Indonesia's external debt (Utang Luar Negeri or “ULN”) reached USD 414.3 billion in July 2024, marking a 4.1% year-on-year increase. This growth was driven primarily by the public sector, encompassing both the Government and the Central Bank. Additionally, the ULN position in July 2024 was impacted by the depreciation of the US dollar against various global currencies, including the Rupiah. [1]

In addition, according to Bank Indonesia, Private ULN in July 2024 was recorded at USD 195.2 billion, contracting by 0.1% compared to 2023. This change was due to a contraction of 0.04% year-on-year in non-financial institution corporate debt.[2]

The largest share of private ULN originated from the manufacturing industry, financial and insurance services, electricity and gas supply, as well as the mining and quarrying sectors, accounting for 78.9% of the total private ULN.[3]

The increase ULN in Indonesia attracts foreign banks and financial institutions (the “Lenders”) to provide loans to Indonesian entities (the “Borrowers”). However, there are critical aspects that the Lenders must carefully consider about Borrowers to ensure that the foreign loans comply with applicable laws and regulations and the 5C principles.

As we know that the 5C principle is utilized by the Lenders to assess a potential borrower's creditworthiness which is including:

1. Character: The Borrowers’ credit history
2. Capacity: The Borrowers’ debt-to-income ratio
3. Capital: The amount of money the Borrowers have
4. Collateral: An asset that can be used as security for the loan
5. Conditions: The purpose of the loan, the amount, and the interest rates

The key considerations for Borrowers include:

1. The Borrowers’ status.

The Lenders should conduct legal due diligence in advance to observe the following borrower’s status:

a. Legal entity.

In this regard, the Lenders should review the Borrower's legal entity status, including the composition of the Board of Directors (“BOD”), Board of Commissioners (“BOC”), and the shareholding structure.

This ensures that the Lenders can verify the legitimacy of the BOD/BOC and the shareholding composition in compliance with Law No. 40 of 2007 on Limited Liability Companies (“Law 40/2007”). For instance, the Lenders should assess whether the appointment of the BOD/BOC aligns with Law 40/2007 and whether the paid-up capital contributions by the Borrower’s shareholders meet the requirements of Law 40/2007. By understanding these factors, the Lenders can evaluate the Borrower's character, capacity, and capital to fulfill their obligations after receiving the loan.

b. Business license.

One of the key considerations for Lenders when providing loans to Borrowers is the purpose of the loan. Typically, Borrowers seek loans to expand their business activities. Therefore, it is crucial for Lenders to thoroughly assess the Borrowers' business operations.

For example, if the Borrower operates in a downstream industry, the Lender should review their business licenses, such as the Business Identification Number (NIB), industrial business licenses, import and export permits, environmental permits, and others. Once the Lender confirms that all necessary business licenses are valid, they can proceed to evaluate the Borrower's ability to meet their obligations after receiving the loan.

c. Internal approval.

In practice, the Borrower's articles of association often require internal approvals, such as approval from BOC and shareholders, before the Borrower can apply for and receive a loan from the Lender. Therefore, it is essential for Lenders to review the Borrower’s internal approval requirements.

This ensures that all actions taken by the Borrower to enter into a loan agreement are valid under Article 1320 of the Indonesian Civil Code and helps mitigate potential objections from the BOC or shareholders.

2. The validity of the loan agreement under Indonesian law.

Most foreign loan agreements are governed by the laws of the Lenders’ origin country. However, to ensure the smooth execution of the loan agreement in Indonesia, the Lenders should verify whether the provisions of the loan agreement can be enforced within Indonesia.

Therefore, it is recommended that the Lenders appoint an Indonesian lawyer to review the loan agreement to ensure it does not conflict with Indonesia’s public order. For example, in reviewing the dispute resolution clause, if the parties agree to resolve disputes through arbitration, the Indonesian lawyer should assess whether the foreign arbitral award can be enforced in Indonesia and whether it complies with the requirements of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards etc.

3. Requirements set by other relevant authorities.

There are several requirements set by Bank Indonesia for the Borrowers regarding the receipt of foreign loans from Lenders, including but not limited to:

• Filing by the Borrowers of (i) certain reports related to the foreign loan, including reports on the application of the prudential principle in managing the foreign loan of non-bank corporations as required by Bank Indonesia Regulation No. 16/21/PBI/2014 dated December 29, 2014 (as amended) and its implementing regulations (“PBI 16/21”), with Bank Indonesia, as mandated by Bank Indonesia Regulation No. 16/22/PBI/2014 dated December 31, 2014 (as amended) (“PBI 16/22”) and Bank Indonesia Regulation No. 21/2/PBI/2019 dated January 9, 2019 (“PBI 21/2019”) and its implementing regulations; and (ii) a copy of the loan agreement with the Ministry of Finance, along with subsequent periodic reports thereafter.
• Ensure the Borrowers’: (i) Hedging Ratio: A minimum Hedging Ratio of 25% (twenty-five percent) shall be established, calculated based on the negative difference between Foreign-Exchange Assets and Foreign-Exchange Liabilities, which are due in more than 3 (three) months but within 6 (six) months from the end of each quarter, as outlined in Article 3, paragraph (2) of PBI 16/21; (ii) Liquidity Ratio: A minimum Liquidity Ratio of 70% (seventy percent) shall be maintained, as specified in Article 4, paragraph (2) of PBI 16/21; (iii) Credit Rating: The minimum Credit Rating required is equivalent to BB-, as issued by Rating Agencies recognized by Bank Indonesia, in accordance with Article 5, paragraph (1) of PBI 16/21.
• Ensure that the Borrowers open a foreign exchange bank account in Indonesia for receiving and repaying the loan, as required by Article 13 of Bank Indonesia Regulation No. 16/10/PBI/2014, dated May 14, 2014, as amended by Bank Indonesia Regulation No. 21/14/PBI/2019, dated November 28, 2019.
• Ensure that the Borrowers (if they produce and export goods listed in the Appendix of the Minister of Finance Regulation No. 272 of 2023, and the total value is USD 250,000) open a foreign exchange bank account in Indonesia for receiving and repaying the loan as set in Article 6 of Government Regulation No. 36 of 2023 on Foreign Exchange Export Proceeds from The Business, Management and/or Processing of Natural Resources.
• Provide guidance to the Borrowers on the use of foreign currency in accordance with Law No. 7 of 2011 on Currency and its implementing regulations.

In conclusion, thorough due diligence and compliance with Indonesian regulations are essential for the Lenders to mitigate risks when providing loans to Indonesian Borrowers.