CASH MANAGEMENT
Cash Management in Indonesia
June 13, 2007
Dewi Damayanti, HSBC Global Payments and Cash Management - Originally published in HSBC Guide to Treasury and Cash Management in Asia Pacific 2007

SUMMARY:

• At the macro-economic level, the short- to medium-term outlook for Indonesia is positive. After a fairly volatile period of fuel subsidy cuts, the economy has regained composure and there are signs of stabilisation, with growth likely to return to levels not too far below the average of recent years.
• While rocked by a number of terrorist attacks and a recent spate of natural disasters, Indonesia has seen a relatively long period of political stability. However, further development in corporate governance and legal certainty is needed to keep investors engaged in the economy.
• Corporations already operating in Indonesia continue to benefit from the improving sophistication of the financial system, clearing systems and the cash management environment.
• Indonesia's companies continue to strengthen their balance sheets through engaging best practice accounts payables and receivables, and liquidity and channel management solutions.

With a 425 basis points increase in market rates over a five-month period to January 2006, one could be excused from thinking that Indonesia' s economy was teetering on the brink. However, the rise was a direct response by Bank Indonesia (BI) to stabilise the economy after the fuel price rises of October 2005, which led to a headline inflation rate of over 17%.

While the dual impact of fuel price and interest rate rises has not been well met by certain sectors - vehicle manufacturing in particular, where sales were down 56% year-on-year in April 2006 - there are signs that activity is stabilising. Consumer confidence has rebounded modestly since the first quarter of 2006, and deterioration in growth has slowed. In particular, growth of fixed capital investment has recovered over the past two quarters.

Critically for Indonesia, export growth is robust with real exports in second quarter 2006 growing at the fastest pace in four quarters - primarily because of strong demand from Japan and China, two of Indonesia's largest trading partners. Export receipts also benefit from continued strength in commodities, oil in particular.

However, worries about inflation remain a constraint for the authorities, particularly when they are also required to maintain the currency's credibility. Although inflation is likely to drop back to 8% year-on-year in October 2007, an aggressive monetary easing will place pressure on the currency.

But Indonesia is not out of the woods yet. October and November is budget time, and fuel subsidies continue to remain a pressure point. With a possible increase in fuel subsidies because of higher oil prices, the downward trend in inflation is likely to slow. Bank Indonesia therefore needs to be careful not to overstep the mark on rate cuts.

Overall though, not a bad performance, considering the shock to activity following last year's events. In time, the economy should return to growth not too far behind the average of recent years.

Financial Sector Overview

Bank Indonesia continues to seek significant consolidation in the banking sector. The latest initiative is the 'single presence policy', whereby investors will only be allowed to maintain a controlling stake in one bank within Indonesia by the end of 2008. Current investors that have a majority shareholding are given three options to resolve the ownership issue - reduce direct ownership, merge or consolidate the banks, or form a financial holding company.

The regulation directly affects three particular investors: Temasek Group, which controls two prominent local banks, Bank Danamon and Bank International Indonesia; Malaysian Khazanah Asset Berhad, which ultimately controls Bank Niaga and Lippo Bank; and the government itself, which controls Bank Mandiri, Bank Negara Indonesia (BNI), Bank Rakyat Indonesia (BRI) and Bank Tabungan Negara (BTN). How the government proceeds in relation to its own requirement to consolidate will be watched with particular interest.

What is certain is that foreign ownership of local banks has increased significantly in recent years. With this, Indonesia has seen greater investment by reinvigorated local banks in areas of banking that have previously only been the domain of foreign banks operating in Indonesia. One such area is cash management.

Cash Management Overview

Account management

A wide range of account types are offered by banks in Indonesia, including current accounts, demand deposit accounts, time deposits and central bank deposit certificates known as SBIs (Sertifikat Bank Indonesia). While corporate entity access to a savings account is prohibited by law, there remain no restrictions prohibiting credit interest paid on current accounts. A deposit insurance scheme is in place, with amounts up to IDR1bn covered by Lembaga Penjamin Simpanan (LPS), an independent legal entity operating local law and reporting directly to the office of the President of the Republic of Indonesia.

The Indonesian rupiah (IDR) and all major convertible currencies are available onshore to residents and non-residents. Inwards IDR transactions to non-resident accounts must be related to an underlying economic activity, with appropriate supporting documents provided for all transactions above IDR500m (about US$55,000). Convertible onshore, transferring IDR offshore or providing IDR credit facilities to non-residents (outside of consumer loans to non-residents with work permits) are prohibited by law, all in the hope of curbing the volatility of the local currency. Additionally, any offshore fund movements of US$10,000 equivalent or more must be declared to BI, with the purpose stated clearly on the payment order.

Resident and non-resident accounts are subject to withholding taxation at 20%. Where a tax treaty exists between Indonesia and a non-resident company's country of domicile, the non-resident company may request a reduction in withholding tax.

Payments and collections management

A wide range of electronic and paper-based payment and collection services are available for companies, including high-value IDR real-time gross settlement (RTGS) electronic payments, low-value IDR single electronic payments, electronic and paper giro, cashier's orders and company cheques - though cheques are not commonly used because of concerns over fraudulent behaviour.

