House endorses long-awaited bill on deposit insurance
Dadan Wijaksana, The Jakarta Post/Jakarta
The House of Representatives endorsed on Tuesday the long-awaited bill on the deposit insurance agency (LPS), paving the way for the gradual termination of the costly government guarantee on bank liabilities.
The existing blanket guarantee program, which covers virtually all deposits and other claims on banks, was introduced in the wake of the late 1990s financial crisis in a bid to instill confidence in the banking industry -- which, at that time, was severely hurt by massive runs. Under the program, the government will cover all the liabilities of closed down banks.
Minister of Finance Boediono said at a plenary session of the House of Representatives that, while the program had successfully revived public confidence in the banking sector, it had also had an undesirable impact.
"Such broad-ranging insurance could heavily burden the state budget and create a 'moral hazard', both among bankers and the public," Boediono told lawmakers.
His remarks were in line with those of experts who have long asked for the revision of the existing guarantee scheme. They say the existing scheme tends to encourage the neglect of good banking practices, as bankers know the government will eventually cover a bank's liabilities, should it go under.
Under the new law, the coverage of the existing guarantee program will gradually be reduced within two-and-a-half-years, after the approval of the law.
During the transition period, and according to the law, the deposit insurance agency (LPS) will be set up to carry out the insurance program. At present, the blanket guarantee program is managed by an ad hoc unit under the Ministry of Finance.
The bill was submitted to the House in November of last year.
Mandatory to all banks, the LPS will charge a premium fee of 0.1 percent of a bank's third party funds per six months. Under the current program, the premium fee is set at an annual flat rate of 0.25 percent, which generates some Rp 2 trillion (US$ 215.6 million) annually.
Dradjad Wibowo, an economist at the Institute for the Development of Economics and Finance (Indef), welcomed the enactment of the LPS law.
"We've been waiting for this for a long time. It strikes a balance between efforts to retain confidence in the banking sector, keep its pressure on the state budget in check, and minimize room for abuses," he said.
Aside from carrying out the insurance program, the LPS will also have the authority to supervise, take over the management, and even close down a bank declared to be suffering deep financial problems.
Such a role is currently being undertaken by the central bank.
Key points of the new law:
* The LPS has two main functions: guaranteeing banking deposits and actively participating in stabilizing the banking system, including overseeing a sick bank and determining rescue measures
* The premium fee for participating banks is set at 0.1 percent of third party funds and payable twice a year
* On payment of claims, the LPS has to undertake a verification process to determine genuine depositors. The LPS has to start repaying claims in five working days at the latest, after the start of the verification process.
* The law becomes effective 12 months after being enacted
* Six months after the law becomes effective, all types of deposits and savings will still be covered by the LPS. In the following six months, the LPS will only cover deposits and savings of an individual size of up to Rp 5 billion. Six months later, the size of deposits and savings to be covered will be cut to a maximum of Rp 1 billion. Afterward, the LPS will only cover individual deposits and savings of not more than Rp 100 million.