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Legal Updates | Indonesia’s OJK Issues Regulation on Quick Restructuring for Troubled Banks in Wake of COVID-19

The COVID-19 global pandemic has taken a toll on the Indonesian economy, underlining the need for financial institutions to have adequate liquidity in the face of uncertain times.


In response, the Indonesian government issued Government Regulation in Lieu of Law No. 1 of 2020 on State Financial Policy for the Handling of COVID-19 and/or Other Threats to the National Economy and/or Financial System Stability, dated March 31, 2020 (“Perppu 1/2020”). Perppu 1/2020 gives the Indonesian Financial Services Authority (Otoritas Jasa Keuangan or “OJK”) the power to issue written instructions for financially troubled banks in Indonesia to restructure by way of an acquisition, merger, consolidation or integration (hereinafter, “Restructuring Measure”).


In an article in Kompas, a leading Indonesian newspaper, by Bambang P. Djatmiko, dated April 23, 2020, the OJK conveyed that in normal times it typically puts troubled banks under intensive supervision for about nine months, giving the banks’ shareholders time to seek new investors. But considering the gravity of the COVID-19 situation, the OJK favors a speedier response in order to prevent negative sentiment and maintain public trust in the financial sector.


Subsequently, the OJK issued an implementing regulation for Perppu 1/2020 specifying the procedures for the Restructuring Measure. This implementing regulation is OJK Regulation No. 18/POJK.03/2020 on Written Instructions for the Handling of Troubled Banks, dated April 21, 2020 (“OJK 18/2020”).


New Regulation on Bank Restructuring Measures


Article 2 of OJK 18/2020 provides that the OJK may issue written instructions to banks involved in a merger, acquisition, consolidation and/or integration (“OJK Instruction”), whether as the initiator of such action or the counterparty. This means that the OJK has the power to instruct banks to conduct a Restructuring Measure and to instruct counterparty banks to accept the proposal for such Restructuring Measure.


OJK 18/2020 sets out the criteria for the OJK to instruct a bank to make an initial proposal for a Restructuring Measure, which are as follows:


  1. Bank’s Ability to Withstand Pressure


The OJK may issue an Instruction to a bank if, based on the assessment of the OJK, the bank has financial troubles that might affect the continuity of its business or leave it unable to withstand ongoing pressure or other pressure in the near future. OJK 18/2020 does not elaborate on what the assessment is based on, but it provides that the assessment will consider the individual condition of the bank (idiosyncratic) and external factors that affect such bank. External factors may include the COVID-19 situation and/or other conditions that threaten an economic crisis and/or the stability of the financial system.


  1. Factors Related to Controlling Shareholder


Based on the assessment of the OJK, if the controlling shareholder of a bank does not have the ability to “strengthen the bank,” that bank may be subject to the OJK Instruction. The term “strengthen the bank” means the ability of the controlling shareholder either to (i) increase or maintain the level of capital in the bank and/or an adequate level of liquidity; and/or (ii) consolidate such bank through methods expressed in OJK Regulation No. 12/POJK.03/2020 on Consolidation of Commercial Banks dated March 17, 2020. A bank with a controlling shareholder that is unable to perform these actions can be subjected to an OJK Instruction.


OJK 18/2020 also sets out the criteria for banks that may be subject to an OJK Instruction as the counterparty of a Restructuring Measure:


  1. Conventional Commercial Bank (Bank Umum Konvensional) or Sharia Commercial Bank (Bank Umum Syariah):


A minimum bank soundness level of Composite Rating 3 (Peringkat Komposit 3 or “PK-3”) is required after a Conventional Commercial Bank or Sharia Commercial Bank receives a Restructuring Measure. Both OJK Regulation No. 4/POJK.03/2016 of 2016 on Commercial Bank Soundness Level Assessment dated January 27, 2016, and OJK Regulation No. 8/POJK.03/2014 on Sharia Commercial Bank Soundness Level Assessment dated June 13, 2014, provide that PK-3 indicates a financially sound bank that is able to withstand a change of external factors. The assessment of bank soundness level for both Conventional Commercial Banks and Sharia Commercial Banks is based on the bank’s risk profile, good corporate governance, earnings and capital.


