Allens Arthur Robinson

• Introduction
• All recent publications
• Asia publications
• Asia services

Focus: Equity deadline for Indonesian banks and insurers

4 June 2010

In brief: Existing regulations require Indonesian insurance companies and banks meet new minimum equity capital requirements by the end of 2010. As the deadline approaches, Partners David Holme (Jakarta) (view CV) and Robert Clarke (Singapore) (view CV) and Lawyer Brooke Nicholls revisit the requirements, and examine the consequences for businesses that fail to comply and the opportunities that will arise from the expected consolidation and capital raising.

• Current Indonesian equity rules
• Conclusion

Current Indonesian equity rules

Insurance sector

Indonesian conventional insurance and reinsurance companies¹ are required to progressively increase their capital base until it has reached specified minimum levels²;

• Insurance companies:
  • US$4.44 million by 31 December 2010;
  • US$7.77 million by 31 December 2012; and
  • US$11.1 million by 31 December 2014.

• Reinsurance companies:
  • US$11.1 million by 31 December 2010;
  • US$16.5 million by 31 December 2012; and
  • US$22.2 million by 31 December 2014.

Capital, for this purpose, is determined taking into account the total amount of paid-up capital, premium shares, profit, general reserve, purpose reserve, the value of securities, and the differences between fixed asset appraisals.

Prior to changes introduced between 1999 and 2008, the minimum equity capital required for insurance companies was US$1.67 million for general insurance companies, US$500,000 for life insurance companies and US$3.4 million for reinsurance companies.

Companies that fail to comply with the minimum capital requirements by 31 December 2010 will, in the first instance, be issued with up to three written warnings. If, following the final written warning, the company is still unable to satisfy the minimum capital requirements, the company's business activities will be restricted or suspended for up to 12 months. Companies that are unable to rectify the situation during this period will have their business permits revoked.

Banking sector

In the banking sector, the minimum equity capital requirement for existing Indonesian commercial banks is currently US$8.88 million. However, current Bank Indonesia regulations require Indonesian commercial banks to increase their equity capital to US$11.1 million by 31 December 2010.

Regulations issued in 2005 imposed restrictions on the activities of banks that did not increase the amount of their equity capital to the required level by the end of 2010.  Restrictions addressed foreign exchange trading, lending and capital raising activities. They also extended to the closure of branch networks outside of the province where the head office of the bank was located.

In December 2007, Bank Indonesia introduced a different mechanism to deal with banks unable to meet the minimum equity capital requirements – the current position is that non-complying banks will, in effect, have their licensing status downgraded by Bank Indonesia to that of a rural credit bank. These licensed entities cannot provide any services in payment transactions and have a restricted operational area.  This licensing change will clearly have a significant and detrimental impact on the business of non-compliant commercial banks.

Conclusion

The minimum equity capital requirements are designed to improve the financial health, efficiency and competitiveness of the domestic insurance and banking sectors in Indonesia.  However, it has been reported, at least in the context of the insurance sector, that many small insurance companies will find it difficult to meet the 2010 deadline without new investors or an injection of fresh capital. It has been estimated that 24 of the 90 general insurance companies, and 14 of the 46 life insurance companies operating in Indonesia, will not be able to satisfy the minimum capital equity requirements, with five life insurance companies and at least one general insurance company having negative equity.  The prospect of the revocation of a business permit and the uncertainty this creates for insurers and policy holders will need careful attention.

In the banking sector, the Deputy Governor of Bank Indonesia has reported that there are currently six banks in Indonesia that have equity capital levels below US$11.1 million and that the majority of those banks are proposing to inject additional capital to satisfy the minimum capital requirement by the end of 2010.

Given the consequences of non-compliance with the minimum equity capital requirements, and in light of the December 2010 deadline for both the insurance and banking sectors, we are likely to see an increase in consolidation and capital raising activity in these sectors in the coming months.

Footnotes

1. Insurance and re-insurance companies carrying on business based on Shariah principles are subject to different requirements.
2. For the purpose of this article, approximate US dollar equivalents of the required Rupiah levels have been used.

For further information, please contact:

• Robert ClarkePartner, Melbourne
  Ph: +61 3 9613 8034
  Robert.Clarke@aar.com.au
• David HolmePartner, Jakarta
  Ph: +62 21 2995 1500
  David.Holme@aar.com.au