Government set to phase out bank guarantee program
Dadan Wijaksana, The Jakarta Post, Jakarta
The government is set to gradually terminate its costly blanket guarantee for bank deposits and claims, starting in January, 2003, in a bid to help remove "moral hazards" and minimize the cost of any bank failures to the state.
The phasing out of the blanket facility will be completed in February 2004, when third party funds above Rp 100 million (about US$11,000) will no longer be guaranteed by the government. But the government will continue to protect small depositors via a new deposit insurance scheme.
Director General of Financial Institutions Darmin Nasution said on Thursday that all technical preparations had been completed, saying the new policy would be announced on July 31 once it had been approved by the Cabinet.
"Technically speaking, we're ready. But the final say will be all up to the (Finance) Minister and the Cabinet meeting," Darmin told reporters prior to a meeting with legislators.
The blanket guarantee scheme was introduced in 1998 to help instill confidence in the ailing banking sector. Under the scheme, if a bank is shut down, the government would cover all of the bank's obligations including depositors' money. The policy was also meant to avoid a widespread panic when the government had to close down banks.
The government must announce six months in advance to the public if it intends to change the scheme.
"We've been publicizing this with the banks since the end of 2001," Darmin said.
Under the phasing out plan, government guarantees on bank accounts in the categories of on-balance sheet and off-balance sheet would be terminated by January 1, 2003, the Kontan weekly said in its latest edition. This includes debt notes issued by banks, direct loans, letters of credit, standby loans, and derivative transactions.
Third party funds worth over Rp 5 billion and interbank loans will no longer be eligible for the blanket guarantee as of August 2003.
And finally, in February 2004, guarantees for third party funds over Rp 100 million will be terminated, while funds Rp 100 million or less will continue to be protected via a deposit insurance facility.
The blanket guarantee program has greatly helped in reviving confidence in the banking industry despite their weak financial conditions.
But the scheme has caused moral hazards among bankers as market forces cannot function properly to screen banks and it has created a huge amount of liability for the debt-ridden government. For 2000, 2001 and 2002, the government had to allocate Rp 42 trillion, Rp 61 trillion and Rp 59 trillion respectively.
Stopping the blanket guarantee, however, could prompt depositors to put their money in foreign banks due to the industry's ongoing precarious condition.
Banking analyst Drajat Wibowo welcomed the plan, saying now was the time to start phasing out the blanket guarantee.
"And the plans to take banks' trade facilities off the scheme first is good, because by this the government can evaluate the progress of the plans. Consider it a test case," Drajat told The Jakarta Post Thursday.
When asked to comment on this, Minister of Finance Boediono said that the plan would still be discussed further: "Bottom line is that, we're very careful about this. This is a fundamental policy."