Implementation of Products by Rural Credit Banks

To:
Directors of Rural Credit Banks

COPY
CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY REPUBLIC OF INDONESIA NUMBER 8 /SEOJK.03/2022 CONCERNING THE IMPLEMENTATION OF PRODUCTS BY RURAL CREDIT BANKS

In view of the establishment of Financial Services Authority Regulation Number 25/POJK.03/2021 concerning the Implementation of Products by Rural Credit Banks and Sharia Rural Financing Institutions (State Gazette of the Republic of Indonesia Year 2021 Number 271, Supplement to the State Gazette of the Republic of Indonesia Number 6743), hereinafter referred to as the POJK on the Implementation of BPR and BPRS Products, it is necessary to regulate the implementation of BPR products in this Circular Letter of the Financial Services Authority as follows:

I. GENERAL PROVISIONS

1. In this Circular Letter of the Financial Services Authority, the following terms are defined as:
   a. Rural Credit Bank, hereinafter abbreviated as BPR, is a conventional bank that does not provide payment transaction services in its operations. b. Product refers to business activities conducted by BPR in the form of implementing products, services, facilities, and/or other activities to support BPR business.

2. In implementing Products, BPR ensures that the application of risk management and governance for the implementation of Products is carried out in accordance with Financial Services Authority Regulations regarding the application of risk management and governance for BPR.

II. BPR PRODUCTS

1. The classification of BPR Products is determined based on all risks inherent in the Product. BPR Products are classified into:
   a. Basic Products, namely products, services, facilities, and/or other activities inherent in the BPR business license, such as fund collection, fund disbursement, fund placement, and/or other basic activities. Other basic activities have the following characteristics:

1. a business model that is not complex, including viewed from Product features, Product management processes, marketing strategies, and other matters related to the needs for implementing the Product;
2. Product risk falls into the low scale based on the assessment of all risks inherent in the Product;
3. in cases involving third parties, the cooperation scheme is relatively simple, viewing the processes and roles of each party in implementing the Product; and
4. in cases where it is a development of Products previously implemented, including low scale that does not result in changes to the BPR risk profile.
   Examples:
   a) Basic Products include savings and/or time deposits and loans received, credits, and placements in other banks; and b) Basic Products related to other basic activities, such as mass employee salary payment services and fund collection for bill payment services, in accordance with the POJK on the Implementation of BPR and BPRS Products. b. Advanced Products, namely products, services, facilities, and/or other activities based on information technology, related to the activities or products of non-bank financial service institutions or affecting the BPR risk profile assessment, and requiring permits and/or approvals from other authorities. Advanced Products are Products that do not meet the characteristics of Basic Products as mentioned in letter a.

Examples:
Electronic banking services, bancassurance distribution or integration business models, foreign currency exchange business activities, and the implementation of access to funding sources for payments in the form of issuing payment instruments, in accordance with the POJK on the Implementation of BPR and BPRS Products.

2. BPR Products are categorized as New Products if:
   a. they have never been implemented previously by the respective BPR. Example: A BPR implements electronic banking services for the first time in the form of mobile banking services; or b. they have been implemented previously by the respective BPR but undergo Product development resulting in changes to the inherent risk of the Product and the BPR risk profile. Examples:

1. A BPR has implemented Products in the form of automated teller machine (ATM) card issuance services and will develop them into cardless ATMs;
2. A BPR will develop service features in mobile banking applications;
3. A BPR has implemented fund collection or disbursement activities and will develop them by changing features or characteristics, such as through cooperation with insurance companies for savings or credit Products (bancassurance); and
4. A BPR has cooperated with third parties and will undergo changes in business models and the development of Product features or characteristics.
   The criteria for the New Product category are established by the BPR and become part of the written policies and procedures for Product implementation. BPR conducts a self-assessment of the planned development of Products to be implemented in accordance with the established criteria. The Financial Services Authority may determine a different assessment based on the evaluation of the self-assessment conducted by the BPR.

3. BPR Products categorized as New Products must be included in the BPR business plan. The Financial Services Authority may request the BPR to provide a comprehensive explanation regarding the planned implementation of New Products, including:
   a. the purpose of implementing the New Product; b. the analysis establishing the mechanism for implementing the New Product; and
   c. the readiness of the plan for implementing the New Product, including if carried out through cooperation with third parties.
   The inclusion of the plan for implementing New Products in the business plan is carried out in accordance with Financial Services Authority Regulations regarding the business plans of rural credit banks and Sharia rural financing institutions.

