Amendment to Financial Services Authority Regulation Number 16/POJK.03/2014 on Asset Quality Assessment for Islamic Commercial Banks and Islamic Business Units

COPY
FINANCIAL SERVICES AUTHORITY REGULATION
REPUBLIC OF INDONESIA
NUMBER 19 /POJK.03/2018
CONCERNING
AMENDMENT TO THE FINANCIAL SERVICES AUTHORITY REGULATION NUMBER 16/POJK.03/2014 CONCERNING ASSET QUALITY ASSESSMENT FOR ISLAMIC COMMERCIAL BANKS AND ISLAMIC BUSINESS UNITS BY THE GRACE OF GOD THE ALMIGHTY, THE COMMISSIONERS OF THE FINANCIAL SERVICES AUTHORITY, Considering:
a. that current policies are needed to increase Indonesia's economic growth and national competitiveness; b. that to increase economic growth, policies are required to drive the growth of priority sectors, namely the housing sector;
c. that to increase national competitiveness, policies are required to drive export financing that can increase foreign exchange reserves;
d. that based on the considerations referred to in letters a through c, it is necessary to establish a Financial Services Authority Regulation concerning Amendment to the Financial Services Authority Regulation Number 16/POJK.03/2014 concerning Asset Quality Assessment for Islamic Commercial Banks and Islamic Business Units;

Recalling:

1. Law Number 21 of 2008 concerning Islamic Banking (State Gazette of the Republic of Indonesia Year 2008 Number 94, Supplement to the State Gazette of the Republic of Indonesia Number 4867);
2. Law Number 21 of 2011 concerning the Financial Services Authority (State Gazette of the Republic of Indonesia Year 2011 Number 111, Supplement to the State Gazette of the Republic of Indonesia Number 5253);

DECIDING:
Establish: FINANCIAL SERVICES AUTHORITY REGULATION CONCERNING AMENDMENT TO THE FINANCIAL SERVICES AUTHORITY REGULATION NUMBER 16/POJK.03/2014 CONCERNING ASSET QUALITY ASSESSMENT FOR ISLAMIC COMMERCIAL BANKS AND ISLAMIC BUSINESS UNITS.

Article I
Several provisions in the Financial Services Authority Regulation Number 16/POJK.03/2014 concerning Asset Quality Assessment for Islamic Commercial Banks and Islamic Business Units (State Gazette of the Republic of Indonesia Year 2014 Number 347, Supplement to the State Gazette of the Republic of Indonesia Number 5625) are amended as follows:

1. Section Eleven is added to Chapter III, so that it reads as follows:
   Section Eleven
   Export-Oriented Productive Assets

Article 31A
(1) Productive Assets in the form of fund investments oriented towards exports to financial institutions that meet specific requirements are determined to have a 'performing' quality. (2) A portion of Productive Assets that receives guarantees from financial institutions that meet specific requirements is determined to have a 'performing' quality. (3) The specific requirements referred to in paragraph (1) and paragraph (2) are:
a. owned by the central government; b. their business activities provide national export financing; and
c. established by Law with sovereign status.

Article 31B
(1) Guarantees as referred to in Article 31A paragraph (2) must meet the following requirements:
a. unconditional and irrevocable; b. can be liquidated no later than 7 (seven) working days since the claim submission, including partial liquidation to pay principal installment arrears and/or margin/profit share/ujrah;
c. have a minimum duration equal to the duration of the Productive Asset; and
d. are not counter-guaranteed.
(2) The Bank must submit a claim against the guarantee received as referred to in paragraph (1) no later than 7 (seven) working days since the customer's default. (3) A customer is declared to have defaulted as referred to in paragraph (2) in the event:
a. principal and/or margin/profit share/ujrah and/or other receivables arrears occur for 90 (ninety) days even though the Productive Asset has not yet matured; b. principal and/or margin/profit share/ujrah and/or other receivables payments are not received when the Productive Asset matures; or
c. other requirements besides the payment of principal and/or margin/profit share/ujrah are not met, which can result in default.

