Cut In Deposit Insurance Ceiling Will Not Cause Rush: Agency

Source: The Jakarta Post (09-02-2007)

Jakarta - The Deposit Insurance Agency (LPS) will press ahead with its plan to reduce the upper insured limit for bank deposits to Rp 100 million (US$10,526) per customer per bank starting March 22 from Rp 1 billion at present, despite some worries that the reduction might precipitate a bank rush, a senior official with the agency says. LPS director Firdaus Djaelani said here Friday that he was upbeat that the sharp reduction in the deposit guarantee ceiling would not cause a massive pullout of funds from the country's banks as public confidence in the sector had significantly improved since the banking industry was brought to its knees in the late 1990s.

Citing a Bank Indonesia study, he said depositors mostly decided to deposit their money in banks not because of the agency's guarantee but rather due to the financial performances of the banks.

"Banks should therefore improve their services so as to increase customer trust, and should be aware that the deposit insurance scheme is not the only factor that aids customer retention," Firdaus told The Jakarta Post.

As part of the effort to ensure the survival of the banking industry during the monetary crisis in the late 1990s, during which more than a dozen banks were liquidated, the government in 1998 decided to issue a blanket guarantee for bank deposits so as to restore people's confidence in the banking sector.

After the crisis was over, the government in 2004 decided to gradually phase out the blanket guarantee scheme -- under which, originally, all funds deposited in banks were guaranteed -- and established the LPS to avoid a bank rush.

The agency began lowering the deposit insurance ceiling last March by reducing it to Rp 5 billion. It then further reduced the figure to Rp 1 billion last September.

"But, if the reduction in the guarantee to Rp 100 million causes a major pullout of funds, we may consider raising the limit again," Firdaus said.

The agency is also authorized to set a ceiling for interest payments on insured deposits and to levy premiums amounting to 0.2 percent per year of each bank's total third party funds.

In January, the interest rate limit was set at 9.50 percent for commercial banks and 13.25 percent for rural savings banks.

According to the LPS, as of last December, depositors with accounts containing Rp 100 million or less accounted for 98 percent of the total number of accounts with the country's banks. However, these accounts only contained about 21 percent of total third party funds, which stood at Rp 1,275 trillion in December.

"The remaining 2 percent controlled the rest of the funds," Firdaus revealed, saying that this meant the agency was still protecting small depositors. He added that the number of accounts with balances of more than Rp 5 billion continued to increase.

"We found 1,200 new accounts with balances of Rp 5 billion between November and December last year," he said. (Ary Hermawan)