Enforcing Sanctions on Delinquent Credit Facilities

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Following rising level of non-performing loans (NPL), the Central Bank of Nigeria in 2015, released to all banks and discount houses, a circular for delinquent debtors of banks to liquidate their bad loans, which constituted about 3 per cent of the total loan portfolio of the banking sector that year. The move was to ensure the industry NPL ratio did not exceed the prudential limit of 5 per cent, among others.  As at  March, 2019, the National Bureau of Statistics, showed  that non-performing loans in the banking industry stood at 9 per cent or  N1.67trillion.  Adedayo Adejobi takes a cursory look at CBN’s effort  to ensure these loans are kept at the barest minimum, to stabilise the financial system

Given  the rising spate of debts and non-performing loans, the Central Bank of Nigeria, issued a circular to all bank and discount houses on the 25th April, 2015.

Part of the statement duly signed by Head Banking Supervision, Central Bank of Nigeria, Tokunbo Martins, reads, ‘‘ In  order  to  ensure  that  the industry Non-Performing Loan  ratio does  not exceed  the prudential limit  of  5 per cent, and to improve  the credit culture  in  the  banking  industry, banks and   discount   houses   are   directed   to   observe   prudent   credit   underwriting   and monitoring standards. Furthermore, banks and discount houses are required with effect from 1st May, 2015 to: Give  the  delinquent  debtors  three  months  of  grace  to  turn  their  accounts  from non-performing to performing status. Publish the list of delinquent debtors that remain non-performing in at least three national  daily  newspapers  quarterly  (The  delinquent  debtors  are  those  whose accounts  have  been  classified  lost and include  the  persons,  entities,  directors, subsidiaries and other related parties). The list must be sent to the CBN as soon as the publication is made. Banks and  discount  houses  are  also  to  note  that  delinquent  debtors  in  the  category described above will be blacklisted by the CBN and are therefore banned from participating in the Nigerian foreign exchange market, banned from participating in the Nigeria Government securities market.’’

It is noteworthy that the Central Bank of Nigeria Prudential Guidelines indicates the criteria in determining a lost non-specialized facility.

Failure by these debtors to make recompense within the grace period should has led to their names being published in three national dailies. This publication is expected to be made quarterly. The graver consequence for these debtors is that they should have been blacklisted by the Central Bank of Nigeria and prohibited from accessing the Nigerian foreign exchange and government securities markets.

Four years down the line, the trend of debts and profile of debtors has hit astronomical heights in the nation’s financial sector. Again, this seems to speak volume on just how laidback the CBN has been in enforcing its temporary restraining order, emerging from its Monetary Policy Committee that recently expressed huge and grave concerns over the N8.1 trillion delinquent loans in the banking system.

The N8.17trillion in non-performing loans on the deposit money banks’  books in 2018, by the National Bureau of Statistics figures, was actually a decrease of N1.38trillion or 14.46 per cent from the 2017 figure of N9.54trillion in non-performing loans. Figures from the Nigeria Deposit Insurance Corporation show that non-performing loans rose sharply by 50 per cent between 2016 and 2017. The corporation has however been grouchy over the worrying lending by banks above the ratios stipulated in Central Bank of Nigeria’s Prudential Guidelines which forbids banks from having more than five per cent of total loans as bad. While NDIC echoed that by December 31, 2016, 19.91 per cent of the loan portfolio of 20 banks examined was non-performing, the CBN’s 2017 Financial Stability Report , however, showed that the ratio of non-performing loans net of provision to capital for the banking industry, rose to 38.4 per cent in 2016 from 28.4 per cent in 2015.

Following the CBN’s directive, adverts from local banks should have been rife in the national dailies appealing to defaulting customers to pay up their loans or face the consequence of publication of their names in the dailies and other penalties. Thus, whilst some customers may have made frantic efforts to settle the loans or negotiate amenable repayment terms before and after the deadline, other customers have also considered challenging the outstanding loans and seeking to prohibit the lenders from publishing their names. However, it is not apparent from the directive whether the names of disputed debtors have been published.

Lending credence to the far-reaching legal implications of CBN’s  directive on the bad loans, an expert on Corporate, Capital market and finance law, Olakemi Salau, Senior Associate at Odujirin and Adefulu Barristers, Solicitors and Notaries Public gave voice to the discourse. ‘‘ Section 57 of the Banking and Other Financial Institutions Act (“BOFIA”) empowers the CBN governor to make regulations, published in the Gazette, to give full effect to the objects and objectives of this Act. Without prejudice to the provisions of subsection (1) of this section, the Governor may make rules and regulations for the operation and control of all institutions under the supervision of the Bank”.

Additionally, Section 33 (1) of the CBN Act empowers it to require persons and institutions having access thereto at all reasonable times, to supply, in such forms as the Bank may from time to time direct, information relating to or touching or concerning matters affecting the economy of Nigeria. In particular, Section 33(1) (b) of the CBN Act provides that the CBN may issue guidelines to any person and any institutions under its supervision.

Giving a position how the apex bank’s directive threatens privacy of citizens, ‘It is our view that the CBN’s directive was issued further to the foregoing provisions of the CBN Act and the BOFIA. However, the directive threatens the right to privacy of citizens guaranteed under the 1999 Nigerian Constitution to the extent that it involves public disclosure of private facts about an individual, as well as the bankers’ duty of confidentiality to customers. Nevertheless, to the extent that the provisions of the CBN Directive may be seen to be reasonably justifiable in the interest of the public, it may therefore be deemed valid.’’

