Cabinet yet to approve removal of blanket guarantee

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."