KARACHI, Sept 17: The State Bank of Pakistan (SBP) is now working on bank deposit insurance scheme to assure small depositors that their funds are secure. The bulk of the bank deposits come from small savings.

Sources here said that with the United Bank sell-off, more than 50 per cent of the assets of the banking system would be in the private sector as against well over 90 per cent in state sector in 1990.

Under the Banks Nationalization Act, the deposits are guaranteed by the government. The nationalized commercial banks are being privatized, rendering the deposits uninsured, say SBP officials.

In fact, the Banks Nationalization Act would lose its validity once the Habib Bank is privatized, probably by the end of this calender year. MCB, UBL have been privatized and ABL enjoys the same legal status. National Bank was floated as a public sector bank, and was not among the nationalized ones.

The SBP’s concern about small depositors is also explained, sources say, by the recent crisis in some of the institutions like Bankers Equity and NDFC. The SBP wants to provide a safety net to small depositors, and central bank officials say that “a deposit insurance scheme would be put in place in order to mitigate the sufferings of the small depositors.” This, in turn, they add, will support the stability and smooth operations of the banks and financial institutions.

The sources said the material on experiences of other countries on deposit insurance has been collected and the implications of the scheme for the banking system is being examined. The regulators have to tread the ground cautiously so that the ultimate goal of making self-sustaining viable commercial institutions is not compromised.

Experience in some countries indicates that deposit insurance has encouraged bank managements to deviate from prudent lending as the deposits are insured. In formulating the scheme, such risks are to be avoided. And yet the depositors have to be protected. Any kind of support tends to breed inefficiency.

The SBP strategy is to ultimately do away with all kinds of government support either in respect of resource mobilization or in respect of pricing of any bank product.

Similarly, the genuine interests of the bank clients is intended to be secured and safeguarded by creation of the office of Ombudsman. Sources close to the ministry of finance said that the banks virtually can do anything they like in a de-regulated environment. There is need for complaints by bank clients to be addressed.

Consultations between the ministry of finance and the State Bank on the proposal of an Ombudsman, to look into complaints against banks, is now under way.

The need for an Ombudsman is also being felt by bank clients in the field of consumer banking. Often arbitrary bank decisions are imposed on a borrower not so knowledgeable not only in Pakistan but also in the United States.

New laws are emerging in states and cities across America to check what is labelled as “predatory lending” by “loan sharks” or “sub-primary lenders”.

These loans carry a higher rate of interest than do prime loans, to compensate the higher credit risk. But in recent years, the regulators have heard more complaints of borrowers trapped in debts because of high fees and rates. Press reports indicate that rate of home foreclosures rose fourfold over a period 1990-1998 despite a buoyant US economy and declining rates. The sub-prime lender takes advantage of the lack of basic financial knowledge among the borrowers.

In Pakistan also, borrowers often complain that bankers often take arbitrary decisions, contrary to commercial law and practices.