Bank Indonesia Issues New Regulation on Prudential Rules for Offshore Debt and FX-denominated Liabilities in Banking Sector
Bank Indonesia (BI) has issued a new umbrella regulation on the application of prudential norms to limit the exposure of Indonesian banks to offshore debt and foreign currency (“FX”)-denominated liabilities. The regulation (No. 21/1/PBI/2019 – “Reg. 21”) entered into force on 1 March 2019.
Reg. 21 revokes BI Reg. No. 7/1/PBI/2005, as amended four times, most recently by BI Regulation No. 16/7/PBI/2014 (collectively, the “Previous Regulation”), with the exception of Articles 6(1) and 7 thereof.
As with the Previous Regulation, Reg. 21 stresses the importance of compliance with prudential norms for maintaining macroeconomic and financial-system stability.
However, while the ambit of the Previous Regulation was confined to offshore bank loans (pinjaman luar negeri bank), the scope of Reg. 21 encompasses “offshore bank debt and FX-denominated other bank liabilities” (utang luar negeri bank dan kewajiban bank lainnya dalam valuta asing).
In this ABNR Legal Update, we focus on three aspects of Reg. 21: (i) key concepts; (ii) the scope of offshore debt and FX-denominated other liabilities in the banking sector; and (iii) the application of prudential norms to short-term and long-term liabilities.
Reg. 21 also sets out detailed provisions on supervision and sanctions, but for the sake of brevity these have been excluded from the scope of this Update.
B. Key Concepts
Reg. 21 provides the following definitions of key concepts:
A “Bank” is a conventional or shariah-based bank, or a shariah unit of a bank, as defined by the banking laws and regulations, including an Indonesian branch of an offshore bank, and an offshore branch of a conventional or shariah-based bank that is domiciled in Indonesia.
A “Resident” is a resident of Indonesia as defined by the Foreign Exchange Law, that is, a legal or natural person that is domiciled, or plans to be domiciled, in Indonesia for at least one year;
An “Offshore Bank Debt” is an FX- and/or rupiah-denominated debt owed by a bank to a non-Resident, including in respect of shariah-compliant financing.
A “Short Term Liability” is an Offshore Bank Debt or FX-denominated other bank liability that has an original maturity of up to one year;
A “Long Term Liability” is an Offshore Bank Debt or FX-denominated other bank liability that has an original maturity of more than one year.
A “Domestic FX-denominated Bond” is a foreign currency-denominated bond that is issued by a Bank on the domestic bourse or is sold by way of private placement to a Resident.
A “Risk Participation Arrangement” refers to an assignment of risk related to a credit and/or other facility based on a master risk participation agreement.
The term “FX-denominated other bank liabilities” is not specifically defined by Reg. 21 but is explained in the body of the regulation and its Elucidation, as discussed further in subsection C.2 below.
C. Scope of Offshore Bank Debts and FX-denominated Other Bank Liabilities
C.1 Offshore Bank Debts
Offshore Bank Debts consist of the following:
a. loan agreement-based debts;
b. debt securities, including letters of credit, banker’s acceptances, bonds, commercial papers, promissory notes, and medium term notes;
demand deposits, time deposits, savings deposits and call money; and
c. other forms of debt.
C.2 FX-denominated Other Bank Liabilities
“FX-denominated other bank liabilities” consist of:
a. Domestic FX-denominated Bonds; and
b. Risk Participation Arrangements.
To be categorized as an “FX-denominated other bank liability,” a Risk Participation Arrangement must satisfy the following requirements:
a. be conducted between a Bank as grantor and a non-Resident as participant (the grantor is the party that sells the risk while the participant is the party that buys or accepts the risk);
b. be accompanied by a flow of funds at the time the arrangement is funded from the non-Resident as participant to the Bank as grantor; and
c. does not involve an assignment of claims from the Bank as grantor to the non-Resident as participant.
Should a claim subsequently be assigned by the Bank as grantor to the non-Resident as participant, then the Risk Participation Arrangement will be treated as an Offshore Bank Debt owed by the Bank’s debtor to the participant. All such assignments of claims must be reported to BI.
D. Application of Prudential Norms
Reg. 21 stresses that prudential norms must be adhered to in respect of Offshore Bank Debts and FX-denominated other bank liabilities.
The applicable prudential norms differ depending on whether the Offshore Bank Debt or FX-denominated other bank liability is categorized as a Short Term Liability or a Long Term Liability.
D.1 Short Term Liabilities:
Short Term Liabilities consist of:
a. short-term Offshore Bank Debts;
b. short-term Domestic FX-denominated Bonds; and
c. short-term Risk Participation Arrangements.
