Deposit insurance bill awaits approval
Tony Hotland, Jakarta
The government's plan to gradually remove its costly blanket guarantee for bank time deposits should be complemented with credible supporting institutions and a clean government, according to an analyst.
Dradjad Wibowo of the Institute for Development of Economics and Finance (a private think tank) said on Friday that such requirements were essential to restoring public confidence in the banking sector, which has been struggling to recover from the devastating impact of the late 1990s financial crisis.
He made the comment after House of Representatives Commission IX on finance and the government agreed late on Thursday on the final version of the bill on the Insurance Deposit Agency (LPS), which stipulates that starting Feb. 1, 2007, only individual bank deposits of up to Rp 100 million (US$11,086) will continue to be guaranteed by the government. The rest will be covered by the LPS system.
The bill will be submitted to the House next month for final approval.
Dradjad also pointed out that a credible rating agency should be established to help people select banks and measure the risk of putting their money in particular banks.
"With a rating agency, the public could select which banks to deposit their money in as they could see the risk of a bank from the ratings," he told The Jakarta Post.
He also welcomed the plan to set up the LPS and reduce the coverage of the government blanket guarantee program.
"It's a good decision. The blanket guarantee program was set up during an emergency situation, but things are better now," he said.
The government introduced the blanket guarantee program on bank liabilities, including time deposits, in the wake of the banking crisis at a time when confidence in the industry was at its lowest point. Under the program, the government guarantees all obligations of closed down banks. But this policy has been very costly to the cash-strapped government.
According to the bill on the LPS, until February 2005, the existing blanket guarantee program is still valid. But after that, the coverage of the program will be gradually reduced to cover only third-party funds and liabilities linked to the interbank money market.
When the LPS starts operation, possibly between August and September 2005, the government guarantee will only cover third- party funds (deposits and savings).
From February 2006, the government guarantee program will only cover individual deposit of up to Rp 5 billion. Six months after that, or August 2006, the coverage will be reduce to Rp 1 billion.
Ultimately, on Feb. 1, 2007, only individual deposits of up to Rp 100 million will be covered by the government.