SBP says 98pc bank savers eligible for deposit protection

KARACHI: The State Bank of Pakistan said Thursday a majority of customer deposits at banks are covered by deposit insurance in the event of the bank’s failure, showing the stability of the financial system.

Deposits of Pakistani banks have been growing in recent years at an increasing pace and as of June 2021, bank deposits have reached an all-time high of Rs20 trillion, which in turn has also propelled growth in eligible deposits, the SBP said in a Deposit Protection Corporation (DPC) Annual Report for 2020-21.

The total eligible deposits as of June 30, 2021, were at Rs11 trillion, while the value of fully protected deposits was Rs1.8 trillion.

The DBP covers a very large number of depositors in Pakistan as the majority of account holders are ‘small depositors’. As of December 31, 2020, 98.9 percent of total depositors of conventional banking and 98.5 percent of Islamic banking are eligible for protection from DPC, in case their bank is declared as a failed institution by the SBP.

In terms of the overall volume of deposits, 18 percent of conventional banking eligible deposits and 13 percent of Islamic banking eligible deposits are fully protected.

“The percentage of the fully protected value of deposits in both conventional and Islamic banking institutions shows the distribution of deposits in our banking industry, where the large value of deposits is being held by numerically fewer depositors,” the report said.

“This also exhibits the fact that coverage of DPS is more centered towards retail and financially unsophisticated depositors rather than big-ticket depositors.”

All types of current and saving accounts, branchless banking accounts, fixed-term deposits, and foreign currency accounts qualify for the compensation of the guarantee amount by the corporation.

The report said that an increasing trend has also been observed in the premium collection from all DPC member banks. The conventional banks have contributed a major chunk of premium since the commencement of DPC’s operations, due to a larger share of deposits.

However, in terms of percentage, growth in the premium collection of Islamic banking institutions has been recorded higher than premium collection from conventional banks.

On a year-on-year basis, the growth in the premium collection from Islamic banks remained 15.0 percent and 21.7 percent during the last two years compared, while the conventional banks' premium saw a growth of 9.5 percent and 13.5 percent for the same periods.

The number of depositors covered under the protection offered by the corporation has increased due to a phenomenal growth trend in bank deposits driven by a host of factors including; thriving remittances and overall improvement in business activities in the post-lockdown scenario. It is also a reflection of depositors’ trust in the banks in the backdrop of proactive risk-based regulatory supervision.

The corporation in September

doubled the guarantee amount for the eligible depositors from Rs250,000 to Rs500,000.

The SBP believes the introduction of explicit deposit protection in Pakistan would further cement depositors’ trust and confidence in the banking system and will enhance its stability to meet any crisis situation in the future.

In the wake of that financial crisis, comprehensive regulatory reforms were introduced across the globe in the form of Basel III standards.

The SBP duly implemented these standards, which significantly enhanced the solvency and liquidity cushions of the banks and improved their governance and operational capabilities.

The SBP’s stress-test results also indicate that the banking sector, in general, has sufficient capacity to maintain solvency against adverse economic conditions for a prolonged period of time.

All 33 scheduled banks in Pakistan are member banks of the deposit protection scheme under DPC.