December 17, 2015

NDIC: The path to progress

IN recent years, the Nigerian Deposit Insurance Corporation (NDIC) has played a critical role in stabilising Nigeria’s financial market through innovative programmes. The turbulence that the banks faced in their continuous growth to maturity, which was triggered by both the nation’s quest to modernise the banking system and global financial meltdown, have been effectively overcome – to the relief of  both depositors and the financial system. And, generally, the Corporation has charted a path that has taken the deposit insurance scheme (DIS) within the country to enviable heights.

At the regional and global stages, the NDIC leadership has become critical to the promotion of best practice in DIS among African nations and developing countries. All these cannot be divorced from the quality leadership at the NDIC.

The Nigerian Deposit Insurance Corporation (NDIC) was established by Act No. 16 of 2006 as a risk minimiser with the broad mandate of deposit guarantee, bank supervision, as well as to provide mechanism for orderly resolution of failures, including bank liquidation.

One of the major policy objectives of putting in place a DIS is to provide an orderly mechanism for failure resolution. Timely and effective handling of failing and failed insured institutions including the adoption of exit strategies, enhance confidence in the banking system, help contain costs, and avoid adverse effects on other safety-net participants, the government, the public, the banking industry, and the economy.

Four years ago, NDIC saved 3.7 million depositors from their distressed banks through a failure resolution engineering that became a celebrated case study in the global community. Depositors now look up to the NDIC to offer relief to them when their funds are threatened or trapped in failed or ailing financial institutions. The NDIC demonstrated its ingenuity in 2011 when it introduced the bridge bank model in failure resolution.

The bridge banking option places priority on the interests of the banking public, especially the primary depositors preventing outright liquidation, which would have had systemic consequences on the financial system and undermined or eroded public confidence in the banking system. The corporation took over the assets of the critically distressed banks and assumed liabilities in the three bridge banks, namely: Mainstreet Bank Limited, Keystone Bank Limited and Enterprise Bank Limited, to replace the erstwhile Afribank Plc, Bank PHB Plc and Spring Bank Plc, respectively. The CBN subsequently revoked the operating licences of the three banks, i.e. Afribank Plc, Bank PHB Plc and Spring Bank Plc, on August 5, 2011.

The adoption of the bridge bank option helped to preserve and sustain daily operations in all the 577 branches of the three failing banks. In the process  6,667 jobs in the affected banks were safeguarded. Significantly, too, depositors had unfettered access to a total deposits of  ?809.4 billion (U$5.58 billion) as against ?130.57 billion (U$842.39 million) insured deposits guaranteed by NDIC.  The three bridge banks (Keystone Bank, Mainstreet Bank and Enterprise Bank)  were acquired, through share subscription, by AMCON.

In the past, the option to resolve the cases would have been Imposition of Holding Actions (HAs). These were corrective or self-restructuring measures. They may also have involved recapitalisation, restriction on new lending, debt recovery, restriction on new capital project, and rationalisation of branches and staff, among others.

Another innovative measure of safeguarding the interests of depositors’ banks that took place in the last five years was the establishement of Asset Management Corporation of Nigeria (AMCON) in 2010 . It is a collaborative measure between Central Bank of Nigeria (CBN) and NDIC.

The AMCON was established for the purpose of efficiently resolving the non-performing loans assets of banks in Nigeria and to recapitalise the technically insolvent banks and enhance the availability of credit to the critical sectors of the economy.

AMCON acquired the three (3) bridge banks mentioned above from NDIC and injected the sum of ?1.012 trillion (U$6.98 billion) into them as capital injection. The specific amounts injected by AMCON into the three banks were: ?194.59 billion for Enterprise Bank ?366.89 billion for Keystone Bank; and ?451.42 billion for Mainstreet Bank. AMCON also injected the sum of ?1.379 trillion into five (5) of the intervened banks (Intercontinental, Oceanic, Finbank, ETB, Union) with a view to facilitating their merger and/or acquisition.

Furthermore, AMCON acquired NPL of about ?2.16 trillion in 20 banks (including the 10 troubled banks) at a discounted value of about ?770.54 billion in FGN-backed bonds between December 2010 and 2012.

NDIC faces enormous challenges in the discharge of its dual roles of guaranteeing deposits and being liquidator of failed banks, and has no made secret of these challenges, which include the following among others:

Cumbersome, slow and bureaucratic judicial process resulting in long-drawn out litigation on winding-up actions and debt recovery matters. There is also the issue of court actions by erstwhile shareholders;

Low level of public awareness of the Deposit Insurance System and clear understanding of its benefits and limitations;

Uncooperative attitude to the bank closing team and poor record keeping (financials, mandate records, broken down IT systems etc) by closed banks; and

Problems of Asset realisation (loans and physical assets) due to large size of insider loans, poor loan documentation, poor quality, lack of secondary market and court sympathy for debtors and weak title for landed properties.

Gladly, the leadership at the NDIC is always rising to these challenges. One of the ways to address these issues that the corporation thought of is through enhancing its regulatory role through amendments of its Law.

The more  serious amendments include: adequate provision for general reserve fund; prohibition of payment of dividends by insured institutions while in default of assessed premium charges; the right to set-off guarantors’ deposits against the claim of the failed bank; payment of insured sums in the event of suspension of payment or imminent difficulty for payment even where operation license has not been revoked; and the supervision of related entities of insured institutions particularly under consolidated supervision, amongst others.

In the last five years of the current management of the NDIC, Mallam Umaru Ibrahim, whose tenure ends this December, has taken the NDIC to greater heights and put forward reform proposals to achieve what it could not achieve due to poor legal framework. If implemented, the Corporation will be further strengthened to achieve more. If progress is to meet continuity; this is the treaded path to follow.

Mr. Bashir  Hassan, a finance analyst, wrote from Abuja.