Govt proposes Rp 6t for setting up insurance deposit body<\/p>\n
Urip Hudiono, The Jakarta Post, Jakarta<\/p>\n
The government has proposed to the House of Representatives a Rp
\n6 trillion (US$642 million) budget for the establishment of the
\nInsurance Deposit Agency (LPS), which will implement the
\ngovernment's future blanket guarantee on bank liabilities.<\/p>\n
Speaking on Thursday during a hearing with House Commission XI
\nfor financial affairs, the Ministry of Finance's director general
\nfor financial institutions, Darmin Nasution, said the money
\nwould cover the agency's financial needs in its initial operating
\nyear and help it implement the blanket guarantee scheme.<\/p>\n
\"The LPS needs an initial setup fund of between Rp 4 trillion
\nand Rp 8 trillion, but Rp 6 trillion would be optimum,\" he said.<\/p>\n
Darmin said if the LPS received Rp 4 trillion in initial setup
\nfunds, the agency would experience a deficit of some Rp 75
\nbillion in its first year.<\/p>\n
He said the LPS would need some 21 years to accumulate
\nsufficient reserves to covering third-party liabilities at the
\ncountry's banks, which as of last year amounted to Rp 963.1
\ntrillion.<\/p>\n
With Rp 6 trillion, the LPS would already have a reserve of
\nsome Rp 75 billion and would only need some 19 years to reach a
\nsufficient blanket guarantee reserve.<\/p>\n
\"Such an initial fund would therefore make the LPS strong
\nenough to gain the trust of the public and the country's banking
\nindustry,\" he said.<\/p>\n
The money itself, Darmin said, would come from a government
\naccount at the central bank, which currently holds Rp 9.7
\ntrillion in cash reserves the government has been using for its
\nexisting blanket guarantee program.<\/p>\n
Upon its establishment, the LPS will also charge all banks an
\nannual flat premium fee of 0.2 percent of third-party funds.
\nCurrently, the premium fee is 0.25 percent, which generates some
\nRp 2 trillion annually.<\/p>\n
Law No. 24\/2004 on the LPS will take effect this Sept. 22. The
\nlaw stipulates the establishment of the agency and the eventual
\nphasing out of the government's existing blanket guarantee
\nprogram for all savings and deposit accounts.<\/p>\n
Starting March 22, 2006, the LPS will only guarantee accounts
\namounting to Rp 5 billion, which will be reduced to Rp 1 billion
\non Sept. 22, 2006, and Rp 100 million on March 22, 2007.<\/p>\n
House Commission XI chairman Paskah Suzetta said the
\ncommission in principle agreed with the government's argument for
\nLPS' Rp 6 trillion initial setup fund, but would hold another
\nhearing on Monday before reaching a decision.<\/p>\n
The government introduced its costly blanket guarantee scheme
\nwhen depositors rushed banks to withdraw their money during the
\n1997-1998 Asian financial crisis.<\/p>\n
Although the scheme helped to restore the public's trust in
\nbanks, it put a strain on the cash-strapped government. Many
\nexperts have also said it tends to encourage bankers to neglect
\nprudent banking practices, because they know the government will
\ncover their liabilities should their banks go under.<\/p>",
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