The consequences of non-compliance with any rules, regulations, guidelines or administrative directives issued by the CBN as stated under Section 64 BOFIA is that the governor may impose a penalty not exceeding N2,000,000 or suspension of any license issued on a bank or any other financial institution.

Shedding light on the prospect of recovery using the instrumentality of banks and recovery institutions, Executive Director, Operations and Chief Rating Officer, DataPro Limited, Adeoye Oladele,  ‘‘Recent statistics from National Bureau of Statistics put as at March, 2019 non-performing loans in the banking industry at 9 per cent. This is above 5per cent recommended standard. In absolute term, delinquent loan for the period stood at N1.67trillion.

The possibility of this non-performing being concentrated in the hands of very few members of the society should not be in doubt. In a report by Moody’s and quoted in Thursday publication, 47 per cent of the total industry loan is in the hand of 100 large customers. The question to ask here is about the prospect of recovery using the instrumentality of banks and AMCON. Just a few has been achieved in this area. Available report revealed that AMCON recovery rate is about 19 per cent implying N1trillion out of N5.4tr.illion. For Banks, impediments such as insider abuses, lack of due diligence on transactions and character of the borrowers make recovery herculean task.’’

Up till date, the efforts of the CBN have been laudable, having established a Credit Risk Management System (“CRMS”) into which all banks are required to feed credit default above N1 million on a monthly basis in the database. In addition, the CBN issued Guidelines for the Licensing, Operation and Regulation of Credit Bureau in Nigeria 2008 (the Guidelines) which birthed three private credit bureaus in Nigeria. The guidelines mandate all financial institutions to enter into data exchange agreement with at least two credit bureaus and to obtain credit report from same before granting any facility to customers.

Speaking on precautionary measure need to advance these credit transactions cases, Adeoye said, ‘‘it’s in this regard that taking precautionary measures in lending and borrowing transactions become a necessary. The old wise saying has always been “Prevention is better than cure”. This cannot be truer in credit transaction cases. The Central Bank of Nigeria has mandated banks to adopt name and shame. This is with the hope that bad debtors would always come back to negotiation table when their names pop up in the public domain. Another initiative is the check of customers’ credit status against credit bureau before loans are advanced to them. These initiatives as good as they are, appear post mortem. It should be noted that credit culture is gradually developing in the country. A time comes when this retail loans will assume secondary dimension.

Concerted effort towards curtailing the growth in bad debts and reckless lending behaviour is therefore necessary now in order to avoid another Lehman Brother’s case in Nigeria. My take therefore is that there should be a hub where credit information is freely shared in the public arena. It should not be restricted to banks. Rather, it should be accessible to everyone availing credits one way or the other.

The hub should be assessable without restrictions. Such restrictions as needing customer consent should be removed. If Mr. A wants to lend to Mr. B, he should have a way of confirming from available public information the credit behaviours of Mr. B. An unfettered access to the opinion of those that A dealt with in the past is essential. And this should be possible without recourse to Mr. B. Such public information should be able to describe Mr. B as “slow payer”, “prompt payer”, “and serial defaulter” and so on. This I believe will impact positively on the behaviour of those who consider loans from financial institutions as another public pie meant for sharing.’’

Shedding light on possible alternative Measures, Olakemi Salau of Odujirin and Adefulu Barristers, Solicitors and Notaries Public, said‘ ‘As an alternative, it is suggested that the Nigerian government exert concerted efforts towards developing structures that encourage and maximise credit reporting, which will act as deterrent to bad debts. Such structures would include setting up effective credit bureaus and credit rating agencies as well as adequate regulatory framework.

“Despite the existence of credit bureaus in Nigeria, much work still needs to be done towards engendering a viable credit reporting system, by developing and ensuring the accessibility of correct/ up-to-date records on individuals and companies, which can be relied upon by the credit bureaus for the purpose of reporting. A recent initiative of the CBN in this regard is the centralised biometric identification system called the Bank Verification Number (BVN). The BVN gives each bank customer a unique identity across the Nigerian banking industry to aid easy identification and verification of customers

“In addition to the BVN system, it is suggested that a national identification system that is similar to the social security number in the United States of America should be developed to aid the identification process of persons by name, address, and occupation. In addition, as credit reporting will involve the dissemination of personal information of private citizens, it is essential that appropriate legislation be passed by the Nigerian government on credit reporting and data protection. It is noted that whilst the guidelines provide a framework for the regulation and operation of credit bureaus, it does not adequately address issues bordering on accuracy, fairness of information as well as privacy and secrecy requirements of customers. Legislation akin to that being proposed is the Fair Credit Reporting Act of the United States of America and the Consumer Credit Act of the United Kingdom. Efforts were made towards drafting a Credit Bureau Report Bill in 2009 in Nigeria but this is yet to be passed into law. Lastly, it is essential for the CBN to strictly enforce the requirement for banks to utilise the services of credit bureaus and adequately collateralize their loans.’’

In the wake of the reality on ground, the question however, remains whether the “name & shame” strategy and blacklisting of the defaulting creditors constitute the right approach to dealing with the credit defaulters. These strategies may be viewed as draconian in nature and may be the underlying question on what could have been done in the first place to prevent the large number of defaulters. With the regulator stepping up in on stricter monitoring deposit money banks , the  alarmingly high credit defaulters ratio would drop  drastically. Stopping the trend and preventing systemic distress should be a key priority of the regulator going forward.