How-to understand legal aspects of loan agreement in Indonesian law

When talking about banking and finance, it is closely related to financing or financing transactions. The financing transaction or financing is closely related to drafting, loan agreements, whether bilateral or syndicated. Loan agreements or credit agreements can vary, such as bilateral, syndicated and others.

Governing law and regulation 

• Law No. 7/1992 concerning Banking Principles as amended by Law No. 10/1998 (“Banking Law”)
• Law No. 24/2009 concerning the National Flag, Language and Emblem, as well as the National Anthem
• Presidential Regulation (Perpres) No. 63/2019 concerning the Use of Indonesian
• Bank Indonesia Regulation (PBI) No. 21/2/PBI/2019 concerning Reporting of Foreign Exchange Traffic Activities
• Bank Indonesia Regulation (PBI) No. 17/3/PBI/2015 concerning the Obligation to the Use of Rupiah in the Territory of the Unitary State of the Republic of Indonesia
• Bank Indonesia Regulation (PBI) No. 18/19/PBI/2016
• Financial Services Authority (OJK) Regulation (POJK) No. 1/POJK.07/2013 concerning Consumer Protection in the Financial Services Sector as amended by OJK Regulation (POJK) No. 18/POJK.07/2018
• Bank Indonesia’s Board of Governors’ Regulations (PADG) No. 20/17/PADG/2018

Introduction

Based on Article 1 paragraph (11) of the Banking Law, it is stated that Credit is the provision of money or equivalent claim to money based on a loan agreement between a Bank and another party, obligating the borrowing party to repay his debt after a certain period with interest. Credit is generally divided into Bilateral Loan and Syndicated Loan. In a syndicated loan, usually there are more than one lenders, bank, or creditor, while in a Bilateral Loan there is only one bank or creditor. 

Key elements of loan agreement

There are 5 key elements of loan agreement which are:

• Conditions Precedent (and Conditions Subsequent). Conditions Precedent is a requirement that must be met by the debtor in order to get financing from the bank. So, if we represent a bank or debtor, signing the loan agreement with the bank does not mean that the facilities will immediately be liquidated. Everyone assumes that the credit signature can be immediately liquidated, but not necessarily. There are subsequent conditions, further requirements that must be met.
• Representations and Warranties. It is statements and guarantees, for example the debtor stated that when they signed this loan agreement they received approval from all the organs in the company.
• Covenants and Undertaking. It usually involves matters that must be maintained by the debtor during the lifetime of this loan agreement. The easiest covenants usually involve the current shareholding ratio or condition.
• Events of Default. Before the event of default occurred, the bank could not take any action, especially regarding the execution of the loan agreement.
• Governing Law and Jurisdiction. In drafting an agreement, you must not forget to include the applicable law related to the agreement, especially in this financing agreement, so there should be no dualism between the parties. This relevance will be very useful if the nature of the transaction is cross border, meaning that the financing is not only with local banks. Likewise with jurisdiction or the place where we resolve disputes.

Syndicated Loan

According to Bank Indonesia (www.bi.go.id) syndicated loan is a loan offered by a group of banks to one debtor, whose amount of credit is too high if only for one bank (loan syndication). This syndicated loan comes from a background of legal lending limits and risk sharing among banks. There are key elements of a syndicated loan, which are:

• More than one creditor;
• Have the same terms and conditions between syndicated landers
• participants;
• Relatively a huge amount of facility;
• Use of one underlying credit facility documents;
• Administered by the same agent
• Syndicated creditor is only responsible to the extent of its portion

Principally, a syndicated loan is similar to a club deal, in that it has more than one creditor. But in the club deal the terms and conditions are different. When a debtor requires financing, they must have a drafting letter of intent in the form of the bank or the debtor himself. Because of the large amount, they invited other banks, so a letter of offer emerged from there. After that, enter the negotiation process, if the negotiations have been approved by the parties, then the term sheet appears and continues to the transaction documents, here the process of compiling a syndicated agreement and other agreements. After the transaction document has been compiled and signed, it enters the signing process and after that proceeds to the completion of CPs. And after that go to the drawdown process step and the last one goes to the payment process.

Parties to the syndicated agreement include:

1. debtor, borrower or person/institution who owes debt to other party;
2. creditors; the party providing credit/debt (in a syndicated agreement, more than one creditor);
3. arranger, the party appointed by the debtor to arrange for the bank to participate in syndicated loans; parties that regulate fundraising for debtors, divided into two best effort basis (trying the best efforts referring to the agreement made) and full commitment (full commitment to meet the funds needed by the debtor);
4. facility agent, the party that manages the implementation of the syndicated loan and performs administrative tasks related to the loan; the bank appointed to regulate the implementation of the syndicated agreement;
5. escrow agent, the party who has the responsibility for managing the escrow account (an account that is managed and can only be withdrawn due to an order, generally the one who gives the order is the facility agent) of creditors/syndicated participants; and
6. security agent, the party who has responsibility for managing guarantees and security documents.

