Deposit insurance premiums to be risk-based

Dadan Wijaksana, The Jakarta Post, Jakarta

As the deliberations for a draft law on a deposit insurance scheme continued, the government stated on Monday that the premiums for national banks would eventually be designed using a risk-based approach.

That means the healthier the bank, with lower risks, the lower the premium the bank would have to pay, Minister of Finance Boediono explained.

"Ideally, the premium rate should be risk-based, determined by each bank's health," Boediono told the legislators at the House of Representatives Commission IX on financial affairs.

But of course, he went on, the implementation would be gradual.

Director General of Financial Institutions of the ministry Darmin Nasution added, "When the scheme kicks off, the premium rate will be flat at 0.1 percent (of the banks' third party funds) for about one or two years, but afterwards it will vary, depending on the banks' financial health."

Darmin, head of a government team that formulated the bill, said also that since the rate margin between the lowest and the highest could not exceed 0.5 percent, the premium would then hover in a range of 0.1 percent to 0.6 percent.

Under the current blanket guarantee program, which provides government guarantees on deposits and savings at national banks, the Indonesian Bank Restructuring Agency (IBRA) sets the premium rate at 0.25 percent of the bank's third party liabilities, which manages to rake in about Rp 2 trillion (some US$235 million) annually.

The draft law, submitted to the House in November last year, was meant to serve as the legal basis for the establishment of a deposit insurance scheme to replace the existing blanket guarantee program, which the government plans to phase out within six months after the bill becomes a law.

The phasing out of the program will take one year until it only covers small depositors with deposits of under Rp 100 million.

"(Over Rp 100 million) is when the deposit insurance scheme would kick in," Darmin said.

Currently, the blanket guarantee program, which was launched in the aftermath of the late 1990s banking crisis, covers all deposits and almost all other claims on banks, including those resulting from interbank transactions. This means that when the government closes down a bank, it must guarantee all of the bank's obligations, which can be very costly.

With the lengthy phasing out period, the insurance scheme will most likely remain effective at least for another 18 months.

To replace the role of IBRA in implementing the blanket guarantee program, a special unit under the Ministry of Finance is to be established before IBRA's mandate expires on Feb. 27.

The unit, to be called the banking guarantee implementation unit (UP3), would operate on a temporary basis -- pending the establishment of the deposit insurance scheme.

Firdaus Zaelani, in charge of setting up the new unit, said that all preparations were nearing completion. "It still needs some final touches, but not much, the unit will be ready when the time comes," Firdaus promised.

He added that the unit would likely employ 30 people.

The deposit insurance forms part of the government's grand design in the formulation of the financial safety net, in a bid to protect and preserve a sound financial system, to prevent another banking crisis.

The other key components include the function of lender-of- last-resort and the establishment of the Financial Services Authorities Institution (LOJK).