The safety of deposits in rural banks

Recent rumours making the rounds that an impending regulatory clean -up of rural and community banks will create major problems for depositors with such institutions have been so intense and potentially damaging that both the ARB Apex Bank and the Bank of Ghana itself have seen fit to issue official rebuttals. They are correct in doing so.

While it is still unclear where the rumours originated from, they are clearly malfeasant, aimed at encouraging panic withdrawals from RCBs in general; interestingly the rumours have made no attempt to identify which particular RCBs out of the over 140 currently licensed to operate would be affected by the alleged impending regulatory actions.

The banking public however should first and foremost consider that the ongoing restructuring of the financial intermediation industry, which has already been nearly concluded with regards to the universal banking sector and is now being implemented with regards to the micro-finance sector, has the preservation of deposits as its foremost priority. No individual, enterprise or institution have lost their deposits (unless of course they cannot be verified or have been offset against indebtedness) and this strategic objective will be pursued with regards to the other genres of deposit takers too, RCBs inclusive, no matter how much it will ultimately cost the state.

This is not a permanent arrangement; going forward, deposit insurance with limited cover will be applied rather than the state’s guarantee of all deposits. But the ongoing regulatory exercise, which intends to effectively reboot the entire financial intermediation industry does guarantee all deposits of duly licensed institutions, including those being forcibly liquidated.

Thus, the advice being given to depositors by the ongoing rumours is moot in practical terms as well as malfeasant.

But even without the state’s guarantees, the impending regulatory clean-up of the RCB sector will not result in anywhere near the kind of widespread melt down that the microfinance institutions (MFI) sector has just experienced.

This newspaper recently carried a front page story based on data contained in an internal ARB Apex Bank report, that revealed that only four out of the over 140 RCBs currently licensed are terminally distressed. While only 29 are so strong that no regulatory intervention whatsoever is required, nearly all of the rest are in financial positions where such intervention – ranging from recapitalization to straight forward intensified debt recovery – can restore them to full financial solidity. Instructively that report was not meant for the public in the first place so there is no question of regulators massaging the data to retain public confidence in the RCB industry.

To be sure, it is not certain that government and its regulatory institutions will opt for such interventions over compulsory liquidation in all such cases. In some, liquidation may be the best option. However even where this is the case, depositors will retrieve all their deposits, net of any indebtedness they have with the RCBs where their deposits are held.

Thus in the overwhelming majority of licensed RCBs, depositors have nothing to worry about; a safety net will be put in place, even though in most cases, it will not even be needed.

Therefore the ongoing rumours should be ignored; but not the rumour mongers themselves, if they can be identified. Deliberate malfeasance should not be tolerated during the ongoing efforts to clean up the financial solidity of Ghana’s financial intermediation industry.