Amid Inflation, Naira Depreciation, Others, NDIC Reviews Deposits Coverage for Financial Institutions

*Raises maximum cover for DMBs to N5 million, MFBs N2 million, PMBs N2 million, MMOs N5 million 

*High uninsured deposits pose risks to financial stability, Hassan declares

*Analyst says move will boost confidence in banking system

Managing Director/Chief Executive, NDIC, Nigeria Deposit Insurance Corporation (NDIC), Mr. Bello Hassan, yesterday announced an increase in maximum deposit insurance coverage levels for all licensed deposit-taking financial institutions in the country, with immediate effect.
Hassan also cautioned that a high level of uninsured deposits in the financial system posed a risk of bank runs.
Citing the International Association of Deposit Insurers (IADI) Brief No. 9 of 2023 that examined the recent bank failures in the United States of America and Switzerland, the NDIC boss stressed that high levels of uninsured deposits in insured institutions might increase the likelihood of bank runs with dire impact on the stability of the financial system.

However, he noted that factors including deposit distribution, the impact of inflation, per capita GDP, exchange rate, and other statistical models often necessitated the review of deposit coverage.
Under the new template, he said coverage for Deposit Money Banks (DMBs) had been increased to N5 million from N500,000 to provide full coverage of 98.98 per cent of total depositors compared to the current 89.20 per cent.
In terms of the value of deposits covered, he said the revised coverage would increase deposits covered by deposit insurance to 25.37 per cent compared to the current 6.31 per cent of total value of deposits.

Hassan, who disclosed the adjustments at a media briefing in Abuja, said under the new regime, the maximum deposit coverage for Microfinance Banks (MFBs) had also been increased to N2 million from N200,000 to offer full coverage of 99.27 per cent of depositors compared to 98.76 per cent currently.
The NDIC chief executive said this would increase the value of deposits covered by deposit insurance to 34.43 per cent compared to 14.38 per cent.
Furthermore, deposit coverage for Primary Mortgage Banks (PMBs) was raised to N2 million from N500,000 to provide full coverage for 99.34 per cent of depositors compared with the current 97.98 per cent.
Hassan further stated that this would increase the value of deposits covered by deposit insurance to 21.04 per cent compared to 10.77 per cent currently applicable.

The adjustments also included an increase of deposit cover to N2 million from N500,000 for Payment Service Banks (PSBs) to offer full coverage of 99.99 per cent of depositors, to increase the value of deposits covered to 43.10 per cent from 40.60 per cent.
In addition, the maximum Pass-through deposit insurance coverage for Mobile Money Operators (MMOs) was increased to N5 million from N500,000 per subscriber per MMO as the applicable coverage level for depositors of DMBs.
Meanwhile, the development has already attracted commendations from analysts.
President, Association of Capital Market Academics of Nigeria, Prof. Uche Uwaleke, told THISDAY that the increases in deposit coverage was a welcome development amid elevated inflation and naira depreciation.

He said, “This would no doubt boost confidence in the nation’s banking sector and deepen financial inclusion.”
Nonetheless, the NDIC boss said the revised deposit coverage had balanced the corporation’s goals of deposit protection and financial system stability with incentives for depositors to practice market discipline and prevent banks from unnecessary risk-taking and moral hazard.
He said consideration was given to ensure that the coverage was limited but adequate to protect a large number of depositors and credible enough to prevent the destabilising effect of bank runs.

According to him, the adoption of the revised maximum coverage was supported by the corporation’s current funding, represented by the balances in the various Deposit Insurance Funds (DIFs), expected annual premium collection, enhanced supervision that would reduce the likelihood of bank failures, effective bank resolution frameworks and other funding arrangements provided by the NDIC Act No. 33 of 2023.
He said, “I would like to reaffirm the NDIC’s unwavering commitment to protecting depositors and contributing to the stability of the financial system.
“These adjustments to the maximum deposit insurance coverage reflect our dedication to adapt and evolve in response to the changing landscape of the financial industry, and we remain steadfast in our pursuit of a secure and resilient banking environment for all.”
He said NDIC’s mandate of deposit guarantee remained a critical component of depositors’ protection, as it guarantees the payment of deposits up to a maximum limit in the event of bank failure.

Hassan explained that the maximum deposit insurance coverage is determined through periodic research-based studies, to ensure its adequacy and credibility.
He said based on these considerations, and in line with the NDIC’s commitment to enhancing depositors’ protection, public confidence, financial inclusion, and stability of the financial system, the NDIC Interim Management Committee (IMC), during its 18th meeting held on April 24-25th, approved the new templates for deposits coverage going forward.

According to him, following a survey in 1989, the maximum cover for DMBs was set at N50,000 at the inception of the NDIC.
The amount was set in a way that up to 85 per cent of the total depositors in the nation’s insured banks would be 100 per cent covered. Subsequently, 96 per cent of depositors were protected when the coverage ceiling was raised to N200,000 from N50,000 in 2006. The coverage limit of N100,000 was also set for the first time, for MFB and PMB depositors in the same year.

In 2011, the coverage limit for DMBs was increased to N500,000 from N200,000 and to N200,000 from N100,000 for depositors of MFBs and PMBs.
The coverage level was further adjusted to N500,000 in 2016 for PMB depositors as well as subscribers of licensed MMOs.
The coverage of N500,000 was equally extended to depositors of PSBs in 2020 while that of DMBs remained at N500,000.
However, Hassan said, “As part of the periodic evaluation of the effectiveness of the deposit guarantee, the corporation conducted a Study in 2023, to determine the adequacy of the maximum deposit insurance coverage.

“This is in line with Principle 8 of the International Association of Deposit Insurers (IADI) Core Principles for Effective Deposit Insurance, which advised jurisdictions, to periodically review their deposit insurance coverage, to ensure that, it is credible and covers a large majority of depositors to prevent the risk of bank runs, but leave a substantial amount of deposits exposed to market discipline.”

He said findings further indicated that high percentages of depositors ranging from 89.20 per cent to 99.99 per cent were fully insured under the maximum deposit insurance coverage levels across different bank categories while a substantial portion of deposits, remain uninsured.