The transaction documents required in the syndicated agreement are:

1. Syndicated Loan Agreement, regulates the terms and conditions between the parties, in the syndicated agreement the provisions are the same;
2. Fee Letter, an agreement between debtors and agents regarding each agent’s fee, including arrangement fees, DP, and agency fees;
3. Security Sharing Agreement (SSA), regulates the distribution of guarantees if the debtor defaults, one of the clauses that must be included in the SSA is that the parties agree that the distribution of guarantees is carried out on a pro rata basis (in proportion) and pari passu (equally);
4. Intercreditor Agreement, an agreement between creditors to regulate all matters between themselves, for example regarding procedures for granting loans to debtors, transfer of loan proportions, appointment of agents, and other things;
5. Escrow Account Agreement, an agreement between a debtor and a bank appointed as an escrow agent, regulates the obligations of the party responsible for managing and supervising cash flows from and to the holding account, payment obligations, and reporting requirements to syndicated creditors;
6. Security Agency/Facility Agency Agreement, an agreement between creditors and/or all creditors with a bank appointed as a security agent or facility agent. The Security Agency Agreement regulates the obligation of the party appointed as a security agent to represent creditors in signing, detaining, and applying guarantees in the event of a default. The Facility Agency Agreement regulates the party appointed as the facility agent to distribute payments from debtors to all creditors;
7. Security Documents, a guarantee agreement made by and between the debtor or a third party as the guarantor and any party that supports the creditor, usually represented by a security agent as the recipient of the guarantee; and
8. Subordination Agreement, regulates and assigns debt repayment ratings until full payment to syndicated creditors is made (syndicated receivables are made to a higher degree than shareholders’ receivables).

Reporting obligation 

There are things that must be met regarding financing transactions, namely reporting obligations that must be carried out if the financing transaction involves foreign parties or is cross-border. Debtors report to BI that they have offshore loans. If the report is not carried out, it will be subject to sanctions by BI or OJK for reporting negligence. The loan agreement does not automatically fail by law if the debtor does not report to BI or OJK. In this case, the loan agreement still exists and cannot be canceled because of the obligations that must be fulfilled by the debtor and creates sanctions for debtors who do not report. In accordance with PBI No. 21/2/PBI/2019, banks are only required to report to BI: Reports on principal data on foreign loans and/or risk participation along with supporting documents; reports on plans for withdrawal and/or repayment of foreign loans and/or risk participation transactions; realization/implementation of the planned withdrawal and/or repayment of foreign loans and/or risk participation transactions; as well as positions and changes in foreign financial obligations and/or risk participation transactions.

Obligation to use IDR for onshore transaction

Article 2 of PBI No. 17/3/PBI/2015 requires all transactions (cash and non-cash) within the territory of the Republic of Indonesia to use Rupiah. Exceptions to the use of Rupiah are made for: 

• certain transactions in the context of administering state revenues and expenditures; 
• acceptance or granting of grants from or to foreign countries; 
• international trade transactions; 
• savings in banks in the form of foreign exchange; 
• international financing transactions; 
• foreign exchange activities are carried out by banks in accordance with the provisions of laws and regulations in banking and sharia banking; 
• negotiable paper transactions issued by the government in foreign currency in the primary and secondary markets; 
• as well as other foreign exchange transactions.

Obligation to use Indonesian language for banking documents 

The obligation to use Indonesian for banking documents is regulated in Law No. 24/2009, Perpres No. 63/2019 and POJK No. 1/POJK.07/2013. Indonesian must be used in memorandums of understanding or agreements involving state institutions, government agencies of the Republic of Indonesia, Indonesian private institutions or Indonesian citizens. The memorandum of understanding involving a foreign party is also written in the foreign party’s national language and/or English. The foreign party’s national language and/or English version is used as an equivalent or Indonesian translation to unify the understanding of the MoU or agreement with foreign parties. If there is a difference in versions, then the language agreed in the MoU will prevail. To comply with these rules, generally in contracts using bilingual with the stipulation of one agreed language as the main language. The absence of Indonesian language invalidates the agreement in court or is null and void by law.

Obligation in relation to foreign exchange (FX) transactions

Transfer of IDR to offshore account is prohibited. Thus, based on PBI No. 18/19/PBI/2016 and PADG No. 20/17/PADG/2018 IDR received by the parties in Indonesia must be converted into foreign currency in Indonesia before such amount can be remitted to the relevant party(ies)’ offshore bank account

All purchases of foreign currency against Rupiah exceeding the stipulated threshold amount per month per customer, must have an underlying transaction, in which case documents evidencing the transaction must be attached. Such threshold being: 

• US$ 25,000 or its equivalent amount in other currency per month per customer based on spot transaction with local parties; 
• US$ 100,000 or its equivalent amount in other currency, per month per customer based on plain vanilla derivative transactions.