सिंहदरबार संवाददाता
Kathmandu. The financial crisis that began in 2008 after 25 banks, including Lehman Brothers Bank, which has been providing financial services in the United States since 1847, collapsed, sparking a global economic recession. After the collapse of Silicon Valley Bank, Signature Bank, and First Republic Bank in the United States just a few months before 2023, what will happen to the deposits kept by savers in banks? The world is starting to be concerned about what will happen now. Although the financial condition of banks in Nepal is said to be healthy at the moment, it remains to be determined what its impact will be in the context of increasing challenges to the banking system due to the impact of the financial crisis.
As there are many risks in the banking business, there is a possibility that weak financial institutions in the system may dissolve. However, although there has been no major example of bank collapse in Nepal in the past, the country’s first development bank, Nepal Development Bank, has already been liquidated 15 years ago. Since banks and financial institutions are the guardians of customer deposits, they should be in a position to return customer deposits at any time.
Currently, some cooperative institutions in the financial system have been closed down by the directors of the institutions and fled, or even the existing institutions have gone bankrupt without being able to return the money of the savers. Nowadays, we often hear news of people having to bear financial risks when the cooperative institutions are unable to return the amount deposited by the savers.
There is a legal provision in the Bank and Financial Institutions Act that banks must provide deposit insurance, i.e. deposit insurance, so that the customer’s money does not sink if the bank goes bankrupt for any reason and the customer cannot repay the deposit they have deposited in the bank when they ask for it. Since banks provide mandatory deposit insurance of the deposit amount up to a certain limit, the customer does not have to pay any fee for this.
What are banks and financial institutions?
Banks and financial institutions are financial institutions that deal in money and credit. That is, institutions that deal in money and credit are called banks and financial institutions. Banks and financial institutions accept deposits from savers scattered across small units in the economy and also provide interest to the depositors at a fixed rate.
Banks and financial institutions provide loans to individuals and institutions in need of loans at a fixed interest rate, with or without collateral. An institution that collects people’s savings, pays money, gives loans to people, issues guarantees, transfers money, exchanges currency, etc. is called a bank and financial institution. According to the Banking and Financial Institutions Act, 2073, it is said that a bank or financial institution that has obtained a license to conduct banking and financial transactions in accordance with this Act should be considered.
Currently, out of the 107 banks and financial institutions licensed by Nepal Rastra Bank, all 20 commercial banks of Class A, all 17 development banks of Class B, and all 17 finance companies of Class C, and 2 microfinance institutions of Class D provide deposit insurance.
Deposit protection is the act of providing protection to the amount deposited up to a certain limit in savings, current, call and fixed deposit accounts opened in the name of natural persons in banks and financial institutions licensed by the National Bank, in case the institution is dissolved and cannot be returned.
Deposit protection is the belief that in the event that banks or financial institutions are dissolved for any reason, the amount deposited by the customer in the bank or financial institution should not be lost due to hardship and hard work. Deposit protection also protects the customer. While the responsibility of protecting the customer who uses financial services lies with the concerned financial institution, the task of policy formulation and monitoring is also the responsibility of the regulatory body and the state.
Why do banks or financial institutions go bankrupt?
Banks go bankrupt when their liabilities exceed their assets. Banks or financial institutions have gone bankrupt due to indiscriminate lending, failure to maintain institutional good governance, failure to manage liquidity, poor risk management, unhealthy competition, etc.
Under what circumstances are banks or financial institutions liquidated?
In Nepal, if a bank or financial institution is not operating smoothly, or if it is found to be acting in a way that is detrimental to shareholders or depositors, the Nepal Rastra Bank suspends the board of directors of such an institution and takes it under its control to carry out reforms. If there is no improvement even after this, the National Bank may initiate compulsory liquidation proceedings against such banks and financial institutions before the court.
If the deposits or other financial obligations due to customers cannot be paid on time, if the capital fund is negative, if liquidation is recommended based on the inspection report of the National Bank, if there is a significant shareholder or officer who repeatedly obstructs the rights and interests of depositors or the development of the financial system, if there is a repeated violation of the instructions given by the National Bank, and if there are other circumstances determined by the National Bank to be liquidated, the National Bank will proceed with the process for the liquidation of banks and financial institutions.
How is the money returned if banks or financial institutions go bankrupt?
