SBP says 95pc bank depositors under DPC ‘fully protected’

KARACHI: The majority of deposits at banks are protected by deposit insurance in the event of a bank failure, the central bank said on Friday, showing resilience of the financial system.

Eligible deposits at member banks of the Deposit Protection Corporation (DPC) have continued to grow, according to the State Bank of Pakistan's DPC annual report for 2021–2022. As of June 30, 2022, bank deposits in the country increased 15.2 percent year-on-year to Rs22.8 trillion. The eligible deposits rose 11.4 percent to Rs12.2 trillion.

“The total number of depositors that falls under DPC’s protection scheme goes beyond 98 percent and out of these approximately 95 percent of the depositors are now fully protected,” the report said.

The high scope of coverage signified effectiveness of the protection offered by the DPC, it added.

As per the report, deposit growth rose due to a number of factors such as expansion in the branch network, higher home remittances inflows from Roshan Digital Account (RDA), and a higher rate of return. During the last fiscal year, a sharp decline in Covid-19 cases also led toward normalcy in business routines and supported the growth in deposits.

“In value terms, based on data as on June 30, 2022, 16.0 percent and 12.0 percent of conventional and Islamic banking eligible deposits, respectively, are fully protected. Such depositors have outstanding balances equal to or less than the coverage amount of Rs500,000 and will receive their full deposit amount from DPC in case of bank failure,” it said.

The report expects the DPC to carry on its practice of reviewing and revision of coverage levels in the future also, to keep it in line with local macro-economic realities and global practices.

The effectiveness of the SBP’s safety net frameworks is reflected by the long-standing financial stability of the banking sector, which presents quite satisfactory financial soundness indicators and holds sufficient resilience to withstand macroeconomic shocks, according to the report.

The sector’s capital adequacy ratio in June 2022 stood at 16.1 percent – against the minimum regulatory requirement of 11.5 percent and global standard of 10.5 percent, while a key risk indicator i.e. non-performing loans ratio – 0.7 percent (net of provision) – remains at one of its lowest levels in last two decades.

The percentage of the fully protected value of deposits in both conventional and Islamic banking institutions shows the distribution of deposits in the banking industry, where the large value of deposits is held by numerically fewer depositors. The combination of the number and value of eligible depositors is in line with internationally accepted principles for deposit insurance that calls for providing protection to the majority of depositors while leaving a significant number uncovered to promote market discipline.

“This also exhibits the fact that coverage of the Deposit Protection Scheme (DPS) is more centered towards smaller or financially unsophisticated depositors,” the report noted. As the premium charged to banks by DPC is linked to their total eligible deposits, thus the increase in the premium collection directly corresponds to growth in such deposits of the member banks. Further, as conventional banking has a lion’s share in the overall size of the industry’s assets and liabilities etc., the deposits of conventional banks and contribution of premium therefrom are much larger than those of Islamic banking institutions (IBIs).

However, as the pace of growth in Islamic banking is higher than that of conventional banking, therefore, the premium collection from IBIs has recorded a higher corresponding increase than premium collection from conventional banks, according to the report.