The banking system is poised to undergo its largest change in years this August with the launch of the new Deposit Insurance Agency.

Since 1997, depositors have had their funds fully guaranteed with the backing of the Bank of Thailand's Financial Institutions Development Fund.

But the launch of Deposit Insurance Agency will replace the blanket guarantee with a limited insurance programme that will cap coverage to just one million baht within five years, a limit authorities say is sufficient to cover up to 97% of all deposit accounts in the system.

At the same time, the programme will help introduce market discipline into the financial system, as banks will no longer have the blanket state guarantee to rely upon in competing for deposits.

Product pricing is also expected to become more varied and sophisticated, particularly among smaller banks lacking the scale and scope of their larger competitors.

Limited deposit protection also means that consumers will have a greater need to do their homework about the stability of a given institution.

Authorities say that premium rates for the new programme will be the same as the 0.4% on deposits charged today by the Financial Institutions Development Fund. But premium rates are expected to vary sometime in the future, with more stable, financially strong banks paying less than others to compensate for lower risk.

Bankers say while they expect little significant shifts in deposit flows in the immediate term, the move to limited deposit guarantees could help accelerate the trend towards more sophisticated money market instruments among savvy depositors seeking higher returns within acceptable risk.

Money market funds, which invest primarily in short-term treasury bills or central bank debt instruments, are already very popular among depositors given that risk for state-issued debt is essentially sovereign risk.

Prasarn Trairatvorakul, the president of Kasikornbank, said depositors will increasingly be able to choose among bills of exchange, structured notes and other financial products as an alternative to deposits.

While banks remain overwhelmingly dependent on plain savings and fixed deposit products for their financing, he said the growing sophistication of the market and investors gave financial institutions greater leeway as well in managing their liquidity.