Government told to reduce scope of bank blanket guarantee

JAKARTA (JP): The government must gradually start limiting the scope of its costly bank blanket guarantee to pave the way for the establishment of an insurance deposit scheme, according to a senior official at the finance ministry.

Director for insurance industry at the ministry, Firdaus Djaelani, said on Thursday that the insurance deposit scheme should only be made available for simple bank deposits.

"The insurance scheme should only be provided for simple banking products like time deposits and savings. It should not cover things as interbank loans," Firdaus told a seminar on the insurance deposit scheme.

"The government blanket guarantee policy covers 20 different products, but the insurance deposit scheme should only cover six ... we could cover individual time deposits but not corporate time deposits," he added.

The government launched the blanket guarantee program in early 1998 in a bid to maintain confidence in the ailing banking industry. The program guarantees all of the obligations of banks including depositors money and interbank loans.

The blanket guarantee helped prevent massive bank runs when the government closed down banks as part of the bank restructuring program. The government has closed down 66 banks since the financial crisis started in the middle of 1997.

So far, the government has paid some Rp 60 trillion (US$6.79 billion) worth of claims as a consequence of the blanket guarantee.

In a bid to reduce the huge cost, the government planned to launch a deposit insurance scheme, which was supposed to be launched in February.

However, the government extended the blanket guarantee for another year.

The government has said that an announcement would be made six months in advance if the blanket guarantee is to be dropped.

The International Monetary Fund, which is providing a multi- billion dollar bailout loan for the country, has given the government until 2004 to set up an insurance deposit scheme.

"If the blanket guarantee is to be extended again, the coverage should be reduced," Firdaus said.

Meanwhile, Bank Indonesia director Djoko Sarwono said that the deposit insurance scheme should be implemented by 2002.

"Waiting until 2004 is too long. I think we must implement it in 2002 because the blanket guarantee is costly," Djoko said in the same seminar.

"And by 2002, domestic banks will be healthy," he added.

Firdaus said that an important prerequisite to launch an effective deposit insurance scheme was that domestic commercial banks first must become healthy.

He said that the deposit insurance operation could go bankrupt if it was forced to insure unhealthy banks.

"We are not expecting banks to be 100 percent healthy ... but we can't insure banks that are clearly unhealthy," he said.

He also said that the insurance deposit operation must have the right to exclude unhealthy banks from the insurance program.

Firdaus said that under the government plan, the deposit insurance scheme would be operated by a government agency or a state-owned company.

He said that for the time being there would be no role for the private sector, but added that they could take part in the future through a privatization program. (rei)