BI governor appeals to public not to panic

BI governor appeals to public not to panic

Dadan Wijaksana, The Jakarta Post, Jakarta

Bank Indonesia Governor Sjahril Sabirin appealed on Friday to the
public not to panic over the government's plan to lift the
blanket guarantee on bank deposits and claims, saying a deposit
insurance scheme would be set up to protect depositors' money.

He added that the removal of the blanket guarantee would be
carried out gradually, and that the effect on depositors' money
would be assuaged by an insurance deposit agency that was to be
established.

"There is no need for the public to worry about all this," he
told reporters.

Bank Indonesia Senior Deputy Governor Anwar Nasution
concurred, saying that the country's banking sector was currently
in better shape than a few years ago.

The two top central bank officials were commenting on reports
that the government was set to phase out its costly blanket
guarantee program. The finance ministry expects to announce the
new policy late this month after approval from the Cabinet.

Under the plan, the blanket guarantee on various bank claims,
including in respect of debt notes, direct loans, letters of
credit and standby loans, will be terminated starting January
next year. By August 2003, interbank loans and third party funds
worth above Rp 5 billion (US$553 million) will also be exempted
from the scheme. The blanket guarantee program is due to have
been fully brought to an end by February 2004. But the government
will still provide protection via a deposit insurance scheme for
small depositors whose deposits do not amount to more than Rp 100
million.

But there have been worries that the termination of the
blanket guarantee scheme could trigger capital flight as the
banking sector is generally still in a fragile condition.

Total third party funds in the banking sector stand at around
Rp 800 trillion, of which around 25 percent are individual funds
worth less than Rp 100 million. This means that 75 percent of the
third party funds would no longer be guaranteed by the government
starting August 2003.

It was the absence of such a scheme that was believed to have
caused the massive capital fight during the crisis, pushing the
banking industry into deeper difficulties and putting huge
pressure on the rupiah.

This was the reason why the government came up with the scheme
in the first place in 1998, and it proved helpful in reviving
confidence in the banking industry, despite the financial
travails of the banks.

Banking analyst Elvyn G. Masassya urged the government not to
hastily make a decision on the size of the deposits to be covered
by the new insurance deposit scheme.

"For the nominal figure, the government should not rush in
making a decision. They need to discuss this carefully with the
banking sector as a miscalculation could trigger capital flight,"
Elvyn told The Jakarta Post on Friday.

Sjahril did not clearly state whether the central bank agreed
with the government's plans.

He said that the government had asked for input, but the
central bank had yet to complete its review of the plan.

There is a possibility that Bank Indonesia will propose a
higher ceiling for the deposits to be guaranteed under the new
deposit insurance scheme.

The government is determined to end the costly blanket
guarantee program so as to help avoid the danger of moral hazard
among bankers and minimize the cost of any bank failures.