KARACHI: The bank deposits reached an all-time high of Rs20 trillion in FY21 creating a need for higher protection, said the Deposit Protection Corporation (DPC) which issued its first Annual Report on Thursday.
The report says that the number of depositors covered under the protection offered by the corporation has increased due to healthy growth trend in bank deposits, which further boosted in FY21.
Since the Great Depression of 1930, a number of institutions were established to provide guaranteed protection to the depositors and creditors of financial sector in various countries, so that confidence in banking and financial system could be maintained.
Focus on the establishment of deposit protection agencies had further increased after financial crisis 2008, which resulted in failure of a number of banks around the world.
“Consequently, deposit protection has almost become a requisite for financial stability,” said the report.
The corporation mainly provides coverage to small depositors. As of Dec 31, 2020, around 98.9 per cent of total depositors of conventional and 98.5pc of Islamic banks are eligible for deposit protection from the DPC in case their bank is declared to have failed by the SBP.
In terms of overall volume of deposits as on Dec 31, 2020, 18pc of conventional banking eligible deposits and 13pc of Islamic banking eligible deposits are fully protected.
Recently, the DPC has increased the coverage amount limit to Rs500,000 per depositor per bank from Rs250,000 prevalent earlier.
This 100 per cent increase in coverage amount is expected to benefit individual depositors and has also resulted in increased number of fully protected depositors, said the report.
The better coverage to depositors is expected to further enhance the depositors’ trust in the country’s financial system to contribute more towards strengthening of financial stability, the report added.
“The protected deposit coverage set at Rs500,000 ‘per depositor per bank’ translates into nearly 2.22 times of GDP per capita in Pakistan as of June 30, 2021,” said the report.
Moreover, in order to have a level playing field, all commercial banks are made mandatory members of Deposit Protection Scheme and are liable to pay the prescribed premium.
“As the concept of explicit and limited deposit protection is still novel in Pakistan, therefore the report tries to educate the readers with basic ideas about deposit protection. It sensitises its readers on the concepts of single depositor view and fixed rate and risk-based premium systems,” said the report.
Additionally, the report provides statistics about coverage of deposits and premium collection and also throws light on risk management framework at DPC.
According to DPC all 33 scheduled banks in Pakistan are members of the deposit protection scheme. Out of these, there are four foreign, four specialised, 20 private and five public sector banks.
Published in Dawn, October 15th, 2021