Bond issuance by banks criticized

Dadan Wijaksana, The Jakarta Post, Jakarta

The government appealed to publicly-listed banks not to rush in issuing bonds to avoid panic in the market when the government decides in the future to revise the existing blanket guarantee scheme to no longer cover bonds.

Director General of Financial Institutions of the Ministry of Finance Darmin Nasution said on Wednesday he had talked with the Capital Market Supervisory Agency (Bapepam) to make sure that banks would inform the public about the risk in investing in bonds.

He said that Bapepam would latter decide on what kind of sanction to be imposed against banks which fail to provide the necessary information.

Under the blanket guarantee scheme, introduced in 1998 following the banking crisis, all obligations of a closed down banks (including to bond holders) will be covered by the government.

But there is plan now to gradually end the blanket guarantee program to minimize the burden of the government.

Banks have been rushing to issue bonds to raise cheap funds amid declining interest rate environment. Bonds on the other hand are seen as an alternative investment for investors as the lower time deposit rate is no longer attractive.

"What if something happens in the future when, let's say, the scheme does no longer exist for such bonds?," Darmin said.

"If everything's normal, there will be no problems. But, the current scheme could change, meaning that the bonds might no longer be guaranteed.

"Banks must inform that, so their investors become well-aware of such a fact," Darmin told reporters.

The phasing out of the blanket guarantee program was initially planned to be completed sometimes in 2004 or 2005, when the banks' third party funds above Rp 200 million will no longer be covered by the government. But, the government currently put the plan on hold.