OJK Improved Regulation on Quality Assessment of Asset for Commercial Banks

To maintain the soundness level of banks through the protection of banks’ quality of asset and loan-loss provisions, the Indonesian Financial Services Authority (Otoritas Jasa Keuangan – “OJK”) enacted OJK Regulation No. 40/POJK.03/2019 on Quality Assessment of Asset for Commercial Banks that came into effect on January 1, 2020 (“POJK 40/2019”). This POJK 40/2019 replaces and synchronizes (i) Bank Indonesia (“BI”) Regulation No. 14/15/PBI/2012 on Asset Quality Assessment of Conventional Bank, (ii) POJK No. 14/POJK.03/2018 on Quality Assessment of Conventional Bank to for the Improvement of Growth in Real Estate Sector and Foreign Exchange, (iii) Bank Indonesia Directors’ Decision Letter No. 23/68/KEP/DIR on Productive Assets Quality and Reserves Structure, (iv) BI Circular Letter No. 15/28/DPNP on Quality Assessment of Conventional Bank, and (v) BI Circular Letter No. 4/241/UPPK/PK on Overdrafts due to Interest/Stamp Duty on Loans (collectively, the “Previous Regulations”).

Continuing the Previous Regulations, POJK 40/2019 governs the procedure for banks’ quality assessment of asset, loan-loss provisions and credit restructuring. Adopting the previous concept in assessing the quality of their assets, banks are required to make an evaluation based on two categories of assets namely:

  • productive asset which includes, among others, credit, placements, securities and derivative receivables; and
  • non-productive asset which includes acquired collateral (Aset Yang Diambil Alih), dormant property and inter-office accounts and suspense accounts.

Similar to the Previous Regulations, in terms of collectability, the new POJK 40/2019 maintains the 1 (one) to 5 (five) classification with 1 (one) being Current (Lancar) to 5 (five) being Loss (Macet).  The same rule of loan-loss provisions is also restated. Essentially, banks are required to maintain loan-loss provisions over their productive and non-productive asset in order to prevent potential losses arising from their assets. The calculating procedure for loan-loss provisions is as follows.

  • For productive assets classified as Current, banks shall set aside 1% (one percent) to be accounted for their general loan-loss provisions. This excludes outstanding credit facility which is part of Administrative Account Transaction, government issued securities and productive assets backed by cash collateral.
  • As for the calculation for loan-loss provisions of non-productive assets and productive assets classified other than Current, banks shall apply the following:
    1. 5% (five percent) for assets classified as Special Mention (Dalam Perhatian Khusus),
    2. 15% (fifteen percent) for assets classified as Sub-Standard (Kurang Lancar),
    3. 50% (fifty percent) for assets classified as Doubtful (Diragukan); and
    4. 100% for assets classified as Loss.
  • Bonds and/or sharia bonds which are not issued through public offering and securities and/or shares securitized by or subject to shares as its underlying asset classified as Loss and shall be calculated based on Loss classification.

The above calculation shall be made after the subtraction of assets’ collateral.

  • Key Changes from the Previous Regulations

Aside from reinstating the Previous Regulations as set out above, the new POJK 40/2019 now gives room for securities listed in off-shore stock exchange to be considered as productive asset, includes apartment unit with fiduciary security as asset collateral that can be subtracted for loan-loss provisions, provides more detailed reporting guideline for credit restructuring and implements two-stages approach in sanction enforcement that will be elaborated below.

Productive Asset: Room for Securities Listed in Off-Shore Stock Exchange

POJK 40/2019 explicitly allows securities that are being actively traded in off-shore stock exchange as productive asset with Current classification provided that such off-shore stock exchange is among the top 25 (twenty-five) biggest capitalization capital market value in the world.

Loan-Loss Provisions: Apartment Unit with Fiduciary Security as An Additional Asset Collateral Subtraction

POJK 40/2019 adds the list of asset collateral that can be subtracted in calculating loan-loss provisions set out in the Previous Regulations by including apartment unit securitized by fiduciary security.

Credit Restructuring: A More Detailed Guideline

OJK now provides a detailed form of credit restructuring report which was not stipulated in the Previous Regulations. The form requires banks to report the type of credit restructuring as well as debtors’ credit condition before and after the restructuring. Further the reporting procedure for credit restructuring also refers to the sanctions set out in OJK Regulation No. 12/POJK.03/2019 on Conventional Bank Report Through OJK Reporting System dated April 5, 2019, where incompliance is subject to additional sanctions in the form of fines.

Sanction: Two-Stages Enforcement Approach

Unlike the Previous Regulations, POJK 40/2019 now imposes sanction for non-compliance in two stages namely (i) written warning, before (ii) additional sanctions in the form of suspension of business activities and/or prohibition of banks to participate as primary parties within financial institutions. Banks will only be subjected to additional sanctions if they have received written warning and remain to ignore such written warning.

February 12, 2020

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