SBP seeks protection for MFB deposits

Subsidiary will provide mechanism to ensure deposits remain safe from risks

KARACHI:

The Deposit Protection Corporation (DPC) has proposed that the deposits of clients of microfinance banks (MFBs) should be safeguarded, as they will be largely unsafe in the event of collapse of any such financial institution.

DPC, a subsidiary of the State Bank of Pakistan (SBP), provides guarantees that clients of scheduled banks will get full return of their deposits of up to Rs500,000 each.

Around 94% of the total 73 million accountholders had deposits below or around half a million rupees as of June 2023. Scheduled banks include larger commercial, conventional and Shariah-compliant banks, but they do not comprise MFBs.

In the Annual Report 2022-23, the DPC said 11 MFBs were serving 98.2 million depositors with a deposit base of around Rs520 billion as of June 2023.

design: Ibrahim Yahya

“Considering the fact that these institutions cater to a majority of financially unsophisticated segment of society, a failure of any of these institutions may create considerable ripples and disrupt socio-economic fabric of a wider population. Therefore, an explicit and limited protection is needed for these depositors.”

DPC said it may provide an independent, credible and robust mechanism as a crucial safeguard for the depositors of MFBs that would not rely on the profitability of the institutions.

By extending DPC’s coverage, the financial security of these marginalised groups can be fortified, ensuring that their hard-earned funds are safe from potential risks.

The corporation has proposed appropriate changes in its statute that will enhance its scope and require MFBs to become compulsory members of DPC, enabling it to provide coverage to their depositors.

The coverage arrangement for the depositors of MFBs will go a long way in making the country’s financial system more robust and will further enhance the public’s trust in the stability of the system.

The report mentions that a deposit protection mechanism already exists under the Microfinance Institution (MFI) Ordinance 2001, whereby each MFB is required to create its own depositor protection fund from its annual profits. “However, there is a need to provide a better and more reliable safeguard mechanism for the depositors of MFBs.”

Read: Bank deposits are perfectly safe: SBP

Besides, the DPC has planned to extend the deposit protection scheme to “digital banks which, once operational, shall become members of DPC as per relevant laws. Accordingly, the potential depositors of digital banks will also fall under the umbrella of DPC’s deposit protection scheme.”

The corporation has managed to build a credible Deposit Protection Fund, which, as of June 2023, has surpassed Rs100 billion.

Failed SME Bank

To recall, the depositors of SME Bank got back up to Rs500,000 each after the SBP declared the bank as a failed institution and the federal government approved a winding down plan earlier in the outgoing year 2023.

Owing to insufficient capital and liquidity, the government approved the winding down plan, as proposed by the SBP, to ensure that no depositor of SME Bank was adversely affected by its closure.

“In terms of SBP’s proposed plan, payout to all the depositors of SME Bank was initiated on a priority basis in order to maintain depositors’ confidence in the banking system. The SBP also issued a notification in this regard on May 10, 2023 ‘declaring SME Bank as a failed institution’ in accordance with Section 21(1) (a) of the Deposit Protection Corporation Act, 2016, effective from March 27, 2023.”

Scheduled banks

DPC said in the annual report that all scheduled banks operating in the country were members of the corporation. As of June 2023, out of Rs25.6 trillion in deposits of member banks, around Rs14 trillion, or 55% of the total, was eligible for protection under the deposit protection scheme.

In terms of the number of depositors, out of the total 73 million depositors of DPC member banks, more than 98% have been covered under this scheme. With the protected deposit amount prescribed by the corporation, around 94% of the depositors are entitled to full reimbursement in the unlikely event of a bank’s failure.

Deposits with the DPC member banks continued to grow in financial year 2023 and jumped to an all-time high of Rs25.6 trillion by the end of June 2023.

Correspondingly, the volume of eligible deposits recorded a net increase of Rs1.8 trillion and stood at Rs14 trillion by the end of June.

Published in The Express Tribune, December 3^rd, 2023.

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