Author: | Published: 30 Sep 2004
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In the wake of the Asian monetary crisis, the Government of the Republic of Indonesia (GOI) issued a blanket guarantee programme in January 1998, whereby the GOI guaranteed the payment of liabilities of Indonesian commercial banks (including their offshore branch offices) owing to domestic and foreign depositors, with limited exceptions. As a matter of policy, the blanket guarantee programme was extended to creditors for obligations in either the rupiah or foreign currency. Promulgated by virtue of Presidential Decree 26 of 1998 on Guarantee of the Obligations of Commercial Banks dated January 26 1998, the guarantee was further amended by Presidential Decree 17 of 2004 dated February 27 2004.

The guarantee programme was originally intended to be of a temporary-short term nature until a deposit insurance scheme could be put in place. Given the delays in the establishment of the deposit insurance scheme, the guarantee programme was successively extended. Originally to have expired on January 31 2001, the programme was extended by a Decree dated May 26 2000 for successive six-month periods automatically, unless the Minister of Finance calls for the end of the programme.

When the Indonesian Bank Restructuring Agency (IBRA) was established, it was given responsibility for administering the guarantee programme. However, the IBRA was dissolved on February 27 2004, and administration of the guarantee programme has now passed to a new unit of the Ministry of Finance, known as the Government Guarantee Implementing Unit (in Indonesian, Unit Pelaksana Penjaminan Pemerintah (UPPP)). The unit was established pursuant to Minister of Finance Decree 85/KMK.06/2004 dated February 27 2004.

Applicability of the programme

By virtue of the terms of Presidential Decree 26 of 1998 establishing the guarantee programme, the Minister of Finance was given the authority to establish the rules for the programme's implementation. Subsequently, this authority was delegated to Bank Indonesia (BI) and then to BI and IBRA jointly.

Under Minister of Finance Decree 179/KMK.017/2000 dated May 26 2000 on the Terms, Procedure and Provisions for the Realization of the Guarantee of the Obligations of Commercial Banks, as amended by Minister of Finance Decrees 84/KMK.06/2004 dated February 27 2004, and 189/KMK.06/2004 dated April 8 2004, the types of obligations of a bank that are guaranteed are essentially all on-balance-sheet and off-balance-sheet liabilities, with limited exceptions.

On-balance-sheet liabilities consist of: third-party deposits (giro, savings, time deposits, certificates of deposit and on-call deposits); loans from other banks based on clear and reasonable underlying documents commonly used in such transactions; negotiable paper issued by banks, among others, but not limited to, floating-rate notes (FRN), floating-rate certificates of deposit (FRCD) and medium-term notes (MTN); bonds; bank guarantees; and other liabilities common in banking business, among others, direct loans, import facilities, and in/out transfers.

Off-balance-sheet liabilities consist of: deposit of instruments on collection basis, bank instruments issued for import transactions, among others, letters of credit, guarantees and other liabilities pursuant to UCP 500; bank guarantees whether in the form of standby L/C or other bank guarantees, such as, bid, performance and advance payment bonds; liabilities for currency swap transactions; and domestic letters of credit.

In principle, the guarantee scheme is available to all Indonesian commercial banks. However, actual participation is contingent upon the participating banks signing a statement letter agreeing to undertakings on the following:

  • that it will comply with the rules on prudential banking principles as stipulated by Bank Indonesia and other rules stipulated by UPPP under the guarantee programme;
  • that it agrees to provide such information as may be required by UPPP;
  • that it agrees to not pay dividends to its shareholders during the guarantee programme or while obligations of the bank to the government have not yet been settled, unless determined otherwise by UPPP;
  • that its board of directors and the board of commissioners will be personally liable for any negligence and any violations committed during the course of operations of the bank;
  • that it will pay a premium of 0.25% a year of its total third-party deposits and/or obligations guaranteed under the guarantee programme.
  • that it will issue promissory notes in amounts equal to the amount of payments made under the guarantee programme, subject to interest at a rate determined by UPPP.

In addition to the above bank undertakings, shareholders holding 10% or more of the total issued and outstanding shares of a bank must also agree to a number of undertakings, as follows:

  • the shareholder agrees to assist the board of directors and commissioners in fulfilling the undertakings of the bank;
  • the shareholder agrees to be personally liable for any negligence or mismanagement of the bank;
  • the shareholder agrees to grant a counter-guarantee to UPPP if so requested by UPPP.