Article 31C
(1) The determination of the quality of Export-Oriented Financing and other fund provisions can be based solely on the accuracy of principal and/or margin/profit share/ujrah payments, which are part of the components in the assessment factor of repayment ability as referred to in Article 8 paragraph (3). (2) The determination of the quality of Export-Oriented Financing and other fund provisions as referred to in paragraph (1) applies to:
a. Export-Oriented Financing and other fund provisions to micro and/or small businesses; b. Export-Oriented Financing and other fund provisions to medium businesses provided by each Bank to 1 (one) customer or 1 (one) project with an amount up to Rp5,000,000,000.00 (five billion rupiah); and
c. Export-Oriented Financing and other fund provisions provided by each Bank to medium business customers with a specific amount.
(3) Export-Oriented Financing and other fund provisions provided by each Bank to medium business customers with a specific amount as referred to in paragraph (2) letter c are with amounts:
a. more than Rp5,000,000,000.00 (five billion rupiah) up to Rp20,000,000,000.00 (twenty billion rupiah) for Banks that meet the criteria, namely:

1. have a Credit Risk Adequacy Assessment Predication (KPMR) for credit risk rated as very adequate (strong);

2. have a KPMM ratio at least equal to the provisions of applicable legislation; and

3. have a composite bank health rating of at least 3 (PK-3); or
   b. more than Rp5,000,000,000.00 (five billion rupiah) up to Rp10,000,000,000.00 (ten billion rupiah) for Banks that meet the criteria, namely:

4. have a Credit Risk Adequacy Assessment Predication (KPMR) for credit risk rated as adequate (satisfactory);

5. have a KPMM ratio at least equal to the provisions of applicable legislation; and

6. have a composite bank health rating of at least 3 (PK-3).
   (4) The assessment of Export-Oriented Financing and other fund provisions provided by each Bank to medium business customers with a specific amount as referred to in paragraph (3) for Islamic Business Units applies the following provisions:
   a. the KPMR assessment predication for credit risk refers to the KPMR adequacy assessment predication of the Islamic Business Unit; and b. the composite health rating and KPMM ratio refer to the composite health rating and KPMM ratio of its parent bank. (5) The KPMR assessment predication for credit risk, KPMM ratio, and composite bank health rating used in the quality assessment of Financing and other fund provisions as referred to in paragraph (3) and paragraph (4) are based on the Financial Services Authority's assessment, which the Bank can know at the time of the prudential meeting. (6) In the event of significant deviation in the principles of healthy Financing, the Financial Services Authority determines the quality assessment of Financing and other fund provisions as referred to in paragraph (2) letter c and paragraph (3) based on assessment factors as referred to in Article 7. (7) The use of assessment predication as referred to in paragraph (3) and paragraph (4) is:
   a. the assessment predication position of December of the previous year is used for the quality assessment of Financing and other fund provisions for the period from February to July; and b. the assessment predication position of June is used for the quality assessment of Financing and other fund provisions for the period from August to January. (8) The provisions as referred to in paragraph (2) letter c and paragraph (3) are excluded for Export-Oriented Financing and other fund provisions provided to 1 (one) medium business customer with an amount more than Rp5,000,000,000.00 (five billion rupiah) which are:
   a. Restructured Financing; and/or b. fund provisions to the 50 (fifty) largest customers of the Bank.

7. Article 47 is added with 1 (one) paragraph, namely paragraph (3), so that Article 47 reads as follows:
   Article 47
   (1) Collateral to be used as a reduction factor for PPA as referred to in Article 45 must be assessed at least by:
   a. an independent appraiser as referred to in Article 35 paragraph (6) for Productive Assets originating from customers or Borrower Groups with an amount more than Rp5,000,000,000.00 (five billion rupiah); or b. the Bank's internal appraiser for Productive Assets originating from customers or Borrower Groups with an amount up to Rp5,000,000,000.00 (five billion rupiah). (2) The Bank is required to assess the collateral as referred to in paragraph (1) from the beginning of the provision of Productive Assets. (3) The provisions as referred to in paragraph (1) are excluded for collateral in the form of residential houses to be used as a reduction factor for PPA as referred to in Article 45 letter b.

