CBN And The Global Standing Instruction

CBN Governor, Mr. Godwin Emefiele

The introduction of the GSI to curb serial loan defaulters is welcome
The failure of some bank customers to repay loans extended to them has remained a sore thumb in the nation’s financial system. Recent figures released by the Central Bank of Nigeria (CBN) put banks’ non-performing loans at N1.2 trillion as at the end of June 2020. This is about 6.4 per cent of the N18.9 trillion gross credit of the banks to the economy during the period under review. Therefore, the recent introduction of the Global Standing Instruction (GSI) by the CBN to curb the activities of those who take bank loans without thinking of paying back is salutary. But there are questions about its implementation.

In the wake of the crisis that almost brought some financial institutions to their knees a few years ago, the Asset Management Corporation of Nigeria (AMCON) was established as a resolution vehicle to acquire toxic assets in the industry and clean up the balance sheet of banks. As a result, AMCON purchased total eligible banks’ assets worth N4.02 trillion at a price of N1.76 trillion with a mandate of restructuring /refinancing opportunities for borrowers. At some point, the CBN further directed that banks in the country should no longer extend credit to 113 companies and 419 directors/shareholders until full liquidation of their indebtedness. The latest move is an indication that the directive may have failed.

With the GSI, which took effect from yesterday (1st August, 2020), individuals and corporate bodies who are in the habit of borrowing from banks with no intention of paying back may now have to change their minds. The GSI, which encompasses an agreement between the banks and the CBN, grants authority to the former to debit loan defaulters from accounts they operate in other banks within Nigeria. The new policy also gives banks the latitude to debit the joint account a debtor holds with a family member or business associate.

To be managed by the Nigeria Inter-Bank Settlement System (NIBSS) on behalf of the financial institutions using customers’ Bank Verification Number (BVN), the objectives of the GSI include facilitating an improved credit repayment culture, reducing non-performing loans (NPLs) in the banking industry, and watch-listing consistent loan defaulters. The GSI also provides that henceforth, before bank customers can access loans, they will be mandated to operate savings, current, investment, domiciliary, or a joint account that is linked to their BVN. Such customers must also fill out GSI mandate forms and sign both soft and hard versions, which give the bank the authority to debit them from other sources in case of default. Should a customer default in paying up the loan or accrued interest upon maturity, and has no funds in the account being operated with the bank, the NIBSS will be instructed to debit from any other bank’s account where the customer has funds, be it joint or family account.

However, whatever may be the merit of the idea, analysts have identified some flaws. For instance, its implementation may suffer a setback across microfinance banks sub-sector of the economy since many are not on the NIBSS platform. It is therefore imperative that the CBN and the various banks address this obvious lacuna. Another critical element in the guidelines is its application to the operation of joint accounts, without any regard to the doctrine of ‘privity of contract’ which provides that such legal agreements cannot confer rights or impose obligations upon any person who is not a party to it. In other words, the settled position of the law is that a loan agreement can only be enforced against a party to it. Simply put, a joint account is a qualified account to the extent that any mandate to draw down on the funds therein must be jointly executed by all the signatories.

While the CBN’s move to address the hydra-headed problem of NPLs arising from the failure of bank customers to repay their loans is therefore commendable, we hasten to advise that every identified grey area that may torpedo the effectiveness of the GSI be examined and properly addressed.

The objectives of the GSI include facilitating an improved credit repayment culture, reducing non-performing loans in the banking industry, and watch-listing consistent loan defaulters