III. PRINCIPLES OF BPR PRODUCT IMPLEMENTATION

1. BPR ensures that the application of risk management and governance for Product implementation is carried out in accordance with:
   a. Financial Services Authority Regulations regarding the application of risk management for BPR; and b. Financial Services Authority Regulations regarding the application of governance for BPR.

2. BPR implementing Advanced Products must observe the following principles:
   a. adequate capital, explained as follows:

1. BPR prepares financial and capital projections showing that the minimum capital adequacy ratio and minimum core capital ratio are in accordance with regulations, and BPR financial performance remains good during the implementation of the new Advanced Product.
   Example: A BPR with a minimum capital adequacy ratio of 20% (twenty percent) that will implement electronic banking services must maintain its financial performance so that there is no significant decrease in the minimum capital adequacy ratio as a result of implementing the Product. The implementation of such Products is expected to improve BPR financial performance.

2. In preparing financial and capital projections, BPR considers:
   a) implementation needs such as investment costs, operational costs, and/or marketing costs, as well as revenue targets; and b) fulfillment of capital requirements established by other authorities, if any.

3. The calculation as mentioned in point 2) is conducted by considering the results of business analysis, including potential and market segments, including competition analysis, and non-financial benefits of the Product to BPR.

4. BPR prepares financial and capital projections for at least the first 1 (one) year since the Product is implemented, with coverage in accordance with the complexity and relevance of the Advanced Product to be implemented.
   Example: Financial and capital projections for Advanced Products such as cooperation related to fund disbursement may be in the form of summary financial projections (financial highlights).

5. The Financial Services Authority may request BPR to prepare financial and capital projections for a longer period than that prepared by the BPR.
   b. effective application of risk management, explained as follows:

6. The application of risk management includes the identification of inherent risks from Product implementation comprehensively and mitigation of risks arising in Product implementation. Example:
   A BPR that will cooperate with an information technology-based lending service provider identifies all inherent risks, including:
   a) credit risk, such as those related to credit concentration, credit type, debtor profile, and other factors that may affect credit risk in the future; b) operational risk, such as those related to system failures or errors, accounting calculation errors, delays and errors in fund disbursement; c) compliance risk, such as those related to weaknesses in cooperation agreements or contracts, potential losses due to claims from related parties, and cancellation of cooperation agreements due to changes in statutory regulations; d) liquidity risk, such as those related to measuring the composition and concentration of assets and liabilities and impacts arising from other risks such as credit risk and operational risk; and e) reputational risk, such as those related to media reporting, customer complaints, and the reputation of cooperating third parties.

7. The application of risk management includes the readiness of infrastructure and information technology, especially for Advanced Products based on information technology, and the readiness of human resources in terms of quantity and quality.

8. In addition to the application of risk management, BPR also fulfills other regulations concerning Product implementation as a form of applying the prudence principle. Examples:
   a) BPR acting as a provider or agent for financial services without offices in the context of inclusive finance continues to comply with Financial Services Authority Regulations regarding financial services without offices in the context of inclusive finance; and b) BPR providing bancassurance Products complies with regulations concerning bancassurance, such as BPR employees having insurance agency certifications issued by the relevant association for bancassurance distribution and integration business models.

9. In cases where Product implementation is carried out through cooperation with third parties, the scope and responsibilities of each party must be clearly regulated to minimize risks arising in the form of cooperation agreements. The content of cooperation agreements is drafted considering the complexity and risk of the Product to be implemented.
   Examples of cooperation agreement content in the context of Product implementation include:
   a) the scope of the cooperation agreement; b) clarity of rights and obligations of each party, including the implementation mechanism of cooperation, such as service level agreements, document administration, as well as monitoring and problem resolution; c) business models along with features or characteristics of the Product to be implemented; d) the distribution of profit amounts or risk sharing among the parties; e) the duration of the cooperation agreement; f) clauses causing the termination of the cooperation agreement, including those allowing BPR to terminate cooperation before the agreement duration expires or based on orders from the Financial Services Authority; g) the settlement of rights and obligations of the parties, including to consumers; h) the obligations and responsibilities of the parties to carry out customer due diligence, apply transparency, and maintain customer data confidentiality; and/or i) settlement in force majeure and breach of contract or disputes between the parties.

