Depositors to receive a maximum of Tk 2 lakh in the event of bank liquidation

The Bangladesh Bank (BB) has drafted a Deposit Protection Ordinance, now open for public feedback, outlining the creation of a Deposit Protection Authority within the central bank. This authority will manage a dedicated fund sustained by premiums collected from financial institutions.

Depositors exceeding the protection limit must claim the surplus amount through the liquidator.

The ordinance specifies a seven-day timeframe for payouts on secured deposits and grants tax exemptions on the fund’s earnings. Institutions failing to pay premiums on time may face penalties imposed by the central bank. Previously, BB Governor Ahsan H Mansur indicated that the ordinance aims to strengthen depositor protection.

This new regulation will replace the Bank Deposit Insurance Act-2000, which currently caps the maximum payout at Tk 1 lakh.

As per the draft, the government will implement a deposit protection system, with BB designated as the Deposit Protection Authority.

"The authority's functions will be distinct and independent from the Bangladesh Bank's usual regulatory, supervisory, and resolution-related duties," the draft states.

To ensure the effective execution of its responsibilities, BB will establish a dedicated "Deposit Protection Division" within its organizational framework.

A board of directors, comprising seven members and chaired by the BB governor, will oversee the deposit protection system. The board will review the maximum coverage limit at least once every three years, regulate investment policies, determine risk-based premium rates, and allocate funds for bank resolutions.

Deposit Protection Fund

Under the ordinance, the BB will establish a dedicated deposit protection fund maintained through a separate account.

The fund will consist of initial, annual risk-based, and special premiums from banks; penalties collected from member institutions; investment returns; adjusted funds from liquidated banks; and other designated contributions.

Primarily, the fund will be used to cover secured deposits during bank liquidations, though it may also extend financial aid for bank resolutions.

In case of a shortfall, BB will have the authority to levy special premiums on member institutions, seek financial support from the government or external sources, or secure government loans.

Additionally, a separate fund will be created to safeguard depositors of non-bank financial institutions.

The draft ordinance stipulates that, irrespective of the Income Tax Act, 2023, the Business Profits Act, 1947, or other existing tax laws, no income tax, surtax, or business profits tax will be imposed on the earnings, profits, or receipts of the Deposit Protection Fund.

Furthermore, if a member institution fails to pay the required premium within the specified deadline, BB will deduct the amount directly from the institution's current account and transfer it to the Deposit Protection Fund.

The central bank may also impose penalties on overdue premiums, applying an interest rate based on the higher of Bangladesh Government Treasury Bonds or Treasury Bills.