Highlights on Latest Development in Fintech Lending Regulation in Indonesia

OJK has just issued a regulation on P2P lending. This is important because this latest regulation is extensive (the official copy of the new regulation has 189 pages) and replaces the existing regulation. It is also significant because it is widely recognised that Indonesia has a huge potential in financial technology (fintech) lending (and P2P lending represents one of the key lending models) with economic conditions comparable to the rise of China's fintech industry in 2013.¹

The P2P lending sector in Indonesia

It was reported that as of 2021, P2P loan book accumulation only reached US$20.4 billion from 103 fintech companies officially listed by Indonesian Financial Service Authority (Otoritas Jasa Keuangan, "OJK"). This only covered 26 million borrowers out of a possible 63 million micro small medium enterprises (MSMEs). Although these MSMEs constitute over 60% of the country’s GDP, estimates indicate that only 19% of these businesses have access to financial products resulting in an estimated US$80 billion lending gap.²

In January 2022, OJK completed the licensing process for all P2P lending platforms, which was a major achievement given the large number of P2P lending platforms. As at 3 March 2022, there were 102 licensed P2P lending platforms.

Following completion of the licensing process, OJK has indicated that it will refocus its attention to revising the P2P lending regulation.

P2P lending regulation

OJK recently issued OJK Regulation No. 10/POJK.05/2022 on Information Technology Based Collective Funding Services (the "New Regulation" or "POJK 10/2022") which was effective since 4 July 2022 and replaces the previous regulation on P2P lending - OJK Regulation No. 77/POJK.01/2016.

The New Regulation states that non-compliance with the provisions set out in the New Regulation may be subject to administrative sanctions from OJK in form of a written reprimand, an imposition of a limitation of business activity and/or revocation of OJK License.

HIGHLIGHTS OF IMPORTANT ISSUES UNDER POJK 10/2022

1. Minimum Paid-up Capital Requirement 

P2P operator must have a minimum of Rp25,000,000,000 paid-up capital at the time of establishment.³  However, there is a grandfathering clause for existing P2P operators such that the new minimum paid-up capital requirements does not apply for existing P2P operators that have obtained OJK License.⁴

2. Fit and Proper Test ("FPT") for Key Parties (Pihak Utama)

The New Regulation requires FPT and OJK approval for key parties of a P2P operator. Key parties in this context consists of (i) Controlling Shareholder (Pemegang Saham Pengendali, "PSP"); (ii) members of Board of Directors ("BOD"); (iii) members of Board of Commissioners ("BOC"); and (iv) Member of Sharia Supervisory Board (for sharia-based P2P operators).⁵

Key parties that have held their respective positions are not required to conduct FPT and obtain OJK approval in order to continue in their respective positions until the end of their term. Nevertheless, if the key parties have the intention to extend their term, FPT and OJK approval are required.⁶

3. Controlling Shareholder (PSP)

A PSP in the context of the New Regulation comprises of any legal entity, individual and/or business group that (i) owns 25% of a P2P operator's shares with voting rights or more; or (ii) owns less than 25% of shares with voting rights but can be proven to have the ability to exercise control over P2P operator, directly or indirectly.⁷

Under the New Regulation, each P2P operator must now designate at least 1 PSP⁸. Any shareholder that fulfills the criteria of PSP as defined above shall be designated as PSP. P2P operators that have obtained OJK license prior to the enactment of this New Regulation are required to report the designation of its PSP and subsequent changes on PSP to OJK within 6 months after 4 July 2022.

4. Change of Shareholders and Lock-up period

The New Regulations requires that any change of ownership in a P2P operator must be approved by OJK, including:

a) ownership of a P2P operator who is not a public company;

b) shareholding in a shareholder of a P2P operator who is not a public company;

c) PSP in a P2P operator who is a public company;

d) controlling shareholder in a P2P operator's shareholder who is a public company.

The New Regulation restricts P2P operator introducing any new shareholder and changing its PSP for a 3-year period following the issuance of its P2P lending license by OJK.⁹  However, the New Regulation is silent on how this restrictions would affect the P2P operator which licenses were issued within 3 years prior to the enactment of the New Regulation.

5. Legal Lending Limit

This is important for lenders on P2P lending platforms. The New Regulation stipulates that the maximum lending limit for each borrower is Rp2,000,000,000.¹⁰  In addition to such limit, the New Regulation now also regulates the maximum lending limit for each of the lender and its affiliates which is set at a maximum amount equal to 25% of loan disbursed by the P2P operator at the end of a month.

The elucidation of Article 26 paragraph (4) of POJK 10/2022 provides an example on the calculation of legal lending limit provisions:

"If the total outstanding amount of lending disbursed by P2P operator in a month is 50 billion Rupiah, each lender may only provide lending in a maximum amount of 12,5 billion Rupiah (50 x 25%)."