It is indisputable that the programme has revived public confidence in the banking sector but it has also created a burden on the state budget.

Deposit Insurance Agency

The establishment of the Deposit Insurance Agency is a key feature of the 1998 Indonesian Banking Law. The law states that the Agency is to be established pursuant to a government regulation but in subsequent deliberations, the legislative form for the programme was changed to a statute. On August 24 2004, all the factions of the House of Representatives approved a Bill on the Deposit Insurance Agency (in Indonesian, Lembaga Penjamin Simpanan (LPS)). The Bill needs to be signed by the president before it becomes a law, which had not yet happened at the time of writing. However, under the Second Amendment to the 1945 Constitution, a bill approved by the House of Representatives and the administration will automatically become a law after 30 days, even if not signed by the president. Stipulated in the Bill, the law will then come into effect 12 months after the date of its enactment (that is, the date it becomes a law).

LPS will take the form of a corporation created by statute, which means that its capital will not be divided into shares. LPS is meant to be an independent, transparent and accountable legal entity reporting directly to the president. On its establishment, its capital will range between a minimum of Rp4 trillion ($432 million) and a maximum of Rp8 trillion. LPS has two main functions: guaranteeing bank deposits and actively participating in stabilizing the banking system.

The Bill provides that LPS will guarantee deposits. The Bill further provides that LPS will undertake this task by formulating policies and providing a guarantee for the banking industry. LPS has authority to develop appropriate policies to maintain the stability of the banking sector and is also given the authority to identify failed banks that do not have a systemic impact on the banking sector and maintain failed banks that have a systemic impact on the banking sector.

Under the terms of the Bill, the coverage of the existing guarantee programme will be gradually reduced within two-and-a-half years of the law's enactment. Six months after the law becomes effective, LPS will still cover all types of third-party liabilities of the commercial banks. In the following six months, LPS will only cover deposits and individual savings of up to Rp5 billion. Six months thereafter, the size of deposits and savings that are covered by the LPS guarantee will be reduced to a maximum of Rp1 billion. Afterward, LPS will only cover, in sum, individual deposits and savings of not more than Rp100 million. These thresholds amounts apply to a depositor in a bank, and not per account.

Under the Bill, all banks operating in Indonesia, including rural banks and branches of foreign banks, are required to participate in the programme. Unlike the guarantee programme provided by GOI, where only Indonesian commercial banks are covered, LPS will cover also deposits at the branches of foreign banks in Indonesia. A membership contribution will be charged at 0.1% of the bank's equity to be paid at the commencement of participation. A guarantee premium of 0.1% of the average amount of deposits with the bank during six months will be paid two times each year. Similar to the guarantee programme provided by the government, for a bank participating in the programme, the Bill requires certain undertakings from the shareholders of a bank, as well as directors and commissioners. The undertakings include: a statement of commitment to adhere to all LPS rules; an agreement to be personally liable for any negligence or mismanagement of the bank; and an undertaking to transfer to LPS all rights of ownership, management and interest in the bank if the bank fails.

The Bill envisages that LPS will be working hand-in-hand with the banking industry supervisory agency, a role now assumed by Bank Indonesia but that may be transferred to a new financial services supervisory entity. In the case of a failed bank, LPS may, at its discretion, take over the authority of the shareholders, manage the assets of the bank, review any contracts the bank has entered into and transfer any assets of the bank. If the licence of a failed bank is revoked, LPS is empowered to carry out the liquidation.

In the beginning, LPS will apply the same rate of premium to all banks. In light of the particular conditions and circumstances of the banking sector, some banking industry commentators believe that the conditions and risks of each bank should be taken into account in assessing the premium rate.

Author biography

Lucyana Dela Rosa

Mochtar Karuwin Komar

Lucyana Dela Rosa has been with Mochtar Karuwin Komar since 1997. Prior to joining Mochtar Karuwin Komar, she worked as a legal officer at a major Indonesian bank. Ms Dela Rosa is responsible for a wide range of banking and finance matters, including bank acquisitions and financing transactions. She also has wide experience in debt restructuring work, including IBRA related debt restructurings.

Ms Dela Rosa is a certified participant of the Course for Capital Market Lawyers in 2002 organized by the Department of Finance in conjunction with the Association of Capital Market Lawyers.

Ms Dela Rosa is also a member of the Association of Indonesian Legal Consultants.

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