By Azhar Razak
Sri Lanka’s commercial banks have commended the banking regulator, the Central Bank of Sri Lanka (CBSL) for deciding to implement a mandatory deposit insurance scheme from October 1, 2010 but are unsure whether they would pass the extra insurance cost to its clients.
With the implementation of the scheme, CBSL is of the view that public confidence will be enhanced, interests of small depositors with low financial literacy will be safeguarded, savings among small scale depositors will be encouraged, unauthorised deposit taking activities will be discouraged and the commitment of the government in the case of failure of a financial institution will be reduced.
“I think it is a good move as it had been in discussion for the last 15 years. Although the insurance premium is very minimal at 0.1% for banks, given the substantial amount of deposits accepted by each bank, it becomes another burden,” Sri Lanka Banks’ Association Secretary General, Upali de Silva told The Bottom Line.
However, he said that most banks have already thought of absorbing the cost although some others are still undecided.
“For example when a bank’s total deposit base is about Rs. 250 bn, they will have to pay around Rs. 200 m to the scheme, which is not easy,” he argued.
According to the CBSL, the members of the scheme is to comprise of all licensed banks and registered finance companies while the premium to be levied on eligible deposits is to range between 0.10% and 0.15% per annum required to be paid by member institutions on a monthly/quarterly basis.
“Such premia will be credited to a Deposit Insurance Fund which will be operated and managed by the Monetary Board of the Central Bank. However, such Deposit Insurance Fund will be distinctly separate from the Central Bank, and its liability will be limited to the extent of the fund balance,” CBSL Governor, Ajith Nivard Cabraal who spoke at a press conference said.
The fund, which is to be known as Sri Lanka Deposit Insurance Scheme (SLDIS) will get an initial capital of Rs. 1.1 bn from the Central Bank’s own reserves.
“All deposits excluding deposits of member banks and finance companies, the Government of Sri Lanka, shareholders, directors, key management personnel, other related parties, deposits held as collateral against any accommodation granted and deposits falling within the meaning of abandoned property in terms of the Banking Act and dormant accounts in terms of the Finance Companies Act, will be considered as eligible deposits under the scheme,” the governor said.
According to the SLDIS, in the event the licence or registration of a member institution is suspended or cancelled by the Monetary Board, depositors will be compensated up to a maximum of Rs. 200,000 per depositor. While member banks and finance companies will participate in this scheme on a mandatory basis from October 1, 2010, depositors will only be entitled to benefits after January 1, 2012.
Mandatory provision halved
In another move, the Central Bank said that it has decided to ‘gradually’ halve the rate of a compulsory general provision it had earlier required licensed banks to maintain. CBSL reduced the general loan loss provision of 1% against performing loans and advances and credit facilities in the special mention category from the current 1% to 0.5% by December 31, 2011.
“Accordingly, Banks would now be able to reduce the existing general provision requirement of 1% to 0.5%, at a rate of 0.1% per quarter, over each of the five quarters commencing with the quarter ending December 31, 2010,” the CBSL announced.
It added the general provision introduced in November 2006 had brought about an extra capital cushion during the period of financial and economic stress in the recent past, and had the desired effect on the Sri Lankan economy.
“However, the careful assessment of the current financial landscape at present, suggests that the risk of any potential downturn in the domestic and global economic activities has substantially abated. Further, the benefits of the improved macroeconomic fundamentals have provided the space for the domestic economy to grow rapidly in a stable environment. At the same time, banks too have been improving their asset quality over the past few months, which outcome need now be supported by the encouragement of further good quality credit to spur economic growth,” CBSL said in a recent press release.
Sri Lanka’s commercial banks have commended the banking regulator, the Central Bank of Sri Lanka (CBSL) for deciding to implement a mandatory deposit insurance scheme from October 1, 2010 but are unsure whether they would pass the extra insurance cost to its clients.
With the implementation of the scheme, CBSL is of the view that public confidence will be enhanced, interests of small depositors with low financial literacy will be safeguarded, savings among small scale depositors will be encouraged, unauthorised deposit taking activities will be discouraged and the commitment of the government in the case of failure of a financial institution will be reduced.
“I think it is a good move as it had been in discussion for the last 15 years. Although the insurance premium is very minimal at 0.1% for banks, given the substantial amount of deposits accepted by each bank, it becomes another burden,” Sri Lanka Banks’ Association Secretary General, Upali de Silva told The Bottom Line.
However, he said that most banks have already thought of absorbing the cost although some others are still undecided.
“For example when a bank’s total deposit base is about Rs. 250 bn, they will have to pay around Rs. 200 m to the scheme, which is not easy,” he argued.
According to the CBSL, the members of the scheme is to comprise of all licensed banks and registered finance companies while the premium to be levied on eligible deposits is to range between 0.10% and 0.15% per annum required to be paid by member institutions on a monthly/quarterly basis.
“Such premia will be credited to a Deposit Insurance Fund which will be operated and managed by the Monetary Board of the Central Bank. However, such Deposit Insurance Fund will be distinctly separate from the Central Bank, and its liability will be limited to the extent of the fund balance,” CBSL Governor, Ajith Nivard Cabraal who spoke at a press conference said.
The fund, which is to be known as Sri Lanka Deposit Insurance Scheme (SLDIS) will get an initial capital of Rs. 1.1 bn from the Central Bank’s own reserves.
“All deposits excluding deposits of member banks and finance companies, the Government of Sri Lanka, shareholders, directors, key management personnel, other related parties, deposits held as collateral against any accommodation granted and deposits falling within the meaning of abandoned property in terms of the Banking Act and dormant accounts in terms of the Finance Companies Act, will be considered as eligible deposits under the scheme,” the governor said.
According to the SLDIS, in the event the licence or registration of a member institution is suspended or cancelled by the Monetary Board, depositors will be compensated up to a maximum of Rs. 200,000 per depositor. While member banks and finance companies will participate in this scheme on a mandatory basis from October 1, 2010, depositors will only be entitled to benefits after January 1, 2012.
Mandatory provision halved
In another move, the Central Bank said that it has decided to ‘gradually’ halve the rate of a compulsory general provision it had earlier required licensed banks to maintain. CBSL reduced the general loan loss provision of 1% against performing loans and advances and credit facilities in the special mention category from the current 1% to 0.5% by December 31, 2011.
“Accordingly, Banks would now be able to reduce the existing general provision requirement of 1% to 0.5%, at a rate of 0.1% per quarter, over each of the five quarters commencing with the quarter ending December 31, 2010,” the CBSL announced.
It added the general provision introduced in November 2006 had brought about an extra capital cushion during the period of financial and economic stress in the recent past, and had the desired effect on the Sri Lankan economy.
“However, the careful assessment of the current financial landscape at present, suggests that the risk of any potential downturn in the domestic and global economic activities has substantially abated. Further, the benefits of the improved macroeconomic fundamentals have provided the space for the domestic economy to grow rapidly in a stable environment. At the same time, banks too have been improving their asset quality over the past few months, which outcome need now be supported by the encouragement of further good quality credit to spur economic growth,” CBSL said in a recent press release.
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