NDIC to review premium paid by banks

The Nigeria Deposit Insurance Corporation (NDIC) is reviewing premiums paid by Deposit Money Banks (DMBs) to protect depositors’ funds.

The implication is that a bank will have to pay a premium based on its size.

The corporation explained that it intends to go about it by reviewing the Target Funding Ratio (TFR) for banks.

TFR is the ratio of fund that determines the optimal fund level that enables a deposit insurer to effectively meet its obligation to depositors.

It also reiterated that it is focused on the protection of depositors, especially small depositors’ funds because asides being more vulnerable, they also make-up over 90 per cent of funds in deposit money banks across the country.

He spoke at the 18th workshop for business editors and Finance Correspondents Association of Nigeria (FICAN) in Ibadan.

NDIC Managing Director/Chief Executive Officer, Mr. Bello Hassan, said: “We are developing an effective methodology for determining a realistic Target Funding Ratio for the Corporation.

Additionally, we have commenced the review of our approach for 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 our premium going forward.’’

“To this end, 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.

“The rationale for the review is to be able to scientifically say okay, this is what is supposed to be the deposit insurance fund that is supposed to be held at any point in time to meet risk that will crystallise.

“ We ask certain questions. One is – what is that risk? It is the risk of making payouts. You know that as deposit insurance we have guaranteed a maximum sum. Next question is – what is the risk that an institution will collapse? And if it collapses, how much funding do we need to put in place to be able to make that liability that will be able to crystalise?

“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?

“Although the funds are already there, 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.

“I don’t want to pre-empt the study on what the CBN and NDIC is doing on risk based pervasion. At the end of each circle, we have risk created on each bank. This way, we now use that risk created to determine the risk that might likely crystalise on the corporation and to say – okay this is the amount of fund that needs to be maintained. But we want to make it more granular in such a way that we actually say yes, looking at all the scenarios, should the risk crystalise, this is what is supposed to be in place to be able to leave that liability.”

In his presentation on building resilience for deposit insurance, Deputy Director of Bank Examination Department, NDIC, Michael Oladele, said one of the ways to ensure resilience is to have a deposit insurance scheme. “We are to ensure deposit of small depositors. More than 90 percent of depositors fall under small depositors, hence they must be protected. They are also the most vulnerable. Our mode of deposit insurance is risk minimising. Hence, we are focusing on them.

“We, therefore, supervise because we don’t want banks to fail. Even if it happens, we ensure that depositors’ funds are protected. A bank can fail, but if it happens, it should be such that the impact on the economy will not be huge. We want to ensure that no deposit money bank in the country fails. When they fail, they should fail safely,” he said.

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