds and managing investment (the Investment Watchdog). Members

of the task force consist of representatives from the Capital Market and Financial Institution Supervisory Board

(BAPEPAM-LK), Bank Indonesia, the Commodity Futures Trading Regulatory Agency (CoFTRA), the Indonesian

Financial Transaction Reports and Analysis Centre (PPATK), the Ministry of Cooperatives and SME, the Directorate

General of Domestic Trade, the Criminal Investigation Unit of the National Police Department and the Attorney

General. Task force activity includes joint inspections and coordinated handling to end illegal activities as well as

public socialization activity and others. In 2011, Bank Indonesia contributed by conducting special inspections

and investigations into a number of bank accounts allegedly used for investment management purposes in the

form of unlicensed futures trading by three agents located in Palembang. Results of the inspections were used

for follow up by the Commodity Futures Trading Regulatory Agency (CoFTRA) as the agency responsible for

regulating, supervising and licensing futures trading.

The handling of criminal activity in the banking sector also requires close coordination with the Deposit

Insurance Corporation for banks that have had their license revoked. Coordination refers to joint decrees

between the governor of Bank Indonesia and the chairman of the Deposit Insurance Corporation: No.11/55/

KEP.GBI/2009 and No.KEP.026/DK/X/2009 regarding coordination and information exchange to support effective

task implementation at Bank Indonesia and the Deposit Insurance Corporation. The implementation guidelines

are contained within No.13/3//KEP.DpG/2011 and No.KEP.011/KE/I/2011 on coordination and information

exchange to support effective task implementation at Bank Indonesia and the Deposit Insurance Corporation

as well as agreements between Bank Indonesia and the Deposit Insurance Corporation No.14/1/KEP.DpG/2012

and No.KEP.001/KE/I//2012, dated 4th January 2012 regarding a mechanism to handle allegations of criminal

behaviour in the banking sector for banks with their licenses revoked. In 2011, in reference to this mechanism,

Bank Indonesia reported one commercial bank and four rural banks that had their licenses revoked to the

appropriate legal authorities.

Meanwhile, to raise the efficacy of corruption eradication, in particular that which uses banks as a means

or target for corruption, Bank Indonesia coordinates with the Corruption Eradication Commission (KPK) pursuant

to two memorandums of understanding, No.8/1/BI/DHk/NK and No.031/KPK-BI/XII/2006, dated 8th December

2011, between Bank Indonesia and the Corruption Eradication Commission regarding coordination to eradicate

corruption and the respective implementation guidelines. The scope of coordination covers reviewing integrated

customer data, information exchange and consultation assistance, personnel assistance, training and socialisation

activities as well as a liaison officer.

F. Supervisory Coordination and Cooperation Across Borders

An increasingly integrated global financial system and the availability of innovative financial instruments

have escalated the risks faced in the banking sector. This requires a commensurate increase in financial

system supervision quality that not only focuses on domestic financial institutions (local) but also the quality

of consolidated supervision of banks operating internationally. Experience from the global crisis in 2008/2009






provided a number of invaluable lessons for banking supervisory authorities around the world. The required

response not only relates to improving bank capital as a solid foundation for creating a more stable financial

system but the importance has also been acknowledged of raising the quality of financial system supervision at

the local level by host supervisors and at the consolidated level by home supervisors.

Home-host supervisors are not merely required to understand institutional conditions at the group level

(consolidated)1 but also to comprehend conditions at the local level2 to ensure that home-host supervisors can

identify and overcome the main risks faced by the financial institutions. This clearly requires a close coordination

process between the host and home supervisors. Hitherto, coordination has been recommended by international

organisations like G20, FSB and BCBS, among others, in the form of information exchange and dialogue. In

practice, information exchange and dialogue among authorities is formalised and documented in memorandums

of understanding containing a mechanism to exchange information, a mechanism for inter-authority consultation

and dialogue as well as other forms of interaction that support the supervision function. In harmony with global

developments as well as the growing share of foreign ownership in Indonesia’s banking sector, Bank Indonesia

signed memorandums of understanding in 2010 with Bank Negara Malaysia, the China Banking Regulatory

Commission and the Monetary Authority of Singapore. Such measures will be continued through the penning

of further memorandums of understanding with bank supervisors in other countries, especially those with

exposure in Indonesia. Two arrangements that have been agreed upon in substance and which are expected

to be finalised shortly areMoU with the Korean Financial Services Commission and the Australian Prudential

Regulatory Authority. The signing of MoU between Bank Indonesia and other supervisory authorities overseas

is a form of Bank Indonesia commitment as a member of international fora to continuously strive to raise the

level of compliance to international standards and one concrete follow-up measure from the Financial Sector

Assessment Program (FSAP) implemented in 2009/2010.

In the implementation phase of the MoU already signed, a number of high level and technical level bilateral

meetings were convened to discuss specific issues and concerns regarding the outcome of supervision at the

local and consolidated levels. Discussions centred on economic conditions in each respective country as well as

new regulations that may affect bank operations at the local or consolidated level. In addition to the bilateral

meetings, Bank Indonesia was also involved in supervisory colleges with a number of supervisory authorities

around the globe. Consequently, increasingly intensive information exchange among supervisors, conducted by

Bank Indonesia with a number of other supervisory authorities, is expected to raise the quality of bank supervision

at the local and consolidated levels, thereby strengthening the financial system regionally and contributing to

global financial stability.

1) Including organisational structure, business strategy, capital structure, funding sources and the supervision system of the home country, etc.

2) Including business strategy at the local level, the significant activities conducted by local institutions, the supervision system in the host county, etc.

51





Box 2.1 Public Education Program

Public Education represents a part of Pillar 6 of the Indonesian Banking Architecture (IBA), namely

customer protection that aims to empower customers through the application of standards in the preparation

of customer protection principles, establishing an independent mediation agency, prioritising transparent

banking product information as well as education for the general public. Public education is provided in

an effort to realise financial literacy among the population, thereby, empowering citizens with greater

knowledge and understanding on the advantages and risks involved with the variety of financial products

offered by financial institutions as well as the costs that can be incurred. In addition, financial literacy is

inherently a form of consumer protection because financially educated members of the general public are

in a better position to protect themselves and, additionally, financial education helps balance the bargaining

power of potential customers with that of the providers of financial services as producers.

Expanding public financial literacy is expected to trigger a shift in the pattern of demand for financial

products, which depends on the real requirement of the general public, and foster healthy competition

among financial institutions/banks through product innovation and development. The work program

implemented in 2011 consisted of the following elements:

1. Campaigning for a culture of saving

Individually, a culture of saving would buttress the financial resilience of members of the general public. From a macroeconomic standpoint, a culture of saving would expand private savings, which could be used for investment and development purposes.

Efforts to encourage a culture of saving among the general public remain ongoing by Bank Indonesia in conjunction with the Banking Education Working Group through a joint campaign to nurture a culture of saving focusing in six key areas, namely Makassar, Banjarmasin, Surabaya, Semarang, Bandung and Medan. Campaign activities in the six cities are part of the strategy implemented by Bank Indonesia together with the banking community to help ensure that the targeted achievements can be measured. To this end, an ongoing campaign entitled ‘SambutHariDepanTerencana, Ayo Menabung!”, which loosely translates to ‘welcome a planned future, let’s save!”, was rolled out in December 2011 and will continue through to February 2012. Perception and preference surveys were also conducted with reference to the low-cost MySavings bank product.

2. Introducing a culture of saving at an early age

In an endeavour to create savings awareness from an early age, Bank Indonesia and the Ministry of Education integrated financial education into the junior and high school curriculum as a part of social studiesin years 5 and 6 of junior school and years 8 and 9 of secondary school.

Consequently, a number of activities have been organised as follows: (i) preliminary monitoring of teaching preparations in each respective school as well as evaluating the pre-test and post-test knowledge of students participating in the program; (ii) training-of-trainer (ToT) activities for school tutors (school principals, teachers, school supervisors and the local education board) involved in the pilot project, the goal of which is to broaden the understanding of teachers on banking and financial matters; teaching skills and financial planning; and (iii) production of supporting materials.







3. Financial education for migrant workers

Financial education is not only provided through formal channels at schools but also to various segments of society. In this context, in 2011 Bank Indonesia collaborated with the Ministry of Manpower and Transmigration to provide financial education to migrant workers and their families. It is hoped that through these activities the financial management and planning of migrant workers can be improved, thereby ensuring more frugal management of the foreign exchange they receive and turning it into productive business enterprises. Implementation is legislated through a joint memorandum of understanding signed between Bank Indonesia and the Ministry of Manpower and Transmigration on 1st August 2011.

4. Providing low-cost savings accounts

One constraint confronted by the general public when trying to save, especially for the lower-middle class and below, are the administrative costs involved. Consequently, Bank Indonesia conceived the idea of a banking product known as MySavings together with the banking community. MySavings is a savings product that does not incur administrative fees and uses less stringent requirements. Currently, as many as 70 commercial banks and a number of rural banks have agreed to carry the product, which in 22 months (up to December 2011) has racked up 2.1 million new accounts to the tune of Rp2.45 trillion.

