Indonesia
CPSS Core Principles for Systemically Important Payment Systems

This paper presents key findings of the Financial Sector Assessment Program for Indonesia. The program covers Bank Indonesia’s real-time gross settlement (BI-RTGS) system’s observance of the Committee on Payment and Settlement Systems (CPSS) core principles for systemically important payment systems (SIPS). The assessment reveals that the legal foundation for payment systems in Indonesia is generally sound with explicit provisions for the central bank’s involvement in payment systems. The BI-RTGS generally functions well and is recognized as the only SIPS in Indonesia.

Abstract

This paper presents key findings of the Financial Sector Assessment Program for Indonesia. The program covers Bank Indonesia’s real-time gross settlement (BI-RTGS) system’s observance of the Committee on Payment and Settlement Systems (CPSS) core principles for systemically important payment systems (SIPS). The assessment reveals that the legal foundation for payment systems in Indonesia is generally sound with explicit provisions for the central bank’s involvement in payment systems. The BI-RTGS generally functions well and is recognized as the only SIPS in Indonesia.

I. Summary, Key Findings and Recommendations

Introduction

1. This assessment forms part of the joint International Monetary Fund (IMF) and World Bank Indonesia Financial Sector Assessment Program (FSAP) which is being undertaken during 2009-2010. The assessment which covers the Bank Indonesia’s real time gross settlement (BI-RTGS) system’s observance of the CPSS Core Principles for Systemically Important Payment Systems (SIPS) and the Central Bank’s Responsibilities in applying the Core Principles was conducted during the first mission (6-16 October 2009).

Information and methodology used for assessment

2. The assessment which was conducted with the cooperation of the Bank Indonesia and other key players in the payment systems area was undertaken by Alice Zanza, Senior Payment Systems Specialist, World Bank with the assistance of Bruce Summers, Senior Payment Systems Advisor, World Bank. Although there are several systems in operation in Indonesia, BI considers the Bank Indonesia Real Time Gross Settlement (BI-RTGS) system to be the only systemically important payment system in the country. BI-RTGS is owned by BI and operated by the Payment Systems Department in the Directorate of Accounting and Payment Systems. To date, the assessment team does not have any information to expand the scope of systemically important payment systems in Indonesia and has conducted the assessment of the RTGS system, as the sole SIPS in the country.

3. The sources of information gathered during the course of this assessment were varied, and included interviews held with relevant officials from the Bank Indonesia (BI); several participants in the BI-RTGS, bank and non bank; representatives of the Bankers Association; Artajasa, an ATM switching company with indirect participant status in BI-RTGS; the Bankers Association By- Laws Committee responsible for enforcing members’ code of conduct in the BI-RTGS operations; the post office; telecommunications companies and mobile service providers.

4. Several documents were provided by the authorities prior to the commencement of the mission, including a detailed self-assessment of the BI-RTGS, and information posted on the website of BI. The other main sources of information were: (i) the BI Act 23 of 1999 (ii) Bankruptcy and Suspension of Obligation for Payment of Debts Act, (iii) various regulations, rules and circular letters relevant to the operations of payment systems and issued by BI in its capacity as the overseer of payment systems.

5. The tools used to assist and guide the assessors in achieving the objectives of this assessment were the standards report itself (—CPSS Core Principles for Systemically Important Payment Systems”, January 2001)—Guidance Note for Assessing Observance of Core Principles for Systemically Important Payment Systems and the Structure and Scope of the Assessment Report” produced by the IMF and World Bank in collaboration with the Committee on Payment and Settlement Systems.

6. The assessors wish to express their appreciation to the BI, banking industry representatives and all the payment systems stakeholders for their cooperation and willingness to meet with the assessors at the times requested. Special appreciation must be expressed for the assistance rendered by the Accounting and Payment System Directorate (DASP) who were the assessors’ main counterparts and facilitated follow up meetings within BI and externally.

Institutional and market structure

7. Bank Indonesia is at the apex of the payment system in Indonesia and is empowered by the BI Act 23 of 1999 to supervise banks and other financial institutions, conduct monetary policy and oversee the payments system. Using its spread of forty (40) branches BI facilitates interbank clearing and the distribution of cash throughout the country. BI also provides settlement in central bank money for the RTGS system it operates, the government securities system and the national clearing system.

8. The main players in the payment system in Indonesia are banks who comprise state banks, private banks, regional development banks and sharia banks. Most of these banks have a deliberate policy to extend payment services by establishing branches throughout the country.

9. Cash remains a dominant means of payment in Indonesia despite the various innovative products and instruments introduced by banks in the provision of payment services. According to available statistics, the cash utilization levels have maintained an upward trend over the last 6 years and reached the highest point in 2008. Other means of payment used in Indonesia include cheques, drafts, and direct debit and credit transfers. Various payment cards are issued by banks and these are switched through different networks which are not interlinked. The biggest of these networks (Artajasa) in terms of number of banks it services, has access to the BI- RTGS in order to facilitate settlement of card and other retail transactions by member banks.

