Karachi:The government’s much-awaited bill for compensation to small depositors, in case a commercial bank fails to meet its obligations, was approved by the Senate earlier this month. Under the law for this purpose a Deposit Protection Corporation, will be set up as a subsidiary of the State Bank of Pakistan.
The initiative was taken some years ago by the SBP to protect small depositors, as they contribute 80pc of total bank deposits. In 2008, a similar legislation was drafted by the central bank, but it could not be presented before the parliament.
The need for the law was felt owing to vague protection provisions under the Banks (Nationalisation) Act of 1974, in which the government implicitly guaranteed the safety of all deposits. As the Act applies only to nationalised banks, the new law will extend protection to the depositors of private sector banks. Deposit Protection Corporation will collect a premium from member banks and reimburse small depositors in case of the failure of a member bank
As a result of privatisation of the once dominant state-owned banks and the entry of new private banks, the market share of public sector banks has dropped from 92pc in 1990 to around 19pc in 2016.
Similarly, the recent KASB Bank episode highlighted the need for the protection of small depositors. Developed countries like US, UK and Canada run deposit insurance schemes.
SBP’s chief spokesperson, Abid Qamar, told Media that the law is under process of being promulgated.
The DPC will collect a premium from member banks and reimburse small depositors in case of the failure of a member bank.
“This insurance/protection will also forestall chances of run on other banks in similar situations”, he said. The DPC will also complement the SBP’s core objectives of financial stability, protection of small depositors, along with serving as an important safety net route for a robust banking system, he further added.
The corporation will charge a premium from member institutions, which will be a regular source of its income. The DPC will decide the initial coverage limit per depositor per bank, insurance premium to be collected from member banks and the criteria for deposits. Apart from inter-bank and government deposits, it will also cover deposits both in local and foreign currency. Mr Qamar said the corporation will issue rules in this regard.
An official of the finance ministry said that the SBP will contribute Rs1bn towards its initial capital.
The corporation will guarantee the full payment of funds held in a depositor’s account with a member-institution, up to a variable amount determined by the corporation from time to time.
According to the Act, the corporation will be administered by a board consisting of seven directors—deputy governor SBP as chairman, managing director: nominee of ministry of finance and four directors to be nominated by the federal government in consultation with the SBP.
The directors will hold the office for three years and will be eligible for re-appointment for an additional term of three years. The SBP will appoint the MD.