The above maximum lending limit for lender will be applied in the following stages: (i) for 6 months period commencing from 4 July 2022, the lending limit is at the rate of 80% of the lending disbursed at the end of a month; (ii) for 12 months period commencing from 4 July 2022, the lending limit is at the rate of 50% of the lending disbursed at the end of a month; (iii) within 18 months from 4 July 2022, the lending limit is at the rate of 25% of the lending disbursed at the end of a month.

Legal lending limit financial services business institution (pelaku usaha jasa keuangan or "PUJK")

The above legal lending does not applicable for a lender who is a PUJK supervised by OJK. The applicable legal lending limit for PUJK is 75% of the lending disbursed by P2P operator at the end of a month.

6. Certain Provisions for Directors and Commissioners:

A. Director's requirements:
The New Regulation obliges a P2P operator to have at least 2 Directors, in which half of the member of BOD must have at least 2 years managerial experience in financial institutions (in the credit/financing, risk management and/or financial sector). All of the Directors must be domiciled in Indonesia.¹¹

B. Commissioner's requirements:
P2P operators must appoint at least 1 commissioner and the number of commissioners must not exceed the number of directors. Half of the BOC members must have at least 2 years of managerial experience in a financial institution.¹²

C. Concurrent Position (Rangkap Jabatan)
A Director is prohibited to carry out concurrent position except for serving as a Commissioner in a maximum of 3 other companies.¹³

A Commissioner of a P2P operator may only hold concurrent position in 3 other companies.¹⁴

The above provisions on Directors, Commissioners and Concurrent Position must be fulfilled within 1 year since the enactment of the New Regulations.¹⁵

7. Certification

Each member BOD, BOC, and officials 1 (one) level below the Directors must obtain competency certification from financial technology profession certification institution registered with OJK. If such institution has not yet been formed, the certification may be obtained from the association.¹⁶

8. Internal Audit Unit

A P2P operator must have an internal audit unit and that unit must comprise of at least 1 person with the relevant expertise and/or background in audit. The P2P operator is required to carry out internal audit for at least once per year.¹⁷

9. Minimum Equity Requirement

P2P operators must maintain a minimum equity of Rp12,500,000,000, to be complied with the following stages: (i) minimum of Rp2,500,000,000 by 4 July 2023; (ii) minimum of Rp7,500,000,000 by 4 July 2024; and (iii) minimum of Rp12,500,000,000 by 4 July 2025.¹⁸

10. Classification of Credit Qualities

The New Regulation specifies that the classification of credit quality of each lending should fall within the following categories¹⁹ :

a) Current (lancar): No delay in the loan repayment and/or economical benefit of the funding;

b) Under special supervision (dalam perhatian khusus): delay in repayment and/or economic benefit of the funding with days-past-due up to 30 days

c) Substandard (kurang lancar): delay in repayment and/or economical benefit of the funding with days-past-due between 30-60 days

d) Doubtful (diragukan): delay in repayment and/or economical benefit of the funding with days-past-due 60-90 days

e) Non-performing (macet): delay in repayment and/or economical benefit of the funding with days-past-due exceeds 90 days.

11. Cooperation with third-party

A P2P operator may carry out cooperation with third-party, provided that such cooperation fulfills the following conditions: (i) carry out with a duly registered and licensed parties; (ii) documented in an agreement; and (iii) have been projected in the business plan of the relevant P2P operator.²⁰

Further, cooperation with regard to (i) informative services; (ii) risk mitigation; and/or (iii) outsourcing, must be reported to OJK within 5 days after the effective date of the relevant cooperation agreement. In addition, cooperation related to informative services can only be conducted with financial institutions supervised by OJK.

A P2P operator may also cooperate with governmental institutions to become distribution partner for government's securities (surat berharga negara). A P2P operator is only allowed to offer such government's securities in the primary market (pasar perdana) and offering in secondary market (pasar sekunder) is not allowed.²¹

A P2P operator may also carry out cooperation in exchanging data, which among others includes data exchange cooperation with credit-scoring providers and e-commerce operator. Such data exchange cooperation must be documented in a data confidentiality agreement (perjanjian kerahasiaan data) and the data exchange cooperation must be reported to OJK using the format annexed in the appendix of POJK 10/2022.²²

12. Debt-Collection Mechanism

A P2P operator is obliged to collect debt from a defaulted borrower by issuing a warning letter. Such warning letter must contain the following information: (i) delay time; (ii) outstanding debt; (iii) economic benefit of the lending; and (iv) outstanding penalty.²³

A P2P operator may cooperate with third-party in carry out debt collection, in which such cooperation must be documented in a written agreement. Such third-party must: (i) be in a form of legal entity; (ii) have a license from the relevant authority; (iii) have human resources that have obtained certification in debt collection from profession certification institution registered with OJK; (iv) is not an affiliate of the P2P operator or lender.²⁴

