Core Principles and Global Practices of Deposit Insurance Scheme: A Comparison of the Trend with the Nepalese System

Abstract

Banks are in the business of assuming and managing risks and by virtue of this they are vulnerable to liquidity and solvency problems. Since, banks rely on customer deposit that can be withdrawn on little or no notice, they are prone to bank-runs, where depositors seek to withdraw funds quickly ahead of the possible bank insolvency. Policy makers thus maintain deposit insurance scheme to protect depositors and to give them comfort that their funds are not at risk.

Deposit insurance or deposit guarantee, as known in Nepal, has been recently introduced by the government of Nepal. While introducing it a thorough study does not seem to have been conducted and government or the central bank seem to have introduced it all of a sudden. There are a lot of contentious issues that even the government agencies seem not be clear of. This research, thus, seeks to find out the basic principles of effective deposit insurance system, the practices and trend in the different countries throughout the world, with emphasis on the South Asian countries, and compare it with the Nepalese context. The research also explores and highlights the major contentious issues in the Nepalese case. The primary data of this research is drawn from existing literature on deposit insurance as well as website of central banks and governments of different countries. Thus, it is a Review Research.

It was found that there are several issues in the Nepalese deposit insurance scheme that need to be addressed based on best international practices and based on basic principles of deposit insurance system. As per the core principles of an effective deposit insurance scheme, policy makers should prepare a way out for the Nepalese deposit insurance system. Based on the findings of this research, it is recommended that at least following improvements need to be done: Deposit and Credit Guarantee Corporation of Nepal be provided explicit backing from the Central Bank and/or Government of Nepal; public awareness campaign be initiated for enhancing the effectiveness of the system; deposit refund period in the case of bank’s liquidation be reduced to around 30 days to prove the efficacy of the system; depositors not be made a scapegoat and cent-percent guarantee of deposits be made; function of both deposit and credit guarantee not be provided to a same institution rather two separate entities be made; and deposit insurance premiums be revised. Besides, it would be better to improve the supervisory capacity of the central bank since with the introduction of deposit insurance scheme banks are prone to increased risk; possibility of co-insurance should be looked after; and possibility of establishing Asset Management Company should also be explored.

Since, one of the major issue of controversy seems to be the premium rate, which is very high compared to other neighboring countries as well as compared to developing and under-developed countries, it need to be revisited. In this context, this research proposes that the policy makers and/or regulators should try to make differential premium rates as follows: Class A: 0.05%; Class B: 0.10%; Class C: 0.20%; Class D: 0.10%. Or if it is not possible, a flat rate of 0.10% will be appropriate for the time being.