LPS starts operation, replaces blanket guarantee

LPS starts operation, replaces blanket guarantee

The Jakarta Post, Jakarta

The Deposit Insurance Agency (LPS) has started operations,
replacing the government's blanket guarantee on bank liabilities
and requiring the participation of all banks -- including
international ones -- in its new guarantee scheme.

The Ministry of Finance's Director General of Financial
Institutions Darmin Nasution said on Tuesday that the LPS had
been established and in operation since Sept. 22, according to
Law No. 24/2004 and Government Regulation No. 32/2005 on the
agency.

He said all banks operating in the country are required to
participate in LPS' new guarantee scheme by becoming members, to
ensure the continued protection of depositors.

"All commercial banks must become members of LPS, including
international banks with permits to operate and provide banking
services in the country," he said. "If they don't, they are
violating the law and will be sanctioned in accordance with the
banking law."

Under the government's previous blanket guarantee scheme,
international banks were not required to participate.

Darmin, who led the government's team in setting up the LPS,
said the government has asked the banks to fulfill the necessary
membership requirements by Nov. 22 at the latest.

The requirements include submitting their permits and
approvals from their management and shareholders, as well as
paying a contribution and premium.

The one-time participation contribution will be levied at 0.1
percent of a bank's equity while the premium fee will be 0.1
percent of a bank's third-party liabilities to be paid every
semester.

Data from the central bank shows that equity in the
banking sector amounts to Rp 80 trillion (US$7.79 billion) while
their third-party liabilities are Rp 980 trillion.

The House of Representatives had previously approved Rp 4
trillion as LPS's initial guarantee fund and allowed it to invest
in government bonds and Bank Indonesia's (BI) promissory notes
for its operational needs.

On the same occasion, Darmin also announced the agency's board of
commissioners and directors.

Incumbent Bank Rakyat Indonesia (BRI) president commissioner
Rudjito was named as LPS president commissioner while BRI
director Krisna Wijaya will serve as LPS chief and as a
commissioner. The two will resign from their present posts at BRI
pending the bank's meeting of shareholders.

Other commissioners include financial supervisory experts
Markus Parmadi and Pontas Riyanto Siahaan, BI deputy governor
Maman H. Somantri and Darmin himself.

Two finance ministry officials will assist Krisna -- Firdaus
Djaelani as LPS' director for guarantee and risk management, and
Mirza Mochtar as the agency's finance and investment director.

Darmin said the LPS would continue to guarantee all savings
and deposits until March 22, 2006.

From then, LPS will only guarantee savings and deposits up to
Rp 5 billion per depositor per bank until Sept. 21, 2006, or up
to Rp 1 billion until March 21, 2007 and only up to Rp 100
million from then on.

LPS' establishment is considered a milestone in improving
Indonesia's banking sector.

The government had to set up the costly scheme when depositors
rushed several banks during the 1997 financial crisis, fearing
they would not be able to recover their funds if the banks
collapsed in the crisis.

Although the scheme helped to restore the public's trust towards
banks, it has long strained the cash-strapped government and
tended to encourage bankers to neglect prudent banking practices.