Indonesia Deposit Insurance Has Rights Write Off Bank’s Debt, Claims During Crisis

Chairman Board of Commissioners Halim Alamsyah (M), Chief Executive Fauzi Ichsan (R), and Corporate Secretary of IDI Samsu Adi Nugroho - Photo by IDI

JAKARTA (TheInsiderStories)Indonesia Deposit Insurance Corporation (IDIC) has rights to write off bank bad debts and claims during crisis followed the Constitutional Court’s decision on the judicial review of the Constitutional Court’s decision on the Law No. 24 of year 2004. Petition for judicial review of Law no. 24/2004 is filed on behalf of IDI’s executive director Fauzi Ichsan.

“Therefore, the right to write off by IDIC can be given under normal circumstances as long as it is still related to the state of the crisis and implemented to meet the provisions of Article 46 paragraph (5) of the the Financial System Crisis Prevention and Handling Act Law,” said Constitutional Judge Manahan Sitompul, yesterday. But the judge only granted part of the material test lawsuit.

In its decision, the Constitutional Court declared Article 6 paragraph (1) letter c has no binding legal force. However, the authority to delete books and delete claims, can not be done by IDIC for assets in the form of receivables. Authority to delete books and write off must also comply with the provisions of Article 46 paragraph (5) of Law no. 9 of 2016 concerning Prevention and Handling of Financial System Crisis Act.

According to Ichsan, the options legally contained in the steps to rescue failed banks as stipulated in the Financial System Crisis Prevention and Handling Act which was just passed by parliament in 2016.

According to the law, IDIC is allowed to do the purchase and assumption scheme if a bank fails and it is decided to be rescued, the assets and liabilities with the most powerful legal status of the bank must be removed from the failed bank.

“Then the assets and liabilities will be auctioned to investors or to other banks,” he said.

if there is no buyer for the asset and the condition of the financial market is not in good condition, then the assets and liabilities of the failed bank will be accommodated temporarily by the bank broker (bridge bank) managed by IDIC. The establishment of the intermediary bank will be regulated in the form of derivative regulations in the form of IDI regulations.

“These assets can later be auctioned off to investors if at any time the financial market conditions improve,” said Fauzi by adding the agency is also allowed to issue bonds for injection capital of the banks that are considered not able to bail in.

With a bail-in system, a systemic bank is required to own or issue convertible bonds that may at any time be converted into equity shares in times of crisis. Its expected, with the bail in the average capital adequacy ratio of the bank could be in the range of 20 percent and should be enough to ensure that there is no financial and banking crisis.

But if it turns out that the capital bearing is not enough, the Financial Services Authority (FSA) will hand over the failed bank to the IDIC. If in a state of financial crisis the bond market slumped and did not allow the agency to issue bonds, then Financial System Stability Committee (FSSC) will consult with the president and ask the president to dig another funding source.

FSA Regulation on Systemic Bank

Previously, FSA has issued three regulations as a follow up of Law Number 9 Year 2016 on the Prevention and Handling of Financial System Crisis Act. The body issued the Status Determination and Follow Up of Commercial Bank Supervision contains rules concerning handling of bank issues, either handling systemic bank or handling of banks other than systemic bank.

In this provision stipulated that bank supervision status consists of three stages, namely normal supervision, intensive supervision, and special supervision.

First, for solvency problem handling for systemic bank is the focus of the revision of this provision, namely the activation of the implementation of the recovery plan, the early entry of the problem of solvency of banks by IDIX, and the mechanism of bank submission that can not be healthful to IDIC.

Second on Intermediary Bank contains rules concerning procedure of establishment of intermediary bank, starting from establishment process, operation, and termination of Intermediary Bank. Intermediary Banks can only be established and owned by IDIX.

The existence of an intermediary bank opens an option for handling bank solvency issues not only by transferring some or all of the assets or liabilities of the troubled bank to the receiving bank, temporary equity participation or revocation of the bank’s business license but also resolution to receive assets or obligations that have good quality from problem banks.

Third on the Recovery Plan for the Systemic Bank contains rules on systemic bank obligations to prepare the plan in order to prevent and overcome the financial problems that may occur in the Bank Systemic by preparing an Action Plan.

With the recovery plan, the efforts to solve the bank’s financial problems have been started since when the bank is in normal condition but there are significant problems. One of the important things to note from this provision is that the rules to contain the obligations of the controlling shareholders or other parties to increase the bank’s capital and convert certain types of debt into bank capital.

Given this rule, the systemic bank will try to solve the financial problems with its own bail-in power in accordance with the recovery plan they have compiled.

Furthermore, the issuance of these three regulation is expected to maintain and enhance customer confidence in the banking industry as well as to create a healthier, more sustainable and competitive banking industry and play a role in maintaining financial system stability in Indonesia.

Liquidation & Claims

IDIC assets is mostly (96.2 percent) in the form of investment placements. With the current funding, IDIX has a guaranteed reserves level of 1.34 percent of total banking deposits in Indonesia, where the law has targeted LPS to have a guarantee reserve of up to 2.5 percent of total banking deposits.

Since the operation, IDI has poured the liquidation fund of Rp1.2 trillion (US$82.76 million). The agency has strengthening its ability as an effort to run its role and function as a guarantor institution of deposit and executor of bank resolution.

Until the first quarter (1Q) of 2018, IDIC assets reached Rp94.5 trillion, growing 7.41 percent compared to the position of the end of 2017 assets, amounting to Rp88.0 trillion.

During 2018, LPS has liquidated 4 rural banks whose business license was revoked by FSA. In 2017, LPS liquidated 9 rural banks whose business license was revoked. Thus, the number of banks liquidated by the IDIC since its operation (September 22, 2005) up to June 5, 2018 totaled 89 banks, consisting of 1 Commercial Bank and 88 rural banks.

The number of claim payments made by IDIC in 2017 reached Rp47.34 billion for 7,309 accounts. While the total claim payment for 2018 (up to May 31) reached Rp20.54 billion for 9,332 accounts.

Thus the total payment of claims by LPS from the beginning of operations until May 31 recorded Rp 1.0 trillion to 160,027 accounts

The IDIX Board of Commissioners Meeting dated July 16 has evaluated and determined the Guarantee Interest Rate for deposits in Rupiah and foreign exchange in commercial banks as well as in Rupiah deposits at rural banks, where the Guarantee Rate for the period July 18 up to Sept. 17, 2018 increased by 25 bps.

For commercial banks the interest is set at 6.25 percent (Rupiah) and 1.50 percent (foreign currency) and for Rural Banks 8.75 percent (Rupiah). This policy was established by taking into account the development of interest rates on benchmark bank deposits which began to show a gradual increase in response to rising interest rates.

This change is also an adjustment to the development of financial market conditions and is intended to maintain the condition of financial system stability. In the future, IDIC said will continue to monitor the movement of banking deposit interest rates and be open to adjusting the Guarantee Rate.

Written by Staff Writer, Edited by Linda Silaen, Email: theinsiderstories@gmail.com