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## The court shall order the National Bank to recommend the appointment of a liquidator to initiate the process of taking a bank or financial institution into compulsory liquidation, and the court shall appoint one liquidator from among those recommended. The liquidator shall prepare an estimate of the assets, liabilities or potential liabilities of the bank or financial institution to be liquidated and sell them at auction.
## From the proceeds of such sale, the liquidator shall pay the liabilities in accordance with the priority order as per the Act. First, the expenses incurred for compulsory liquidation shall be paid. Second, the deposits covered by the deposit insurance shall be returned. In Nepal, deposits up to five hundred thousand rupees are currently insured, so deposits of natural persons up to five hundred thousand rupees are returned. In the third, the remaining deposits are returned after the first two liabilities are paid.
In this way, if the remaining amount is paid for other deposits, the salary, allowances, other liabilities, the amount due to the government, the National Bank, the remaining fees to be paid to other banks or financial institutions, the amount for valuation, and the payment of other creditors or other claims will be made on a priority basis. In this way, if the remaining amount is paid after all liabilities are paid, the amount is paid to the shareholders by Damashahi.
Status of Deposit Insurance (Insurance) in Nepal
In Nepal, deposits of banks and financial institutions are insured (insured). The Deposit and Credit Insurance Fund Office, established with 90 percent share investment of the Government of Nepal and 10 percent share investment of Nepal Rastra Bank, has been providing deposit insurance. This fund has also helped in the development of entrepreneurship by taking some premium for the small loans disbursed by banks and financial institutions.
B. S. 2079 From 1st of Shrawan, the limit of bank deposit insurance in the name of natural persons has been increased to five lakh rupees. In Nepal, if the amount in the savings, current, call and fixed deposit accounts of banks and financial institutions in Nepal is up to three hundred thousand, the Fund will pay the amount up to five hundred thousand rupees, i.e. up to the protection limit, if the depositor is unable to return the amount due to problems up to the protection limit.
The Fund is protecting deposits from financial institutions by charging an annual premium of 0.16 percent. This premium is being paid by financial institutions on a quarterly basis. The Fund. In FY 2078/079, it has protected deposits worth eight hundred and seventy-nine billion rupees of 36 million, 143 thousand depositors of 62 banks or financial institutions, while in FY 2079/080, it has protected deposits worth 12 hundred and thirty-two billion rupees of 41 million, 80 thousand depositors of 56 banks or financial institutions.
Similarly, in the FY 2080/081, 56 banks or financial institutions have insured deposits worth Rs. 1430 billion of 45.795 million depositors. This shows that the level of insurance of deposits of banks or financial institutions is increasing. The funds of savings and credit cooperatives have not been providing insurance of deposits.
What is the international practice in deposit insurance (insurance)?
The work of insurance of deposits began in the 60s in neighboring India. The Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly owned subsidiary of the Reserve Bank of India, has made arrangements to insure deposits up to Rs 5 lakh.
As regional rural banks and cooperative banks were dissolved, the DICGC has stated that it has paid deposit insurance amount of Rs 7248 crore to depositors with deposits up to Rs 5 lakh from December 2021 to March 2022.
Indian Prime Minister Narendra Modi has said that 98 percent of the deposits worth Rs 76 lakh crore in India through the DICGC have been protected through the deposit insurance program.
In the United States, the Federal Deposit Insurance Corporation has been providing deposit insurance services since 1933. The corporation currently insures deposits of up to $250,000 opened in the name of natural persons. Since 2002, the International Association of Deposit Insurers has been working to share expertise in deposit insurance services around the world and make them more effective. This organization has 94 member countries, but Nepal has not joined it.
Finally,
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## Deposit insurance protects up to five hundred thousand rupees in the name of natural persons. This has certainly made the money of small and medium depositors safe, and the customer does not have to bear any financial costs for this. This has increased the trust of the general public in financial institutions. Although cooperatives are also collecting savings from the general public in the system, only 56 banks and financial institutions licensed by Nepal Rastra Bank are currently involved in deposit protection.
Financial transactions in cooperatives are increasing, and sometimes news is heard of cooperative directors closing down the organization and fleeing. This has added a challenge to maintaining stability in the financial system. In such a situation, it is necessary to protect the deposits of customers in cooperatives. If cooperatives that collect savings from the general public can be included in the deposit protection program, customer protection will increase and the general public’s trust in the financial system will increase. This will attract people to the formal economy and contribute to economic development.
(The author is the Assistant Manager of the National Commercial Bank, courtesy of Tax Souvenir 2081)
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