KATHMANDU: Good news for depositors. Their deposit in banks and financial institutions will be insured soon. Beema Samitee (Insurance Board-IB) is initiating the establishment of a strong mechanism to guarantee deposits with banks and finance companies.

IB will form a deposit insurance mechanism, said IB chairman Dr Phatte Bahadur KC. “We have finished two rounds of talk with stakeholders,” he added. Budget 2009-10 announced the formation of a mechanism to safeguard deposits up to Rs 2,00,000. The move was started after the failure of Nepal Development Bank Ltd last year.

IB, insurance companies, banks and finance companies have prepared a draft to secure small deposits and it is under discussion among stakeholders. “IB is welcoming comments and suggestions from the public also,” said IB spokesperson Shekhar Kumar Aryal. According to Aryal, the draft has four areas of concentration — protection of depositors, stability in the financial system, promotion of competitiveness in the financial sector and financial crisis rescue.

Deposit and credit guarantee mechanism was first established in the United States in 1934 to safe-guard deposits in recession. Currently, 103 countries are safeguarding deposits of small to big depositors through the mechanism. “There are different mechanisms as per the needs of different countries,” an officer of Deposit Insurance & Credit Guarantee Corporation Pvt Ltd said, “But it must be strong with regulatory powers.”

The Nepali private sector has been providing credit protection services to banks since 1995 but Deposit Insurance & Credit Guarantee Corporation Pvt Ltd’s business is limited to few banks due to lack of legal support. “If we want to cover all banks and financial institutions, a new mechanism must be backed by law,” the officer said.

Bhakti Bilash Pandey of Nepal Finance Companies Association called for representation of all stakeholders in the mechanism. “Nepal Rastra Bank (NRB), banks and financial institutions and the government must be on the board,” he said adding that without a guarantee from the government it cannot work properly. Devendra Gautam, assistant director of NRB, echoed Pandey and said such a mechanism cannot run without the government’s guarantee on deposits.

The draft has proposed Rs 2 billion capital base for the mechanism with Rs 1 billion paid-up capital. It has proposed to sell shares equal to Rs 710 million to 26 commercial banks, 10 per cent shares to the government and 10 per cent shares to NRB. The share of finance and insurance companies is yet to be decided.