Govt to phase out deposit insurance scheme

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.