10. The BI-RTGS system is the main system for handling payments, and is also used for the settlement of obligations arising from the other payment streams. The system was introduced in 2000 as part of BI’s strategy to address risks inherent in the cheque clearing system, arising from the ever increasing volumes and values. The BI-RTGS links 149 participants to the central bank, using a designated network. The forty branches of BI connect to the system using the Bank’s intranet. Of the 149 participants, 144 are banks of which 2 are indirect participants; the remaining 5 are non bank participants who include Artajasa (ATM switching company), Posindo (the post office), Lintas Arta (a switching company) Finnet (an e-money switching company) and more recently, the Indonesia Eximbank. The indirect participant status is offered to participants who handle small volumes; they are required to hold a demand deposit account at the BI.

11. BI RTGS settles transactions in real time, using central bank money. Participants to the system use a front end (provided for interfacing with BI), to input instructions that are sent through a dedicated network to the central bank’s central system. Since the system works on a credit push basis, the settlement account has to be adequately funded before a transaction can be settled. Once a payment is successfully processed in BI-RTGS-one account debited and the other credited-it is deemed to be final and cannot be reversed. This position is clearly provided for in the BI-RTGS regulations.

12. In the event that a settlement account is not adequately funded, payment transactions are held in a queue until sufficient funds are available on the participant’s account. Participants have the facility to manage outgoing payments held in queue, and prioritize them as appropriate. Items still held in the queue at the system cut off time are automatically cancelled.

13. To facilitate settlement as well as ensure a smooth flow within the system, BI provides a collateralized intraday credit facility to all bank participants. Participants are also encouraged to process their payments early in the day using the throughput guidelines provided. The system’s pricing is designed around two windows with the first window being the cheapest (at Rp 7,000 per transaction) to encourage early payments. The second window which runs from 3 pm to end of day attracts a fee of Rp 14,000 per transaction. In terms of value, about 93 percent of all interbank transactions in Indonesia are settled through the BI-RTGS, which as at end of June 2009 recorded average daily transaction activity of 39,250 by volume and Rp 174 trillion by value.

14. BI also administers the national clearing system, SKN-BI in terms of the powers granted by the BI statute. The system handles the clearing of debit-pull and credit-push instruments throughout the country. In areas where BI is not represented, agents in the form of commercial banks have been appointed to carry out the clearing function on behalf of the central bank. SKN-BI was established in 2005, and handles clearing through over 100 clearing facilities established throughout the country. The debit clearing within SKN-BI involves paper based instruments including cheques and debit notes. The arrangements are localized with the clearing operator having the responsibility of ensuring that obligations are calculated correctly before they are sent to BI for settlement through the BI-RTGS system. There is no threshold imposed on debit clearing; hence cheques of a high value nature can still be issued by customers in this regard. Unlike debit clearing, the credit clearing process is non-paper based and involves the clearing of credit instructions between banks before settlement takes place. A threshold of Rp 100 million is imposed in credit clearing. Any amounts exceeding this threshold must be processed through the RTGS system. The transactions cleared through SKN-BI have maintained an upward trend over the years 2006 to 2008 in both value and volume terms.

15. Over the last decade, BI has been involved in collaborative efforts to reform the payment system in Indonesia. The existing blueprint that provides guidance to this process is currently being revised in response to the ever changing payments environment and to set strategic direction for the critical international linkages being envisaged by BI.

Main Findings

Legal Framework (CP I)

16. The legal foundation for payment systems in Indonesia is generally sound with explicit provisions for the central bank’s involvement in payment systems. A number of statutes have been enacted and these are supported by regulations and circular letters that the BI issues from time to time. The authorities should however consider enacting a specific law that governs payment systems as well as address any areas that need further strengthening and clarity. For example, in order to eliminate ambiguity and uncertainty, there is need to explicitly recognize netting as a legal process. In this regard, it should be noted that reference to the term in the circulars or rules does not translate to recognition of —netting” as a legal term.

Management of Risk (CP II-III)

17. The BI-RTGS generally functions well and is recognized as the only SIPS in Indonesia. System participants have a good understanding of the financial risks and the need to contain these in accordance with operating rules. The rules cover various aspects which include systems operation and oversight; consumer protection, system features. Participants are well informed and have a clear understanding of the risk of participation and the need to manage the same. Authorities must be commended for the —observed” rating allocated to all risk related CPs in this assessment

Settlement (CPIV-VI)

18. Over and above the clarity of BI-RTGS rules, the system design is such that once a transaction is accepted in the system, and the respective accounts debited and credited it is deemed final and cannot be revoked. This position is also supported by explicit provision in the regulations. The operating schedule is adhered to and any interruptions are communicated to the participants. The system has a queuing mechanism and participants fully understand that queued transactions are not settled and have to be discarded at the end of the day if they are not funded.

