DECREE OF THE BOARD OF MANAGING DIRECTORS OF BANK INDONESIA CONCERNING ALLOWANCE FOR EARNING ASSETS LOSSES

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1 Unofficial Translation No. 31/148/KEP/DIR DECREE OF THE BOARD OF MANAGING DIRECTORS OF CONCERNING ALLOWANCE FOR EARNING ASSETS LOSSES THE BOARD OF MANAGING DIRECTORS OF, Considering: a. whereas bank survival is highly dependent upon readiness to face risks of losses arising from placement of funds; b. whereas to cover the risk of losses, banks are obliged to establish an allowance for earning assets losses; c. now therefore it is deemed necessary to enact provisions concerning allowance for earning assets losses in a Decree of the Board of Managing Directors of Bank Indonesia. In view of: 1. Act Number 13 of 1968 concerning the Central Bank (State Gazette Number 63 of 1968, Supplement to the State Gazette Number 2865); 2. Act Number 7 of 1992 concerning Banking (State Gazette Number 31 of 1992, Supplement to the State Gazette Number 3472), as amended by Act Number 10 of 1998 (State Gazette Number 182 of 1998, Supplement to the State Gazette Number 3790); 3. Decree of the Board of Managing Directors of Bank Indonesia Number 31/147/KEP/DIR dated November 12, 1998 concerning Earning Assets Quality. HAS DECREED:

2 BOARD OF MANAGING DIRECTORS Page 2 To enact: THE DECREE OF THE BOARD OF MANAGING DIRECTORS OF CONCERNING ALLOWANCE FOR EARNING ASSETS LOSSES. Article 1 The terminology used in this Decree has the following meanings: a. Bank is a Commercial Bank as defined in Act Number 7 of 1992 concerning Banking as amended by Act Number 10 of 1998; b. Earning Assets are placements of Bank funds both in rupiahs and in foreign currencies in the forms of credit, securities, interbank placements, and equity participation, and includes commitments and contingencies in off balance sheet accounts; c. Credit is the provision of funds or equivalent claims based on a loan agreement between a Bank and another party, which requires the borrowing party to repay his debt after a certain period with interest, and includes: 1. purchase of securities from a customer accompanied by Note Purchase Agreement (NPA); 2. negotiation of claims in the course of factoring; d. Securities are promissory notes, bills of exchange, bonds, securitizations or derivatives thereof, or other interest, or an obligation issued by issuers, in a form commonly traded on the money market and capital market, including but not limited to Bank Indonesia Certificates (SBIs), money market securities, commercial paper, mutual fund certificates, and Medium Term Notes; e. Interbank Placements are placements of fund in other Banks, comprising demand deposits, call money, time deposits, certificates of deposit, Loans, and other placements; f. Equity participation is placement not conducted through the capital market of Bank funds in stocks of financial institutions, including temporary equity participation in a debtor company for the purpose of resolving credit default. g. Off Balance Sheet Transactions are commitments and contingencies comprising issued guarantees, acceptance/endorsements, outstanding irrevocable L/Cs, import draft acceptance under usance L/Cs, sales of securities under repurchase agreements (repo), standby L/Cs, and other guarantees, and derivative transactions which have credit risk; h. Independent Appraiser is an appraisal firm that:

