DPC starts reimbursing defunct SME banks’ depositors

KARACHI: The Deposit Protection Corporation (DPC), a subsidiary of the State Bank of Pakistan (SBP), has initiated reimbursements to depositors of the defunct SME Bank, aiming to protect depositor interests and maintain financial system stability, DPC's annual report showed on Friday.

The report for the year 2022–2023 satted that in compliance with the Single Depositor View (SDV) database provided by SME Bank, it began paying SME Bank periodic reimbursements against its payouts to eligible depositors up to the protected amount.

“The SDV database played a crucial role in determining eligibility and payment of the total liability of the SME Bank toward its depositors. Due to the availability of the SDV database, the turn-around-time for reimbursing eligible depositors has been shortened,” it said.

“The payouts are made based on claims received from SME Bank i.e. as and when a customer approaches the bank for withdrawal, the outstanding balance in his/her account is paid out by SME Bank and the protected deposit amount i.e., up to Rs500,000, is claimed from DPC which is subsequently reimbursed to SME Bank after due verification,” it added.

While the failure of a small bank can be distressing for its depositors, the presence of efficient and well-functioning deposit insurance serves as a financial safety net, it noted.

Meticulous planning, quick action, and timely and clear communication by stakeholders, including DPC, play a pivotal role in ensuring the stability and integrity of the banking system. Nonetheless, there are challenges in the process that require ongoing adaptation, especially in a world of ever-evolving financial products and economic conditions, according to the DPC report.

“The efficient payment and reimbursement to protected depositors of SME Bank can be quoted as a test case in safeguarding both the interests of the individual depositor and the broader financial system.”

Last year, owing to insufficient capital and liquidity, the government approved a winding down plan for the SME Bank as proposed by the SBP to ensure that no depositor is adversely affected by the closure of the bank.

The SBP in May 2023 declared SME Bank as a failed institution. Consequently, the DPC made a public announcement informing eligible depositors of SME Bank to approach the bank to receive their due balances.

The report showed that the DPC provides deposit protection to more than 98 percent of the total 73 million depositors of scheduled banks in Pakistan.

According to the report, deposits with DPC’s member banks continued to grow 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 during the same period and stood at Rs14 trillion by the end of June 2023. However, the year-on-year trend revealed a slowdown in the pace of deposit mobilization during FY2023 as compared to FY2022.

The growth of deposits decelerated to 12 percent during FY2023 from 15 percent witnessed during the previous year. The increase in total deposits can be attributed to factors such as the higher rate of return offered in the wake of a tighter monetary policy stance and the expansion of banks’ branch network, the report noted.

While the deceleration of deposit mobilization may be accredited to macroeconomic uncertainty, including inflationary pressures, a slowdown in the inflow of foreign remittances by the Pakistani diaspora could be another factor for the deposit deceleration, it said.

As of June 30, 2023, 98.9 percent of total depositors of conventional banking and 98.7 percent of total depositors of Islamic banking are eligible for deposit protection in case of a bank failure. In terms of value, 52 percent of conventional banking and 63 percent of Islamic banking deposits are eligible for deposit protection, it said.

The percentage of eligible depositors in both conventional and Islamic banking institutions shows the distribution of deposits in Pakistan’s banking industry, where large amounts of deposits are being held by fewer depositors.

“Moreover, the number of eligible depositors considered together with the value of eligible deposits reflects our standing with the accepted principle for deposit insurance that calls for protecting the majority of depositors while leaving a significant amount of deposits exposed to market discipline, the report said.

This also exhibits the fact that the coverage of our deposit protection mechanism is more centered towards smaller and financially unsophisticated depositors, it added.

“Of the eligible deposits, based on data as of June 30, 2023, 13 percent and 10 percent of conventional and Islamic banking deposits, respectively are fully protected. Such depositors have outstanding balances less than or equal to the coverage amount of up to PKR 500,000 and maybe reimbursed their full deposits from DPC in case of bank failure.”