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.