While cash notes continue to be a prolific medium of exchange, there is a growing acceptance of the use of electronic transfers. Assisting this migration, BI has been involved in developing a new low-value local clearing system - Sistem Kliring Nasional (SKN) - a precursor to a centralised nationwide low-value electronic settlement system.

Launched in Jakarta in July 2005, SKN will ultimately replace four distinct payments processing systems used throughout 105 clearing centres. In particular, SKN eliminates the need to prepare and clear paper credit notes, replacing this in its entirety with online electronic file clearing. With such standardised processing, settlement risk is significantly reduced, with associated benefits of same-day clearing, guaranteed funds availability and the elimination of system or bank float. BI is committed to having SKN nationwide by 31 December 2006.

While SKN is a long-awaited and positive step, further moves are required to bring Indonesia in line with more sophisticated cash management markets in Asia Pacific. In particular, Indonesia suffers from the absence of a cross-bank bulk debit clearing switch. Currently, banks are required to enter into bilateral arrangements to offer customers the ability to electronically auto-debit from a payor's account with another bank to a beneficiary account at the beneficiary's bank. The banking industry, with the assistance of BI, needs to address this issue to ensure that the momentum towards electronic exchange continues.

With their ability to draw on considerable international experience of operating within and managing local payment clearing systems, foreign banks in Indonesia continue to dominate the cash management market. Constrained by the absence of physical branch networks, foreign banks have formed alliances with some local banks to guarantee delivery of 'physical' cash management services in locations where they have no direct presence. Such services include country cash deposits, automated teller machine (ATM) bill payments, up-country cheque collections and outsourced cash delivery and pick-up services.

Indeed, the number of cash management alliances between local and foreign banks has increased considerably in the past three years, with local banks benefiting not only from increased fees and commissions, but also from increased cash management experience.

Liquidity management

With the absence of a cross-bank direct debit switch, a wide-spread payor requirement to settle via internal bank transfer and limited branch presence in certain regions, companies are often required to hold collection accounts at different local banks. However, holding funds in such a decentralised manner reduces the opportunity to optimise interest income.

Once the funds are collected, companies look to cash management providers to concentrate local collection account balances in a master account with the concentration bank, where the aggregated balance may attract higher interest. Various investment options are available for this surplus liquidity, including call and time deposits, SBIs, and corporate and government bonds. Though corporate money market fund offerings are also gaining prevalence, they still comprise a very small amount of corporate liquidity.

Channel management

As with recent clearing industry moves to migrate from paper-based to electronic settlement, Indonesian companies have embraced the need to automate internal cash management and use electronic banking channels. Unlike many of its neighbours, however, moves towards Internet banking in Indonesia have been hampered by the quality and price of local broadband.

While such challenges will be overcome as Indonesia focuses more on its Internet economy, some banks have taken a lead in improving access speeds and cost through direct negotiation with Internet service providers on behalf of their customers. Their motivation comes from the increased costs of running two channels - and, in particular, developing new solutions across these channels.

Many banks have also been involved in the development of national ATM networks. While the main reason for such developments is reducing the reliance on physical branches - corporate cash management is a key beneficiary. For companies with significant volumes of retail collections, widespread ATM access allowing interbank transfers will reduce the need for numerous collection accounts across multiple banks. The company will only need to hold a master concentration account at a core cash management bank that is a member of the ATM network. Benefits will be prompt value, guaranteed funds availability, aggregated balances to optimise interest earnings and improved reconciliation - the last benefit is a direct result of the presence of more sophisticated ATMs that allow for narrative input.

Development trends

The demand for corporate cash management solutions in Indonesia remains robust, and competition between banks is clearly rising. Foreign banks' dominance is under attack by recapitalised and reorganised local banks - many with foreign shareholdings. Indeed, many local banks are investing significantly in local cash management solutions, while some foreign banks are now focusing on achieving an acceptable return on previous investment before looking at further development.

What is certain is that the most successful banks will be those that can provide 'one-channel access' to cash management services. A disjointed array of products and services, delivered to ill-defined customer segments via a disparate and poorly managed channel network will naturally not meet with success. Local banks that exercise management control on a decentralised basis will never make headway in the corporate cash management world, no matter what their parentage.

In the short to medium term, developments in the area of effective management of collections will be of particular interest to corporate customers. Starting with the collection channels themselves, banks that have access to the most ubiquitous and efficient methods will win out. In particular, cross-bank ATM collection solutions with screens tailored to the needs of customer-to-business receivables is one local demand that needs satisfying. Add to this an automated reconciliation solution identifying the payor and matching the collection with an outstanding invoice in the enterprise's resource planning system - and you have a winning solution.

In the area of payments management, continued progress in reducing paper-based support documentation will be the focus in the short- to medium-term. With continued regulatory involvement in the payments environment and the surrounding bureaucracy, some banks have seen the opportunity to build electronic documentation systems to support their underlying payments solutions. Related to this, many local banks now understand the importance of satisfying not just the accounts reconciliation needs of their direct customers, but also those of their customer's customers. Electronic payments advising has been used by a number of banks, and this development is likely to continue as the benefits of improving supplier relationships is realised.

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