Peters: Non-performing Loans Have Dropped Due to GSI

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The Acting Managing Director of FirstCentral Credit Bureau and Chairman of Credit Bureaus Association of Nigeria, Mr. Oladimeji Peters, in this interview, speaks about the Global Standing Instruction guidelines introduced by the Central Bank of Nigeria and its impact on loan recovery in Nigeria. Peter Uzoho brings the excerpts:

In August, the CBN launched the guidelines on the Global Standing Instruction guidelines, an initiative used to make debtors fulfil their loan obligations to creditors and help reduce the volume of loan defaults in the country. How does that affect the Nigerian credit system?

I guess one of the key things we have seen from the professional standpoint is that the willingness to pay and the ability to pay are two different things. I can decide to come to your bank, let’s say microfinance bank, to borrow N5 million from you and at the same time I have another N10 million stashed away somewhere. But all the same, I have refused to pay you back your N5 million when it is due and I would much rather keep your N5million together with my N10 million and not pay back. So in that scenario, I do have the ability to pay but I don’t have the willingness. And that is usually where the defaults resetting comes in and just so that we can manage that. I’m sure what CBN would also have discovered on their own that also took place in their regulatory and policy changes was that they found out that there were people you could track their BVN to the fact that they have cash in certain banks but at the same time they have non-performing or defaulting loans in other banks. So they (CBN) were able to marry the two together and said okay, why do you have this bad loans, for instance, with AMCON, when you have this much cash in this bank? And therefore, the CBN now came with this policy like a trigger and said okay, if you are defaulting in this bank and you have money in other banks, you should now be able to offset that loan. And going forward, that will also now affect the volume of non-performing loans we are having in the Nigerian market; and also help people understand that going forward, you need a culture of credibility where if you say, for instance, you are going to repay something, you will do it.

You are like an intermediary between lenders and borrowers. How are borrowers reacting to the GSI guidelines?

It’s a mixed kind of reaction. There are those that say it’s a great idea, and those that say it’s a terrible idea. Some say, what happens if you get my BVN wrong? What are the dispute mechanisms if for instance, the bank has over-charged me for some sort of interest charges and you decide to take that money even though there is still contention around the repayment in itself. I recall a particular case, I think it was in 2014, where someone borrowed money in dollars and at the time of repayment in one of the big banks, he decided to pay back in naira. So the bank said well, we would take the naira from you so that we cover ourselves and so that you don’t say you can’t find the money but at the same time, we will continue to report you as non-performing. Now, don’t forget, this was around the time we had foreign exchange issues a few years ago. Now what happened was that in the argument of the borrower, he said, well, you know how this country is now, I can’t get foreign exchange. The lender said, but you collected the money in dollars, why will you pay in naira? So, it became a contention. But that didn’t stop the bank from collecting the naira. They collected the naira and held on to it, and they continued to report the customer as non-performing. Now, at the time the customer sued us, I remember writing to the bank and saying, has this customer actually paid? And the bank said, well, he has paid but he paid back in naira and he needs to pay back in dollars. And we contacted the borrower and he said, well, I did pay back in naira but there was nothing in the terms or agreement that said I have to pay back in the currency that I used to borrow. So it becomes again, like you said, the role of an intermediary to now find a way to balance all of this. And in the case of GSI, we can have such cases if it is not clearly outlined. So you want to also be very clear about what customer protection demands, the dispute mechanisms and resolutions.

Was there any pushback from customers regarding the part of the GSI guideline that authorises access to a debtor’s joint account, particularly the family’s joint account, to take money from there and repay his loan?

