For keen observers of recent occurrences in the banking sector, it could easily be identified that the underlining issues were all linked to non-repayment of loans and poor servicing of credit facilities.
The Central Bank Governor, in his speech to justify his intervention at FirstBank where he reinstated the Managing Director and sacked the entire board said, “The problems at the bank were attributed to bad credit decisions, significant and non-performing insider loans and poor corporate governance practices. The shareholders of the bank and FBN Holding Plc also lacked the capacity to recapitalise the bank to minimum requirements”.
The summary of the crisis in FirstBank was an attempt by an allegedly compromised and heavy-handed board, most of them probably owing billions of naira, trying to remove a Managing Director who was not “playing ball” adequately. Interestingly, their efforts backfired. Bad loan has always been the crux of every bank crisis in Nigeria.
Now there is a new policy created to tackle this. Individuals and corporate organisations that are in the habit of borrowing from banks with no intention of repayment may have to think twice. Such borrowing pattern may soon come to an end following the agreement reached between the Central Bank of Nigeria (CBN) and banks in the country. This new understanding will ensure that loan defaulters’ monies are drawn to offset their debts in any given bank or banks.
However, loan default is a global challenge that has become a recurring decimal in many countries. In Nigeria, the point has been made that bad debts in financial institutions are a contributory factor to bank failures. This has been the situation over the years as a cursory reference to the totality 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 later 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 lent to their board members, relations and friends who in turn, didn’t pay back the loans. And when that happened, it had ripple effects that 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 sensitisation, weak monitoring system, lack of adequate knowledge by practitioners and 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 in 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 somewhere in 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 the 1890s to the 1950s before the CBN Act and the First Banking Act were enacted. These Acts brought about a 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 the 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 relationship is a contractual one, and so, the rules that govern the management of the customer’s account are based on a 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. That is, a system that ensures that only those that deserve the loans get them.
One of such measures was the introduction of the Credit Risk Management System that is meant to centralise 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 is enhanced by harmonising the different silos of identity management including Bank Verification Number (BVN), National Identification Management Commission (NIMC), Federal Road Safety Commission (FRSC), Nigeria Immigration Service (NIS), telecoms, among others.
With a 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 the country’s legal proceedings take a lot of time. 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 a global approach in terms of dealing with recalcitrant debtors. The application of this initiative will among other things, check loan defaulters who go elsewhere to procure loans.
This policy will make loan defaulters honour their obligations to their financial institutions, thus preventing them from having access to more 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 their 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 challenge with respect to existing loan defaulters. Unless the banks are able to coerce them to sign some kind of consent form, this policy will not work with them. The legality or otherwise of the GSI to be able to reach an account that is jointly held for either a member of a family, will still have to be interrogated because that account has its own mandate instructions.
But 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 were given samples of how to draft or craft loan conditions going forward. This means that non-performing loans prior to September 2019 may not 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 this idea can by way of the policy directive, interfere with individual contracts between customers and the banks.
The practice of reaching agencies is not well defined in Nigeria, and their prominence and effectiveness have not been tested in the financial sector. Here, there could be 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 organisation, 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 your own account and your wife’s account, if there is N50,000, for instance, 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 in the courts.
GSI is a specific reference to an 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 a competency framework is very important. This entails training and retraining, certifying and professionalising 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.