Financial Services Authority moves toward industry consolidation

The Financial Services Authority (OJK) has urged banks classified in core capital bank group (KBMI) 1, or banks with up to Rp 6 trillion (US$355 million) in capital, to strengthen their capital position or consolidate with other banks, as part of its longer-term aim to eliminate the KBMI 1 classification altogether. The policy aims to enhance banks’ capacity, performance and service quality and enable them to scale up while maintaining operational security and efficiency.

The OJK sent formal letters on the policy to KBMI 1 banks in late October 2025, emphasizing the urgency for consolidation amid rapid technological change, accelerated digitalization in banking, rising cybersecurity risks and persistent uncertainty in the global economy.

The regulator has also signaled its openness to providing incentives to encourage consolidation. While it prioritizes a persuasive, voluntary approach, the authority has not ruled out issuing an OJK regulation (POJK) on consolidation if voluntary efforts prove insufficient. Regional development banks (BPD) are exempt from the new policy, as the OJK is pursuing a separate scheme to strengthen their capital. KBMI 1 banks generally welcome the policy direction, according to the authority, though most institutions remain at the internal assessment stage.

The financial authority stressed that consolidation would not be rushed: Each case would be assessed individually to ensure regulatory compliance and consumer protection. For KBMI 1 banks seeking to upgrade to KBMI 2, the OJK assessment would extend beyond financial indicators to include digital transformation readiness, IT infrastructure robustness, cybersecurity resilience and technology risk management.

Article 147 of POJK No. 12/2021 mandates the classification of all commercial banks operating in Indonesia, including sharia banks and local branches of foreign banks, into four groups based on core capital. The ranges are up to Rp 6 trillion for KBMI 1, from over Rp 6 trillion to Rp 14 trillion for KBMI 2, from above Rp 14 trillion to Rp 70 trillion for KBMI 3 and core capital above Rp 70 trillion for KBMI 4.

There are currently 61 KBMI 1 banks, which represent more than half the 105 commercial banks in the country. However, they carry limited economic weight: KBMI 1 had collective assets totaling Rp 1.31 quadrillion as of June 2025, down 6.2 percent year-on-year (yoy) from Rp 1.39 quadrillion in June 2024 and accounting for only 10.2 percent of overall commercial banking assets. Loan disbursement among KBMI 1 banks declined 2.1 percent yoy to Rp 753.55 trillion and third-party funds (TPF) fell 3.1 percent yoy to Rp 919.39 trillion, or just 9.86 percent of overall TPF. In contrast, KBMI 4 banks contributed 53.4 percent to overall TPF during the same period, underscoring the growing concentration within the banking industry.

While KBMI 1 banks are the smallest by core capital, they still record relatively strong prudential ratios. As of June 2025, KBMI 1 banks posted a capital adequacy ratio of 30.7 percent and a net interest margin of 4.72 percent, both above the industry average. However, their structural weaknesses are evident: KBMI 1 banks’ operating expenses absorbed 86.44 percent of operating income, indicating persistent efficiency challenges, while asset quality was below the industry benchmark, with a nonperforming loan ratio of 2.61 percent.

Some analysts argue that the consolidation policy reflects the OJK’s view that the country has too many small commercial banks. Banks that successfully upgrade to KBMI 2 could expand beyond their traditional focus on the micro, small and medium enterprise segment and benefit from stronger supervision and broader business scope. However, banks unable to attain KBMI 2 classification through organic growth would effectively be forced into a merger or acquisition. Poorly managed mergers could lead to layoffs and risk eroding long-standing customer relationships.

The Federation of Private Banks (Perbanas) has voiced support for the OJK’s plan to eliminate the KBMI 1 classification. It argues that banks with core capital below Rp 10 trillion face structural constraints in achieving sustainable growth and healthy profitability, especially when competing with larger KBMI 4 banks that benefit from economies of scale and superior technological resources.

At the same time, the consolidation push appears to clash with Article 59 of POJK No. 11/2023 on sharia business units, which mandates that sharia units spin off from conventional banks once their assets reach at least 50 percent of the parent bank’s assets and/or Rp 50 trillion. Nevertheless, the two policies could coexist if sharia spin-offs are accompanied by adequate capital injections from parent banks, thereby supporting overall strengthening of the sector.

Ultimately, bank consolidation is likely to have a positive, long-term impact on Indonesia’s financial sector and broader economy by improving intermediation capacity and competitiveness. However, the process must be accompanied by careful regulatory oversight to minimize disruption to customers and mitigate potential employment losses. Broadening business scope and strengthening capital will also help smaller banks stay competitive amid the rapid expansion of fintech lending services.