A Bank is required to observe a daily limit on Short Term Liabilities of 30 percent of capital. This limit also applies in the case of a Long Term Liability whose original maturity has been shortened to one year or less.
However, the following are exempt from the 30-percent limit:
a. a short-term Offshore Bank Debt owed to a controlling shareholder based on an emergency liquidity loan;
b. a short-term Offshore Bank Debt owed to a controlling shareholder based on a loan to be on-lent to the real sector;
c. up to 100 percent of the declared operating funds of the Indonesian branch office of an offshore bank;
d. liabilities owed by Banks to non-Residents based on hedging transactions;
e. demand, savings and time deposits held by foreign country representatives and international institutions;
f. demand deposits held by non-Residents for investment activities in Indonesia, including direct investments, and the purchase of shares, Indonesian corporate bonds, Indonesian government securities and/or securities issued by BI;
g. demand deposits held by non-Residents to accommodate the proceeds of the sale or divestment of direct investments, shares, Indonesian corporate bonds, Indonesian government securities and/or securities issued by BI;
h. demand deposits held by non-Residents and non-controlling shareholders for on-lending to infrastructure projects;
i. demand deposits held by non-Residents to accommodate the proceeds of rupiah bonds issued by a supranational agency for financing infrastructure projects;
j. demand or time deposits held by non-Residents that are used to temporarily accommodate injections of Bank capital, as referred to in the Financial Services Authority (OJK) regulations on minimum capital requirements.
In addition, BI may provide individual exemptions in cases of emergency.
D.2 Specific Rules for Branches of Offshore Banks
An Indonesian branch office of an offshore bank must inform BI of its declared operating funds and changes thereto, and must maintain a minimum daily operating-funds balance of 90 percent of its declared operating funds. A branch office may also have a daily operating funds balance that exceeds 100 percent of its declared operating funds, in which case the excess should be treated as a Short Term Liability.
D.3 Long Term Liabilities
Long Term Liabilities consist of:
a. long-term Offshore Bank Debts;
b. long-term Domestic FX-denominated Bonds; and
c. long-term Risk Participation Arrangements.
A Bank that intends to incur a Long Term Liability must first submit a market entry plan to BI for approval.
For a market entry plan to be submitted to BI, it must be incorporated in the Bank’s business plan.
Exemptions to the requirement that a market entry plan be incorporated in the Bank’s business plan are provided in the case of:
a. a Long Term Liability in the form of a subordinated loan that is based on a recommendation from the OJK;
b. a Long Term Liability that is essential so as to address a pressing problem at the Bank and/or satisfies the requirements set by the relevant authority, and which is based on information and/or a recommendation from the relevant authority. The Elucidation on Reg. 21 explains that “the relevant authority” refers to the OJK or the Deposit Insurance Agency (LPS).
A BI approval for a market entry plan remains valid for three months counting from the date of issuance. Should the Bank not have entered the market within that three-month period, the approval will lapse and the Bank will need to apply for a new approval before entering the market.
A Bank is prohibited from incurring a Long Term Liability that exceeds the quantum stated in the BI approval.
Reports must be submitted to BI on market-entry realization within seven days of market entry or within seven days of the settlement date, depending on the type of Offshore Bank Debt or FX-denominated other bank liability that is incurred.
BI may impose ceilings on the Long Term Liabilities of Banks having regard to the findings of debt-sustainability analyses, the balance of payments situation, monetary conditions, adequacy of foreign currency reserves or such other matters as may be deemed important by BI.
The requirements set out in Reg. 21 are not applicable to Bank liabilities that are related to international trade (with the exception of pre-shipment financing facilities), provided that such liabilities are supported by sufficient underlying-transaction evidence.
 BI Regulation No. 21/1/PBI/2019 on Offshore Bank Debt and FX-denominated Other Bank Liabilities (Peraturan BI Nomor 21/1/PBI/2019 Tahun 2019 Tentang Utang Luar Negeri Bank dan Kewajiban Bank Lainnya Dalam Valuta Asing)
 BI Regulation No. 7/1/PBI/2005 on Offshore Loans in the Banking Sector (Peraturan BI Nomor 7/1/PBI/2005 Tentang Pinjaman Luar Negeri Bank)
 Undang-undang No. 24 Tahun 1999 tentang Lalu Lintas Devisa dan Sistem Nilai Tukar
This ABNR News and its contents are intended solely to provide a general overview, for informational purposes, of selected recent developments in Indonesian law. They do not constitute legal advice and should not be relied upon as such. Accordingly, ABNR accepts no liability of any kind in respect of any statement, opinion, view, error, or omission that may be contained in this Legal Update. In all circumstances, you are strongly advised to consult a licensed Indonesian legal practitioner before taking any action that could adversely affect your rights and obligations under Indonesian law.