Risk Management Implementation - Reports for New Banking Products and Activities

As banking products, services, and activities grow ever more complex, the Indonesian banking industry has generally increased its exposure to risk. In an effort to partially mitigate areas of risk, Bank Indonesia issued Circular Letter No. 11/35/DPNP on New Product or Activity Reports, which tightens supervision by way of enforcing reporting standards on all conventional banks in Indonesia.

The Regulation requires all banks to report any plans to issue new products or engage in new activities to Bank Indonesia. The Circular Letter defines ‘new’ product or activity as that which has never been issued or conducted by a particular bank, or that which has been issued or conducted but will newly introduce an element of exposure to ‘specific risks’ (although it does not define ‘specific risks’). ‘Products’ are defined as ‘financial instruments for fund distribution and collection’ - savings, deposits, bonds, credit, derivatives, medium term notes, and so on - while ‘activities’ are defined as ‘services provided by banks to customers’, such as investment management.

The forms that are to be used to report any new development in a bank’s line of products or services are contained in the Circular Letter’s Attachments. For banks that are developing upon an existing product, all that is required is to report that development to Bank Indonesia. Banks introducing an entirely new product to their product line must, in addition to submitting a report to Bank Indonesia, enclose an articulation of the product or service in their annual business plan, which is also submitted to BI.

Banks may only go on to issue the new product or service activity after receiving approval by BI. Such approval will be granted within 60 days of complete submission of the report and supporting documents, and the applicant bank will subsequently have a window of six months to initiate the proposed product or service program.

Section D sets out prohibitions on certain forms of marketing for products and services. Banks may not market products or services that are not those of the bank in question - this may be a response to Century Bank’s marketing of securities for PT Antaboga Delta Securitas, which more-or-less triggered the events leading to the former’s failure. Additionally, banks may not market products or services that fulfill the criteria of ‘new’ until they are approved by BI.

All banks that have issued new products or engaged in new activities after 1 July 2009 are required to fulfill reporting obligations set out by this Circular Letter.

This Circular Letter repeals and replaces the following provisions under Bank Indonesia Circular Letter No. 4/21/DPNP on the Implementation of Risk Management for Conventional Banks: Article 10; Numbers 4 & 5 of Section IV of Attachment I, and; Attachment 7. Any other regulations relating to risk management that contradict the current Circular Letter are similarly repealed and replaced.

This Circular Letter has been in force since 31 December 2009.