3 BOARD OF MANAGING DIRECTORS Page 3 1. is not affiliated in terms of ownership, management, financial linkages with a Bank and/or its debtors; 2. conducts business in appraisal according to the Code of Ethics of Indonesian Appraisers and other provisions stipulated by the Council of Indonesian Appraisers; 3. holds an operating license issued by an authorized agency to operate as an appraisal firm; and 4. is registered as a member of Indonesian Appraisal Company Association (GAPPI); i. Appraisal refers to a written statement prepared by Independent Appraiser or a Bank in-house appraiser setting forth an estimation and opinion concerning the economic value of collateral in the form of fixed assets, based on analysis of relevant and objective facts and compliance with the generally accepted appraisal methods and principles stipulated by the Masyarakat Profesi Penilai Indonesia/MAPPI (Indonesian society of professional appraisers); j. Market Approach is an estimated value obtainable from the sale or exchange of an asset on the date of appraisal after deduction for transaction costs, in which the transaction is agreed on by a buyer and seller with no prior relationship with each other, with proper knowledge of the asset concerned, and without compulsion to conduct the transaction; k. Cost Approach is the estimated cost required for replacement with a new asset after deduction for depreciation expense incurred by physical damage and decline in economic value; l. Income Approach is the present value of the estimated future income expected to be received within a period of 5-10 years; m. Allowance for Earning Assets Losses is a provision that is required to be established in certain percentages of nominal value, based on classification of earning assets, as defined in Decree of The Board of Managing Directors of Bank Indonesia, Number 31/147/KEP/DIR dated November 12, 1998 concerning Earning Assets Quality; n. Capital is capital as referred to in the Decree of the Board of Managing Directors Number 26/20/KEP/ DIR dated May 29, 1993 concerning the Bank Capital Adequacy Requirement, as amended by Decree of the Managing Directors of Bank Indonesia Number 31/146/KEP/DIR dated November 12, 1998.

4 BOARD OF MANAGING DIRECTORS Page 4 Article 2 (1) Banks shall establish an Allowance for Earning Assets Losses in the form of general provision and special provision to cover risks of losses. (2) General provision as referred to in paragraph (1) shall amount to not less than 1% (one percent) of Earning Assets classified as Current, excluding Bank Indonesia Certificates and Government Bonds. (3) Special provision as referred to in paragraph (1) shall amount to not less than: a. 5% (five percent) of earning assets classified as Special Mention; and b. 15% (fifteen percent) of Earning Assets classified as Substandard after deduction for collateral value; and c. 50% (fifty percent) of Earning Assets classified as Doubtful after deduction for collateral value; and d. 100% (one hundred percent) of Earning Assets classified as Loss after deduction for collateral value. Article 3 (1) For Earning Assets quality classified as Current, Special Mention, and Substandard, Allowance for Earning Assets Losses as referred to in Article 2 paragraph (2) and paragraph (3) shall until the end of May 2001 amount to not less than the percentages referred to in the Appendix to this Decree; (2) The Appendix referred to in paragraph (1) constitutes an integral part of this Decree. Article 4 Collateral deductible from Allowance for Earning Assets Losses consists of: a. demand deposits, time deposits, saving deposits, margin deposits in both rupiahs and foreign currencies accompanied by letter of authorization for withdrawal; b. Bank Indonesia Certificates and Government Bonds; c. Securities actively traded on the capital market; d. land, buildings, residential property, aircraft, and ships with a capacity of more than 20 (twenty) cubic meters.

5 BOARD OF MANAGING DIRECTORS Page 5 Article 5 Appraisal of collateral in the form of Securities, land, buildings, residential properties, aircraft, and ships as referred to in Article 4 letter c and letter d shall be determined according to the following approaches: a. Securities shall be appraised by Market Approach according to the value quoted on the capital market at the end of the month; b. Land shall be appraised by Market Approach; c. Residential properties shall be appraised by Market Approach and Cost Approach; d. Buildings, aircraft, or ships shall be appraised by Market Approach, Cost Approach, and Income Approach. Article 6 The value of collateral that may be deducted against Allowance for Earning Assets Losses as referred to in Article 2, Article 3, and Article 4 shall be determined as follows: a. not more than 100% (one hundred percent) for cash collateral comprising demand deposits, time deposits, saving deposits, and margin deposits whether in rupiahs or foreign currencies accompanied by letter of authorization for their withdrawal; b. not more than 100% (one hundred percent) for Bank Indonesia Certificates and Government Bonds; c. not more than 50% (fifty percent) for collateral in the form of Securities; d. for collateral in form of land, buildings, residential properties, aircraft, and ships, not more than: 1) 70% (seventy percent) in the case of Appraisal conducted not more than 6 (six) months previously; 2) 50% (fifty percent) in the case of Appraisal conducted more than 6 (six) months but not exceeding 18 (eighteen) months previously; 3) 30% (thirty percent) in the case of Appraisal conducted more than 18 (eighteen) months but not exceeding 30 (thirty) months previously; 4) 0% (zero percent) in the case of Appraisal conducted more than 30 (thirty) months previously.