5. A special menu for consumer education and information on the official Bank Indonesia website

One effort undertaken by Bank Indonesia to promote customer protection is the provision of a special menu on the official website that presents consumer education and information, which was launched on 1st July 2011. This aims to facilitate the general public’s appetite for information relating to financial services, particularly the banking sector and payment instruments. As a result, members of the general public can protect themselves when transacting with a bank and consequently reduce the number of customer complaints filed against the banks. To simplify public access, this menu is available on the home page of the official Bank Indonesia website. The information contained within includes explanations on banking products and services as well as information on product transparency, the customer complaint mechanism, the bank mediation mechanism, simulations to calculate interest and profit sharing, payment instruments and fund transfers, debtor information, information about the rupiah as well as tips for the general public to benefit from financial products and payment instruments. The material is presented in an appropriate manner for the target segment of readers, namely adults and children.


53





Overview

Bank Indonesia issued Circular No.13/5/DPNP/ on transparency regarding prime lending rates on 8th

February 2011 in order to enhance good governance when determining lending rates as well as to nurture

healthy competition in the banking industry through the creation of market discipline.

The background and objectives of the new regulation are as follows: (i) to level the playing field

between banks and their customers/the general public; (ii) to encourage greater transparency regarding

the characteristics of different bank loan products; (iii) to expand customer protection as publishing prime

lending rates can help minimise asymmetric information; and (iv) promote more efficient loan product

pricing.

Theoretically, numerous authors have discussed prime lending rates. Saunders (2003) postulated that

the prime rate is the lending rate offered to customers with the lowest level of risk and is generally used as

a reference for long-term loans. According to Goldberg (1981), the prime rate is a key indicator that can be

used to observe conditions on the credit market. Meanwhile, Nabar, Park and Saunders (1993) suggested

that the prime rate could no longer be viewed as the rate offered to creditworthy customers but more as a

key indicator of the calculation structure of lending rates at a particular bank.

Prime Lending Rate Regulations in Indonesia

Referring to prevailing theory, the application of prime lending rates in several other countries and based

on discussions with several concerned parties, Bank Indonesia promulgated a regulation on transparent

information regarding the prime lending rate, which became effective on 31st March 2011. The regulation

is only applicable to conventional commercial banks with reference made to Bank Indonesia Regulation

No.7/6/PBI/2005 on bank product information transparency and using personal customer information, as

well as Bank Indonesia Regulation No.3/22/PBI/2001 on the financial transparency of banks as amended by

Bank Indonesia Regulation No.7/50/PBI/2005.

Fundamentally, the prime lending rate is the lowest interest rate used by banks as a reference when

determining their lending rates for customers. The prime lending rate is calculated in rupiah for three types

of loan, namely corporate loans, retail loans and consumption loans (mortgages and non-mortgages). Credit

cards and uncollateralised loans are included with non-mortgage consumption credit. In addition, prime

lending rates are calculated as a percentage on an annual basis. The classification of loans is based upon the

internal criteria of each respective bank.

Prime lending rates are calculated based on three components, namely (i) the cost of loan funds; (ii)

the overheads paid by the bank; and (iii) the profit margin set by the bank for credit activity. This does not

take into consideration the risk premium of individual customers or groups because that depends on a risk

Box 2.2 Transparent Publication of Prime Lending Rates







Prime Lending Rate versus Lending Rate

Suku Bunga Kredit

(Lending Rate)

Harga Pokok Dana untuk

Kredit (CoLF)

Biaya Overhead (Overhead

Cost)

Marjin Keuntungan

(Profit Margin)

Suku Bunga Dasar Kredit

(SBDK)

Premi Risiko(Risk Premium)

assessment for each respective candidate borrower. Consequently, the actual lending rate offered to a

customer is rarely the same as the prime lending rate.


Only banks with total assets in excess of Rp.10 trillion on or after 28th February 2011 according to their

monthly report are required to publish their prime lending rate. Such banks are required to disclose their

prime lending rate in rupiah simultaneously through: (i) noticeboards in each branch office; (ii) the home

page of the bank’s official website if available; and (iii) in newspapers. Banks are still required to publish

their prime rate even in the event of a decline in total assets to below the threshold of Rp.10 trillion.

Meanwhile, in terms of their reports submitted to Bank Indonesia, all conventional commercial banks are

required to report their prime lending rate to Bank Indonesia in rupiah pursuant to the new regulation.

The benefits and performance of Prime Lending Rates

The policy to disclose prime lending rates benefits the real sector and public in general, the banking

sector and Bank Indonesia. For the general public and real sector, the promulgation of the new regulation

on prime lending rates has improved bank loan product transparency and reduced asymmetric information,

thereby, improving aspects of customer protection. For the banking sector, disclosingthe prime lending rate

has become a means by which to enhance efficiency and boost healthy competition through the creation of

better market discipline. In addition, for Bank Indonesia, the prime lending rate helps facilitate competition

mapping in the banking sector, measuring efficiency and understanding loan product pricing by banks.

55





Table 2.1 Average Prime Lending Rates in the Banking Industry (%)

Credit Segment Banking

March April May June July Augst Sept Oct Nov Dec

Korporasi 10,51 10,58 10,64 10,72 10,54 10,55 10,51 10,50 10,36 10,18

Ritel 11,80 12,21 11,84 11,91 12,00 12,08 12,04 11,98 11,78 11,61

KPR 11,16 11,25 11,35 11,38 11,03 11,03 11,04 10,98 10,82 10,71

Non KPR 11,56 11,70 11,76 11,86 11,86 11,96 11,88 11,83 11,68 11,51

Note: excluding outliers and calculated using a weighted average.

Policy Implementation, Follow Up and Future Planning

A number of measures have been introduced in terms of the approach/socialisation to the publicand

bank supervisors in order to strengthen the implementation of transparent prime lending rates. Regarding

socialisation to the general public, Bank Indonesia aims to raise public awareness of prime lending rates,

thus: (i) empowering the general public to study and compare rates between banks as one source of

information in their decision-making process; and (ii) prime lending rate information can be used by the

general public as a form of bargaining power when applying for a bank loan. The measures implemented

by Bank Indonesia to raise public awareness include the following:

• Compiling a booklet containing frequently asked questions concerning prime lending rates disseminated to the general public through the official Bank Indonesia website.

• Organising seminars and policy socialisation activities for the banking community, lecturers, academics, entrepreneurs, local government, NGOs and members of the general public in Jakarta, and other cities like Aceh, Medan, Padang, Bandung, Yogyakarta, Solo, Surabaya, Denpasar, Mataram, Manado, Banjarmasin, Pontianak, and Makassar.

• Socialisation through print media (newspapers and magazines) as well as electronic media (television

and radio).

In terms of supervision, Bank Indonesia continues to: (i) meet with banks and the banking association

to deepen the calculation structure of prime lending rates and lending rates in general; (ii) formulate a

benchmark prime lending rate for the banking industry and for each bank group, as well as peer group

analysis; and (iii)compile bank rankings.

Since January 2012, prime lending rates have also been published on Bank Indonesia’s website

(in addition to the requisite media stipulated in the regulation) in order to help the general public find

information on the prime lending rates of banks that are required to publish them. This is updated regularly

based on the monthly reports submitted by the banks to Bank Indonesia.

Looking ahead, prime lending rate policy will be continued and improved to become more effective,

including: (i) incorporating the target prime lending rate into the Bank Business Plan (BBP); (ii) continuing

the public socialisation program; (iii) reporting prime lending rates online through the commercial bank







monthly report; and (iv) reviewing and calculating the risk premium, which is an integral part of lending

rates. In addition, discussions and communications with the banking community will continue in order to

discuss the calculation and performance of prime lending rates and lending rates in general in the future.


57





On 3rd September 2010, Bank Indonesia announced policy regarding the minimum statutory reserve

requirement in rupiah for commercial banks calculated as follows:

Rupiah statutory reserves = 8% primary reserves + 2.5% secondary reserves + LDR based reserves

On 1st March 2011, this policy became effective. The LDR based reserve requirement is set within

a range deemed suitable to expand the bank intermediation function while maintaining adherence to

prudential principles. The target range of LDR is between 78% and 100%. A number of disincentives are in

place for banks that maintain a loan-to-deposit ratio outside of that range as follows:

• For banks with a loan-to-deposit ratio below the lower limit of the target range, a disincentive is imposed of additional reserves amounting to 0.1% of rupiah denominated deposits for each 1% below the target.

• For banks with a loan-to-deposit ratio in excess of the target range but with a capital adequacy ratio (CAR) of below 14%, a disincentive is imposed of additional reserves amounting to 0.2% of rupiah denominated deposits for each 1% above the target.