There will definitely be pushbacks. But you know, when it comes down to basic corporate financing, the whole idea of having even a credit report or even the GSI is that people are able to service their loans. Now, I can be a smart customer. For instance, let’s say, I’m married to my executive secretary and I decide to take N5 billion from the bank. I take N5 billion from the bank, I don’t pay the bank back. I put the money in my wife’s joint account. It’s sitting there, and in the joint account there is another N10 billion together with the N5 billion I borrowed from the bank. If we say that we would not consider the joint account and the man dies, he has left her with the N10 billion that is their money and also left her with the N5 billion liability that they cannot take further recourse, to even though the money is sitting in the account. So if you are not careful when it comes to policy formulation you create loopholes in those policies. You know, an average Nigerian is a very smart person. They can tap into those loopholes and said okay, they can pay him in my account but not in my wife’s joint account. So the man dies and the bank has a liability of N5 billion to deal with and the woman smiles to the bank. Do we now say, oh, you are a widow, madam just go and spend the N5 billion. No, it can’t happen because that’s depositors’ fund out there. A lot of people amounted to that N5 billion that is now sitting in one person’s account.

Let’s look at Nigeria’s credit system. How has it fared, say, in the last five years?

Well, we are now better than what we used to do. And one of the things I tell people at every opportunity I get is, any country that has the goal of development must create supporting institutions. If you don’t create supporting institutions, there is no such thing as development. Now, if you go back to the 90s when we didn’t have microfinance banks, you will see how SMEs, for instance, fared in Nigeria. A lot of them opened today and died the next day. The only SMEs that really fared well were the ones selling corn by the roadside. When you look at the amount of SMEs development in Nigeria now it’s really amazing. Simply because people have initiative and they are also able to now get the credit to fund that initiative, that’s one. And then, you look at credit bureau system for instance, you see that in the early 90s, a lot of banks died -Savana Bank and the likes, all died by the minute because people were borrowing money and they were not paying back. But now if you look at it, you will see that the banking system is more stable credit-wise. People take money and they have to service it. If you don’t service this bank and you go to another bank, even if it’s an overdraft, nobody wants to give you money. They will say, go back and pay your bill. So those supporting institutions have started to create a concrete system that helps you now have the development that you can build on over the years. So we have really done well for ourselves overtime and the results are very clear. The non-performing loans have dropped massively and it continues to be so.

Looking at the lending rate in Nigeria, are we improving?

We are improving massively. Again you would also see that recently, with the activities of fintechs in Nigeria -digital lender and all of them, it has improved massively. Over the course of the week, I have spoken to at least five fintechs. Some of them coming from China, some of them have businesses in India, Kenya and they want to replicate the same business model in Nigeria. The average Nigerian now can use loans from Sukut lender, Keke money, that are using all kinds of credit from different digital lender. You will now ask yourself, why didn’t we do this in 1993? Why did we have to resort to Isusu savings? So we are becoming more digital in our push for credit and the credit culture is also developing overtime.

And you think the Credit Bureau Association of Nigeria is instrumental to that?

Extremely instrumental. Instrumental by virtue of the things we have done; whether it’s advocacy, whether its publicity, Webinars, outreaches, roadshows, seminars, every type of thing. CBAN has been instrumental such that each credit bureau sees that even the government acknowledges that, the CBN acknowledges that. I think it was in 2017 that we got letter from the Presidency on the Ease of Doing Business, saying we are doing a great job. It said that the indicators around the world showed that we are doing well. So that’s part of the things that speak to what we do and the results we are seeing in the market.

One of the challenges SMEs face in this country is lack of access to credit. Banks find it difficult to lend to then. Why is it so?

