NDIC The Managing Director/Chief Executive, Nigeria Deposit Insurance Corporation (NDIC), Mr. Bello Hassan, yesterday said an effective methodology for determining a realistic Target Fund Ratio (TFR) was being developed as part of measures to enhance the deposit insurance system and align it with present reality.
Hassan said this during the opening of the 2021 NDIC workshop for Finance Correspondence Association of Nigeria (FICAN) with the theme: “Enduring Extreme Disruption: Resilience and Reinvention for Banking System Stability and Deposit Insurance,” holding in Ibadan, Oyo State.
The International Association of Deposit Insurers (IADI) Funding of Deposit Insurance Systems (2009), stipulates that an appropriate fund target size should be adequate to at least cover the potential losses of the deposit insurer under normal conditions.
Essentially, the TFR is the ratio of fund that often determines the optimal fund level that enables a deposit insurer to effectively meet its obligation to depositors.
All insured banks contribute a premium to a pool fund which the NDIC utilises for payment resolution in the event bank failure.
Hassan said the corporation had commenced the review of approach to the determination of premium by banks to make it more risk-based, such that, the probability of the risk crystallising, becomes a major factor in the pricing methodology of premium going forward.
He said the move was to ensure that the insurance cover remained adequate to support the objective within the banking sector.
The MD stressed that the corporation had also evolved a strategy which accentuates the existing framework.
He said as economies across the globe continued to grapple with the devastating impact of the COVID-19 pandemic, it had become expedient and highly desirable for supervisors to come up with appropriate strategies that are required to build resilience into the financial system.
This, he said, became inevitable as the financial sector seeks to provide the much-needed support to the federal government’s economic recovery agenda.
Hassan added: “Our key focus is therefore to scale up the deposit insurance framework; provide timely support to insured institutions as and when required; ensure faster and orderly resolutions of liquidated insured institutions; as well as continue to assist the central bank in promoting the stability of the banking system”.
He said there had been recent calls on the corporation to enhance the provision of support, to insured institutions that are facing financial difficulties.
To this end, Hassan said, “We have identified the need to reconsider our framework, to provide realistic terms and conditions that will enable qualifying insured financial institution promptly access technical and or financial support, in line with S.(2)(1)(b) of the NDIC Act, whilst also protecting the corporation from possible downside risks.”
He said the NDIC was equally collaborating with relevant stakeholders, to ensure the corporation discharges its responsibilities efficiently without hindrances, following revocation of licenses of any insured institution by the CBN.
He said: “This has become more important to us, giving the need to improve on our processes in resolving liquidated financial institutions.”
He identified slow recovery and realisation of assets, as well as litigation by erstwhile shareholders and creditors of closed banks as some of the obstacles bedeviling the efficient and timely resolutions of liquidated institutions.
Further elaborating on the proposed review of the premium thresholds, the NDIC boss explained that the rationale for the review was to be able to scientifically determine the deposit insurance fund that should be held at any point in time to meet risks that crystalise.
He said: “What is that risk? It is that is risk of making payouts; you know as deposit insurer, we say we have guaranteed a maximum sum; so what is the risk that that institution will collapse?
“And if it collapses, how much funding do we need to put in place to be able to meet that liability that will be able to crystalise.”
He said: “And so we are looking at various scenarios under the reverse framework but essentially we want to make it risk-based looking at the various factors that could impact on the viability of the bank to be able to say that maybe this is the number of bank that might likely collapse.
“And if they collapse do we have sufficient funding to be able to make that payout?
“And because this is our own model of the deposit insurance is ex ante -we collect premium to build up the fund before the event happens.”
He added: “It is not when the event happens that you begin to shop in for funds no, the funds are already there but what we want to do now is to be able to say that yes scientifically this is the amount we should have in that fund which is considered to be sufficient to meet any liability should it crystalise on the deposit insurer.”
In January 2015, the NDIC had granted a cumulative sum of N192.6 billion in deposit insurance premium rebate to deposit money banks (DMBs) between 2012 and 2014.
It also reduced the deposit insurance premium rate to all DMBs in the country as part of efforts toward contributing to financial system stability and promoting public confidence in the banking industry.
The premium reduction policy had been initiated to consolidate on the gains achieved by the corporation’s migration from Flat Rate Premium System (FRPS) to Differential Premium Assessment System (DPAS).
The DPAS approach takes into consideration the risk each bank poses to the system and encourages banks to adopt sound risk management practices
The corporation had granted additional relief to the DMBs in September 2014, reducing the insurance premium basis rate from the existing 40 to 35 basis points.
(Thisday)
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