Cash Management in Indonesia

The Indonesian political situation continues to show signs of improvement. In October 2004, the country successfully conducted the first direct general election in the nation’s history, which resulted in a handover of power from incumbent Megawati Sukarnoputri to Susilo Bambang Yudhoyono, a retired general with a PhD in economics. The success has produced an optimistic environment for foreign investment. Based on data from the country’s Investment Coordinating Body, foreign investment for the first half of 2005 was US$3.4bn (IDR31.9 trillion), an increase of about US$1.4bn (69.5%) over the same period last year. In terms of the number of projects, the rise was from 253 to 424.

There has also been a wave of foreign takeovers, including Philip Morris’s US$5.2bn majority stake in Indonesia’s third-largest cigarette-maker Hanjaya Mandala Sampoerna, and increasing foreign ownership of local banks, including Bank Buana, Bank Danamon, Bank Niaga, Bank NISP and Bank Permata.

Other signs of optimism are in export growth and the capital market. The Jakarta Stock Index is at the highest point in its history, trading at 1,100 levels, an increase from the 900 levels of 2004. From the Central Bureau of Statistics, figures show exports for the first half of 2005 at about US$41bn, an increase of 27% compared with the same period in 2004. Non-oil and gas exports alone increased by 33% to about US$32bn.

Indonesia’s sovereign rating has been upgraded to BB-, about two notches below investment grade rating. Many believe that it won’t be long before it is raised again.

Financial Market Overview

In banking circles, the topic most widely discussed today is still consolidation. As well as being a consequence of the Asian crisis of 1997, consolidation is driven by the recent introduction by Bank Indonesia (BI), the central bank, of its architecture plan – known as Architecture Perbankan Indonesia (API). Under the plan, banks are required to increase their capital substantially, especially for those aiming to be an ‘international bank’ with capital exceeding IDR50 trillion or a ‘national bank’ with total capital of between IDR10 trillion and IDR50 trillion. As shown in Figure 2, most of the 132 banks, or about 60%, have capital of between IDR100bn and IDR10 trillion. This requirement to increase capital will, in turn, encourage or even force banks to merge. BI predicts that the number of banks will fall from the 132 that exist today to only about 40 by the target date, 10 years from the introduction of API.

To speed up consolidation, BI also recently introduced terms and conditions for becoming an ‘anchor bank’, i.e. a bank that is expected to lead the merger and acquisition process. The conditions include assets of more than IDR10 trillion, capital of more than IDR1 trillion, a healthy financial ratio in the past two years as indicated by a non-performing loan ratio below 5%, a capital adequacy ratio above 12%, and a loan-to-deposit ratio above the banking industry average, currently about 50%.

Another main area of interest for the industry is the fact that a large number of the top 20 local banks are now controlled by foreign owners, including the banks Bank Buana, Bank Danamon, Bank International Indonesia, Bank Lippo, Bank Niaga, Bank NISP, Bank Panin and Bank Permata. In general, foreign ownership has helped the industry to become more competitive. More new products are being introduced, including those used in cash management services. Another boost is to the quality of service. Based on the survey results shown in Figure 3, the three local banks that dominated the rankings in 2003 and 2004 – Bank Danamon, Bank Niaga and Bank Permata – are all foreign-owned.

Another important change is the establishment of Lembaga Penjamin Simpanan (LPS), an independent legal entity operating under Indonesian law and reporting directly to the country’s president. LPS, which will provide insurance to bank depositors, will replace the blanket guarantee that was created by the government in the late 1990s to support the banking industry during the Asian crisis. From its establishment on 22 September 2005 through to 22 March 2006, LPS will insure total amounts deposited. The maximum amount insured will then be reduced to IDR5bn. By September 2006, it will be further reduced to IDR1bn. Finally, by 22 March 2007, the figure will be IDR100m.

Previously, there was also talk of the creation of a Financial Services Authority, which would be responsible for regulating and supervising the whole financial industry, including the banking sector. However, there are as yet no details available on when it might be established.

Regulatory Overview

Bank Indonesia currently has three roles: maintaining economic stability through monetary policy, regulating and supervising the banking industry, and managing the national payment system. During 2005, BI has introduced a series of regulations covering asset quality valuation and foreign exchange transactions between domestic and foreign operators. The regulations should also help BI to curb speculation and stabilise the rupiah (IDR).

Following the successful implementation of a real-time gross settlement (RTGS) system in 2000 and an inter-city clearing system in 2002, BI is now putting in place Sistim Kliring National (SKN), a paperless national clearing system based in Jakarta. Previously, each major city had a clearing system handled by the local BI branch or a bank appointed by BI. The differences between the previous system and SKN are shown in Figure 4.

The new system is expected to help banks reduce their operating costs, including those for printing. In terms of time, it will improve receipt of funds from three days to one.

