Deposit insurance scheme to undergo revision for better compensation mechanism

• Around 76 banks and finance companies contribute annually to the fund
• As per latest available data, SLDILSS is now estimated to have grown to Rs.70bn 

Sri Lanka Deposit Insurance and Liquidity Support Scheme (SLDILSS) is slated to undergo certain revisions this year to expedite the payment of compensation to depositors of failed financial institutions. 

The scheme, which was set up in 2010 under the Central Bank in response to the collapse of Ceylinco group, has now grown roughly to a Rs.70 billion fund as the latest data available up to end-2019 showed a balance of Rs.62.7 billion, with the fund growing by Rs.11 billion in that year. 

Around 76 banks and finance companies contribute annually to the fund. 

In 2019, the scheme paid Rs.851.8 million as compensation to depositors of various finance companies, which closed shop largely due to mismanagement. 

As both the Central Bank and the government have grown tough dealing with financial institutions, which don’t play by the rules, the former said that it would also take measures under the ‘resolution framework’ to mitigate contagion effect of any failure of a financial institution and to stem its effects on the real economy. 

Even though the Central Bank gave certain regulatory reprieves to banks and finance companies on their capital and liquidity, they are promoting a sector consolidation plan with a view to reduce the number of banks and finance companies via a market-driven consolidation process. 

“A robust resolution framework is an essential part of a healthy financial system. 

The Central Bank has already taken measures to put in place such a framework with the aim of maintaining overall financial system stability,” Central Bank Governor Prof. W.D. Lakshman said last week.

In case of a failed financial institution, SLDILSS pays up to a maximum of Rs.600, 000 per depositor. 

A licensed commercial bank with a capital adequacy ratio of 14 percent or above is required to pay a premium of 0.10 percent of its total deposit liability to SLDILSS, barring a few ineligible deposit types annually, while those with below 14 percent capital adequacy are required to pay a higher premium of 0.125 percent on their total deposit liability. 

A licensed finance company is required to contribute 0.15 percent of its deposit liability annually to the fund.