• For banks with a loan-to-deposit ratio in excess of the target range and CAR above 14%, no disincentives

are applied.

This is not the first time Bank Indonesia has applied LDR based reserves. In the final quarter of 2005

Bank Indonesia issued regulations requiring LDR based reserves, which remained effective until 2008. There

are, however, a number of differences between the two policies. The regulation issued in 2005 could only

provide incentives to banks that met the new requirements; there was no mechanism to impose disincentives

when LDR was considered too high. Secondly, the new regulation sets LDR within a predetermined range. If

a bank falls below the target range then an incentive can be applied for the bank to raise its LDR. If a bank

exceeds the target range then an incentive can be applied for the bank to address liquidity risk by adjusting

LDR. Therefore, there is a self-correction mechanism for banks to optimise their allocation of credit, while

still adhering to prudential principles.

The target LDR range is based on macroeconomic and micro-banking objectives. Macroeconomically,

LDR is a reflection of the credit requirement needed to support targeted economic growth. From a micro-

banking standpoint, the target is determined with due regard for liquidity conditions and bank LDR. The

limits of the target range are set to maintain the resilience of bank capital and liquidity. Nonetheless, banks

still have the option to extend credit beyond the limits of the target LDR as long as there is adequate capital

resilience.

Since implementation of the LDR based statutory reserve requirement along with a number of other

Bank Indonesia policies to stimulate the bank intermediation function, the loan-to-deposit ratio of the

banking industry has experienced an impressive upturn. As of December 2010, bank LDR was reported at

75.5%; while in December 2011 this had risen to 79.0%. In addition, the number of banks maintaining LDR

in the range of 78% to 100% also increased significantly. This is a reflection of the fact that the panoply

Box 2.3 LDR based Statutory Reserves







of policies instituted by Bank Indonesia (primarily the LDR based reserve requirement) has been able to

catalyse the bank intermediation function.

In addition to the expected expansion in the role of bank intermediation, implementation of the LDR

based reserve requirement will also encourage banks to adhere to prudential principles by maintaining

adequate capital. This can be observed from the number of banks with LDR in excess of 100% and CAR

above 14%.

Table 2.2 LDR of Conventional Commercial Banks

Dec 2010 March 2011 Dec 2011

Industry LDR 75.5 77.2 79.0

Number of banks with LDR < 78% 42 53 42

Number of banks with LDR between 78%

and 100%

47 42 51

Number of banks with LDR > 100% 20 14 16

Total number of banks 109 109 109


59





A rural bank business model was compiled after a five-year period of observation on the behaviour and

performance of rural banks. From the observations it was simple to choose which rural banks had performed

better than others as well as those that had witnessed a significant expansion in business. The selected rural

banks then had their success stories explored in detail in terms of rural banking management. These aspects

were subsequently presented in the rural bank business model as a reference for the establishment of new

rural banks as well as the ongoing management of existing rural banks. The Governor of Bank Indonesia

officially launched the business model for rural banks in book form on 5th December 2011. The book launch

was part of Bank Indonesia policy to encourage the establishment of sound and sustainable rural banks that

can play an active role in local economic development. Meanwhile, for existing rural banks the business

model is available as a reference for rural banking executives in the operation of a sound rural bank.

Box 2.4 Rural Bank Business Model

Rural Bank Business Model Chart

The rural bank business model consists of six main aspects that affect rural bank development,

namely: ownership, financial performance and capital, location and operational area, business strategy,

management and human resources as well as public relations. These aspects represent the core

management practices of successful rural banks over the past five years.

Rural Bank Ownership, (i) ideally the owners are originally from the area where the bank will be

established as a local person is expected to have a stronger desire to build and develop the potential

economy in the local environs; (ii) the owners must be committed to supplement capital when the

bank requires additional capital in line with future business growth; and (iii) the owners must have the

capability to nurture sound bank management practices that will help the bank prosper and guarantee

its sustainability in line with the ongoing development of small businesses in the area. Location and

Operational Area, choice of the ideal location must take into consideration the potential economy in the

operational area and it must easily be within reach of the local community, particularly in rural areas and







for potential small and medium business customers. Expansion of the operational area must be undertaken

as required and in line with public demand for rural banking services. Coverage area and office network

can be expanded from the district level to the regency and eventually the provincial level through a steady

seepage pattern to the surrounding areas.Business strategy, rural banks focus on financing productive

micro and small businesses, for which their behaviour and characteristics are already known, including

competitive and affordable lending rates, simple procedures and requirements, expedient and concise

processes, as well as communication and customer hospitality. Therefore, the support of information

technology is required in order to enhance service quality, which could be faster and more efficient as well

as expanding the office network as required. Management and Human Resources must be of the highest

integrity (to earn the trust of the local community and bank’s owners) and professional (operating the rural

bank according to prevailing regulations); must have an understanding of potential local businesses as

well as the characteristics of the locale and community (market) served by the rural bank; and must apply

adequate human resources policy. Employees should originate from the surrounding area where the rural

bank plans to operate as they are expected to have first-hand knowledge and understanding of the local

customs, culture and people as well as the potential of their area. Public Relations, rural banks arebusiness

oriented but must assimilate and become part of the local community in order to develop relationships and

genuine bonds through involvement in social activities in the local community, for instance during religious

festivities, public celebrations and privatecelebrations with customers.


Chapter IIIBank SupervisionImplementation andFollow-Up in 2011






Executive Summary


63





Executive Summary

Conventional Commercial BanksThroughout the reporting period of 2011, banking supervision (microprudential) focused on three pillars,

namely to expand the role of bank intermediation, to enhance bank resilience and to strengthen the supervision

function. The role of bank intermediation was broadened through the promulgation of policy that requires all

banks with total assets in excess of Rp10 trillion to publish their prime lending rate, through a comprehensive

financial inclusion program and through financing of potential sectors by the relevant institutions. In addition,

pursuant to the re-introduction of an LDR based statutory reserve requirement, banks with a loan-to-deposit

ratio of below 78% were required to improve their intermediation function as well as optimise their composition

of earning asset placements.

Bank Indonesia issued several regulations legislating the application of an anti-fraud strategy, the application

of risk management when serving prime customers and the application of prudential principles for outsourcing

at banks in order to bolster the resilience of the banking sector (primarily relating to customer protection). These

policies are part of the follow-up measures taken to maintain public confidence and ensure a sense of security

when using banking products and/or services. Regarding the supervision function, a number of regulations were

refined, among others, to raise the quality of the early warning system, which is in harmony with the adjusted

method to assess the soundness level of a bank (Risk Based Bank Rating - RBBR). In addition, imposing time limits

on each level of bank supervision status helped boost the effectiveness of problem bank resolution.

The method used to assess the soundness level of a bank was adjusted from the previous method of

CAMELS ratings to a more integrated format known as risk based bank ratings. This move was taken after careful

consideration of the global economy, the advancement of international standards and the desire to avoid potential

duplication in the assessment of bank soundness. Accordingly, commencing in December 2011 the level of bank

soundness was calculated under normal conditions using the RBBR method periodically every six months. The

calculation of RBBR is based on four factors, namely the risk profile, good corporate governance, earnings and

capital. Meanwhile, intensive internal training and socialisation activities were provided to bank supervisors

at Bank Indonesia head office and Bank Indonesia branch offices in order to ameliorate the competence of

supervisors when applying the risk based bank rating method.

When assessing the soundness level of a bank, Bank Indonesia requires the banks to submit the results of

a self-assessment no later than one month after the assessment period. The self-assessments conducting by

the banks are subsequently considered by Bank Indonesia when evaluating the soundness level of a bank. The

follow-up supervisory actions taken by Bank Indonesia in response to the assessment of bank soundness include

requesting the bank’s management to undertake corrective measureswith accompanying reports, which can be

used in future assessments of bank soundness and further supervisory actions.

The first component of RBBR is risk profile, which illustrates the risk exposure faced by the banks as a

consequence of bank performance and/or business strategy. Based on the results of supervision, the most

common types of risk in the national banking industry are credit risk and operational risk. This is the result when






Executive Summary

the majority of the banks’ business relies on credit allocation. In terms of credit risk, policy improvements and

internal control must be enhanced at a number of banks. Meanwhile, regarding operational risk, the quantity

and quality of human capital as well as technology infrastructure require upgrading. The follow-up supervisory

measures undertaken by Bank Indonesia include requesting the bank’s management to undertake corrective

actions with accompanying reports, which can be used in future assessments of risk profile and further supervisory

actions.

