The Financial Services Authority (OJK) has issued a new umbrella regulation on finance companies to take account of changes in the market since its last intervention in the form of OJK Regulation 29/POJK.05/2014 (“Reg. 29”).
The new regulation (OJK Regulation No. 35 /POJK.05/2018 / “Reg. 35”), which entered into effect on 28 December 2018, revokes and supersedes Reg. 29. However, the implementing regulations for Reg. 29 remain in force in so far as they do not conflict with those of Reg. 35.
The principal changes introduced by Reg. 35 concern cash lending, down-payment requirements for vehicle loans, significantly greater emphasis on fraud prevention, and recognition of the growing role of fintech.
Reg. 35 also introduces a range of new financial and accounting requirements for finance companies, but these are beyond the scope of this ABNR Legal Update.
The key changes brought about by Reg. 35 are as follows:
1. Cash Lending
Reg. 29 specifically prohibited finance companies from extending cash loans. By contrast, such lending is now expressly permitted by Reg. 35.
Two types of cash lending are allowed, consisting of:
a. Consumer-cash loans; and
b. Working-capital cash loans.
No doubt, the decision to relax the restrictions on cash lending has been influenced by the rapid growth of fintech in Indonesia, particularly peer-to-peer (P2P) lending.
However, given the macroeconomic implications that could arise, cash lending is subject to the following restrictions:
- a cash loan may only be used for the purchase of specific goods/services for consumptive purposes;
- the goods/services to be purchased must be clearly identified in the finance agreement;
- purchase receipts or other evidence of purchase must be provided to the finance company;
- cash lending is only permitted in the case of finance companies that are categorized as “financially sound” and which satisfy certain other financial requirements;
- cash lending must account for not more than 25 percent of a finance company’s aggregate financing debt (total piutang pembiayaan);
- loans are subject to a ceiling of IDR 500 million per borrower;
- security must be provided in the form of vehicles, land, buildings and/or heavy machinery.
In addition, a borrower’s creditworthiness should be checked by an OJK-licensed credit reference agency (or credit bureau), and their ability to repay the loan carefully assessed by the finance company.
2. Vehicle Finance: New Down-Payment Requirements
Reg. 35 stipulates the minimum down payments that must be applied by finance companies in the case of installment-based vehicle finance. Down-payment rules were also incorporated in Reg. 29, as subsequently amended by OJK Circular No. 47/SEOJK.05/2016, both of which are revoked by Reg. 35.
The new down-payment requirements, which are set as percentages of a vehicle’s actual purchase price (i.e., excluding such things as discounts, fees, incentives to third parties, etc.), vary depending on (a) the financial soundness of the finance company and its net non-performing finance (“NPF”) ratio, (b) the number of vehicle wheels, and (c) the type of finance provided (i.e., investment finance or consumer finance), as shown in the following table:
3. Finance Companies and Fintech
Reg. 35 recognizes the ever growing importance of fintech by permitting a finance company to conduct operations using an internet-based platform. Those operations that may be conducted online include the marketing, credit-application, and repayment functions.
A finance company that wishes to establish an online platform must have a data center located in Indonesia, appropriate SOPs and protocols in place, qualified IT staff, and a reliable and secure IT system.
4. Restrictions on Third-Party Incentives
Restrictions are imposed by Reg. 35 on the incentives that may be offered to third parties to acquire customers for a finance company by capping the monetary value of an incentive to not more than 17.5 percent of the interest income that will be generated by a particular finance agreement. Examples of incentives given by the Elucidation on Reg. 35 include cash payments and commissions, bonuses, covering the cost of joint promotions, and free holidays.
5. Fraud Control & Reporting
Reg. 35 incorporates an entirely new chapter (containing 12 detailed articles) devoted to fraud control. Among other things, it obligates a finance company to design and adopt an anti-fraud strategy and protocols; put in place a whistleblower mechanism; establish a dedicated anti-fraud unit or function in its organizational structure (reporting directly to the CEO); ensure an effective system to monitor and detect fraud; undertake regular top-level and functional reviews of anti-fraud strategy; conduct unannounced audits; and institute an effective separation of functions so as to ensure that opportunities for fraud do not arise.
Further, a finance company is required to include anti-fraud reports in its regular good corporate governance (GCG) reports to the OJK, and submit incidental reports on every incidence of fraud that is detected.
6. Debt Collection
Finance companies are now expressly permitted to collaborate with one or more third parties for the purpose of debt collection, that is, recovering sums owed by defaulting borrowers. However, such collaboration must be based on a formal written agreement. Further, the third party must be a legal entity, be licensed by the authorities and be certified by a credit and collection compliance certification agency (lembaga sertifikasi profesi di bidang pembiayaan). In all circumstances, the finance company remains legally liable for any loss that results from the actions of a third-party debt collector.
7. New Certification Requirements
The certification requirements for finance-company officers have been tightened as directors, commissioners and managerial staff will henceforth be required to obtain certification from a professional certification agency registered with the OJK, whereas previously certification was provided by agencies designated by the industry association. However, all certificates obtained by finance-company officers prior to the coming into effect of Reg. 35 will continue to be valid and recognized by the OJK.
Meanwhile, existing certification agencies must comply with the requirements of Reg. 35 within not more than three years of its coming into effect.
8. Miscellaneous Changes:
- Factoring without recourse (anjak piutang tanpa pemberian jaminan dari penjual piutang) is now expressly permitted for investment finance (including project finance and infrastructure finance). Previously it was permitted solely in the case of working-capital finance.
- Under Reg. 29, finance companies were only permitted to enter into channeling and joint financing arrangements with banks, secondary mortgage providers, micro financial institutions, and other finance companies. This list has now been expanded to include online lending platforms, venture capital companies and/or “other institutions that are permitted by law to enter into channeling and joint financing arrangements” (as regards the precise scope of “other institutions,” Reg. 35 only gives the example of savings and loans cooperatives). However, channeling with recourse and joint financing with recourse are now expressly prohibited.
- 35 contains significantly more detailed rules governing borrowing and the issuance of debt and equity securities by a finance company, and also requires foreign-currency debt issuances to be fully hedged (under Reg. 29 only foreign-currency borrowings needed to be hedged).
9. Transitional Provisions
Depending on the specific requirement imposed by Reg. 35, finance companies that were licensed at the time of its coming into effect are given between six months and one year to bring their operations into line with its provisions.