Insuring small depositors
\nJP\/6\/ED26<\/p>\n
Insuring small depositors<\/p>\n
People with large financial assets should be more careful in
\nchoosing the banks they deal with because the government blanket
\nguarantee is gradually being phased out to cover only deposits to
\na maximum of Rp 100 million (US$10,000) by March, 2007.<\/p>\n
The gradual dilution of the blanket guarantee began last week
\nwith the start-up operations of the state-owned Deposit Insurance
\nAgency, with a paid up capital of Rp 4 trillion. It is this
\nagency that will reimburse depositors in case a bank becomes
\ninsolvent and has to be closed and liquidated.<\/p>\n
Many depositors these days are often influenced more by levels
\nof deposit interest rates or such factors of convenience as
\nlocation, rather than the soundness of the financial
\ninstitutions, because they can rest assured that whatever may
\nhappen to the bank, all their savings or deposits will be
\nreimbursed by the government.<\/p>\n
But this unlimited guarantee is now considered a big
\ndisincentive to sound competition within the banking industry.
\nLarge depositors have the resources to monitor and assess the
\nconditions of their banks. Moreover, the blanket guarantee
\ncreates moral hazards and imposes large contingent liabilities on
\nthe government.<\/p>\n
The new deposit insurance scheme run by the agency will cover
\ndeposits of only up to Rp 5 billion by March, 2006. This ceiling
\nwill further decline to Rp 2 billion in September, 2006 and
\nfinally fall to a maximum Rp 100 million by March, 2007.<\/p>\n
Deposit insurance is one of two key components of the
\nfinancial safety net, vital to promoting the stability of the
\nfinancial system by enhancing public confidence in the banking
\nindustry. The other key component -- the lender-of-last- resort
\nfunction -- has been strengthened under the amendments of the
\ncentral bank act last year.<\/p>\n
The phasing out of the blanket guarantee, which was launched
\nat the height of the banking crisis in January, 1998, will likely
\nensure people become more careful when choosing banks they deal
\nwith.<\/p>\n
As big depositors put banks under stronger scrutiny, giving
\nmore attention to their soundness and franchise, rather than
\ntheir deposit interest rates, deposits will likely move from one
\nbank to another to seek higher quality (capital flight to
\nquality). But it is this process that will strengthen the market
\nscreening of banks.<\/p>\n
This, and the tough new criteria for a national anchor bank,
\nwhich was announced by Bank Indonesia last July, will further
\naccelerate the consolidation of the 130 banks into a sound,
\nstrong and efficient, yet leaner banking industry through mergers
\nor acquisitions.<\/p>\n
The sets of qualitative and quantitative requirements for
\nbecoming a national anchor bank are so comprehensive that most of
\nthe existing banks will have to merge with bigger ones to survive
\nas national-class banks, or convert into specialized or rural
\nbanks with tight restrictions on the scope of business and
\nlocation.<\/p>\n
The deposit insurance program will focus on the protection of
\nsmall depositors, who are supposed to be incapable of assessing
\nthe conditions of their banks. The final ceiling of Rp 100
\nmillion is considered ideal for Indonesia because, according to
\nBank Indonesia's reports, more than 90 percent of bank depositors
\nhold small accounts with less than Rp 100 million in savings,
\nalthough they account for only around 20 percent of the total of
\naround Rp 1,000 trillion in third-party funds at banks now.
\nProtecting small depositors will therefore increase household
\nconfidence and help protect the payments system.<\/p>\n
However, the deposit insurance scheme and the strong lender-of
\nlast resort function of the central bank, though vital for
\nmaintaining the public's confidence in the banking industry, is
\nnot enough. The Deposit Insurance Agency now has a capital of
\nonly Rp 4 trillion -- compared this to the Rp 1,000 trillion in
\nthird-party deposits at banks now -- and its capital will
\nincrease only incrementally because the insurance premium it
\ncharges on banks is limited to 0.2 percent of deposits.<\/p>\n
Bank Indonesia should continue strengthening its bank
\nsupervisory system to force banks to accelerate their operational
\nrestructuring. The Deposit Insurance Agency will not be able to
\nexecute its function properly and will not have enough money to
\nreimburse depositors, if the banking industry remains fragile and
\nthe incidence of insolvent banks remains high.<\/p>\n
------------<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/insuring-small-depositors-1447899208", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }