FULL GUARANTEE ON BANK DEPOSITS NEEDED TO PREVENT CAPITAL OUTFLOW

By Andi Abdussalam

Jakarta, Nov 15 (ANTARA) - Bankers and businessmen have called on the government to provide a full blanket guarantee on bank deposits in order to maintain the stability of banks' liquidity and prevent capital from flowing out of the country in the current financial crisis.

        Indonesian banks currently hold a total of about Rp600 trillion in third party funds which have the potential to be transferred overseas when financial turmoil happens at home because they are not covered by a blanket guarantee.

        When the global financial crisis was at its worst recently, the government only raised the ceiling amount of its deposit guarantee to Rp2 billion from Rp100 million previously to bolster confidence in the financial sector.

        There are about 77 million deposit accounts in the country, including that of the Indonesian Retailers Bond (ORI), according to legislator Zulkifli Hasan of the National Mandate Party (PAN) recently.

        He said that based on PAN studies, about 90 percent of the 77 million accounts belonged to depositors with money less than Rp2.5 billion each.

        According to a report by the Jakarta Post recently the Rp2 billion guarantee covered 99.92 percent of depositors but most people seemed to forget that the remaining 0.08 percent accounted for nearly 40 percent of all third party funds totaling Rp1,520 trillion.

        In the current financial crisis, about Rp600 trillion in funds which are not guaranteed are at very high risk of being moved to safer places.

        After all, neighboring countries such as Malaysia and Singapore have decided to provide a full blanket guarantee on deposits.

        "Singapore, Malaysia and Hong Kong have provided blanket guarantees on deposits. Indonesia should also have done it," State Banks Association (HIMBARA) Chairman Agus M said.

        Therefore, HIMBARA called on the government to provide full blanket guarantee on banks' third party funds and inter-bank money market lending (PUAB).

        The same idea was also expressed by the chairman of the Association of Young Indonesian Entrepreneurs (HIPMI), Erwin Aksa who asked the government to provide a full blanket guarantee on deposits in banks so that the funds will remain in the banks and the interest rates on credit can be lowered.

        "Right now banks are facing liquidity problems," he said here on Friday.

        The government had so far only guaranteed deposits amounting to a maximum of Rp2 billion and this was inadequate, he said.

        He said because no full blanket guarantee was given, some big clients had transferred their deposits to other countries such as Singapore, Hong Kong and Australia that were providing full guarantees.

        As a result, he said, banks faced liquidity problems as incoming funds were small while banks had to continue distributing credits based on previous agreements. He said right now the incoming funds were smaller than credits.

        To lure people, banks were now increasing their interest rates but they also had to raise credit interest rates as well, he said. The lending rates were now quite high at 18 to 19 percent a year, causing difficulties to businessmen.

        The withdrawal of public funds could of course be prevented if they are covered by blanket guarantee. It would also encourage bank to lower their interest rates.

        Chairman of the Indonesian Chamber of Commerce and Industry (KADIN) MS Hidayat said 15 large banks will cut their lending rates by 2-3 percent if the government provides a full guarantee on all bank deposits.

        "Fifteen banks have agreed to cut their lending rates by 2-3 percent on condition the government provides a full guarantee on bank deposits and I urge the government to do so," he said.

        He said the government should guarantee all bank deposits in any amount instead of limiting the guaranteed amount of deposits to Rp2 billion

        "This will not only eliminate people's worries about depositing funds in domestic banks nor also prevent capital outflow. As such, the source of funds in domestic banks will grow," he said.

        Meanwhile, Lippo Group chairman Mochtar Riady said the government needed to provide a full blanket guarantee in order to create financial stability at home and to prevent capital outflow.

        He said that a blanket guarantee would make depositors feel more secure. "Singapore has provided a full blanket guarantee while Indonesia only provides a guarantee on deposits of up to Rp2 billion. Thus, money will flee to Singapore," Riady said.

        In spite of the possible outflow, National Development Planning Minister/National Development Planning Board (Beppenas) chairman Paskah Suzetta said the government would provide a blanket guarantee or full guarantee only if there was a systemic financial crisis which posed a threat to the national economy.

        "The government has yet to see any systemic crisis so that if a full guarantee is provided now it is feared that it will create moral hazard in its implementation," the minister said.

        Yet, in case there is a systemic banking crisis, the government will wait for inputs from the Saving Guarantor Institution (LPS) to decide the type and the provision of a guarantee. (A014/A/HAJM/A/S012) 15-11-2008 21:27:47