KARACHI: The government is reviewing a law drafted by the State Bank of Pakistan (SBP) to protect bank depositors against the losses in case of bankruptcy of a financial institution, a central bank’s top official said on Tuesday.

“Presently, the ministry of law is reviewing the proposed [legislation] before presenting [it] to the parliament. After enactment… the process for establishment of deposit protection corporation (DPC) will be initiated,” said Abid Qamar, chief spokesman at SBP.

“The SBP has formulated the draft legislation… to institute a deposit insurance regime in Pakistan for the protection of small depositors and ensuring financial stability in the country.”

Qamar said the corporation will safeguard the interest of the depositors “by compensating them to the extent of protected amount the losses that may incur due to failure of a member institution/bank.”

He said a provision for the purpose has been included in the draft SBP act amendments. The national assembly passed “The State Bank of Pakistan (Amendment) Bill 2015” in August this year.

The SBP formulated the said draft legislation for the creation of deposit protection fund in 2008. However, this law could not be presented before the parliament.

Qamar said the corporation, a subsidiary of SBP, will charge a periodic premium from the member intuitions, which will be a regular source of the corporation’s income. “After its incorporation, the DPC will decide the amount of insurance premium to be collected from member banks, the limit of deposit coverage, and criteria for deposit which all will be covered under the regulations to be issued by the corporation.”

All the scheduled commercial banks regulated by the SBP will be the members of the corporation.

The protection of small depositors through strengthening financial stability has been on the central bank top priority for the past few years.

Bankers said this law is a part

of the regulator’s ongoing efforts to ensure sound central banking supervisory practices with regard to strengthen the financial system stability regime by implementing a formwork for resolving distressed banks and for supervising systemically important financial institutions.

They said this is also in compliance with the implementation of Basel III on banking supervision framework and minimum capital requirement for banks.

Improving crisis management, dealing with weak institutions and operationalising the deposit insurance scheme initiatives are the main objective of the recently launched SBP strategic plan (2016-2020) also known as SBP vision 2020.

A former central bank governor termed the latest development as positive.

The ex-governor, however, said the central bank should come up with strong regulations to let the banks resilient.

“It means the banks will give a kind of assurance to the depositors that their cash in bank accounts is guaranteed,” he said.

Another banker said the people confidence on the State Bank is still intact.

The banker said the recent KASB Bank’s crisis that left depositors in concerned about their deposits encouraged the central bank to introduce deposit guarantee scheme. BankIslami took over the major shareholdings in the distressed bank.

