Pakistan’s deposit protection scheme meets global benchmark

KARACHI: The deputy governor of the State Bank of Pakistan (SBP) Dr Inayat Hussain said on Wednesday that depositors in Pakistani banks are legally insured for amounts up to 500,000 rupees ($3,000) and that 94 percent of the depositors are now fully protected by the deposit protection system.

What is the DPC?

All scheduled banks in Pakistan are member banks of its deposit protection scheme. The DPC provides coverage of up to Rs500,000 per depositor per bank for the domestic operations of member banks. The previous limit was Rs250,000.

The DPC commenced its operations in 2018 as a subsidiary of the State Bank of Pakistan. It is mandated to compensate bank depositors for their losses in the event of a bank failure, as provided in the Deposit Protection Corporation Act, 2016.

Does the legal protection meet global standards

According to the SBP, which states that it should be between 1-2 times GDP per capita, it is adequate. About 1.3 is the current ratio.

Resilience of the financial system The majority of deposits at banks are protected by deposit insurance in the event of a bank failure, showing the resilience of the financial system.

In keeping with the increase in total deposits, eligible deposits at member banks of the DPC continued to grow, according to the SBP’s DPC annual report for 2021–2022.

As of June 30, 2022, bank deposits in Pakistan increased 15.2 percent year-on-year to Rs22.8 trillion. The eligible deposits rose 11.4 percent to Rs12.2 trillion.

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

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

The effectiveness of SBP’s safety net frameworks is reflected by 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 fully protected value of deposits in both conventional and Islamic banking institutions shows distribution of deposits in the banking industry, where large value of deposits are held by numerically fewer depositors.

The combination of number and value of eligible depositors is in line with internationally accepted principles for deposit insurance that calls for providing protection to majority of depositors while leaving significant number uncovered to promote market discipline.