FOREIGN BANKS PROTEST BILL REQUIRING LOCALLY INCORPORATED BRANCHES
Posted on August 22, 2015 on 10:56:21 WIB
Critics have balked at a provision in a bill brought before the House of Representatives which would require foreign banks to incorporate their Indonesian branches locally.
Indonesia currently permits foreign banks to operate in the country without having to establish a local corporation, allowing their offices here to run as overseas branches of their headquarters. Local banks have long opposed this arrangement, saying it allows foreign banks to pull capital out of the country quickly, particularly during financial market volatility.
Under the banking bill set for deliberation, banks like Citibank, Standard Chartered and Deutsche Bank would have to set up locally incorporated offices – a move that the banks say will severely undermine their competitiveness and operations.
For one thing, local branches of international banks would lose the ability to obtain "cheap money" from their overseas headquarters, said Kunardy Lie, managing director and chief country officer of Deutsche Bank in Indonesia.
He argued that this would force the foreign bank branches to compete with local banks by offering high interest rates to collect third party funds such as savings, term deposits and current accounts.
Branches of foreign banks in Indonesia currently enjoy the privilege of falling under the legal auspices of the parent company, and thus are not required to go through complex corporate actions, such as a rights issue, to obtain capital injections.
Hotman Simbolon, senior vice president of government affairs at Citibank Indonesia, said the notion that foreign banks relied on the current arrangement as a way to pump money out of the country in the event of a crisis was "baseless."
"International banks have been put under scrutiny since global crisis in 2008," he said.
"Meanwhile, the branches of foreign banks are also supervised under strict regulations after the national crisis in 1998. People forget who helped Indonesia's economy in times of crisis."
In the aftermath of the Asian financial crisis of 1998, Indonesia opened its doors to foreign banks to operate more freely in the country in a bid to boost confidence in the local banking sector after a catastrophic run on banks.
Hotman said foreign bank branches already complied with a requirement to meet minimum capital equivalency maintained assets, or CEMA. The CEMA regulation requires branch offices of foreign banks to set aside 8 percent of their total liabilities each month and no less than Rp 1 trillion ($74.8 million) into liquid assets like government bonds, central bank debt papers (SBIs) and investment-grade corporate bonds.
Hotman also argued that requiring foreign banks to incorporate their local branches would affect employees. He said thousands of professionals employed by these banks would need to adjust their social security and work insurance policies at the same time, which he warned would be a "catastrophic process."
Perbina represents 24 foreign banks from 12 countries, comprising 10 joint-venture banks (incorporated locally), 10 banks with local branches, and four banks with only a representative office in Indonesia.
Muhammad Misbakhun, a legislator from House Commisison XI, which oversees finance and banking affairs, said lawmakers would consider all the concerns raised by the foreign banks in their deliberations of the bill.
"It's still being drafted, so the room for negotiation is still wide open," he said. Agus Martowardojo, the Bank Indonesia governor, said separately that the central bank would discuss the bill with representatives from foreign banks.
The total outstanding loans issued by branches of foreign banks in Indonesia stood at Rp 278.37 trillion as of April 2015, a relatively small figure compared to the total Rp 5,681.86 trillion from all commercial banks operating in the country, according to the Financial Services Authority (OJK). Joint-venture foreign banks had outstanding loans of Rp 194.55 trillion during the same period.
Foreign bank branches recorded Rp 195.46 trillion in third-party funds as of the end of April, while the joint-venture foreign banks booked Rp 154.43 trillion.