6 BOARD OF MANAGING DIRECTORS Page 6 Article 7 (1) Appraisal of collateral shall be conducted by an Independent Appraiser: a. for any Loan in excess of Rp 1,500,000,000 (one billion five hundred million rupiahs) to an individual debtor or a group of debtors by a Bank with capital not exceeding Rp 300,000,000,000 (three hundred billion rupiahs). b. for any Loan in excess of Rp 2,500,000,000 (two billion five hundred million rupiahs) to an individual debtor or a group of debtors by a Bank with capital in excess of Rp 300,000,000,000 (three hundred billion rupiahs). (2) In the case of Loans in amounts smaller than the amounts referred to in paragraph (1), appraisal of collateral may be conducted by a Bank in-house appraiser. Article 8 Bank Indonesia may recalculate the collateral value deducted against Allowance for Earning Assets Losses in the event that: a. the collateral is not supported by legal documentation and/or the collateral agreement fails to comply with prevailing laws and regulations; or b. Appraisals are not conducted in compliance with the provisions referred to in Article 5, Article 6, and Article 7; c. collateral is not covered by insurance with a banker s clause vesting rights in the Bank to accept funds paid out from insurance claims. Article 9 (1) Banks shall disclose their required Allowance for Earning Assets Losses in their Published Financial Statements, in compliance with the provisions referred to Article 2 and Article 3. (2) A Bank shall correct its Published Financial Statements and announce the corrected Statement in the event of that the Allowance for Earning Assets Losses disclosed in the Published Financial Statement fail to comply with the provisions referred to in paragraph (1).

7 BOARD OF MANAGING DIRECTORS Page 7 Article 10 Banks are prohibited from making any correction to surplus Allowance for Earning Assets Losses already in compliance with the provisions of Article 3 in the event that the Allowance for Earning Assets Losses fails to comply with the provisions of Article 2. Article 11 (1) Any violation of the provisions in this Decree shall be liable to administrative sanctions as stipulated in Article 52 of Act Number 7 of 1992 concerning Banking as amended by Act Number 10 of 1998; (2) In the event that a Bank commits repeated violations of the provisions of this Decree, Bank Indonesia shall ask the Bank to replace its management. Article 12 (1) The provisions of this Decree shall also apply to Banks based on Syariah Principles. (2) Syariah Principles as referred to in paragraph (1) are rules of agreement based on the Islamic law between a Bank and a party for the purpose of deposits and/or financing for business activity or other business operations declared to comply with syariah law, including but not limited to financing based on the mudharabah principle (profit sharing), financing based on the musharakah principle (equity participation), the murabahah principle (trading for profit), ijarah (leasing without option), or ijarah wa iqtina (leasing with option). (3) Financing based on Syariah Principles is the provision of funds or equivalent claims based on a financing agreement between a Bank and a party which requires the borrowing party to repay the debt or claim after a certain period with a fee or profit share. With the issuance of this Decree: Article 13 a. Decree of the Board of Managing Directors of Bank Indonesia Number 26/167/KEP/DIR dated March 29, 1994 concerning Amendment to Decree of the Board of Managing Directors of

8 BOARD OF MANAGING DIRECTORS Page 8 Bank Indonesia Number 26/22/KEP/DIR dated May 29, 1993 concerning Earning Assets Quality and Allowance for Earning Assets Losses is declared no longer valid for Commercial Banks. b. Decree of the Board of Managing Directors of Bank Indonesia Number 30/268/KEP/DIR dated February 27, 1998 concerning Allowance for Earning Asset Losses is revoked and declared no longer valid Article 14 This Decree shall come into force on December 31, For the public to be informed, it is instructed that this Decree be promulgated in the State Gazette of the Republic of Indonesia. Enacted in Jakarta November 12, 1998 THE BOARD OF MANAGING DIRECTORS (signed) Achwan (signed) Subarjo Joyosumarto UPPB