Assessing good corporate governance, which is the second component of RBBR, is based on three

main aspects, namely governance structure, governance process and governance outcomes. Governance

structure covers task implementation and the responsibilities of the commissioners and directors as well as

task implementation and completion of the committee. Governance process embodies the bank compliance

function, handling conflicts of interest, internal and external audits, risk management including internal control,

providing (large) funds to related parties as well as the strategic business plan. Governance outcomes involve

disclosing transparent financial and non-financial conditions, reporting the implementation of good corporate

governance and internal reporting. The application of adequate good corporate governance is prerequisite in

bank management considering that the human resources operating the business of the bank are a key factor,

who must espouse integrity and maintain competencecommensurate with their responsibilities. Based on the

results of supervision, one aspect that requires immediate improvement is the governance process. The current

form of oversight, among others, utilises fit and proper tests for all bank executives deemed to undermine

the governance process and requires that the banks undertake steps to improve the implementation of good

corporate governance as a whole.

With reference to earnings, at the end of 2011 conventional commercial banks could, in general, generate

adequate profit (earnings). This is a reflection of the fact that the profits accrued exceeded the target and were

supported by adequate bank capital. The form of oversight used was to request that the banks augment their

ability to generate profit, for instance by boosting efficiency and business volume while still adhering to prudential

principles.

In terms of capital, this too was also deemed adequate. For banks that were assessed to still need to raise

more capital in order to support their business activity, Bank Indonesia urged shareholders to inject more paid

up capital, seek new investors and/or reduce the proportion of dividends paid to the shareholders.

In relation to the ongoing application of know your customer principles, Bank Indonesia referred to more

comprehensive international standards that support efforts to prevent money laundering and the funding of

terrorism. This was achieved through the promulgation of Bank Indonesia Regulation No. 11/28/PBI/2009 on the

prevention of money laundering and the funding of terrorism at commercial banks, which covers the following

salient points:

a. Using customer due diligence for customer identification, verification and monitoring;

b. Applying a risk-based approach;

c. Regulating the prevention of funding terrorism;

d. Regulating cross-border correspondent banking; and

e. Regulating fund transfers.

65





Executive Summary

The evaluation of anti-money laundering and the prevention of terrorism funding (APUPPT) covers five

aspects, namely supervision by the directors and commissioners, polices and procedures, internal control, the

management information system as well as human resources and training. Based on the results of supervision,

the most noticeable factor that requires improvement is policies and procedures, followed by internal control

that remains inadequate. The application of APUPPT in the banking industry is performed by Bank Indonesia in

conjunction with the Indonesia Financial Transaction Reports and Analysis Centre (PPATK) congruent with the

signed memorandum of understanding.

Concerning the supervision status of a bank, intensive supervision is currently available according to

measurable criteria, namely financial aspects (capital, liquidity and non-performing loans), the soundness level

and risk profile. Pursuant to prevailing regulations, Bank Indonesia will place a bank under intensive supervision

for no more than one year from the date of the notification from Bank Indonesia. However, as the settlement of

non-performing loans/financing is complex, an extension period of one year may be permitted but only once. The

supervisory action taken by Bank Indonesia against banks placed under intensive supervision include requesting

an action plan of corrective actions covering specific schedules that can be monitored closely by Bank Indonesia.

In addition, Bank Indonesia can also request the controlling shareholders to replace the executives of the bank

involved as well as limit certain bank activities through cease and desist orders.

Based on Article 52 of Act No. 10, 1998, which amends Act No. 7, 1992, on Banking, Bank Indonesia can

impose administrative sanctions consisting of, among others, fines, written warnings, a lowering of the bank

soundness level as well as freezing certain business activities at specific branch offices or the bank as a whole.

With reference to fines, Bank Indonesia imposed fines on a number of banks in 2011, primarily attributable to

infractions relating to the monthly report of commercial banks (LBU) and the Debtor Information System (DIS)

as well as reserve requirement violations. Other forms of punitive measures were consistent with the violations

and infractions committed by the respective bank.

Islamic BanksIn line with growth in additional market players, the variation in products and services and increasingly

innovative and complex technological advancements, the supervision of Islamic banks has become more

comprehensive and effective. In addition, in order to strengthen resilience and ensure the business sustainability

of the Islamic banking industry, the application of effective supervision is expected to detect the risks faced by

banks as early as possible. Therefore, the supervision of Islamic banks performed by Bank Indonesia adheres to

international supervision principles as recommended by the Basel Committee on Banking Supervision, namely

risk-based supervision.

Islamic banking supervision aims to oversee industry development and is always directed towards

safeguarding Islamic bank resilience to risk, focusing on areas that tend to exacerbate risks as well as reviewing

new banking products. Supervision is conducted through routine inspections as well as special inspections on

specific transactions that escalate bank risk and have the potential to undermine bank resilience or capital but

still adhere to aspects of bank compliance pursuant to prevailing regulations, including compliance to sharia






Executive Summary

principles. The results of the risk assessment, the bank soundness level and the outcome of inspections are

used as the foundation for follow-up actions to restore the bank’s conditions. These measures are followed by

observing the implementation of corrective actions (commitment) that must be met by the bank according to

the schedule set.

The assessment of Islamic bank soundness is affected by financial and managerial performance as

stipulated in CAELS+ M, consisting of capital, asset quality, earning/rentability, liquidity, sensitivity to market

risk + management, as well as the results of the risk profile assessment. To maintain the soundness level of

Islamic banks, Bank Indonesia continuously takes supervisory actions that involve requesting an action plan and

commitment from the bank’s management to reduce the level of non-performing loans, requesting additional

loan loss provisions, requesting commitment to improve internal control and requesting bank commitment to

add capital in order to anticipate insufficient loan loss provisions. In addition, Bank Indonesia also inspects Islamic

products launched by the banks to ensure they are in line with the licenses used.

Based on the results of supervision, the risks that significantly affect the risk profile of Islamic banks

are credit risk and operational risk. The following still needs to be done by Islamic banks in order to mitigate

credit risk, including refining policies and procedures, upgrading information system technology, recruiting

competent human resources, understanding sharia based contracts, enhancing the control function, reducing

the concentration of fund allocation to core borrowers and specific sectors, as well as requesting an action plan

and monitoring its implementation.

In terms of operational risk, information system technology and the quality of human resources need to

be improved. Bank Indonesia asked banks to meet their requirement for human resources, among others, by

ensuring an adequate recruitment process and by offering reasonable remuneration and facilities, including

raising the quality of human capital through education, training and certified risk management in order to

mitigate the operational risks faced stemming from weak human resources. Meanwhile, mitigating operational

risk originating from technology can be achieved by monitoring core banking in accordance with the Islamic

business as well as safeguarding operational security.

Based on the results of supervision, the implementation of good corporate governance by Islamic banks

requires improvement, particularly the implementation of GCG committees, compliance, internal audit and risk

management. In this context, Islamic aspects of the supervision function inherent with the Sharia Supervisory

Board (SSB) as a part of sharia compliance need to be optimised. Task implementation of the Sharia Supervisory

Board is not restricted to just offering opinions on new products but also ensuring that all business activities

undertaken by the bank comply with sharia principles. Optimisation of Islamic aspects of the supervision function

by the Sharia Supervisory Board can be achieved through sharia testing of the transactions conducted by the

bank. The effective implementation of the SSB function requires greater understanding from the Board regarding

the operational system of the banks and an effective communications mechanism among SSB, internal auditors

and the compliance division.

In the implementation of anti-money laundering and the prevention of terrorism funding (APUPPT), the

supervision of Islamic banks is conducted through periodic assessments. Assessments are conducted through

inspections on the implementation of APUPPT based on five criteria, namely active supervision by management,

67





Executive Summary

policies and procedures, internal control and internal audit, the management information system as well as

human resources and training. Based on assessment results, the aspects that still require further improvement

relate to internal control and internal audits as well as management information system integration to detect

suspicious customer financial transactions.

Meanwhile, in the case of Islamic rural banks (BPRS) the level of bank soundness is affected by managerial

and financial performance (CAEL+ M: capital, asset quality, earning/rentability, liquidity + management), as well

as the results of a risk profile assessment by supervisors regarding ongoing inspections throughout the year. The

main factor influencing the soundness level of Islamic rural banks is high non-performing financing, which leads

to lower earnings as well as insufficient loan loss provisions that undermine the capital ratio of Islamic rural

banks. In this context, Bank Indonesia introduced supervisory measures to encourage improvements in the root

of problem banks, among others, by requesting a gradual decline in non-performing financing. A gradual decline

in NPF is possible through bank optimisation of billing and settling non-performing financing. Several Islamic

rural banks with a low earnings level were required to conduct measured financing expansion. Meanwhile,

Islamic rural banks with insufficient loan loss provisions were asked to improve the quality of their assets and

add capital.

Rural Banks (BPR)In 2011, rural bank development policy focused on efforts to boost rural bank efficiency and resilience

in the face of microfinance market competition and improve governance in the management of rural banks.

Accordingly, the supervision conducted by Bank Indonesia was geared towards enhancing the quality and efficacy

of supervision through several policies as follows:

• Expand monitoring activity, in particular for high-risk rural banks, namely rural banks meeting specific criteria in terms of financial performance and those with potential problems;

• Apply a rural bank panel forum; and

• Implement consolidated inspections of rural banks under the same ownership.

