Govt to phase out deposit insurance scheme

Urip Hudiono, The Jakarta Post/Jakarta

As the country's banking sector is recovering to a healthier state, the government plans to start phasing out its costly guarantee on bank liabilities -- including savings and deposit accounts -- starting next year, the finance ministry said.

"We will lift the existing blanket guarantee in a planned manner and in gradual steps, not all at once," Ministry of Finance Yusuf Anwar said on Wednesday.

"And the government will still guarantee all savings and deposit accounts in banks until at least 2006."

The plan, Yusuf added, was based on Presidential Decree No. 95/2004 issued last October by the previous administration, and would remain consistent with Law No. 24/2004 on the deposit insurance agency (LPS), which would then take over the government's blanket guarantee program. That law will take effect on Sept. 22, 2005.

"We also believe that this vote of confidence by the government will restore genuine trust in the banks," he said.

The government had to set up the costly scheme when depositors flocked to banks to withdraw their money during the 1997-98 financial crisis, fearing that they would not be able to recover their funds if the banks collapsed.

Although the scheme helped to restore the public's trust in the banks, it has put a strain on the cash-strapped government. Many experts have also said that it tends to encourage bankers to neglect prudent banking practices, as they know the government would eventually cover their liabilities should they go under.

According to the new plan, the government, as of April 18, 2005, will only guarantee savings and deposit accounts and inter- bank loans. Other bank liabilities, such as letters of credit for exports and imports, would no longer be guaranteed.

But starting Sept. 22, 2005, inter-bank loans will also be phased out of the government's protection scheme.

The phasing out of the guarantee on savings and deposit accounts will begin on Sept. 22, 2006, starting with those accounts less than Rp 5 billion. From March 22, 2007, the phasing out will affect deposit size of up to Rp 1 billion. After that, only deposits of less than Rp 100 million will continue to be guaranteed by the government.

Director general for financial institutions Darmin Nasution said that even though savings and deposit accounts of up to Rp 100 million would be guaranteed, it would still account for around 98 percent of total deposit accounts in the country's banks.

"Practices in other countries usually guarantee up to 90 percent (of total deposits)," he said. "So I think our scheme is still a fairly good one."

Darmin also explained that the cost of establishing the LPS of between Rp 4 trillion to Rp 8 trillion, would be taken from a Rp 12 trillion in reserve cash that the government had been using for the existing blanket guarantee program.

Upon its establishment, the LPS will also charge all banks an annual, flat rate premium fee of 0.2 percent from third party funds. Currently, the premium fee is set at 0.25 percent, which generates some Rp 2 trillion (US$ 222 million) annually.

The government will, however, consult with Bank Indonesia and the LPS in the future, to determine a premium fee based on a bank's risk.

"The higher the probability of a bank of going under, the higher its premium fee to the LPS would be," he said.