Are Bank Deposits Over Rs500,000 In Pakistan Risky?

KARACHI – The State Bank of Pakistan (SBP) has unequivocally affirmed the safety of deposits, citing Pakistan’s robust banking system operating under a strong regulatory framework established by the central bank.

This statement from the SBP follows certain segments of the media implying that bank deposits exceeding Rs500,000 in Pakistan’s banking system might be unsafe, based on remarks made by Deputy Governor of the State Bank of Pakistan (SBP), Dr. Inayat Hussain, during a meeting of the Senate Standing Committee on Finance and Revenue.

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The SBP underscores that Pakistan’s banking system is well-capitalized, highly liquid, and profitable, with a low level of bad loans (net non-performing loans). It highlights that the sector recorded robust profitability of Rs284 billion in the first half of CY23, a remarkable 125 percent increase over the first half of CY22.

These increased earnings have bolstered banks’ capital and raised the Capital Adequacy Ratio (CAR) of the banking sector to 17.8 percent by the end of June 2023, compared to 16.1 percent at the end of June 2022. This is significantly higher than the SBP’s minimum regulatory requirement of 11.5 percent and the international standard of 10.5 percent. As a result, the banking sector is better equipped to withstand severe shocks.

However, the central bank clarifies that the Deposit Protection Corporation (DPC) offers insurance coverage of only up to Rs500,000 in the event of a bank’s bankruptcy.

The official statement highlights that the DPC’s insurance coverage of up to Rs500,000 per depositor aligns with global best practices and trends. Deposit protection is a crucial component of the safety net used by supervisory authorities and deposit protection agencies worldwide to safeguard depositors’ funds in the unlikely event of a bank failure. Depositors can access the insured amount immediately if a bank fails.

Nonetheless, the statement reassures that the remaining amounts of deposits are also recoverable through a regulatory-assisted process when a troubled bank is resolved. Currently, 94% of depositors are fully protected under the Deposit Protection Act of 2016.

In summary, the SBP emphasizes the soundness of Pakistan’s banking system and the added layer of protection provided by the DPC’s insurance coverage for depositors, making it a secure environment for bank deposits.