Efforts to expand monitoring activity on high-risk rural banks intended to garner early supervisory

information on potential problems at rural banks. Consequently, Bank Indonesia can apply preventative measures,

like developing and communicating with the rural bank’s management. Monitoring high-risk rural banks is

determined by the results of supervision conducted by Bank Indonesia, namely by assessing the development

and performance of rural banks individually.

The rural bank panel forum was introduced to enhance the quality and effectiveness of rural bank supervision.

The rural bank panel forum was initiated by Bank Indonesia head office in coordination with supervision work

units at Bank Indonesia representative offices in areas where rural banks are the objects of supervision. Such

activities were undertaken to identify the need for knowledge sharing in terms of rural banking supervision, to

review the results of inspections/supervision, and to provide recommendations to work units that supervise

rural banks.






Executive Summary

In addition to rural banking supervision policy, Bank Indonesia also routinely conducts on-site and off-site

supervision. In its implementation Bank Indonesia assesses the soundness level of the rural bank in question,

taking into consideration financial aspects (capital, assets, earnings and liquidity) as well as managerial aspects.

From the results of the assessment Bank Indonesia conducts a further general inspection and strives to maintain

the business continuity of the rural bank.In addition to general inspections, Bank Indonesia can also initiate

special inspections in the event of revealing unfavourable conditions from the off-site supervision.

Bank Indonesia regularly communicates with the management of rural banks regarding the results of

the supervision conducted by Bank Indonesia, providing recommendations and monitoring the action plan

put in place by the management in order to maintain the business sustainability of the rural bank, which is

demonstrated, among others, by the soundness level of the bank. If a rural bank experiences a serious problem,

primarily in terms of solvency or earnings, Bank Indonesia can place the affected bank under special surveillance,

involving intensive rescue measures. If the problem cannot be overcome within the allotted time frame then

Bank Indonesia will take the final step of revoking the business license of the rural bank to protect the interests

of the customers and the banking industry in general. Fourteen rural banks had their business licenses revoked

in 2011, the most common reason for which was failure to meet the commitments made to recover the bank

within the allotted time frame having already been placed under special surveillance.

Meanwhile, as part of the efforts to combat money laundering and prevent terrorism funding (APUPPT)

through the banking system, Bank Indonesia assessed aspects of APU PPT. The assessment was conducted

covering five main areas consisting of supervision performed by the commissioners and directors, policies and

procedures, internal control, the management information system as well as human resources. Based on the

results of the supervision, the most salient points that require improvement by rural banks are internal control,

including the information system to detect suspicious transactions.

Fit and Proper TestsThe implementation of good corporate governance is necessary in the banking industry in order to create a

sound banking system, protect the interests of the stakeholders and enhance compliance to prevailing regulations.

The realisation of good corporate governance requires the presence of bank owners and executives who meet

certain requirements. To this end, in the first line of defence Bank Indonesia conducts its selection process using

fit and proper tests for all candidate commissioners, directors and controlling shareholders because these people

have most influence over the management of the bank. Fit and proper test are conducted for all candidates

through administrative evaluations as well as interviews as required.

Conventional Commercial Banks

In 2011 as many as 220 candidates were subjected to fit and proper tests, comprising of 106 directors,

21 compliance directors, 84 commissioners/supervisors and nine controlling shareholders. Compared to the

number of fit and proper tests conducted in 2010, the number of candidates declined slightly. Overall, however,

from 1999 to 2011 the graduation rate of those passing the fit and proper tests was 84.15%.

69





Executive Summary

Partici-pants

Passed Did not Pass

Peserta Passed Did not Pass

Partici-pants

Passed Did not Pass

2010 2011 Cumulative 1999 to 2011

Board of Directors: 159 134 25 127 110 17 2.062 1.698 364

a. Directors 128 112 16 106 95 11 1.627 1.381 255

b. Compliance Directors 31 22 9 21 15 6 435 317 121

Commissioners/supervisors 82 69 13 89 69 15 1.221 1.046 175

Controlling shareholders 11 10 1 9 9 0 155 149 6

Total 252*) 213 39 220*) 188 32 3.438 2.893 545

Table 3.1 Breakdown of Fit and Proper Tests for Conventional Commercial Banks

*) Excluding participants of fit and proper tests who have only completed the administrative evaluation phase (without interview)

In 2011 Bank Indonesia also conducted fit and proper tests affecting 12 banks on 82 existing officials

comprising of six controlling shareholders, 48 managers and 28 executives.

Islamic Banks

Bank Indonesia conducted fit and proper tests on candidate controlling shareholders, candidates for the

board of commissioners and candidates for the board of directors in order to ensure that Islamic banks and

sharia business units (UUS) are always run by trusted parties who are competent and of high integrity. In addition,

according to Bank Indonesia Regulation No. 11/10/PBI2009 on sharia business units, all commercial banks that

have a sharia business unit must designate one member of the board of directors to be fully responsible for the

sharia business unit. Bank Indonesia also interviews the directors of sharia business units to ensure that the

appointed director is competent and committed to UUS development. Furthermore, Bank Indonesia utilises an

administrative evaluation and interview process for all candidate members of the Sharia Supervision Board (DPS)

for sharia business units and Islamic banks in order to boost the effectiveness of the Sharia Supervision Board

when conducting supervision to ensure the banks’ activities are always congruous with Islamic principles.

In 2011, fit and proper tests were performed on 33 candidate controlling shareholders, commissioners or

directors of sharia business units and Islamic banks, including the chairmen of foreign representative branches,

five of whom were deemed unfit. Furthermore, nine candidate members of DPS were also interviewed with two

failing the process. Meanwhile, six candidate directors of sharia business units were interviewed with all passing

thanks to adequate competence and commitment to develop their respective sharia business unit.

Rural Banks

Fit and proper tests are conducted when seeking approval for a license to establish anew bank, a change in

the management or controlling shareholders occurs or if there are indications of unsound business practices.

In 2011, there were a total of 686 participants for fit and proper tests, consisting of 54 controlling shareholders,

317 commissioners and 315 directors with a pass rate of 73.8%. Meanwhile, fit and proper tests were also






Executive Summary

conducted for 151 existing officials, including 3 controlling shareholders, 56 commissioners and 92 directors with

a pass rate of 99.3%. In general, candidate controlling shareholders and candidate managers who failed the fit

and proper tests did not meet the administrative requirements listed on the Failure List (DTL) and the List of Debt

Losses (DKM) or the requirements set by Bank Indonesia regarding the level of integrity or competence.

Banking Information System (BIS)Bank Indonesia developed a Banking Information System to replace the outmoded Bank Indonesia Banking

Sector Management Information System (SIM-SPBI) in 2009 in order to meet the requirements of the banking

sector in terms of upgrading the quality of information and implementing new regulations appertaining to

the information system (among others the application of Basel II as well as PSAK 55 andPSAK 50Accountancy

Standards). In addition, BIS is expected to accommodate the changing needs of the supervisors, who previously

measured the soundness level of a bank using CAMELS ratings but now use the risk based bank rating method.

In broad terms, the objectives of banking information system development are as follows:

1. To enhance the effectiveness and efficiency of the supervision system and bank inspections.

2. To create standardisation in the task implementation of bank supervision and inspections.

3. To optimise bank supervisors when analysing the conditions of a bank, thereby raising the quality of bank supervision and inspections.

4. To provide information for the purposes of banking research and regulation.

5. To provide information for banking publications.

6. To assist the more effective and efficient implementation of investment activity and bank mediation.

7. To simplify the audit trail for interested parties.

8. To reinforce the security and integrity of data and information.

Banking Investigations Bank Indonesia is explicitly aware that advancements in the banking industry increase the potential

opportunities for quality and complex transgressions in the banking industry. Accordingly, efforts to enhance

bank compliance to prevailing laws and regulations is an important aspect of protecting the general public’s

funds as well as preventing the emergence of structural problems in the banking system that can undermine the

national economy. Repressive measures through legal enforcement are therefore an intrinsic part of efforts to

strengthen the banking supervision system in the pursuit of a banking system that is sound, stable and growing

naturally, which will maintain public confidence.

In 2011, Bank Indonesia initiated investigations into 63 cases of alleged criminal activity in the banking

sector (Tipibank) occurring at commercial banks and rural banks across the archipelago. Of the total, 28 cases

involving 12 banks were referred to investigators.

71





Executive Summary

The most common cases of criminal behaviour in the banking sector referred to investigators relate to

lending (46%) followed by funding (25%) and misappropriated bank funds/assets (21%).

