Nepal Rastra Bank governor Bijaya Nath Bhattarai has said that bank deposits will be insured by the Deposit and Credit Guarantee Corporation (DCGC) to protect depositors, however, its capability is doubtful because of its limited capital base and untrained lower-level employees.As the government through the budget for the current fiscal year made a compulsory provision of deposit insurance up to Rs. 200,000, governor Bhattarai commented that NRB was of the mind to start with the existing institution that was also meant to insure deposits. The DCGC has, however, never insured deposits although the government introduced policies even in the past.
Among the shortcomings of the DCGC is its limited capital base. Its paid-up stands at just Rs. 70 million and its authorized and issued capital at just Rs. 100 million each.
Its guarantee for credit has also been decreasing over the last few years after NRB phased out priority sector loans although the DCGC used to guarantee credit for the priority sector. Its guarantee amount declined by 41.32 percent in the fiscal year 2007/08 against the previous year.
NRB officials and bankers agree that there should be a financially strong institution to insure deposits. A senior NRB official said that it would be a joke to dare operating an institution that insures deposits if the institution does not have at least Rs. 10 billion in paid-up capital.
According to officials, there has been talk about starting a deposit insurance scheme through the DCGC with around Rs. 500 million. The main motive of deposit insurance is to return the deposit of ordinary depositors through the deposit insurer if the financial institution fails to return the deposit like in the case of Nepal Development Bank. The government has also not allocated a big budget for the purpose.
Sashin Joshi, president of the Nepal Bankers' Association, said that a financially strong institution was a must as the estimated amount of deposits worth Rs. 200,000 in the commercial banks would total Rs. 160 billion. There are deposits worth Rs. 550 billion in commercial banks, according to NRB.
Another problem with the DCGC is its untrained and small number of employees. There are just 17 employees with one general manager, one deputy general manager, two eighth grade employees, one seventh grade employee, four sixth grade employees, a computer operator and four chief assistants.
The number of employees in the DCGC was downsized through the Voluntary Retirement Scheme this year from 25 employees.
It’s general manager Chandra Man Maleku said that no employee of the DCGC was trained in deposit insurance. There is also no technology to deal with deposit insurance with the DCGC.
There is also no legal provision regarding deposit insurance in the country. The DCGC is being run under the Company Act. The proposed draft of the new bank and Financial Institution Act has proposed deposit insurance up to Rs. 100,000, according to an NRB official.
According to the draft, the insurer should pay back against the deposits up to Rs. 100,000 as the first priority. The DCGC has also presented a draft act to the government with the provision of deposit insurance last April, said Malegu.
The NRB official said that the deposit insurer must play the role of regulator as well given that it should be liable to pay in case the financial institution fails. "That's why, such institutions cannot be run from the private sector," said the NRB official.
NBA president Joshi said that there were two types of models in practice internationally, one is creation of an independent body with regulatory powers and another is forming a subsidiary of the central bank.
According to NRB officials, it is doing its homework to form a committee to study the matter. NRB also urged the central bank on Sunday to start deposit insurance as per the international norms.
Source: Kantipur
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