  1. Rural Bank (Bank Perkreditan Rakyat):


A minimum bank soundness level, as represented by a credit score of 66-81 (Financially Sound or Cukup Sehat), is required after a Rural Bank receives a Restructuring Measure, as regulated under Bank Indonesia Board of Directors Decision No. 30/12/KEP/DIR on Guidelines for the Assessment of Rural Bank Soundness Level dated April 30, 1997. The determination of credit score includes reviewing the bank’s capital, asset quality, management, earnings and liquidity.


  1. Sharia Rural Bank (Bank Perkreditan Rakyat Syariah):


A minimum bank soundness level of PK-3 is required after a Sharia Rural Bank receives a Restructuring Measure. The bank soundness level must be determined using the standard of assessment regulated by OJK Regulation No. 20/POJK.03/2019 on Assessment System for Sharia Rural Bank Soundness Level dated September 9, 2019. The soundness level of a Sharia Rural Bank is assessed based on its capital, asset quality, management, earnings and liquidity.


Action Plan for Restructuring Measure


After the receipt of a written instruction from the OJK to conduct a Restructuring Measure, banks are obliged to respond with an action plan that stipulates the process and schedule for such Restructuring Measure until its effective date (the “Action Plan”). It must be noted that OJK 18/2020 does not indicate a time limit for when the Action Plan must be submitted following receipt of the OJK Instruction.




Failure to respond to the OJK Instruction with an Action Plan may result in administrative sanctions for the bank as a legal entity and each member of its board of directors and board of commissioners, and its controlling shareholder (“Principal Parties”). Administrative sanctions will first be in the form a written warning. Failure to heed the written warning may result in further administrative sanctions.


For banks, as legal entities, violation of the written warning may result in a downscaling of its operation. For example, Conventional Banks or Sharia Banks may be downscaled to Rural Banks or Sharia Rural Banks, while temporary restrictions on business activities may be imposed for banks already classified as Rural Banks or Sharia Rural Banks.


If the Principal Parties fail to comply with a written warning from the OJK, they may be prohibited from holding any position as a Principal Party at any bank in the future by virtue of OJK Regulation No. 34/POJK.03/2018 of 2018 on Re-evaluation of Principal Parties in Financial Services dated January 28, 2019.




OJK 18/2020 gives the OJK the authority to decide which financially troubled banks require an early Restructuring Measure through the issuance of an OJK Instruction. Such decision is contingent on the OJK’s subjective assessment of the bank’s ability to withstand external pressures such as the COVID-19 pandemic. Although the intention of OJK 18/2020 is to remove obstacles faced during the threat of an economic crisis and/or financial system instability, it gives banks and business actors limited time to react once an OJK Instruction is directed to them. Time is certainly of the essence to the OJK during the COVID-19 situation.



SSEK - 2020

icone share

Indonesia Finance Snapshot - Banking

Contribution to GDP: 2.87% (2016)
Return on Assets: 2.30% (Q4 2015)
Number of Commercial Banks: 120; 4 State/Partially State Owned, 10 Foreign, 16 Joint Ventures, 32 Non Foreign Exchange, 35 Foreign Exchange, 26 Regional Development Banks (August 2015).
Number of Islamic Banks & Units: 13 Banks, 32 Units (2016)
Total Assets: 6,244 trillion IDR (Q3 2015)
Government Bodies: Bank Indonesia, Ministry of Finance, Financial Services Authority (OJK).
Relevant Law: Bank Indonesia Regulation No. 14/8/PBI/2012 on Share
Ownership in Commercial Banks limits ownership by a single local/foreign financial institution to 40%, by a non financial institution to 30%, and by an individual to 20%. Larger stake is possible with the approval of Bank Indonesia.

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