8. Between Article 47 and Article 48, 1 (one) article is inserted, namely Article 47A, so that it reads as follows:
   Article 47A
   (1) Collateral in the form of residential houses to be used as a reduction factor for PPA as referred to in Article 45 letter b must be assessed at least by:
   a. an independent appraiser as referred to in Article 35 paragraph (6) for Productive Assets originating from customers or Borrower Groups with an amount more than Rp10,000,000,000.00 (ten billion rupiah); or b. the Bank's internal appraiser for Productive Assets originating from customers or Borrower Groups with an amount up to Rp10,000,000,000.00 (ten billion rupiah). (2) The assessment of collateral as referred to in paragraph (1) is conducted at the beginning of the provision of Productive Assets and at the time of collateral reassessment for updating the assessment.

9. Article 61 is amended and added with 1 (one) paragraph, namely paragraph (7), so that Article 61 reads as follows:
   Article 61
   (1) The quality of Financing after restructuring is determined as follows:
   a. at most equal to the quality of Financing before restructuring, provided the customer has not met the obligation to pay principal installments and/or margin/profit share/ujrah consecutively for 3 (three) periods according to the agreed time; b. can increase at most 1 (one) level from the quality of Financing before restructuring, after the customer has met the obligation to pay principal installments and/or margin/profit share/ujrah consecutively for 3 (three) periods as referred to in letter a; and
   c. based on assessment factors as referred to in Article 7:

10. after the determination of Financing quality as referred to in letter b; or

11. in the event the customer does not meet the conditions and/or payment obligations in the Financing Restructuring Agreement, either for 3 (three) periods or after 3 (three) periods of payment obligations according to the agreed time.
    (2) The determination of the quality of restructured Financing up to an amount of Rp1,000,000,000.00 (one billion rupiah) is conducted as follows:
    a. at most 'less performing' for Financing that was previously classified as 'doubtful' and 'non-performing' before restructuring, and remains the same for Financing classified as 'less performing' and 'special attention', up to 3 (three) periods of payment obligations; and b. subsequently determined based on assessment factors regarding the accuracy of principal and/or margin/profit share/ujrah payments. (3) The quality of restructured Financing can be determined based on assessment factors as referred to in Article 7, in the event the implementation of Financing Restructuring is not supported by adequate analysis and documentation as referred to in Article 60. (4) In the event the period for meeting the obligation to pay principal installments and/or margin/profit share/ujrah is less than 1 (one) month, the quality upgrade as referred to in paragraph (1) letter b can be conducted at the earliest 3 (three) months since the Financing Restructuring was conducted. (5) The provisions as referred to in paragraph (1) to paragraph (4) remain applicable for the re-restructuring of Financing. (6) The additional quality of Financing as part of the Financing Restructuring package is determined to be the same as the quality of the restructured Financing. (7) The provisions as referred to in paragraph (1) and paragraph (2) are excluded for the determination of the quality of restructured Financing for:
    a. Export-Oriented Financing to micro and/or small businesses; and b. Export-Oriented Financing to medium businesses provided by each Bank to 1 (one) customer or 1 (one) project with an amount up to Rp5,000,000,000.00 (five billion rupiah).

12. Between Article 61 and Article 62, 1 (one) article is inserted, namely Article 61A, so that it reads as follows:
    Article 61A
    (1) The determination of the quality of restructured Financing for Export-Oriented Financing to micro and/or small businesses and Export-Oriented Financing to medium businesses provided by each Bank to 1 (one) customer or 1 (one) project with an amount up to Rp5,000,000,000.00 (five billion rupiah) is determined:
    a. at most 'less performing' for Financing that was previously classified as 'doubtful' and 'non-performing' before restructuring; or b. the same for Financing that was previously classified as 'less performing' and 'special attention' before restructuring, up to 3 (three) periods of payment obligations. (2) In the event 3 (three) periods of payment obligations as referred to in paragraph (1) have been exceeded, the determination of the quality of restructured Financing is determined based on assessment factors regarding the accuracy of principal and/or margin/profit share/ujrah payments.

