Loan default is a global challenge that has become a recurring decimal in many countries including Nigeria, the contractual relationship between the banker and the customer notwithstanding.
In Nigeria, the point has been made that bad debts in the financial institutions are a contributory factor to bank failures. This is evident over the years as a cursory reference to the total of bad debts amounting to over N5trn of toxic assets that have been taken over by the Asset Management Company of Nigeria (AMCON), glaringly shows the effect of bad debts on the financial system in general.
Statistics show that by 2007, non-performing loans were less than 5 per cent. In 2010, they were less than 10 per cent, and came down to 3 per cent by 2013 because AMCON bought a lot of the toxic assets off the banks. But the volume of non-performing loans spiked in 2016 rising up to about 13 per cent.
Bank distress in Nigeria started with bad loans; bankers who borrowed to their relations who in turn, didn’t pay back the loans. And when that happened, it had ripple effects which affected many banks and created a lot of issues in the banking system. In most cases, the loans were given out on the basis of who knew who. Essentially, banks were failing initially largely due to insider trading, poor management, no adequate sensitization, weak monitoring system, lack of adequate knowledge by practitioners, the technicalities of banking, among others.
The indicator to use to have a sense of loan default by borrowers in the Nigerian financial system is the quantum of non-performing loans in the banking industry today. Over time, that has been on the high side. According to financial experts, the Central Bank of Nigeria (CBN) has a threshold of 5 per cent, meaning that non-performing loans in the banking sector should not be higher than 5 per cent for the interest of financial system stability. There were times it was as high as 15-16 per cent.
According to reports, the trajectory of the banking system started from about 1894 and passed through phases that culminated into a certain period in which there appeared to be no strong regulation. That was the laisser faire kind of system from 1890s to 1950s before the CBN Act and the First Banking Act were enacted. These Acts brought about strictly regulatory regime which lasted until about 1986 when the Structural Adjustment Programme (SAP) came into place. After 1986, the sector became deregulated substantially until the consolidation era.
Over time, the CBN has been introducing one measure or the other which status report or ordinary banking practice should normally have taken care of. But status enquiry has limitations in the sense that banks have a duty of confidentiality to their customers. So there is a limit to what a bank can disclose.
Basically, the banker-customer relation is a contractual relationship, and so, the rules that govern the management of the customer’s account are based on contract. Legal minds cite that the law is very clear that a banker has no right to transfer any sum of money from one account to the other. The right of set-off has to be enshrined in the contract. So, when you open a new account, one of the forms the bank will give you is the one that allows the bank the right to set off.
There are prudential guidelines that compel banks to manage their credit and ensure a good and robust system of credit administration; a system that ensures that only those that are deserving get loans.
One of such measures was the introduction of the Credit Risk Management System that is meant to centralize credit information of all borrowers. In other words, it is known as the “Credit Bureau,” and it helps to reduce the level of non-performing loans by checking people of bad character who want to obtain loans. The effectiveness of this measure will be enhanced by harmonising the different silos of identity management including BVN, National Identification Commission, Federal Road Safety Commission (FRSC), Nigeria Immigration Service (NIS), telecoms, among others.
With proper identity management system, the financial sector will be able to follow up on people who have shady characters and nip financial crimes in the bud before they mess up the banking system.
In practical terms, if a borrower wants to have access to a loan in Bank A for example, Bank A is expected to do a background check and status report on the borrower. In the case of serial defaulters or predatory debtors, the bank is at liberty to exercise the right of set-off particularly when the loan agreement is breached. The aim of this policy is to reduce cases of non-performing loans while also creating a watch list of chronic loan defaulters.
Worse still, some borrowers take advantage of the fact that our legal proceedings take time to resolve. That is why some financial experts are advocating for the setting up of special courts for banking-related issues as it is done in Pakistan and India which have debt recovery tribunals.
To reinforce the already existing system, the CBN has come up with the Global Standing Instruction (GSI), which adopts global approach in terms of dealing with recalcitrant debtors. The application of this initiative will among other things, check loan defaulters who go somewhere else to procure loans.
