Base deposit premiums on bank risk: Association

Dadan Wijaksana, The Jakarta Post, Jakarta

The government-proposed bank deposit insurance scheme has been criticized by local and international experts for treating banks unfairly and lacking certainty on when depositors could get their money back when a bank becomes insolvent.

The chairman of Indonesia's general insurance association, Frans Sahusilawane, said premiums banks charged in the insurance scheme should be based on risk, meaning that less healthier banks should pay higher premiums, to ensure fairness.

"Applying a flat rate, in which banks pay an equal amount, would create injustice, because this scheme basically means that healthier banks would subsidize other, less healthy banks.

"We therefore recommend that the premium be risk-based," Frans said on Monday during a hearing with House of Representatives Commission IX on financial affairs, which is deliberating the bill on the deposit insurance scheme.

The deposit insurance scheme will replace the existing government-sponsored blanket guarantee on banks, which covers all obligations of closed down banks, launched in the wake of the late 1990s financial crisis to help revive confidence in the banking industry.

Under the government plan, premiums imposed on banks would be equal in the early stage.

As stated in the draft law, banks would be required to pay a flat fee of 0.1 percent of third party liability during the first two years of the scheme's operation. Afterward, the fee would be based on each bank's financial condition.

But Article 15 of the draft states that the margin between the lowest and the highest rate must not exceed 0.5 percent.

"There should not be a margin limit at all to ensure fairness for all banks," said Frans.

Six months after the bill is approved by the House, the government will start phasing out the items to be covered by the insurance scheme.

The phasing out process will likely take one year until it only covers individual deposits of less Rp 100 million (about US$12,000).

Also present at the hearing was Paul L. Sachtleben, who worked for the U.S. Federal Deposit Insurance Corporation for 27 years and who is now a senior advisor for a similar agency in Bulgaria.

He came here at the commission's invitation.

Sachtleben said that in principle, most of the issues outlined in the bill were in line with international practices, although some revisions were necessary.

Sachtleben, speaking through an interpreter, emphasized the need to set a time limit by which the deposit agency must pay the claims of depositors of an insolvent bank.

The proposed draft does not state a time lime.

"The speed of claims payments is crucial to avoid panic among depositors, and also to promote public confidence in the banking sector," Sachtleben told legislators.

Sachtleben said that under an International Monetary Fund directive, the payment of claims had to be made within no more than 30 days after a bank's closure, as compared with the three months regulated by the European Union and five days by the U.S.