Article II
This Financial Services Authority Regulation shall come into force on the date of its enactment.

This copy is in accordance with the original.
Director of Law 1
Law Department signed
Yuliana

In order for everyone to know it, it is ordered to promulgate this Financial Services Authority Regulation by placing it in the State Gazette of the Republic of Indonesia.

Established in Jakarta on 20 September 2018
CHAIRMAN OF THE COMMISSIONERS
FINANCIAL SERVICES AUTHORITY
REPUBLIC OF INDONESIA, signed
WIMBOH SANTOSO

Promulgated in Jakarta on 20 September 2018
MINISTER OF LAW AND HUMAN RIGHTS
REPUBLIC OF INDONESIA, signed
YASONNA H. LAOLY

STATE GAZETTE OF THE REPUBLIC OF INDONESIA YEAR 2018 NUMBER 167

EXPLANATION
OF
FINANCIAL SERVICES AUTHORITY REGULATION
REPUBLIC OF INDONESIA
NUMBER 19 /POJK.03/2018
CONCERNING
AMENDMENT TO THE FINANCIAL SERVICES AUTHORITY REGULATION NUMBER 16/POJK.03/2014 CONCERNING ASSET QUALITY ASSESSMENT FOR ISLAMIC COMMERCIAL BANKS AND ISLAMIC BUSINESS UNITS

I. GENERAL
To increase Indonesia's economic growth and national competitiveness, efforts are needed to promote the intermediary function of Islamic banking through adjustments to provisions regarding bank asset quality assessment. The aforementioned provisions are expected to increase the potential for Bank Financing expansion conducted in a measurable manner while still paying attention to prudential principles. The aforementioned provisions are focused on promoting the growth of priority sectors, namely the housing sector, and increasing foreign exchange reserves through the provision of export-oriented funds. In light of these considerations, banking policies are needed to promote economic growth.

II. ARTICLE BY ARTICLE
Article I
Number 1
Article 31A
Paragraph (1)
Export-oriented fund investments are stipulated in an agreement between the Bank and financial institutions that meet specific requirements.
Paragraph (2)
Sufficiently clear.
Paragraph (3)
Letter a
What is meant by "central government" is the central government as referred to in the Law concerning regional government.
Letter b
Sufficiently clear.
Letter c
Sufficiently clear.

Article 31B
Paragraph (1)
Letter a
What is meant by "unconditional" is that the benefits obtained by the fund-providing Bank from the guarantee do not decrease substantially even if losses occur due to factors beyond the Bank's control and do not contain procedural requirements. Procedural requirements include:

1. requiring a time limit for submitting default notifications;
2. requiring the fund-providing Bank to prove good faith; and/or
3. requiring the liquidation of the guarantee to be done by mutual offset (setoff) first with the fund-providing Bank's obligations to the guarantor.

Letter b
Sufficiently clear.
Letter c
Sufficiently clear.
Letter d
Sufficiently clear.
Paragraph (2)
Sufficiently clear.
Paragraph (3)
Sufficiently clear.

Article 31C
Paragraph (1)
Sufficiently clear.
Paragraph (2)
The amount limit is calculated against all facilities provided (ceiling) to each customer or project, both for individual customers and Borrower Groups, in the event that Export-Oriented Financing and other fund provisions are used to finance the same project. Other fund provisions include the issuance of guarantees and/or opening letters of credit. Included as Financing and other fund provisions are all types of Financing or other fund provisions provided to all categories of customers.

Paragraph (3)
Letter a
Number 1
KPMR Adequacy includes:
a. risk governance; b. risk management framework;
c. risk management process, adequacy of human resources, and
adequacy of management information systems; and d. adequacy of risk control systems, as referred to in Financial Services Authority regulations concerning the assessment of the health level of Islamic commercial banks and Islamic business units. Generally, the KPMR adequacy assessment predication for credit risk rated as very adequate (strong) is reflected through the application of all KPMR components to all effective credit risks to maintain a healthy internal Bank condition. Although there are minor weaknesses in the KPMR adequacy assessment, they can be ignored because those weaknesses are not significant.