Implementation is already under way, with Jakarta and major cities in West Java being the first areas for completion in 2005. All other major cities in Indonesia are targeted for completion by 2007. Of the country’s 132 banks, 118 are currently taking part in the process.

To reduce disruption and non-settlement risk, BI plans to implement on a gradual basis a ‘failure to settle’ scheme, which will require banks to provide reserve funds to cover clearing mismatches.

Cash Management Services Overview

Bank accounts

A wide range of bank accounts is available for both residents and non-residents. They include current and saving accounts, demand deposits and time deposits and certificate of deposit. The accounts are available either in IDR or major convertible foreign currencies.

The IDR continues to be freely convertible. The restrictions apply for transfer of IDR to non- residents or abroad. Under a new BI regulation, IDR transfer to an account of a non-resident can only be carried out if there is an underlying economic transaction, including proceeds from the sale of marketable securities and shares by the non-resident, coupon and dividend payments, loan repayments and the sale of goods and services. Also, the regulation requires the non-resident account holder to submit a statement to the bank for the receipt of transfers below IDR100m. If the amount is above that figure, either in a single transaction or multiple transactions in the same day, the non-resident is required to provide the statement plus copies of related documents such as shares information, sales contracts and loan agreements.

Payment and collection services

Indonesia is still very much a cash-oriented society with notes still widely used for payments to third parties. For companies, the most common methods of payment include cheques (including post- dated cheques), bilyet giro (cheques that cannot be cashed), funds transfer through the clearing system and RTGS.

Collection of payments or receivables management is carried out by the bank, mainly through cash pick-up services, cash and cheque counters, and various types of electronic collection including direct-debit systems, automated teller machines and Internet banking.

Liquidity management

For excess liquidity, there are various types of investment products available. As well as on-call and time deposits, companies can invest in marketable securities, including central bank certificates, corporate bonds and government bonds. There is a 20% withholding tax from the interest, except for non-resident recipients in a country with a tax treaty agreement with Indonesia.

Electronic banking

More local banks have now developed electronic systems, including Internet capability, as part of a strategy to win back cash management business that has been mainly dominated by foreign banks in the past five years. Some of the standard features are account balance, transaction report, rates inquiry and funds transfer between own accounts or third-party accounts. A more advanced system will normally feature fund transfers to accounts at other banks through RTGS, outward foreign currency transfers, mass payment transfers, cheque printing and liquidity management.

Product development

Cash pick-up and delivery continues to be the most required cash management services. Besides banks, there are a few companies specialising in such services. Given the high cost and limited area coverage, there is a growing trend of banks towards outsourcing cash pick-up and delivery services to specialised companies, especially those equipped with supporting products such as cash notes payroll and disbursement. Another growing trend is the cooperation of local and foreign banks with the Indonesian post office for cash deposit and payment services via its extensive national network.

More companies are requiring banks to provide integrated solutions for the whole value chain, including credit-related products to assist financing of suppliers and distributors. In the near future, such an integrated solution is expected to play a bigger role and will be essential in determining a successful cash management business.

Cooperation between banks

Cooperation between banks is a significant factor in cash management as it brings many benefits to all related parties, including the partnering banks and, most importantly, the customer.

Some of these benefits are:

• Better service to the customer.
• Fee revenues for the partnering bank.
• Closer relationship between the banks.
• Exchange of product knowledge and cross-selling opportunities for the banks.
• Improved company image for all parties.

Where cooperation takes place, it is usually because:

• Foreign banks have limited branch networks but local banks have extensive networks throughout the country’s dispersed geography.
• Local banks have wider target markets, ranging from small to large companies, thus they complement the foreign bank, which usually focuses on multinational and large local companies.
• Local banks have limited products and require the ‘demand push’ generated from cooperation to accelerate their own products and technological development.

Looking Ahead

Competition in cash management is rising. Recapitalised, reorganised and backed by strong new shareholders, some of which are foreign banks or large financial services groups, local banks are making a comeback and putting more resources and investment into business development. They are not only building electronic cash management systems but some have created a competitive advantage. For example, the Indonesian Central Securities Depository (PT Kustodian Sentral Efek Indonesia), a private-sector organisation that is responsible for handling securities settlement, recently selected four local banks – Bank Central Asia, Bank Lippo, Bank Mandiri and Bank Niaga – to manage and operate payment settlement and related fund transfers for the sale and purchase of shares. This provides the selected banks with better cash management for stock exchange members, namely the securities companies and banks involved in the custody business. Another example is quality of service, which local banks have dominated for the past two years.

Despite the competition, there is still plenty of room for establishing cooperation between banks, even between competitors for reasons already given. The Indonesian government continues to support the growth of cash management business, as shown by improvements in the payment system, such as RTGS, inter-city clearing, the national clearing system and the online system developed by the tax and customs office with most of the banks in Indonesia. The only concern for banks is the increasing regulation of the finance sector, which creates higher investment costs and administrative work.