10. In applying risk management, BPR has and applies written policies and procedures in Product implementation.

The two principles of Product implementation as mentioned in letters a and b aim to support the implementation of BPR Products and are fulfilled by BPR consistently and continuously during the Product implementation process, starting from the planning stage to implementation.

3. Written policies and procedures in Product implementation as mentioned in point 2 letter b point 5) must at least include:
   a. the determination of business benefits and customer needs for the Product, considering:

1. business benefits in line with the strategy and business plan established as defined in policy directions; and
2. the principle of benefit and customer needs for the Product to be implemented in accordance with customer capabilities;
   b. the identification of all risks inherent in the Product and their mitigation, conducted to:
3. measure the level of risk and mitigation to be carried out by BPR before Product implementation; and
4. determine the criteria for Products to be implemented, including New Products.
   Identification of risks inherent in Products includes credit risk, operational risk, compliance risk, liquidity risk, reputational risk, and strategic risk.
   Mitigation of each identified risk is drafted in detail and concretely with implementation steps carried out by BPR. As a form of risk mitigation implementation, BPR prepares the scope and scenario for limited pilot project implementation for Advanced Products to be carried out through limited pilot projects;
   c. accurate recording methods and accounting information systems for Products, including:
5. transaction recording must be in accordance with standards and accounting guidelines; and
6. accounting treatment is drafted for each Product to be implemented;
   d. the determination of criteria and processes for evaluating third parties, if Product implementation is carried out through cooperation, including:
7. ensuring that cooperating third parties have permits, approvals, are registered as digital financial innovation providers, or have business certificates from competent institutions or authorities; and
8. evaluating the performance and/or reputation of the third party periodically at least 1 (one) time in 1 (one) year or at any time; and
   e. methods for measuring and monitoring risks over BPR Products documented in systems and procedures, including for evaluating:
9. risks and business benefits arising from Product implementation, including the effectiveness of risk mitigation; and
10. the correspondence of Product implementation realization with previously prepared plans or targets;

4. In accordance with the POJK on the Implementation of BPR and BPRS Products, BPR is required to conduct periodic reviews and revisions of written policies and procedures in Product implementation in accordance with each BPR's policies. Reviews and revisions of policies and procedures are conducted by considering:
   a. internal factors, including plans for new Product development, changes in business strategy directions, and findings regarding weaknesses or deviations; and b. external factors, including adjustments to financial accounting standards and changes in statutory regulations.

IV. MECHANISM FOR IMPLEMENTING NEW PRODUCTS

1. In accordance with the POJK on the Implementation of BPR and BPRS Products, BPR implementing new Basic Products must submit reports on the realization of implementing new Basic Products in the form of other basic activities, in accordance with the appendix in the POJK on the Implementation of BPR and BPRS Products, completely and relevantly to the new Basic Product implemented.

2. In accordance with the POJK on the Implementation of BPR and BPRS Products, BPR planning to implement Advanced Products must obtain approval for implementing new Advanced Products from the Financial Services Authority, through the following mechanisms:
   a. Approval through limited pilot projects (piloting review)

