Foreign banks protest proposed Indonesian banking law

Bill also limits investors to a controlling share in only one bank.

The Indonesian House of Representatives has completed a draft of the new banking bill that will compel the branches of foreign banks to convert into legal entities, that is, become separate companies.

The bill will apply retroactively if passed into law. This means that the 10 existing foreign banks operating in Indonesia will have to convert their branches into separate business units if they want to continue operating in Indonesia, said Harry Aziz, deputy chairman of House Commission XI on finance and banking.

Among these foreign with branches are HSBC, Citibank, Standard Chartered, Bank of America, Deutsche Bank, Bank of Tokyo Mitsubishi and Bank of China Ltd.

Representatives of the foreign banks quickly criticize the bill, which they claim will spawn inefficiency. Analysts said foreign banks might degrade their risk profile thereby driving up funding costs if they convert their branches into legal entities or PTs.

As branches, banks can borrow dollars from their headquarters without being charged risk premiums. If the bank becomes a legal entity, it will be charged a risk premium according to the risk status of Indonesia.

The new bill stipulates that no investor can take a controlling share in more than one bank, contradicting the single presence policy unveiled by the central bank in November.

This policy allows investors to hold 25% of shares in two or more banks as long as they form a holding company to oversee the operations.