Description Commercial Banks Rural banks Total

Cases Bank Cases Bank Cases Bank

The number of cases that have been completed in the investigation

25 13 38 21 63 34

1. Referred to investigators 9 4 19 8 28 12 2. In the referral process 16 9 19 13 35 22

Table 3.2 Investigation Statistics of Criminal Activity in the Banking Sector during 2011

Note:1. Cases referred to investigators are those of alleged criminal activity in the banking sector that have been discussed at the Tipibank

Handling Coordination Forum, where agreement was reached for Bank Indonesia to refer the case onwards. 2. Cases in the referral process are those of alleged criminal activity in the banking sector that have been investigated and are currently

being coordinated to discuss at the Tipibank Handling Coordination Forum at the local and central levels.

Figure 3.1 Cases of Tipibank by Type in 2011

Misappropriatedbank funds/assets

21%

Cost mark-up4%

Funding25%

Fictive costs4% Lending

46%

In the legal enforcement process, Bank Indonesia only has the authority to impose administrative sanctions

on the bank(s) involved. The imposition of sanctions for violations containing elements of criminal activity

requires a follow-up investigation process involving the police department and the judiciary. Consequently, in

an attempt to enhance the application of good governance between Bank Indonesia, the police department and

the attorney general in terms of coordinating the handling of criminal activity in the banking sector, the three

institutions signed a memorandum of understanding. The scope of coordination includes discussions of alleged

criminal activity in the banking sector, reporting said allegations, providing (expert) witnesses, blocking bank

accounts, confiscating money and documents, exchanging information, conducting evaluations/assessments

and other activities.






Executive Summary

Figure 3.2 The Handling of Criminal Cases (1999-2011)

Verdict reached31%

Still under investigation27%

Terminated (SP3)15%

Prosecutionprocess 5%

Not followed up11%

At trial6%

Others5%

With the signing of this memorandum of understating, investigations into cases of alleged criminal activity

in the banking sector reported by Bank Indonesia also represent the cases discussed and agreed upon at the

Tipibank Handling Coordination Forum (FKPT) for referral to law enforcement. Cumulatively, from 1999-2011,

Bank Indonesia investigated 640 cases of alleged criminal activity in the banking sector, with 31% already settled

in a court of law and 27% still under investigation by the relevant parties.

In addition to the handling of criminal activity in the banking sector, as legislated in Articles 46 to 50A of

Act No. 7, 1992, on banking, which was subsequently amended by Act No. 10, 1998 (the Banking Act), as well as

Articles 59 to 66 of Act No. 21, 2008, on Islamic Banks (the Islamic Banking Act), coordination and cooperation

through the Tipibank Handling Coordination Forum also covers criminal activity contained within other laws as

follows:

• Act No. 31, 1999, on the eradication of corruption, subsequently amended by Act No. 20, 2001.

• Act No. 8, 2010, on the prevention and eradication of money laundering.

• The Criminal Law Act as well as other laws and regulations that affect bank operations.

If during the course of a Bank Indonesia investigation criminal activity is revealed that fallsunder the

auspices of a different agency, Bank Indonesia will inform the appropriate agency responsible to conduct follow

up actions.

The contribution of Bank Indonesia to support legal enforcement is not merely in the form of investigating

and reporting alleged criminal activity to the relevant parties, Bank Indonesia, in its role as bank supervisor, also

assists law enforcement agencies by providing detailed descriptions to explain the case in question by providing

(expert) witnesses. During 2011, Bank Indonesia answered the call of law enforcement agencies by providing

(expert) witnesses as many as 116 times at the central and local levels as follows:

73





Executive Summary

Besides being used for the purpose of law enforcement, the outcomes of investigations are also utilised as

inputs in the setting of recovery measures for a bank, including the imposition of administrative sanctions on a

bank and/or violators of banking regulations, as well as inputs to refine the banking supervision system by Bank

Indonesia.

Bank MediationBank Indonesia has operated a bank mediation function since 2006 in order to provide protection to the

banks’ customers. Dispute resolution through bank mediation is part of the follow-up process for customer

complaints that were unsuccessfully settledbetween the affected parties. Bank mediation also aims to help smaller

customers access dispute resolution measures with their bank through a simple, cheap and fast process.

The implementation of bank mediation as an alternative form of dispute resolution plays a significant role

in helping settle disputes between customers and their bank. During 2011, the number of disputes received by

Bank Indonesia totalled 510; up 83% on the previous year (278 disputes). This increase was not only caused by

the growing number and greater variety of products offered by the banks but also due to growing customer

awareness concerning the alternative dispute settlement mechanism, namely bank mediation.

Description HO Branch Office Total

Experts 21 54 75 Witnesses 35 6 41 Total 56 60 116

Table 3.3 Number of (Expert) Witnesses Supplied

Type of Product Number of Disputes

2009 2010 2011

Fund Accumulation 23 35 47

Fund Allocation 79 86 246

The Payment System 88 149 206

Cooperative Products 10 2 4

Other products 20 3 4

Unrelated to banking products 11 3 3

Total 231 278 510

Table 3.4 Number of Disputes Received by Bank Indonesia

As presented in Table 3.4, based on product type, fund allocation and payment system are the two types

of product most commonly reported to Bank Indonesia. Fund allocation has experienced the most dramatic

increase in disputes, reaching 246 in 2011, the majority of which were reported by the Consumer Protection

Society (LPKSM), amounting to 171 disputes. Of the disputes referred to Bank Indonesia, nearly all stemmed

from credit restructuring, repayment difficulties or failure to provide a copy of the credit agreement by the

bank.






Executive Summary

During 2011, Bank Indonesia mediated 61 disputes compared to 41 in 2010 and 18 in 2009. Meanwhile,

456 disputes were not followed up through the mediation process as the banks involved had already found a

mutually agreeable solution or the dispute failed to meet the requirements for bank mediation as stipulated in

Bank Indonesia Regulation No. 8/5/PBI/2006, which was subsequently amended by Bank Indonesia Regulation

No. 10/1/PBI/2008 on bank mediation. Most disputes failing to meet the requirements related to requests for

loan restructuring, predominantly submitted by the Consumer Protection Society (LPKSM).

The increasingly widespread practice of using bank accounts as a means of deception through short message

service (SMS) text messages forced Bank Indonesia to work in unison with the banking industry and in October

2011 a set of actions were published to prevent the fraudulent use of banking products and services as follows:

1. Prepare internal bank infrastructure to receive and handle complaints related to SMS based fraud.

2. Publish the means by which members of the general public can report such cases through a call centre at each respective bank.

3. Educate the general public through various forms of print and electronic media.

4. Jointly commit with the banking community to take rapid integrated action to prevent the victims of such

fraud from incurring loses.

Bank Indonesia also cooperates with the Indonesian Telecommunications Regulatory Authority (BRTI),

primarily through information exchange regarding customer complaints relating to SMS deception schemes.

Through this collaborative effort a number of bank accounts allegedly used by criminals were blocked and

a number of customers were saved. In addition, Bank Indonesia cooperates with the banking community to

continue publishing and educating through various media and programs in order to expand and broaden public

insight into bank mediation as follows:

• Educate journalists;

• Educate banks internally and present video education materials on mediation in the Banking Hall for each respective member of the Bank Mediation Working Group;

• Write articles on bank mediation in print media and online;

• Attend talk shows on television and radio as well as at the Jakarta Fair;

• Socialise bank mediation to students/academics and the banking community; and

• Hold routine meetings with contact persons from the banking community in order to exchange information, ideas and experiences relating to the handling of customer complaints and the implementation of bank mediation.

75





Executive Summary

Bank Indonesia utilises a risk based approach to banking supervision, which comprises of a risk based

strategy and methodology that allows supervisors to detect significant risks associated with the banks’

business activities early, as well as to take appropriate and timely supervisory action. Risk based supervision

can be described as a cycle consisting of several stages.

Box 3.1 Strengthening Banking Supervision based on Risk (Risk Based Bank Ratings)

The Risk Based Supervision (RBS) Cycle

In order to hone the quality of supervision (quality assurance) and boost itseffectiveness, quality

assurance is applied that guarantees the input, process and output of risk based banking supervision meet

prevailing quality standards. To this end, the Risk Based Banking Supervision Panel Forum was established

tasked with formulating recommendations and conducting assessments on the quality of banking

supervision. The Panel Forum is convened in two stages of the RBS cycle, namely in the assessment of risk

and bank soundness phase as well as the supervision and monitoring phase.

Supervision based on risk has been applied by Bank Indonesia since 2003. In 2004, Bank Indonesia

introduced a system to assess the soundness level of a bank (CAMELS rating system) where bank supervisors

assessed bank soundness based on capital, asset quality, management, earnings, liquidity and sensitivity

to market risk. Although the application of this kind of system was adequate to support risk based banking

supervision, Bank Indonesia saw the need to refine its existing supervision system according to the following

considerations:

1. The recent global crisis triggered a movement towards global financial reforms aiming to ensure financial system stability through refinements to the supervision system and the application of risk management by the banks.

