Dev banks, finance cos told insure small deposits

REPUBLICA

KATHMANDU, Feb 16: Nepal Rastra Bank (NRB) has made insurance of deposits up to Rs 200,000 mandatory for development banks and finance companies in order to safeguard savings of small depositors.

Issuing a circular to the financial institutions of category B (development bank) and C (finance companies), the central bank on Tuesday even instructed them to make all necessary arrangements to insure the small deposits at the Deposit and Credit Guarantee Corporation (DCGA).

“Under the directives, financial institutions will need to insure all deposits up to Rs 200,000 in both savings and fixed accounts,” said a source. The source told Republica that the central bank decided to enforce the insurance mandatory mainly after financial institutions continued to cold-shoulder the government´s call to voluntarily safeguard small depositors.

Currently, financial institutions, including development banks, finance companies, micro-finance development banks and co-operatives, have mobilized well over Rs 165 billion from the public. Of that, the central bank estimates the volume of small deposits (up to Rs 200,000) to be worth around Rs 20 billion.

“Basically these savings belong to low income groups. We have decided to make insurance mandatory largely to guarantee the depositors that they will get back their savings up to Rs 200,000 even if the financial institutions go bust,” said the NRB source.

The new directives, however, has left micro-finance development banks and co-operatives untouched even though the savings made in them belong to low-income groups.

Sources said that the instruction issued to category B and C was only the first good step. “It will be expanded to other financial institutions and the commercial banks as well,” said the source.

The central bank´s enforcement of compulsory deposit insurance has come at a time when experts have been expressing wariness over possible adverse impacts of real estate crash on the financial system, particularly institutions of category B and C.

Program to insure small deposits is not a new scheme though. The government had announced it in the budget for 2009/10, mainly after the collapse of Nepal Development Bank (NDB). Its implementation had hit snag mainly because of poor financial health of DCGC, the proposed insurer, and lack of clear operational strategy.

However, Ministry of Finance has recently finalized the draft of Deposits Guarantee Act 2011 in order to do away with its shortcomings. Under it, MoF has proposed to restructure the DCGC, raising its paid-up capital to Rs 2 billion in order to enable it to effectively deliver critical insurance services.

The draft act allows the central bank to fix and revise the level of deposits to be insured by the banks and financial institutions (BFIs). It seeks BFIs to register themselves at Deposit Guarantee Fund compulsorily, for which they will contribute 20 paisa per Rs 100 of deposit received.

Once into effect, the depositors who would lose their deposits with the bankruptcy of the bank or financial institution would get compensation after the seven days of submission of report to the Deposits Guarantee Fund by the liquidator.

The whole process of settlement would not take longer than one and a half months, according to the source.

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