JAKARTA (JAKARTA POST/ASIA NEWS NETWORK) - A new draft of Indonesia's banking bill has revealed that lawmakers will proceed with a plan to restrict the operation of foreign banks, setting a deadline for them to become legal entities in the form of Perseroan Terbatas (PT) and capping the level of foreign ownership.

According to the newest version of the banking bill, a copy of which was recently obtained by The Jakarta Post, all foreign banks operating in Indonesia must become PT.

While the clause would translate into better protection for the banking sector against banking crises overseas, it would affect the operations of many foreign banks here, some of which are still operating under branch status (KCBA), such as Citibank, Deutsche Bank, HSBC, JPMorgan Chase and Standard Chartered.

"By the time this law comes into effect, foreign banks operating under branch status must adjust with this law within five years of this bill being passed into law," the bill stated.

By transforming into a PT, a foreign bank would operate as an independent company, meaning that its parent company offshore could not just withdraw money from Indonesia should there be liquidity issues in the bank's overseas headquarters.

Meanwhile, the bill also stated that maximum foreign ownership in banks would be capped at 40 percent, which would effectively prevent foreigners from being controlling shareholders.

This could discourage new foreign investment in the banking sector, as the global Basel III banking regulation stipulates that any investor performing banking acquisition without acting as controlling shareholder would have to deposit a significant amount to safeguard against banking management risks.

In August of last year, South-east Asia's largest bank, DBS Group Holdings Ltd., backed off from acquiring privately owned Bank Danamon in a Rp 66.4 trillion deal (at that time equivalent to US$6.8 billion or S$8.4 billion), as the Singapore-based investor was only allowed to own 40 percent, falling short of its initial 99 percent demand.

The case drew attention as many local banks, such as Bank Mandiri, Bank Rakyat Indonesia (BRI) and Bank Negara Indonesia (BNI), called for the banking regulator to apply reciprocal treatment for DBS, as state-run banks frequently faced difficulties when expanding operations in Singapore.

Apparently driven by these claims, lawmakers moved to highlight the issue specifically.

"The Financial Services Authority (OJK) and/or Bank Indonesia must consider the principle of reciprocity in their approach to international banking negotiations," the bill said.

Deputy chairman of House of Representatives' Commission XI on finance and banking Harry Azhar Azis, said that the bill's ownership limit would not apply retroactively, thus, would not affect existing investors.

The banking bill could be passed into law by Sept 30 at the earliest, according to Harry.

New foreign investment in the banking sector may well be deterred by the bill, which would be ill-timed as Indonesia is trying to enlarge the size of its banking industry to support its fast-growing economy, according to Joseph Abraham, the chairman of the Foreign Banks Association of Indonesia (FBAI).

"The key issue here is 40 percent stake; it's uneconomic from a Basel III perspective," said Abraham, who is also the president director of PT Bank ANZ Indonesia.

"Indonesia must make itself attractive. If you put rules like this, it creates uncertainty - we need an environment where there is certainty."

Abraham explained that, for some foreign banks, transforming into PT might "not be a preference", as such a regulation would make it more difficult for their headquarters to transfer funds in Indonesia, hampering inter-office lending.

Nevertheless, by forcing foreign banks to become PT, the local banking industry could be better protected from the contagious effect of overseas financial crisis, said Sigit Pramono, the chairman of the National Banks Association (Perbanas).

"By becoming PT, our foreign banks would become more accessible to the OJK, therefore, making it easier for the authority to perform its banking supervisory role," he added.