RBS CYCLE

1. Understandingof the bank

6.Supervisionand

Monitoring

5.Update risk profileand level of

bank soundness

InspectionReport

4.Risk BasedInspections

3. SupervisionPlanning

InspectionWork Plan

Assessment of riskand bank

soundness

Collection of dataand information

RBS Phase 1Panel Forum

RBS Phase 2Panel Forum

Risk Profile andLevel of

Bank Soundness

AnnualSupervision

Strategy







Executive Summary

2. Development of international standards, among others, by the Basel Committee on Banking Supervision (BCBS), the Financial Stability Board (FSB), G-20 and International Financial Reporting Standards (IFRS), which demanded refinements to the supervision framework and methodology to bring them in line with prevailing international standards.

3. The simultaneous introduction of risk profile assessments and the CAMELS rating system, which precipitated a potential duplication in terms of assessing bank soundness, therefore, it was more effective to integrate the two into one comprehensive and structured assessment system, namely a risk based level of bank soundness.

The level of bank soundness based on risk is the result of evaluating the conditions of a bank centred

on four factors, namely the risk profile, good corporate governance, earnings and capital. Assessments

are mandatorily carried out by bank supervisors as well as the banks themselves (self-assessment). The

assessment of risk profile consists of evaluating inherent risk and the quality of risk management applied

according to eight types of risk: credit risk, market risk, liquidity risk, operational risk, legal risk, strategic risk,

compliance risk and reputational risk. Good corporate governance is gauged by assessing bank management

referring to prevailing Bank Indonesia regulations on the implementation of good corporate governance

by commercial banks. Earnings are assessed based on the performance of earnings, sources of earnings,

sustainability of earnings and the adequacy of earnings management. Capital is assessed based on capital

adequacy and capital management.

Banks are obliged to submit the results of individual and consolidated self-assessments to Bank

Indonesia within the predetermined time frame. Furthermore, banks are also required to update their self-

assessments at the first available opportunity in the event of a deterioration in financial conditions or if

the bank faces new problems like liquidity risk or a capital shortfall, or indeed any other conditions that,

according to Bank Indonesia, require the soundness level to be updated.

The results of assessments by bank supervisors are subsequently used as the basis for supervisory

planning and the implementation of supervisory actions against the problems identified in the assessment,

including determining the supervision status of the bank as well as exit policy. For the bank, the assessment

of bank soundness is used as the foundation of future business strategy as well as to compile corrective

actions for the problems identified in the assessment of bank soundness. If, based on the findings of Bank

Indonesia, significant problems or violations are found that affect or will affect the business continuity of the

bank, Bank Indonesia is authorised to downgrade the composite rating of the bank’s soundness level.


77





Executive Summary

During 2011, a number of cases came to light involving the misappropriation of prime customers’ funds

by bank officials. Prime customers, those with large deposits, in general receive special services from the

bank, like a pick-up service as well as the ability to sign blank forms (transfer slips or withdrawal slips). This

clearly involves an extraordinary level of trust between the customer and bank official, thereby undermining

internal controls at the bank. In addition, there were also cases of credit card providers outsourcing the

billing process to a third party, which contravened the code of ethics and SOP of the bank.

The supervisory actions taken by Bank Indonesia to resolve these problems at the banks, to restore

customer confidence and to prevent any repeat offenses, among others, consisted of the following:

• Conduct special inspections as well as fit and proper tests on all banking officials and employees involved.

• Impose sanctions consisting of temporary cease and desist on acquiring new prime customers.

• Suspend the opening of new branch offices and products for prime customers.

• Request banks to rectify SOP and internal control.

• Request banks to open escrow accounts in order to protect their customers and ensure the bank has the capacity to settle its liabilities in line with prevailing laws.

• Request corrective actions in accordance with the action plan submitted to Bank Indonesia.

• Establish cooperation with legal agencies to resolve the problems.

Additionally, in order to redouble customer protection efforts and reinforce outsourcing regulations,

Bank Indonesia promulgated Bank Indonesia Regulation No. 13/25/PBI/2011, dated 9th December 2011, on

prudential principles for outsourcing at commercial banks, Bank Indonesia Circular No. 13/28/DPNP, dated

9th December 2011, regarding the application of an anti-fraud strategy for commercial banks, and Bank

Indonesia Circular No. 13/29/DPNP, dated 9th December 2011, on the application of risk management at

commercial banks serving prime customers.

An array of measures was also introduced by Bank Indonesia to prevent and detect early signs

of infractions, including bank fraud. Institutionally, banks are required to appoint an Internal Audit &

Compliance Director as part of the internal control structure in order to strengthen bank efforts to ensure

compliance to prevailing laws and regulations as well as internal regulations and policy. Furthermore, Bank

Indonesia continues to emphasise the application of risk management and good corporate governance for

all operational activities of a bank. On the other hand, Bank Indonesia also continuously strives to improve

the banking supervision system through enhancements to risk based banking supervision, improvements to

the quality of supervisors, promulgation of banking regulations, reinforcement of supporting infrastructure

as well as coordination and cooperation with external parties.

Box 3.2 Handling Cases of Fraud concerning Prime Customers and Credit Card Billing


Chapter IVProspects and BankingPolicy Direction in 2012


Prospects and Banking Policy Direction

Foreword Table of Contents Bank Structure and Performancein 2011



Executive Summary


81





Executive Summary

Challenges and ProspectsEntering 2012, the range of challenges faced by the economy of Indonesia and the banking sector in

particular are varied both internally and externally. The external challenges stem from vulnerability risks that the

global economic recovery process will be worse than initially thought. Accordingly, national economic growth

will depend on the effectiveness of absorbing sources of domestic growth and the ability to take advantage of

the domestic market. In this context, suboptimal bank intermediation and fiscal expenditure absorption will

limit the capacity to maintain growth momentum. On the other hand, a combination of deteriorating global

economic conditions, very low interest rates in advanced countries and excess global liquidity have the potential

to shift the global capital portfolio with two-way capital flows. This is a source of instability that will become a

policy challenge for authorities in emerging market countries in terms of maintaining macro and financial system

stability.

Domestically, on the financial market, the conditionof the national banking industry has improved steadily

since the crisis in 1998. Notwithstanding, the banning industry’s contribution to national economic development

remains below par. Robust asset growth in the banking industry has not been accompanied by a commensurate

increase in economic contribution, which is attributable to a portion of bank assets deemed unproductive from a

macro perspective, namely in the form of excess liquidity placed in monetary instruments and tradable government

securities (SBN). In addition, the level of efficiency in the banking industry remains low, which pushes up lending

rates. The low level of efficiency is reflected by the BOPO efficiency ratio, which was 85.42% in December 2011

compared to 40%-60% for banks in the ASEAN region. Despite the conducive bank intermediation function, as

reflected by a loan-to-deposit ratio of 78.77% in December 2011, bank operational inefficiencies have created

a high-cost economy, thereby undermining economic competitiveness. The high cost of financing in Indonesia

is reflected by the interest rates levied on working capital credit, investment credit and consumption credit

amounting to 11.98%, 11.69% and 13.38% respectively in December 2011, despite maintaining the benchmark

BI Rate at just 6.0%.

Amid the ongoing global slowdown, the national economy is projected to expand in the range of 6.3%-6.7%

in 2012. Solid national economic momentum can be maintained providing that the foundations of domestic

growth are improved. A reduction in the policy rate in October 2011 is expected to catalyse sources of domestic

financing, primarily stemming from the banking sector. The forecast for national economic growth assumes

financing (including channelling) in excess of Rp598 trillion; equivalent to 26.9% (yoy) credit growth. The rate of

investment growth in 2011 was 7.7%, which is projected to increase to the range of 9.7%-10.1% in 2012. Greater

investment will buttress public purchasing power. Meanwhile, the role of fiscal stimulation remains limited by

the sheer magnitude of budget allocation for subsidies.






Executive Summary

Banking Policy Direction in 2012Conventional Commercial Banks

For conventional commercial banks, policy will be directed towards maintaining an optimal balance between

boosting competitiveness and strengthening resilience on the one hand, and fostering bank intermediation and

broadening public access to low-cost banking services on the other. Consequently, Bank Indonesia set policy

direction as follows:

1. Enhance bank competitiveness

In order to boost bank competitiveness, the prime lending rate policy will be continued to ensure the market mechanism runs without disruption and the policy objectives are accomplished. Following up from a banking supervision standpoint,regulatory enforcement will require the Bank Business Plan to contain efficiency targets and a proposal to reduce lending rates to a more reasonable level. Bank Indonesia is also currently reviewing the practice of determining savings rates above the rates set by the Deposit Insurance Corporation, and reviewing the restrictions on awarding gifts to customers.

2. Strengthen bank resilience

Policy to strengthen bank resilience will be achieved through increasing capital in order to support future economic growth and anticipate changes in the business cycle. Through this policy, banks in Indonesia will be better prepared to anticipate the variety of risks faced thanks to adequate capital to cover the risk.

