The central bank says a full guarantee on bank deposits may raise business confidence in the domestic banking sector, keeping liquidity intact at home given similar protection provided by neighboring countries.
"A blanket guarantee is important to boost investor confidence (in our banking sector)," Bank Indonesia (BI) deputy governor Hartadi A. Sarwono said Monday at a meeting with the Regional Representatives Council (DPD).
He was responding to questions from members of DPD over the need for such guarantee.
Hartadi said depositors had yet to move their money to neighboring countries as confidence in local banks remained high thus far.
"A full guarantee does not mean that the guarantee will be executed. If everything goes accordingly, the guarantee fund will not be used," he said.
The government recently raised the ceiling for deposit guarantees to Rp 2 billion (US$183,066), from the previous Rp 100 million, in a bid to boost confidence in the banking sector.
However, the business community believes the guarantee was not sufficient to protect those having more than Rp 2 billion, encouraging local depositors to keep their funds in Singapore, Malaysia and Hongkong, which already have a full guarantee in place.
With a full guarantee, funds are expected to remain in Indonesia, keeping the banking sector safer from any shortage of liquidity.
In 1998, when the Asian financial crisis hit Indonesia, more than US$100 billion reportedly fled the country to Singapore which then had a full deposit guarantee.
Because of fears of a repeat of such a capital outflow, the Indonesian Chamber of Commerce and Industry (Kadin) has proposed the full guarantee scheme to President Susilo Bambang Yudhoyono.
However, Vice President Jusuf Kalla has opposed such scheme, saying it would create a "moral hazard" among bankers, while the existing scheme already covered 99.7 percent of depositors.
The risk resulting from such scheme would be that bankers mmight channel loans to their cronies without strict prior scrutiny, knowing that if the bank folded then the government would step in anyway to protect depositors.
In August, total bank deposits amounted to Rp 1,528.10 trillion ($138 billion), according to BI.
Around Rp 900 trillion has been covered by the existing guarantee scheme, under the supervision of the Deposit Insurance Corporation (LPS).
