Deposit insurance bill awaits approval
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.