In addition, Bank Indonesia will persist with policy to improve aspects protection for customers and potential customers. Furthermore, to raise the quality of bank governance, Bank Indonesia will refine its policy on transparent financial reporting , particularly published financial reports, and regulate the public accountants used by the banks. Bank Indonesia will also continue to review policy concerning bank ownership and multi-licenses in line with increasingly complex bank business activity.

3. Promote bank intermediation

Bank Indonesia will persevere with efforts to broaden public access to banking services (financial inclusion), especially low-cost banking services for citizens in rural areas. This will involve enhancing the MySavings bank product, developing financial education, implementing Financial Identity Numbers and conducting a financial literacy survey. In addition, Bank Indonesia will facilitate intermediation to support financing in potential sectors in conjunction with the relevant agencies. Research will also be conducted into the most binding financing constraints faced in sectors with relatively slow credit growth. Furthermore, for sectors that are commercially less desirable to the banking industry but still play a strategic role in the economy Bank Indonesia together with the Government will develop a number of financing schemes.

Islamic Banks

To support Islamic banking development, in 2011 Bank Indonesia introduced Islamic banking policy and

development measures that focused on the following:

1. Strengthen Islamic bank intermediation to productive economic sectors

In 2012, Islamic banks were steered towards building capacity and more actively serving the financing needs of production sectors, including government priority sectors like construction, electricity and gas, agriculture and creative industries, and if possible finance a number of projects associated with the Master Plan to Accelerate and Expand Economic Development in Indonesia (MP3EI). Bank Indonesia, in line with

83





Executive Summary

its capacity, will facilitate a link & match process between Islamic banks and business people in the priority sectors mentioned through business matching and focus group discussions among Islamic bankers and the business community. In addition, Islamic banks are also urged to control the risks inherent with business concentration, among others, through improvements in report quality regarding products and bank activities.

Furthermore, to guide the business structure to better reflect the financial characteristics of Islamic banks, in 2012 Bank Indonesia will review the business model of Islamic banks, and identify business behaviour and policy response/regulatory incentives that can encourage Islamic banks to be more compatible with their business model, among others, through licensing policy, reports and/or suspending bank products and activities. Islamic banks are expected to optimise their various options in terms of policy to open service outlets in order to broaden their network while ensuring business penetration in various regions of Indonesia.

2. Develop and enrich more focused products

In harmony with greater customer segment diversification, Bank Indonesia will prioritise support to develop products relevant to production sectors. Support, among others, will be provided in the form of product reviews as well asrefining regulations and the product licensing process. Bank Indonesia will consider refining regulations relating to Islamic banking products to boost the efficiency of the product licensing process. Furthermore, Bank Indonesia will continue tripartite cooperation with the National Sharia Board (DSN) and the Indonesian Association of Accountants (IAI) to expedite new and non-standard product development. In addition, in 2012, Bank Indonesia will compile a development strategy for Islamic banking products.

On the other hand, each Islamic bank is expected to bolster their product development work units in order to accelerate product and service level parity with conventional banks, thereby meeting the various Islamic service needs of their customers.

3. Enhance synergy with parent banks by developing the institutional business structure of Islamic banks

A co-opetition strategy or collaborative synergy between Islamic banks and their parent conventional bank was announced by Bank Indonesia as Islamic banking policy in 2011. Through this strategy Islamic banks are expected to align their service level with that of their conventional commercial parent banks through the joint use of technological facilities, the office network and human capital. For a number of banks, the one bank concept is progressively being introduced, for instance in the form of capital support and regular business expansion, thereby developing cross selling and product parity with supporting infrastructure like the office network and IT as well as more integrated human resources policy.

To this end, Bank Indonesia sees the need for all parent banks to reconsider business synergy with Islamic banks towards segment and product diversification. In addition, parent banks and Islamic banks must identify problems together and compile an action plan to bolster synergy.

4. Expand education and communication with a focus on parity and distinctiveness

Bank Indonesia’s public education/socialisation program will focus more in 2012 on reaching parity and promoting product distinctiveness in order to raise public understanding about Islamic banking products (iB financial literacy). This program will be rolled out through a variety of effective media to promote the launch of Islamic banking service as follows:

• Community based socialisation through various events and media like radio, a new microsite and talk shows aimedat the target segment of iB communications, namely, the youth, women/families and professionals. The main message of educational activity, among others, is technological parity and financial planning through iB.






Executive Summary

• The participation of Islamic banks at expositions to approach the general public with the Islamic banking products required, including expos for productive sectors like construction, maritime and creative industries. Program implementation in local areas is facilitated by iB pavilions with the same entry point as past expos, namely property, MSME, electronics, automotive and franchise.

• Dialogue with Islamic banking stakeholders (Islamic bank managers, industry/business associations, local government, academics, media, economic observers and the banking community as well as public organisations) to introduce and harmonise prevailing opinion on Islamic banking products while concomitantly nurturing product innovation. Specifically, training will also be provided for academics and scholars through training for trainers in various regions.

In addition to a greater focus on communicating Islamic banking product and service parity, Bank Indonesia will prepare the next phase of the iB communication program in 2012, namely by introducing the character of iB, including partnerships. Furthermore, Bank Indonesia will also facilitate a human capital competence mapping program for Islamic banks referring to the business model formula for the Islamic banking industry.

5. Enhance good governance and risk management

Looking ahead, Bank Indonesia will strengthen screening based on character and integrity as well as the competence of bankers. Bank Indonesia will also reinforce sanctions on those who deliberately abuse their authority. Controlling shareholders and bank management are fully responsible, within the limits of prevailing laws and regulations, for what happens at their bank. In addition, Bank Indonesia plans to compile regulations concerning good governance for Islamic rural banks. Through this policy the sound management of Islamic rural banks is expected by prioritising aspects of professionalism and transparency.

Islamic banks are urged to control risk by raising the quality of risk management in the interest of the bank and the customer relating to the bank’s products and activities, among others, through enhanced product and activity reporting that adheres to prudential principles, legal aspects and employee competence in line with availableinfrastructure.

6. Strengthen the supervision system

In 2012, Bank Indonesia will integrate the Islamic banking supervision system into a single platform in order to simplify access and improve the quality of information used as the basis of supervisory analysis. Integration covers the assessment of Islamic bank and sharia business unit soundness as well as the application of refined stress testing according to the 2011 change in regulations concerning the bank business plan. In addition, Bank Indonesia will evaluate the BPRS early warning system and also the early warning system for Islamic banks and sharia business units. Bank Indonesia will also amend the guideline for the monthly Islamic bank report (LBUS) to prepare for planned revisions in 2013.

In addition to enhancing supervisory infrastructure, Bank Indonesia will ameliorate risk assessment, oversight and inspections for Islamic banks. The quality of risk management, in the context of controlling new product and activity risk, internal control and know your employee principles, is the main focus of improved supervision, in addition to customer protection and security. Bank Indonesia will also continue efforts to raise the competence level of supervisors and apply quality assurance to Islamic banking supervisory activities.

85





Executive Summary

Rural Banks (BPR)

In order to boost the competitiveness of rural banks in terms of MSME financing, Bank Indonesia will focus

on the following policy measures:

1. Evaluate the requirements for paid up capital at rural banks with due consideration for the operational area of the bank. Currently, the minimum requirement for paid up capital refers to legislation issued in 2004.

2. Expand the contribution of rural banks as community banks for MSME and communities in their respective operational area by refining regulations that legislate the quality of earing assets at rural banks. This should take into consideration the assets of MSME, which have an economic value that can be deducted from the loan loss provisions. Furthermore, the risk weighting of credit allocated to MSME will be lowered, which will be included in a regulation concerning the capital adequacy ratio (CAR).

3. Foster rural bank credit expansion, which is more affordable to micro, small and medium enterprises by raising the operational efficiency of rural banks.

4. Improve the quality of existing cooperation with the rural banking associations in order to build the capacity of human resources at rural banks. This consists of organising training and providing easily accessible industry information on productive potential businesses that are financiallyfeasible as well as the latest information required to raise the competence of human resources at rural banks.

5. Encourage the establishment of Apex banks for rural banks by regional development banks while simultaneously promoting regional development banks as regional champions.

Following up the memorandum of understanding between the Governor of Bank Indonesia and the Minister

for Agriculture, signed to augment credit allocation programs, Bank Indonesia will host a number of activities like

accelerating the certification of agricultural land, establishing an agricultural insurance scheme, coordinating in

the provision of potential borrowers for the credit program, expanding the role of price buffers and socialising

the credit program.

Director

Coordinator & Editor

Contributor

Writers & Contributor

Banking Supervision Report

Department of Banking Supervision 1

Department of Banking Research and Regulations



Department of Sharia Banking

Department of Credit, Rural Bank Supervision and SMEs

Department of Bank Licensing and Banking Information

Department of Investigation and Banking Mediation

banking policy direction in 2011

Documents