1. BPR planning to implement Advanced Products through the execution of limited pilot projects must explain in the readiness document for the implementation plan of limited pilot projects, including:
   a) the scope of implementation of limited pilot projects, including the duration of implementation of limited pilot projects, including the time for implementing Products, target customers and/or potential customers, locations or regions, and transaction limits; and b) the scenario for implementing limited pilot projects, including potential failures of implementation of limited pilot projects, such as related to operational risk (e.g., information technology system failures, human resource weaknesses) and compliance risk (e.g., violations of regulations, fulfillment of consumer protection principles), as well as resolutions that BPR must carry out to mitigate the spread of such risks. Example: A BPR that will cooperate with a digital financial innovation provider and will execute limited pilot projects prepares a timeline for implementing limited pilot projects for 3 (three) months, including target times for submitting approval requests. BPR maps target customer locations in limited regions and transaction limits in accordance with the level of risk to be taken and risk tolerance during the limited pilot project period.
2. During the implementation of limited pilot projects, BPR may submit reports on the progress of implementing limited pilot projects periodically or based on evaluations and requests from the Financial Services Authority, including through meetings or written documents.
3. In cases where BPR ensures that no problems arise in connection with the implementation of limited pilot projects, including following up on recommendations provided by the Financial Services Authority, BPR submits an approval request to the Financial Services Authority.
4. BPR submits the approval request as mentioned in point 3) accompanied by:
   a) supporting documents for the completion of limited pilot projects, which may be documents explaining the results of the final evaluation of tested Products, such as the latest information on the realization of limited pilot projects, obstacles faced, and improvements made; and b) issuance approval of the Product, such as internal BPR decisions regarding Product implementation. b. Approval without limited pilot projects
5. Products requiring permits from other authorities or financial service sectors include Products whose implementation is fully linked to permits from other authorities or financial service sectors, such as the implementation of access to funding sources, for example, issuing ATM cards, or bancassurance distribution and integration business models.
6. For Products requiring permits from other authorities or financial service sectors:
   a) permit requests to other authorities or financial service sectors, accompanied by copies to Regional Offices or Financial Services Authority Offices; and b) approval requests to the Financial Services Authority accompanied by permits from other authorities or financial service sectors.
7. BPR planning to implement Advanced Products without limited pilot projects for reasons not requiring limited pilot projects must prove that the implementation of such Advanced Products does not materially impact the risk profile, health status rating, key financial ratios, and there are business reasons underlying it.
   c. Approval in the form of notification regarding the plan for implementing new Advanced Products (instant-approval)
8. Approval requests through the instant-approval mechanism may be conducted for the implementation of new Advanced Products in the form of developments of information technology-based activities or products, services, facilities, and/or other activities affecting the BPR risk profile assessment.
   Examples:
   a) BPR that has obtained approval and implements electronic banking services will develop features; or b) BPR that will cooperate with information technology-based lending service providers with channeling business models.
9. Approval requests as mentioned in point 1) may be conducted by BPR meeting the following criteria:
   a) risk ratings with rating 1 (one) or rating 2 (two) in the last 2 (two) periods; and b) health status with a healthy rating or composite rating 1 (one) in the last 2 (two) periods.
10. BPR includes the date of Product implementation in the notification letter regarding the plan for implementing new Advanced Products submitted to the Financial Services Authority.
11. BPR implements new Advanced Products by considering the time for the Financial Services Authority to examine the fulfillment of requirements, namely 10 (ten) working days after the complete application documents are received.

3. In cases where, in the opinion of the Financial Services Authority, there are inconsistencies with statutory regulations and/or potentially cause significant risks in the mechanism for implementing New Products, the Financial Services Authority has the authority to take specific actions, including:
   a. requesting BPR to fulfill requirements and/or adjust the implementation mechanism to go through limited pilot projects. Examples:

1. BPR cannot provide adequate explanations that new Advanced Products to be implemented do not require limited pilot projects; or
2. BPR does not meet risk rating and health status requirements to conduct the implementation mechanism for new Advanced Products through instant-approval;
   b. requesting BPR to fulfill requirements and/or adjust the implementation mechanism to approval without limited pilot projects. Examples:
   BPR submits reports on the implementation plan of limited pilot projects for Products that require approval from non-bank financial service industry supervisors during implementation; or
   c. stopping the plan for implementing new Advanced Products. Examples:
3. Based on the results of Financial Services Authority analysis, it is known that new Advanced Products to be implemented do not comply with the latest regulations issued by competent authorities; or
4. BPR will implement Products through cooperation with third parties that do not have permits from competent authorities.

V. ADJUSTMENT OF NEW PRODUCT IMPLEMENTATION PLANS

1. BPR may adjust plans for implementing New Products other than those previously submitted in the business plan, including adding plans for implementing New Products and/or refining plans for implementing New Products previously listed in the business plan. Examples:
   a. Adding plans for implementing New Products in the form of subsidized housing credit disbursement in the context of supporting government program implementation;

b. Improvement of the plan for implementing new products, including adjustment of features in electronic banking services; or

c. Addition of other institutions or parties that will cooperate and are not yet listed in the business plan.

2. Adjustments to the plan for implementing new products may be submitted to the Financial Services Authority:

a. concurrently with changes to the business plan submitted no later than the end of June of the current year in accordance with the Financial Services Authority Regulation regarding the business plan of rural banks and sharia rural financing banks; or

b. after the period for submitting changes to the business plan for the current year, in accordance with the POJK on Implementation of BPR and BPRS Products.

