Govt to limit bank guarantee scheme

Govt to limit bank guarantee scheme

The Jakarta Post, Jakarta

The government is moving ahead with plans to limit the bank
guarantee scheme, which currently covers all the obligations of
closed banks, as public confidence in the country's banking
sector has gradually improved, according to Bank Indonesia deputy
governor Achjar Iljas.

Achjar also said on Friday that the banking sector was now in
relatively better condition than it was during the devastating
1997-1998 financial crisis.

"When it (the blanket guarantee scheme) was first launched, we
were suffering from a crisis. Now we're in a situation where the
crisis has lessened, so I think now is the time (for the scheme)
to be modified," he told reporters.

Achjar said that all the preparations leading up to the change
would be put in place solely by the government, claiming that it
was the government itself that had implemented the program in the
first place.

He said that the central bank was only being consulted.

Introduced in early 1998, under the blanket guarantee scheme
the government is obliged to cover the obligations of closed
banks, including repaying depositors' funds.

The scheme was aimed at avoiding mass panic whenever the
government decided to close a bank.

The absence of such a scheme was widely believed to have
caused massive runs on local banks when the government closed
down 16 banks in November 1997.

Bank closures have been a sensitive issue ever since.

Nevertheless, the presence of such an insurance scheme has
also drawn criticism as it could serve to increase the level of
moral hazard among bankers.

Critics argue that the guaranteeing of all depositors' funds
in banks would only give bad bankers more reasons to engage in
reprehensible practices.

The government-sponsored blanket guarantee scheme is also
deemed by many as being too costly.

The government has said that it would announce six months in
advance if it was going to end or change the existing blanket
guarantee scheme.

Director General of Financial Institutions Darmin Nasution was
not available for comment.

Achjar declined to provide details about the revision of the
program.

"The current scheme covers almost everything. But to avoid the
moral hazard, its scope will have to be diminished," he said.

Sources said that the revision would include limiting the
amount of bank deposits to be guaranteed by the government.