BY: Celestine Mel
It is no longer news that CBN withdrew the banking license of Heritage Bank of Nigeria PLC few days ago. Since then, a lot of disinformation and misinformation have been peddled online, regarding the fate and remedies available to unfortunate customers of the defunct bank. I will attempt to provide clarity on the situation in this intervention.
The Nigeria Deposit Insurance Corporation (NDIC) is not looking for anybody to buy the bank. Rather, the bank is dead. This means that NDIC is now like an undertaker appointed by the court (by law) to bury the rotten carcass of the dead bank in an orderly manner. This is to avoid any negative impact of the smell of its dead body on the Nigerian banking system.
The following is the order of funeral service approve by law for burial (liquidation) of dead banks:
1. CBN revokes the banking license
2. NDIC determines the least-cost and least-risky failure resolution option to dispose-off the bank.
In the case of Heritage Bank, NDIC has chosen deposits pay-out failure resolution option which entails the following:
1. NDIC moves into the bank to physically take over and secure the database, assets and chattels of the bank.
2. While in the premises of the bank, authorized NDIC staff identify and separate Depositors (those who kept their money in the bank), creditors (those who rendered services to the bank but were not paid), shareholder (those who own the bank) and other interested parties into registers for the purpose of processing their claims and refunding money (where applicable).
3. When that process is completed, NDIC takes money from the Deposit Insurance Fund – DIF (not the dead Heritage Bank) to pay depositors who had accounts in the bank up to a guaranteed sum of N5 million per depositor. This means that everybody who had any amount that does not exceed N5 million in his account, will collect his money IN FULL.
4. In Heritage Bank, out of a total of 2.30 million customers, about 2.26 million fall into this category and will receive their money in full within the next few days
5. Note that DIF is a special contingency account funded by all banks in Nigeria through the mandatory annual insurance premium that they pay to, and is managed by NDIC. It is set aside for a time like this.
6. While the initial guaranteed payment of the insured amount of N5 million and below goes on, NDIC collects and will auction-off the physical assets of the bank. (Physical assets include buildings, cars, tables, computers, wall clocks, landed properties, telecom masts, DSTV decoders, TV sets, chairs, carpets, generators, calculators, shredding machines, counting machines, staplers, safes, etc.) These will all be valued and sold through competitive transparent public auction to the highest bidders very soon.
7. NDIC will also go after customers and insiders who collected risk assets (risk assets are loans, overdrafts, advances, etc.) from the bank. They will be compelled to pay back the said risk assets within the shortest possible time. NDIC is empowered by law to go after them.
8. NDIC will then use the proceeds realized from the recoveries (from sale of physical assets and realization of risk assets) to pay off the remaining balance of customers who had more than N5 million in their accounts. (any amount in excess of N5 million is uninsured deposit mind you!).
9. The amount to be paid to each of those remaining customers with uninsured deposits will depend on the quality and size of the assets of the dead bank. According to the MD/CE of NDIC, Heritage Bank is exposed to outstanding loans (risk assets) in the hands of its customers worth N700 billion. Whereas, the total deposit liability to all its customers is about N650 billion. It means that if NDIC will be able to recover all the monies that people collected as loans from the bank, and refuse to pay, then the Corporation would have sufficient money to reimburse everybody who was a depositor in the bank in full, especially because DIF is being used to settle some customers already.
10. In order to ensure that the process of refunds is faster this time, NDIC liaised with the Nigeria Interbank Settlement System (NIBSS) to use BVN to automatically credit the insured amounts of Heritage Bank customers to the alternate BVN-linked accounts of customers in any other bank in Nigeria. This is being done right now.
11. NDIC has advised that customers of Heritage Bank who have alternate accounts in other banks should not bother to go to join the long queues for verification in the branches of the failed bank because the Corporation has already used BVN to verify them and has began paying the insured deposits.
12. However, customer who had their only account with Heritage Bank need to physically visit the branch to fill out a form, provide positive identification (drivers’ license, international passport, voter’s card, bank teller, cheque book, etc) and provide an alternate account that will be used to reimburse them.
13. Whenever (and if) ALL depositors are paid their money in FULL, then all other categories of claimants will be considered and settled in order of priority viz: creditors and then, shareholders. (if there will be money left from recoveries)
14. The key point to note here is that deposit insurance scheme anywhere in the world is not designed to give 100% blanket coverage to all bank depositors. Rather, the scheme is targeted at protecting the weak, vulnerable and small savers who normally form more than 95% of the banking public. They are the engine room of the economy. Their protection is critical to the stability of the financial system and by extension, the economy. They need to be assured again and again that whatever money they put in the bank cannot be lost, even if the bank disappears from the surface of the earth or has been swallowed up by a Tsunami. They are the reason for the establishment of the deposit insurance system as a safety-net arrangement to instill public confidence and trust in the banking system. Another reason why everyone cannot be protected is moral hazard. Moral hazard is an incentive to take risk. Just imagine that NDIC guaranteed that every money in the bank is insured 100%. People will start to be reckless knowing that whatever happens, NDIC will pay. Even the bank owners will deliberately steal and fleece their customers and wait for NDIC to refund. People who have plenty money would not be circumspect about their banks. They would have incentive to do anyhow because BIG BROTHER NDIC will always refund. That would be injurious to the economy and the banking system, which is the lifeblood of the economy.
15. In the case of Heritage Bank, only about 4,000 folks out of 2.3 million customers, have deposits that exceed N5 million. That is less than 1% of the total. It means that 99% of all the dispositors who have been effected by the closure of the bank will get full refund of their money in the coming few days.
That is what protecting bank deposits mean.
*Celestine Mel is a chartered banker, projects lead and IT Specialist. He writes from the FCT, Abuja.