Government set to phase out bank guarantee program<\/p>\n
Dadan Wijaksana, The Jakarta Post, Jakarta<\/p>\n
The government is set to gradually terminate its costly
\nblanket guarantee for bank deposits and claims, starting in
\nJanuary, 2003, in a bid to help remove \"moral hazards\" and
\nminimize the cost of any bank failures to the state.<\/p>\n
The phasing out of the blanket facility will be completed in
\nFebruary 2004, when third party funds above Rp 100 million (about
\nUS$11,000) will no longer be guaranteed by the government. But
\nthe government will continue to protect small depositors via a
\nnew deposit insurance scheme.<\/p>\n
Director General of Financial Institutions Darmin Nasution
\nsaid on Thursday that all technical preparations had been
\ncompleted, saying the new policy would be announced on July 31
\nonce it had been approved by the Cabinet.<\/p>\n
\"Technically speaking, we're ready. But the final say will be
\nall up to the (Finance) Minister and the Cabinet meeting,\" Darmin
\ntold reporters prior to a meeting with legislators.<\/p>\n
The blanket guarantee scheme was introduced in 1998 to help
\ninstill confidence in the ailing banking sector. Under the
\nscheme, if a bank is shut down, the government would cover all of
\nthe bank's obligations including depositors' money. The policy
\nwas also meant to avoid a widespread panic when the government
\nhad to close down banks.<\/p>\n
The government must announce six months in advance to the
\npublic if it intends to change the scheme.<\/p>\n
\"We've been publicizing this with the banks since the end of
\n2001,\" Darmin said.<\/p>\n
Under the phasing out plan, government guarantees on bank
\naccounts in the categories of on-balance sheet and off-balance
\nsheet would be terminated by January 1, 2003, the Kontan weekly
\nsaid in its latest edition. This includes debt notes issued by
\nbanks, direct loans, letters of credit, standby loans, and
\nderivative transactions.<\/p>\n
Third party funds worth over Rp 5 billion and interbank loans
\nwill no longer be eligible for the blanket guarantee as of August
\n2003.<\/p>\n
And finally, in February 2004, guarantees for third party
\nfunds over Rp 100 million will be terminated, while funds Rp 100
\nmillion or less will continue to be protected via a deposit
\ninsurance facility.<\/p>\n
The blanket guarantee program has greatly helped in reviving
\nconfidence in the banking industry despite their weak financial
\nconditions.<\/p>\n
But the scheme has caused moral hazards among bankers as
\nmarket forces cannot function properly to screen banks and it has
\ncreated a huge amount of liability for the debt-ridden
\ngovernment. For 2000, 2001 and 2002, the government had to
\nallocate Rp 42 trillion, Rp 61 trillion and Rp 59 trillion
\nrespectively.<\/p>\n
Stopping the blanket guarantee, however, could prompt
\ndepositors to put their money in foreign banks due to the
\nindustry's ongoing precarious condition.<\/p>\n
Banking analyst Drajat Wibowo welcomed the plan, saying now
\nwas the time to start phasing out the blanket guarantee.<\/p>\n
\"And the plans to take banks' trade facilities off the scheme
\nfirst is good, because by this the government can evaluate the
\nprogress of the plans. Consider it a test case,\" Drajat told The
\nJakarta Post Thursday.<\/p>\n
When asked to comment on this, Minister of Finance Boediono
\nsaid that the plan would still be discussed further: \"Bottom line
\nis that, we're very careful about this. This is a fundamental
\npolicy.\"<\/p>",
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