13. Further Prohibition (Affiliates of P2P Operator are Prohibited to act as Lender)

The New Regulation expands the scope of prohibition (compared to POJK 77/2016) which now includes the prohibition for P2P operator: (i) to grant access to its Directors, Commissioners, Shareholders including their respective affiliates to act as borrower or lender; (ii) to obtain a loan via the platform; (iii) to carry out actions that cause other financial institutions (under the supervision of OJK) to violate or avoid the provisions of the regulations; and (iv) to represent a lender to carry out lending and/or providing an automatic lending feature (which is a scheme where a lender hands-over the fund to the P2P operator without any interaction or involvement of a lender in the lending transaction).²⁵

14. Escrow Account, Virtual Account and Lender's Account (Rekening Dana Lender, "RDL")

A P2P operator must use an escrow account and virtual account/payment gateway for its business activities. Specifically, P2P operator must provide virtual account or payment gateway for each users (lender and borrower).

For the purpose of loan disbursements to a borrower, the disbursed funds shall only be placed in the escrow account for a maximum period of 2 working days (T+2). As for the repayment, the funds paid by a borrower shall only be placed in the escrow account for a maximum period of 1 working day since the funds are received from such borrower.

The New Regulation provides certainty regarding the disbursed fund which states that the disbursed fund is not the asset of the P2P operator.²⁶

15. Amendment of Electronic System and/or Amendment of Business Model

Any change of electronic system must be reported OJK within 15 days from the date if issuance of notification and/or approval to and/or from the relevant authority.²⁷

The P2P operator must report any amendment of its business model to OJK within 15 days after the realization of the new business model. Such reporting must be supported with the following documents: (i) feasibility study that incorporates funding projection for the next 3 years; (ii) cost benefit analysis; (iii) risk mitigation analysis; and (iv) cooperation agreement with third-party (if any).

Any "amendment of business model" is defined as amendment or addition that have significant differences with the current business of P2P operator (e.g. a P2P operator who previously provide "productive loan" services (i.e. working capital loan product) switches to provide "multi-purpose funding" services (i.e. consumer loan product)).

16. Utilizations of foreign employees

Foreign workers can only be employed for a maximum period of 3 (three) years, which is non-extendable.²⁸  Moreover, the New Regulation prescribed that foreign workers can only be employed as an information technology (IT) consultant or expert directly reporting to the Board of Directors.  In addition, the use of foreign employees must be coupled by transfer of knowledge program, both of which must be reported to OJK.

17. Further Provisions to be Regulated

OJK has yet to issue the implementing regulations for POJK 10/2022 and thus, certain specific and technical requirements are yet to be regulated.

This article only summarises what we regard as the main points of the New Regulation. Please do approach our team if you have any further queries and/or wish to obtain further advice in relation to the New Regulation.

Authors: Rizaldy Tauhid (Partner); Jean Woo (Partner); Anggarara Hamami (Senior Associate); Chandra Setyabrata (Associate) ; Fernanda Dharmawan (Junior Associate)

_{1. See PwC Indonesia – Fintech Series – Indonesia's Fintech Lending: Driving Economic Growth Through Financial Inclusion, Executive Summary . Indonesia's Fintech Lending: Driving Economic Growth through Financial Inclusion - Executive Summary (pwc.com)}

_{2. See article on "2022 the Coming of Age of Indonesia’s Fintech Industry" published by AC Ventures.} 

_{3. Article 4 paragraph (1) of POJK 10/2022}

_{4. Article 113 of POJK 10/2022}

_{5. Article 21 of POJK 10/2022} 

_{6. Article 114 paragraph (6) and (7) of POJK 10/2022}

_{7. Article 1 paragraph (29) of POJK 10/2022} 

_{8. Article 5 of POJK 10/2022}  

_{9. Article 68 paragraph (3) of POJK 10/2022}

_{10. Article 26 of POJK 10/2022}   

_{11. Article 55 of POJK 10/2022}

_{12. Article 56 of POJK 10/2022}

_{13. Article 55 paragraph (4) of POJK 10/2022}

_{14. Article 56 paragraph (3) of POJK 10/2022}  

_{15. Article 114 of POJK 10/2022}

_{16. Article 16 of POJK 10/2022}

_{17. Article 58 paragraph (1) of POJK 10/2022}

_{18. Article 50 of POJK 10/2022}

_{19. Article 51 of POJK 10/2022}

_{20. Article 38 of POJK 10/2022}

_{21. Article 39 of POJK 10/2022}

_{22. Article 40 of POJK 10/2022}

_{23. Article 102 of POJK 10/2022}

_{24. Article 103 of POJK 10/2022}

_{25. Article 111 of POJK 10/2022}

_{26. Article 36 of POJK 10/2022}

_{27. Article 62 of POJK 10/2022}

_{28. Article 18 paragraph (1) of POJK 10/2022}