What is the LPS Guarantee Interest Rate?

The Indonesian Deposit Insurance Corporation (LPS) has raised its guaranteed interest rates for rupiah and foreign currency (forex) deposits in commercial banks, as well as rupiah deposits in Rural Banks (BPR). This policy follows Bank Indonesia's two increases in the BI 7-day Rate in May 2018, each by 25 basis points (bps), bringing the rate to 4.75%.

The LPS guaranteed interest rate for rupiah deposits in commercial banks increased by 25 bps to 6%, while the rate for forex deposits increased by 50 bps to 1.25%. The LPS guaranteed interest rate for rupiah deposits in BPRs increased by 25 bps to 8.5%. This is the first increase in LPS guaranteed interest rates since May 2015.

The guaranteed interest rate is a rate issued by LPS that serves as a benchmark for guaranteeing bank customer deposits in Indonesia to prevent moral hazard. If a bank offers an interest rate exceeding the guaranteed rate or if the deposit is not recorded in the bank's books, LPS will not guarantee the customer's deposit. Based on Indonesian Government Regulation in Lieu of Law Number 3 of 2008 concerning Amendments to Law Number 24 of 2004 concerning the Deposit Insurance Institution, the value of customer deposits guaranteed by LPS is capped at Rp 2 billion.

(Read Databoks: 2017, Bank Lending Rates Decreased)