3. Approval from the Financial Services Authority over the document adjusting the plan for implementing new products does not constitute approval for the implementation of new products.

VI. HALTING OF BPR PRODUCTS

1. The execution of halting a Product based on the initiative of the BPR is carried out as follows:

a. The BPR includes the plan to halt the Product which is estimated to affect the BPR's business activities in the "other information" section of the business plan, in accordance with the Financial Services Authority Regulation regarding the business plan of rural banks and sharia rural financing banks.

b. The Plan to halt the Product is accompanied by:

1. reasons and considerations for the Product halting plan;

2. the planned timeline for halting the Product;

3. plans for settling or transferring the BPR's obligations; and

4. other relevant information.

c. In certain conditions, the BPR may halt the implementation of a Product not listed in the business plan as a Product halting plan. For example: based on evaluation results conducted by the BPR regarding the performance and/or reputation of third parties, cooperation with such third parties increases the BPR's risk profile.

d. The BPR is required to submit a report on the realization of Product halting as referred to in letters a and c to the Financial Services Authority in accordance with the POJK on Implementation of BPR and BPRS Products.

2. The execution of halting a Product based on an order from the Financial Services Authority is carried out as follows:

a. An order to halt a Product is issued if the implemented Product does not comply with statutory regulations and/or there are certain considerations. For example:

1. There are changes in statutory regulations prohibiting the BPR from implementing certain Products; or

2. A system failure occurs in the BPR's own electronic banking services causing losses to the BPR or customers.

b. Halting of a Product based on an order from the Financial Services Authority may be temporary or permanent based on the determination by the Financial Services Authority. The determination of Product halting is made by considering among others the significance of the violation, the losses incurred, and the BPR's ability to mitigate risks.

c. The BPR ensures that information regarding the halting of the Product is received by every customer via letter or the BPR's information channel and is documented properly.

VII. CONSUMER PROTECTION

1. In accordance with the POJK on Implementation of BPR and BPRS Products, the BPR is required to apply consumer protection principles in the implementation of Products in accordance with statutory regulations regarding consumer protection in the financial services sector. In the event that the BPR implements a Product requiring permits and/or approval from other authorities, the BPR is also required to meet consumer protection provisions issued by the competent authority.

2. In the event that Product implementation is carried out through cooperation with third parties, the BPR must ensure that the aforementioned third party also applies consumer protection principles as agreed upon in the cooperation agreement.

3. The BPR must disclose all information related to the Product transparently and ensure that prospective customers or customers have obtained explanations and understand the benefits, costs, and risks of the offered Product. The statement that prospective customers or customers have understood the benefits and risks of the Product is set forth in a separate document and signed or approved by the prospective customer or customer.

4. In the implementation of Products, the BPR must also pay attention to the use of prospective customer and customer data, as follows:

a. The BPR may only provide personal data of prospective customers or customers to third parties insofar as:

1. there is written consent from the prospective customer or customer; or

2. based on statutory regulations; and

b. The BPR or third party applies the principle of customer due diligence in accordance with regulations regarding anti-money laundering and counter-terrorism financing.

VIII. REPORTING

1. The BPR submits reports on the realization of new Product implementation, reports on the plan for limited pilot project implementation, reports on the realization of Product halting, and/or requests for approval for new Product implementation to:

a. the regional office of the Financial Services Authority for BPRs headquartered in the working area of the Financial Services Authority regional office; or

b. the Financial Services Authority office for BPRs headquartered in the working area of the Financial Services Authority office.

2. In the event that reporting systems and/or licensing systems are available, the BPR submits reports and/or requests for approval online through the integrated reporting, licensing, and registration system of the Financial Services Authority.

This copy is consistent with the original
Legal Director 1
Legal Department signed
Mufli Asmawidjaja

IX. CLOSING

1. At the time this Circular Letter of the Financial Services Authority takes effect, Circular Letter of the Financial Services Authority Number 45/SEOJK.03/2017 concerning Business Activities and Office Network Areas of Rural Banks Based on Core Capital is revoked and declared invalid.

2. Provisions in this Circular Letter of the Financial Services Authority take effect on the date of establishment.

Established in Jakarta on 29 June 2022
EXECUTIVE HEAD OF BANKING SUPERVISOR
FINANCIAL SERVICES AUTHORITY
REPUBLIC OF INDONESIA, signed
HERU KRISTIYANA