Financial Times

Deposit insurance scheme for banks
By Duruthu Edirimuni
The Central Bank, despite reservations from bankers, is going ahead with a mandatory deposit insurance scheme aimed at providing a safety net for depositors.

The Financial Sector Cluster appointed by the National Council for Economic Development has finalised the initial draft in this proposal. "There is currently no adequate safety net in the banking sector, if banks are to be liquidated or collapse, such as the Pramuka case," Dr. Ranee Jayamaha, Deputy Governor, Central Bank explained adding: "The banks are not very happy, but they will have to comply with it (new scheme)."

Under the proposal, all banks would have to pay a premium to a deposit insurance scheme. Jayamaha said the amount to be charged from each bank will depend on the risks that each carries.

"We need the initial capital from the government," she said. But the regulator has not done any assessment on the exact amount needed to set up the scheme. "At the moment we have Rs. 160 million in the voluntary deposit scheme that is already in place and we will transfer this amount to the mandatory deposit scheme," she said.

Anil Amarasuriya, Managing Director and CEO, Sampath Bank said a mandatory deposit insurance scheme will protect depositors but the design of the scheme has to be looked into.

"The cost factor has to be carefully looked into, and an efficient and cost-effective way of implementing this scheme," he said, adding that ultimately it will be the customers who will absorb the cost when it gets transferred to the products the banks sell.

Many bankers feel the premium of the scheme, currently targeted at 0.5 percent of the total insurable deposits, is too high. Rienzie T. Wijetilleke, Chairman and Managing Director of HNB, said the bank has some reservations about the scheme, with regard to the regulatory framework and the cost-effectiveness of the scheme. "We are studying the proposal carefully and have made representations to the Sri Lanka Banker's Association (SLBA) regarding the scheme," he said.

SLBA Secretary General Upali de Silva said he has received all the bankers' concerns and ideas about the scheme and will be making representations based on them to the Central Bank.

"The foreign banks say that considering the global presence they have, it is absurd to charge 0.5 percent on their whole deposit base," he said. There is a dialogue between the regulator and the bankers on the amounts of the deposits to be insured. "They still have to decide on whether the deposits that are to be insured are below or above Rs. 100,000," he said.

The more established banks say that a differentiation between them and their smaller counterparts should be made, because the risks that they carry are much lower than those of the smaller banks.

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