Cabinet yet to approve removal of blanket guarantee

Dadan Wijaksana, The Jakarta Post, Jakarta

The Cabinet has not yet approved plans by the finance ministry to phase out the costly blanket guarantee program on bank deposits, according to a senior official at the ministry.

Ministry director general for financial institutions Darmin Nasution was quoted by Antara as saying that more time was needed to thoroughly discuss technical matters to help avoid negative impacts on the banking sector and the economy.

The finance ministry was supposed to announce the termination of the blanket guarantee program at the end of July so that the phasing out could start at the end of January next year.

The government must announce the new policy six months in advance before the blanket guarantee is lifted.

The blanket guarantee program was introduced in 1998 to help instill faltering confidence in the ailing banking sector. Under the scheme, the government would cover all obligations of failed banks.

But the program has been very costly to the already-strained state budget, and creates "moral hazards" among bankers.

The gradual termination of the blanket guarantee for bank deposits and claims is aimed at removing moral hazards and minimizing the cost of any bank failures to the state.

Under the plan, to be implemented in phases, the government guarantee on bank accounts under the category of on-balance sheet and off-balance sheet would be terminated by the end of January.

This includes debt notes issued by banks, direct loans, letter of credits, standby loans and derivative transactions.

Third-party funds worth more than Rp 5 billion and interbank loans will no longer be eligible for the blanket guarantee as of August 2003.

The facility will finally be completed in February 2004, when third party funds above Rp 100 million (around US$11,000) will no longer be guaranteed by the government, while funds below that level will continue to be protected via a deposit insurance facility, to be established beforehand.

Some analysts, however, have warned that the termination of the blanket guarantee could prompt people to put their money in foreign banks as confidence in the local banking industry has yet to fully recover. Overseas banks may also stop doing transactions with local banks, which in turn could cause trouble to local importers needing international banking services.

Darmin said that in addition to domestic worries, the latest developments in the global economy, particularly in the wake of the accounting scams in the U.S. which have caused havoc on the stock market, has alarmed the government to seek ways to ensure stability in local financial markets.

"The latest developments such as in the Enron case and Worldcom make us think of how to maintain the stability in the financial sector," he said, adding that the ministry was currently in talks with the central bank as the regulator of the banking sector.

Meanwhile, Bank Indonesia deputy governor Maman Sumantri warned the government to be extra careful with the timing of the planned termination of the program, saying it had the potential to ruin domestic and foreign confidence in the country's banking industry.

"Timing is very important here. It can only be done when confidence from the public, both domestic and international, has been restored," Maman said.

"But, that's difficult to see for now."