February 06, 2018

IMF issued staff report and selected issues report in the context of the 2017 Article IV consultation with Indonesia. Directors took positive note of the authorities’ efforts to strengthen financial oversight and crisis management. Going forward, they encouraged greater focus on the areas identified by the Financial Sector Assessment Program (FSAP) where further improvement is needed, including improving supervision of financial institutions and financial conglomerates, adopting a more rigorous approach to credit risk, and continuing to strengthen the crisis management framework.

The staff report highlights that the financial soundness indicators point to a sound, liquid, and profitable banking sector. The banking system is well-capitalized, with a capital adequacy ratio of 23.2%. Profitability is strong while system-wide liquidity remains ample. The FSAP stress tests show that, under the most severe stress scenario, banks experience credit losses, particularly from corporate exposures, but high capital buffers and strong profitability help to absorb most of these losses. The tests also show that many, but mostly smaller, banks are vulnerable to liquidity shocks, including foreign exchange liquidity shortfalls, due to their reliance on short-term deposits and limited access to the money market. Nonperforming loans have stabilized at slightly below 3% due to improved corporate performance and household debt service capacity, but special-mention loans and restructured loans remain elevated. Bank Indonesia and OJK have been improving their stress test framework and established a framework for a joint stress test and data sharing. Bank Indonesia and OJK also issued regulations to implement risk-based Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) supervision.

The report reveals that the authorities have been strengthening financial oversight and crisis management. Basel III standards and a new insurance law have been adopted, while supervisory practices are improving. The authorities have made active use of macro-prudential tools and introduced a countercyclical capital buffer, currently set at zero in line with credit developments. Most implementing regulations for the crisis management law have also been issued, including those regarding recovery plans for domestic systemically important banks, resolution framework for both systemic and non-systemic banks, and rules for write-off and haircut of remaining assets from the Bank Restructuring Program. However, the implementing regulation regarding a levy for the Bank Restructuring Program is still under discussion. The authorities are taking early actions in response to the findings of the 2017 FSAP. They broadly agree with the key recommendations of the FSAP and are considering how to take them forward, recognizing that some recommendations are for the medium term. The draft bill amendment of the Bank Indonesia law that is being prepared and will be included in the 2015-2019 National Legislation Program includes a financial stability and macro-prudential mandate. An amendment to the OJK law is also included in that Program.

The selected issues report assesses the status of financial market development and financial access, summarizes the national strategies, and discusses priorities to enhance the role of financial system for inclusive growth. The report highlights that banks dominate the financial system, accounting for about 80% of the aggregate assets. Insurance accounts for a small part of the financial system while domestic capital markets are relatively underdeveloped, with a strong foreign presence. The authorities have made progress in enhancing inter-agency coordination to develop capital markets. The increasing use of digital financial services also offers a promising channel to overcome geographical barriers to financial inclusion. Bank Indonesia and OJK are supportive of the rapid developments of fintech. The fintech sector has expanded rapidly in recent years and attracted around USD 15 billion in investments in 2016. Bank Indonesia has established a fintech office and OJK has established an internal cross-departmental group to promote sustainable growth of fintech and mitigate risks to the financial system. OJK recently issued a regulation on Peer-to-Peer lending and proposals to establish a fintech incubator. Additionally, Bank Indonesia had issued regulation in December 2016 on fintech players in the payments system.

 

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Keywords: Asia Pacific, Indonesia, Banking, Insurance, Securities, FSAP, Article IV, Basel III, Fintech, IMF

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