Operational Reliability and Efficiency (CPVII-VIII)

19. BI has adequate contingency plans in place to address any technical problems; a general security policy that is set by the Board is applied across applications used by the Bank. The business continuity procedures are well documented and the disaster recovery site which is manned by a small contingency of staff is tested periodically to ensure its ability to take over the primary production environment in the event of a challenge. The 40 kilometer separation between the production site and the DR site is however minimally acceptable particularly for an environment that is prone to natural disruptions. The two main systems operated by BI, (BI-RTGS and BI-Securities Settlement System) and linking external participants are based on legacy technologies which have been replaced by modern technology. BI has advanced plans to implement a new second generation system in 2011. In allocating the —observed” rating to CP IV, these advanced plans were taken into account and must therefore be realized within the stipulated time in order to maintain full observance of the two CPs in future.

Access and Governance (CP IX-X)

20. There is absence of clear, documented access criteria based on specific indicators. This position appears to have been influenced by the historic position taken by BI requiring all banks to be direct participants in the system. Hence any bank that is licensed has direct access to the system on application. The BI would benefit from access criteria that are based on specific indicators agreed between the Payment Systems Department and the Banking Supervision Department. While not being restrictive and stifling competition, such criteria should act as a risk management tool by ensuring that weak banks that are likely to pose systemic risk to the system are not automatically granted access. Limiting access to banks only is increasingly becoming an exception for most central banks. In considering the option of granting access to non banks, BI will need to give attention to the final settlement needs of the market, as well as clearly distinguish between the access to settlement account only and access to central bank credit and settlement account.

Central Bank Responsibilities (CBRs) A-D

21. BIs payment systems objectives are clearly documented and publicly disclosed via the website and communication with the National Payment System Communication Forum. There is scope for broadening and deepening BI’s communication with key stakeholders in the payment system. Such communication should incorporate the explicit pronunciation of the direction being taken at national level to achieve the objectives identified in the blueprint. The revision of the blueprint provides a good opportunity for BI to strengthen consultation with banks and other stakeholders. BI has defined its payment system oversight narrowly and focuses on overseeing only the systems it operates with an operator’s perspective. Rapid developments of the financial system will likely raise the profile of a number of systems and it is important for BI to anticipate pressure on the oversight function by ensuring adequate resources both in terms of staff levels and skills. BI cooperates with other central banks in the region and also gets technical assistance from other central banks. Cooperation with domestic authorities and regulators could be improved and structured by signing formal MOUs and creating joint working groups, when appropriate. This applies to cooperation with other functions of BI (e.g. the Bank Supervision Department) and other external authorities and regulators (e.g. Bapepam, and the telecommunications regulatory authority.

Table 1

Summary Observance of the CPSIPS and Central Bank Responsibilities in Applying the CPs—ROSCs

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Recommended Actions and Authorities Response

Table 2

Recommended Actions to Improve Observance of the CPSIPS and Central Bank Responsibilities in Applying the CPs—BI-RTGS

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Authorities’ response

22. The recommended action on CP I (Legal Foundation) was for authorities to consider enacting a specific law to govern payment systems operations as well as take steps to explicitly recognize netting as a legal process. BI noted that currently there are regulations in existence governing netting settlement e.g. in BI regulations on national clearing system. While agreeing that it is necessary to have an Act or statute that governs payment and settlement systems, (including netting) BI pointed out that the process of enacting a statute is time consuming and involves many parties.

23. The recommended action on CP IX (Access and Governance) was for authorities to consider introducing clear, documented access criteria based on specific indicators, for both direct and indirect participants. BI agreed with this recommendation and advised that access criteria are being reviewed to give clear and explicit indicators.

24. In response to the recommendation under CP X to set up a BI-RTGS User Group to encourage dialogue on system specific issues, extend oversight activities to RTGS participants as well as broaden communications with stakeholders, BI advised that the operator of BI-RTGS already conducts on site examination of several members as a tool for oversight. BI noted that the oversight function needs to extend activities to operational activities of securities settlement system.

25. With regard to central bank responsibilities (CBRs) in applying the core principles (CBR B, C and D), the recommended actions were for BI to consider employing measures that would help in achieving full observance of all CPs; widening the scope of oversight and strengthening activities through formal arrangements; and lastly, improving the structure and cooperation with other domestic authorities and regulators by signing formal MOUs and creating joint working groups, where appropriate. This applies to cooperation with other functions of BI (e.g. the Bank Supervision Department) and other external authorities and regulators (e.g. Bapepam, and the telecommunications regulatory authority).

26. BI fully agrees with taking appropriate measures to ensure full observance of all CPs. The oversight of the BI-SSSS will commence in 2010 in accordance with the consolidation of BI-RTGS and BI-SSSS under the Payment Systems Directorate. BI further advised that coordination with Banking Supervision Department has been conducted in the form of information exchanges and joint teams in on-site examination. Cooperation with other authorities (Bapepam-LK and Ministry of Information and Communication) will be discussed and followed up.

II. Detailed Assessment

Table 3

Summary observance of CPSS Core Principles and Central Bank Responsibilities in applying the CPs—Detailed Assessments

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Table 4

Detailed Assessment of BI-RTGS Observance of the CPSS CPSIPS and the BI Responsibilities in Applying the CPSIPS

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