This policy will make loan defaulters honour their obligations to their financial institutions, thus preventing loan defaulters from having access to further bank facilities. It is a directive issued by the CBN to allow banks to debit accounts of loan defaulters in other banks where their accounts are domiciled.
This is more like an expansion of the banker’s right of set-off. There are conditions by which those rights can be applied including serving a notice to that customer before the bank can set off his account. That right of set-off is just within a particular bank but GSI has now made it global. In effect, it is capable of entrenching the culture of responsible behaviour on the part of borrowers, and helping banks to also carry out good credit appraisal.
However, GSI has some implementation challenges. With respect to existing loan defaulters, unless the banks are able to coerce them to sign some kind of consent form, then this policy will not work with them. The legality or otherwise of the GSI to be able to reach a third account that is jointly held for either a member of your family, will still have to be interrogated because that account has its own mandate instructions.
This policy or directive may have anticipated this because the provisions are designed with respect to new loans such that when customers want to access new loans, they are given instruments or warrants to sign, authorizing the banks to carry out their inter-bank transfers. But that only addresses the problem as to the future and not the present loan defaulters.
In September 2019, the first GSI circular or information was released and the banks given samples of how to draft or craft loan conditions going forward. That’s when GSI became effective. This means that non-performing loans prior to September 2019 cannot be cured with the GSI.
But even with respect to the future or would-be defaulters, this directive is not a statutory provision or law emanating from the National Assembly. It’s also contestable whether the CBN and the Bankers Committee that conceived of this idea can by way of policy directive, interfere with the individual contracts between customers and the banks.
The practice of reaching agencies is not well defined in Nigeria, and their prominence and effectiveness has not been tested in the financial sector. Here, we are going to run into problems. If a bank customer is a signatory to a family account, the bank would like to reach that family account to verify a private debt. If a customer holds an account in trust for an organization, the bank wants to reach that account to satisfy a personal debt. If a customer belongs to an association or a group where he is a co-signatory and his name appears because his BVN is linked to that account, the bank wants to reach that account to confirm a private debt. In any case, under GSI, not only the loan defaulter will be arrested, his wife and children will also be taken into custody. These could raise issues.
Basically GSI affects personal accounts including savings and current accounts, or joint accounts probably between a husband and wife, and three trust accounts for the children. The GSI circular states that, if for example, you have defaulted to the tune of N100,000 including the principal and the interest and excluding penal charges, and you refuse to pay, the GSI can be triggered by the creditor. If you have N20,000 in your account with the bank, it will be taken. In the account of yourself and your wife, if there is N50,000, it will be taken, making N70,000. The remaining N30,000, will be withdrawn from your children’s account who are still minors if you are the sole signatory.
This new regime may give banks the opportunity to be defiant and not cooperative in addressing the claims of customers with the hindsight that they have a GSI that enables them to reach out to sister banks to effectively deal with such customers. These could raise serious issues that will be contested at the courts.
GSI is a specific reference to individual or personal accounts, and does not address the issue of corporate borrowing. In other words, this policy, as it were, applies to both personal and individual accounts whereas corporate borrowers who are more in number in terms of quantum as well in defaulting to repay back their loans ordinarily are more of the culprits.
The bulk of the defaulting loans posing serious danger to the banking system is in the corporate sector. Experience has also shown that the problems with these accounts are usually with respect to documentation. Some of these loans are disbursed without proper documentation and securitization. So, the banks find it difficult to follow the security that otherwise would have been in place in addressing and recovering their monies.
If we are really interested in addressing the problem of loan default and financial scams involving banks, and therefore build a sound banking system, implementing competency framework is very important. This entails training and retraining, certifying and professionalizing the banking practice and ensuring that anyone who is practising banking is properly certificated.
Records show that about 80 per cent of loans go bad because of the way they are approved and the drawdown made. Borrowers should be made to understand the terms and conditions of GSI mandate that they are about to execute. The creditor bank is expected to explain to the borrower those terms. It is only when the borrower has understood those terms that he executes, and once he executes, that becomes binding on him.
Moses, Publisher, Researcher, Biographer, Phonetics Instructor; Legacy BookMedia, Lagos,
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