As the Global Standing Instruction (GSI) takes effect on Saturday, August 1, 2020 banks will be able to recover bad debts from customers account in other banks without the customer’s permission, BUKOLA IDOWU and KEHINDE SALLAH write on the initiative that is expected to increase lending and reduce non-performing loans in the country.
Non-performing loans (NPL) in the banking industry had in times past soared to more than 37 per cent before the birth of Assets Management Corporation of Nigeria (AMCON) and had dropped to 2.96 per cent by 2014. However as the Central Bank of Nigeria (CBN) began to harp on banks to increase lending NPLs began to rise.
NPLs began to climb, rising from 4.86 per cent in 2015 to 12.82 and 14.81 per cent in 2016 and 2017. The NPL levels had soared to 16.21 per cent, but as it declined to 14.51 per cent, banks became more cautious in lending as many recalled their loan and were not giving out new loans. Many banks had resorted to making profit from government securities which is by far less risky.
To ensure that the increased loan drive does not end up becoming the downfall of the banks or a return to the pre-AMCON era, bankers and regulators in the industry including the CBN had sought a way out at the 345th Bankers Committee meeting held last year July.
At the end of the meeting, it was agreed that individuals who seek to obtain new loans in the banking industry, will now have to sign a new clause which states that in the case of default on the part of the debtor, the bank can take over all his or her deposits within the banking industry.
This new move is being helped by the Bank Verification Number (BVN) which ties together all the accounts of an individual across the Nigerian banking industry, be it microfinance bank, finance company, mortgage bank or investment bank.
The New Loan Clause
The clause comes as a form titled Global Standing Instruction, which is a mandate authorizing recovery of past due obligations from any and all deposit accounts maintained by a defaulter. The GSI is limited to debt recovery only and is limited to only individual accounts.
Although it can be used as recovery of repayment amount, the GSI cannot be used to recover any additional fees, charges or penal rate for default.
To set up the mandate, customers will fill in their BVN, Credit Risk Management System (CRMS) number, the full repayment amount, the loan duration and the repayment account. The GSI is being maintained by NIBSS which is the custodian of BVN and holds records of all bank accounts in the country.
Once a debtor defaults on a loan, the GSI is triggered with the creditor bank activating the mandate on GSI Module specifying the recovery amount. Once triggered, the available accounts for recovery are identified, available balances for the accounts are retrieved and funds from the accounts according to Recover Logic are recovered.
According to the guideline, the GSI will serve as a last resort by a creditor bank and participating financial institutions must honor all transactions from NIBSS with a valid GSI Mandate code. The GSI Transactions can be triggered upon default on repayment, seven days after scheduled repayment date or before application of penal rates.
Once the GSI is triggered, the creditor bank is enabled to recover the loan for any account which the debtor holds in other banks including savings account, current account, domiciliary accounts, investment deposit accounts either in local or foreign currency, electronic wallets as well as joint accounts.
However the GSI Trigger Amount can only be for outstanding principal amount and accrued interest on the loan excluding any Penal Charges. To ensure that banks or participating financial institutions do not shield accounts from the GSI or customers errousnously debited, the guideline had insitutued penalties for any infraction.
One of such is that in addition to a fine of N100,000 any financial institution where a PFI fails to grant the GSI permission to debit an eligible account, “the erring PFI shall pay a fine equivalent of the balance in the account shielded from the GSI’s Debit Request, regardless of the GSI Trigger Amount.
“For each incident, the Chief Information/Technology Officer (CIO/CTO) of the erring PFI shall submit a formal explanation letter to the Director Banking Supervision and Director Financial Policy and Regulation Department.”
Growing Bank’s Confidence in Lending
According to the CBN Deputy Governor, Financial Systems Stability, Aishah Ahmad, explained that the GSI is to give banks the confidence to increase retail lending. Expressing the concern of the apex bank about the level of credit to the industry she stressed the need for urgent requirement to use expanded credit to small and medium enterprises, retail and mortgage sectors as a way of revitalizing the economy by stimulating demand, expanding opportunities for businesses that served those sectors where that demand will be and to grow the economy.
“We are not unaware of some of the challenges of the reasons why credit has not been growing, part of that was the appetite of banks to lend especially where you have customers that willfully refuse to repay their loans and so in this respect we have come up with a new clause that we will be including in the offer letters that we will be granting going forward.
“This is going to be more or less a credit risk protection clause that will be in all offer letters going forward. Basically it will contain the BVN details of the customers and the 10 numbers of the customers and more or less it will be a commitment by the customers that is taking the loan or a covenant that in taking the loan you agree or promise to repay the loan and that you also agree that should you default on the loan the total amount of the asset, the total amount of deposit you have across the banking industry will be applied towards repaying the loan.