You are very correct. That’s the question an average SME in Nigeria asks. We have had countless meetings around this. One of the things they tell you is that they don’t have capital, they don’t have access to credit. But the fact is, when you look at the human nature, there is higher chance for you to lend money to someone you know very well than you will do to someone you have little or no knowledge about. Now, the idea with most of these banks is: there is a business decision running on the background -a risk profile running on the background that is saying, ‘do we know this person? Even if we don’t know this person as a person, do we know him financially? A lot of the SMEs don’t have financial footprints. Some of them have never taken a loan and if you have never taken a loan, the bank is unable to see how you will perform overtime. So, they can’t identify you financially. Some of them have never done any serious transactions before. So, the banks have a model running on the background when they are doing their book building and consideration whether to give this person a loan or not. They are looking at it and saying, ‘but we don’t know this person. So, our risk profile says that this person is high risk because we don’t know how he is going to behave. He may just take this money and take ticket out of Nigeria and never to come back soon.’ And we say this to them every time when we go to SMEs out there. We say to them, can you at least start having a book building or some sort, whether it’s your transaction with the bank. Take N10, 000 loan, perform on it. Some of them just have bad credit that they don’t even know of. So, they have taken an overdraft, maybe bank charges or something, they just feel less concerned and say it’s just N2 and it was 10 years ago, and that N2 has now come back to hurt them because 10 years after, that N2 is now looking like N1000 plus. And it’s sitting in the book of a bank as liability that must be served. So, at the time they now need fund and they walk into the bank and the bank said no, you can’t take this money. They won’t tell you the reason. The report has simply said non-performing or high risk. So, they go out there and say nobody is giving them money. We come in as a credit bureau and we try to make them understand that these little things that you overlook will start to count when you don’t think it matters. So, those are some of the things that come to play in SMEs being able or not being able to get credit from banks.

Is interest rate not also a factor, because we still have double-digit interest rate?

It’s a consideration but really, if I have viable business that I want to run, as much as I will consider the interest rate, it’s still very negotiable. So, the interest rate in Union Bank is different from others, and you can always work it out with the bank. But the willingness of the banks to actually give the money out as the first stage is usually universal to the banks. So, if they don’t know you, they can’t give their money out. Why would anybody give their money to me, for instance, in comparison to Dangote? Dangote doesn’t even need to walk into the bank to get loan because they know him. So, when they know and they are able to establish your financial footprints as the first stage, which can even play into your interest rate negotiation dynamics.

Does it mean collateral should no longer be much of an issue because the intending borrower is well known to the bank?

No, collateral is not even the case. We emphasise it every time. We say ‘character over collateral’. Because if you look at it very well, how many people even have collateral in this country? Look at the middle class and the lower class, nobody has a collateral in this country. It’s only the big men buying houses in Maitama and Asokoro, Banana Island, which really have collateral. So in those type of cases, you can give them billions with the idea that you would recover the house. But if you are really talking about financial inclusion which is the goal of CBN, the Credit Bureau Association of Nigeria, and other institutions, the whole idea is to be able to extend money to people that don’t even have collateral. We call them NINJA loans -No Income, Job or Asset. They don’t have any of these things but they need to survive. Just because they don’t have income, job or asset does not mean they should die. They are human. So the consideration for your financial inclusion then is, if in the banking space for instance, you have this wealthy class and the middle class of about N50 million with BVN and everything. And outside the banking space you have another N50 million of your adult population, bringing your adult population to about N100 million out of your total population of N200 million. What then happens is that you need to be able to extend your reach from that 50 per cent to 100 per cent or 80 per cent. Because if you don’t, you already have a social crisis in your hand. So the entire goal is to make sure that you increase your financial inclusion and be able to elevate people.

How did credit bureau operators feel the impact of COVID-19?

Well, the impact was felt mostly in April. That was when most organisations saw the need to stop lending because of the uncertainty. Nobody knew whether or not they would still be here in the next three months or how that would affect their loan repayment. In other words, if someone who takes a loan today dies the next day, what then happens to the repayment of that loan? So it was okay for everyone to be really uncertain at that time and so, loan allocation probably dropped by 70 or 80 per cent. It was a V-shape kind of recovery. So, one month it dropped truly high, I think in April. And then the next month it picked up as if nothing has happened and everyone went back to the normal state again. So that was really the case during COVID-19 even though we had some structured ways to offer our clients, it turns out that a lot of them didn’t ask for it. They just went back to proper business model after a month or two and everything came back normal.