Risks persist but Cabraal says CB is not a guarantor of deposits

By Deepal V. Perera

Governor Nivard Cabraal yesterday emphasised that the Central Bank was not a guarantor of public deposits but a regulator of financial system and admitted there was an element of risk which is however minimised via stringent supervision.

The Governor was apparently responding to JVP raising alarm bells over the security of public deposits in financial institutions after Central Bank print advertisements listing registered institutions had a rider saying it does not guarantee the safety of deposits. The advertisement also cautioned the public to protect their hard earned money without depositing them in unauthorised or risky institutions and always remember the past incidents of default of repayment of deposits by such institutions.

This rider however exposed the Central Bank to accusation that some of the institutions that defaulted were indeed registered and licensed prior to it.

In urgent media conference on licensed and registered financial institutions the Central Bank yesterday clarified its stance.

“Investors should take due care when depositing money in the country’s financial system and the role of the Central Bank is not to act as guarantor on the investments, but as a regulator closely supervising the financial institutions in the country,” Governor Cabraal said.

 “I must clarify here that there has been no change in the policy of the Central Bank. It always keeps close supervision on every registered bank and financial institution in the country.

 This supervision structure makes the management structure of these institutions higher than that of normal businesses,” he noted.



However, Cabraal pointed out that one must realise there is a certain degree of risk involved when depositing money in these institutions or any other businesses.

“Due to the stringent supervision carried out by us on these institutions, we have managed to reduce these risks to a certain level but not 100%. There is no Central Bank anywhere in the world or any government anywhere for that matter that acts as a guarantor in relation to deposits in financial institutions. However, if problems arise in financial institutions that are registered as banks, the Central Bank as a regulator has a responsibility to intervene in order to correct the situation,” he said.

Due to this right of supervision and responsibility, it can enforce proper management of financial institutions, which in turn ensures security of the investments. Cabraal asserted: “One should not misunderstand this supervision right and the responsibility as some kind of guarantor status offered by the Central Bank.”

Cabrral said that the Central Bank has been informing people through the mass media over the years that they should take extra care when depositing monies as there is certain degree of risk involved in making such deposits.

“Financial institutions in the country and their capacity differ, due to many reasons such as capital, liquidity, loans, management capability and experience. Besides, due to various requirements, they also offer different interest rates on deposits. Therefore people have a choice to make their deposits under differing interest rates which contain a certain degree of risk,” he added.

Cabraal said that the only financial instrument for which the Government acts as a guarantor to the general public is Treasury Bills and Bonds.

Despite these instruments featuring low interest rates, they come with a guarantee from the Government.

From this month onwards, the Central Bank and the Government began offering all registered banks and financial institutions a deposit insurance scheme. Accordingly, by 2012, all deposits under

Rs. 200,000 would receive deposit insurance, providing further security.

The Central Bank Governor also said that in order to ensure more accountability and better standards of supervision, it had taken steps to convert all financial institutions into public quoted companies by 2012. By doing so, all the banks and financial institutions would be managed under more stringent standards, ensuring better corporate governance and accounting and auditing standards.