“This is not uncommon because banks already have right. There is something we call right of setoff within a bank, you take money from bank take a loan the banks usually has a clause in the letter that allows the bank to repay your loan from all the assets you have with the bank so this is just extending it across the industry.
“We think that there are very honest Nigerians out there that are willingly to take loans and repay their loans. However, we feel that those who do not pay or willfully do not pay is actually affecting others to have access to this credit”, she stated.
Ahmad Expressed optimism that the GSI will enable banks to lend more with more confidence, enable more Nigerians to get access particularly to the SME, Retail sector and also revitalize the mortgage sector.
Asides the GSI, CBN Director, Banking Supervision, Ahmad Abdullahi noted that “we are also working with the credit scoring system in the industry whereby all those that want to get a credit scope that will enable them have easy access to credit that is another thing that will help improve credit the industry.
Commenting on the new clause, customers remained divided on if they would want all their bank accounts emptied in a case where they default on their loans. To Debo Ogunranti, a retiree the GSI “is not the best. Bank accounts and assets pledged as collateral should be sufficient comfort for the lender and should be the only items put in jeopardy in a case of default.
“Some accounts may be linked to the BVNs of lenders which the money there are not theirs, for example, joint accounts, company accounts, accounts held in trust. Imagine what a raid on account that account that you save your children’s school fees would mean if your lender can assess it. The least the lender should do is to approach the court to obtain a garnishee order on the debtor’s account.”
An interview with Nigerians on the Global Standing Instruction (GSI) directive by the Central Bank of Nigeria (CBN) which is to take effect from August 1, 2020 has showed that Nigerians are indifferent about the implementation of the policy.
Speaking with LEADERSHIP, the national Publicity Secretary, Action Democratic Party (ADP), Adelaja Adeoye stated that the financial institutions in Nigeria is gradually coming out of the long and old culture of customers with the habit of loan agreement default which is not good for the liquidity of many of the banks.
The initiative of the CBN is a good one because many of the funds in banks belong to bank customers, shareholders and borrowed funds from other financial institutions. It is the power of general lien they have that makes them to use these funds for quick business such as granting loans but in a case where customers don’t pay back as at when due there will surely be problems.
“Many Nigerian banks that have liquidated in the past was mostly as a result of loan default by bank customers and process of recovery is not so easy which can be compounded by legal imbroglio that usually spans for a long time. So, direct debit from customers after signing indeminity when the loan is being processed via NIBSS is a welcome idea.
This will make people to be more cautious and responsible when taking loans.
“Again, the truth is that rolling out this initiative will not make people to stop borrowing from banks or making them to keep money at home, it will only instil financial discipline in the lives of people.
Before now, people go to the bank to borrow after such loan which may have originally meant for business is approved by the bank, the beneficiary turns around and start spending it on social lives, that is when some of them remember they want to marry more wives and begin to live a flamboyant lifestyle instead of using the money for business ventures that will enable them to pay back but when the money vanishes with the hope of repayment they abandon the bank and move to another but with this new system recovery will not be that hard as before.
Although some of them may now be becoming smart by abandoning their own account with their BVN and running their financial transactions via another person’s account just to evade repayment.” A digital marketer, Moshood Atinshola stated that there is a lot of people in the country who live on borrowed money. If CBN decides to start debiting loan defaulters from their other account through BVN people might not even go to the bank to borrow with their names or even use a family member’s account to receive money.
For as long as people feel it’s in their capacity to refund money, that idea might cause them to think about loans in another perspective. Bad situations might get people not to mind, but along the way, they might find alternatives to it.
Self employed Oluwaseun Adeniji said, “Banking in Nigeria can be frustrating in this era. Especially the quick tactics of crediting and the barbaric style of withdrawal. But with the CBN new regulations on loan Customers will still seek for loan especially with the damages Covid 19 has caused on our economy.
Although banks have to be on the safer side to recover loans and reduce bad debts they also have to pay attention to the fact that the economy is not favourable and people are facing hard times in the country which can result to difficulty in quick repayment of loans.
To Adeola Oyebamiji, an accountant, as “the rate of defaulters is on the high side such that sometimes the collateral isn’t enough. It is becoming high so since all BVN accounts are linked I don’t agree to sweep of the account but at least a post no debit (PND) on the account. Basically the financial institutions should use the Capital Asset Pricing Model (CAPM) to calculate risk of their portfolios.”
In all, it is expected that banks will have more confidence in lending to individuals for consumption purposes, as this is all in line to trigger spending and drive business activities that would spur the economy towards growth.
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