Bankers expose weaknesses in government deposit insurance plan

The Jakarta Post, Jakarta

While generally acceptable in principle, the government- proposed bank deposit insurance law still contains weaknesses that could deal a serious blow both to the public and banking sector, top bankers have warned.

Representatives from the country's major banking associations conveyed on Wednesday the concerns to the House of Representatives Commission IX on financial affairs -- which is in charge of deliberating the bill.

Agus Martokusumo, chairman of the National Private Banks Association (Perbanas), questioned, among other things, a clause the would protect officials of the planned deposit insurance agency (LPS) from being sued, in as far as they acted in accordance with their mandated duty.

"If that's the case, the same treatment should also be extended to the shareholders of the troubled banks, as far as they are deemed as having fulfilled their obligations," Agus told the lawmakers.

The move is necessary to ensure equal treatment for both the people who govern and those who are being governed, Agus added. He is also the president of Bank Permata.

Perbanas also voiced concern over the fact that many of the LPS operational guidelines, stated in several clauses, were based on assumptions that the planned establishment of the financial services authority (locally abbreviated as OJK) was already in existence.

In the draft, the word OJK has been mentioned 18 times. "This is confusing, how can we base anything on something that doesn't even exist?" he asked.

OJK is a powerful agency the government is planning to set up before 2010, tasked with supervising the country's wide range of financial institutions.

The bill on the deposit insurance scheme was submitted to the House in November last year, to be used as the legal basis for the setting up of a deposit insurance agency to replace the existing costly government blanket guarantee program. Under the current program, the government would cover all obligations of banks that close, including savings, deposits and liabilities to other parties.

But the government has said that six months after the bill becomes law, the funds to be covered by the government's existing program would gradually be reduced.

The LPS will be in operation up until after the guarantee only covers individual deposits of not more than Rp 100 million.

Elsewhere, other associations, including Association of State Owned Banks (Himbara) and the Association of Regional Banks (Asaba), reiterated the importance of applying a risk-based premium fee and a more specific timetable for claims payment.

According to the draft, the premium fee would only be applied after the first two years of operation of the LPS. This means that the healthier a bank the lower the premium rate it has to cover.

But, Asaba chairman Hasan Soeftendy anticipated a more transparent and prudent calculation in determining the premium rate as it could affect a bank's business operation, especially smaller banks.

Under the current blanket guarantee program, the fee is set at a flat rate of 0.25 percent of a bank's third party liabilities, which generates some Rp 2 trillion annually.