Indonesia plans to start phasing out its costly guarantees on bank liabilities, including letters of credit (L/Cs) used in international trade.

The guarantees were introduced to prop up banks that were ailing in the late 1990s, but which are now perceived to be in a more robust condition.

Blanket guarantee

The government's costly guarantees on bank liabilities, which included savings and deposit accounts, will be phased out from next year according to the finance ministry.

"We will lift the existing blanket guarantee in a planned manner and in gradual steps, not all at once," said finance minister Yusuf Anwar.

L/C guarantees

From 18 April 2005 the government will no longer guarantee bank liabilities, such as L/Cs for exports and imports.

At that time guarantees will continue on savings and deposit accounts and inter-bank loans, but the latter will also be phased out of the government's protection scheme from September 2005.

Replacement schemes

Schemes operated through the deposit insurance agency will take over from the burdensome blanket insurance scheme, introduced by government in response to the 1997-98 financial crisis when depositors rushed to banks to withdraw their money fearing that they would not be able to recover their funds if the banks collapsed.

Although the scheme helped to restore faith and confidence in Indonesia's banks, some experts have said the knowledge of a blanket guarantee by government could encourage slack banking practice.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.