Number 2
Sufficiently clear.
Number 3
What is meant by "composite rating" is the composite rating as referred to in Financial Services Authority regulations concerning the assessment of the health level of Islamic commercial banks and Islamic business units.

Letter b
Number 1
KPMR Adequacy includes:
a. risk governance; b. risk management framework;
c. risk management process, adequacy of human resources, and
adequacy of management information systems; and d. adequacy of risk control systems, as referred to in Financial Services Authority regulations concerning the assessment of the health level of Islamic commercial banks and Islamic business units. Generally, the KPMR adequacy assessment predication for credit risk rated as adequate (satisfactory) is reflected through the application of all KPMR components to all credit risks that are sufficiently effective to maintain a healthy internal Bank condition. Although there are several minor weaknesses in the KPMR adequacy assessment, those weaknesses can be resolved in normal business activities.

Number 2
Sufficiently clear.
Number 3
What is meant by "composite rating" is the composite rating as referred to in Financial Services Authority regulations concerning the assessment of the health level of Islamic commercial banks and Islamic business units.

Paragraph (4)
Sufficiently clear.
Paragraph (5)
Banks can use the results of the Bank's self-assessment of the health level as long as there is no request for a prudential meeting regarding the results of the Bank's health level assessment. In the event of an adjustment to the assessment position of December or June by the Financial Services Authority, the Bank uses the latest adjusted assessment position.

Paragraph (6)
Sufficiently clear.
Paragraph (7)
In the event of an adjustment to the assessment position of December or June by the Financial Services Authority, the Bank uses the latest adjusted assessment position.

Paragraph (8)
Letter a
Sufficiently clear.
Letter b
The 50 (fifty) largest customers of the Bank are:

1. the 50 (fifty) largest customers of the Islamic commercial bank individually; or
2. the 50 (fifty) largest customers of the Islamic business unit, excluding customers from its parent bank.

Number 2
Article 47
Paragraph (1)
The limit of Rp5,000,000,000.00 (five billion rupiah) is calculated against all facilities provided to customers or Borrower Groups.
The assessment of collateral by the Bank's internal appraiser refers to the assessment standards used by independent appraisers.

Paragraph (2)
Sufficiently clear.
Paragraph (3)
Sufficiently clear.

Number 3
Article 47A
Paragraph (1)
The limit of Rp10,000,000,000.00 (ten billion rupiah) is calculated against all facilities provided to customers or Borrower Groups.
The assessment of collateral by the Bank's internal appraiser refers to the assessment standards used by independent appraisers.

Paragraph (2)
Sufficiently clear.

Number 4
Article 61
Paragraph (1)
Example:
Bank Z conducts Financing Restructuring for customer A, whose quality is doubtful. After restructuring, the determination of customer A's Financing quality is as follows:
a. before the customer can meet the obligation to pay principal installments and/or margin/profit share/ujrah for 3 (three) consecutive periods according to the agreed time, the determination of Financing quality is at most doubtful; b. after the customer can meet the obligation to pay principal installments and/or margin/profit share/ujrah for 3 (three) consecutive periods according to the agreed time, the Financing quality is determined to be 1 (one) level higher, becoming less performing; and
c. subsequently, the determination of Financing quality is conducted based on 3 (three) Financing assessment factors.

Paragraph (2)
Sufficiently clear.
Paragraph (3)
Sufficiently clear.
Paragraph (4)
Sufficiently clear.
Paragraph (5)
Sufficiently clear.
Paragraph (6)
Sufficiently clear.
Paragraph (7)
Sufficiently clear.

Number 5
Article 61A
Sufficiently clear.

Article II
Sufficiently clear.

SUPPLEMENT TO THE STATE GAZETTE OF THE REPUBLIC OF INDONESIA NUMBER 6251