As a debt management consultant, any policy or law related to debt financing, restructuring, and collections is of particular importance to me. The CBN’s GSI guidelines touted to help Banks in loan recoveries and reduce the incidence of non-performing loans were released on July 13, 2020.
The GSI essentially gives a lending financial institution referred to as a participating financial institution (PFI) an automatic right of set-off. The creditor PFI will in a simplistic manner aided by the (CRMS), (NIBBS) and (BVN), recover its non-performing loan from balances standing to the credit of the borrower in any other financial institution. My review of the guidelines is summarized below:
1.1. To engender an improved credit payment culture
1.2.A Watch-list of consistent loan defaulters.
1.3.Reduce the incidence of non-performing loans in the Nigerian Banking System (NBS)
- ELIGIBILITY & COMMENCEMENT
2.1. The effective date of commencement of guidelines is August 1, 2020.
2.2.All financial institutions connected to NIBBS platform
2.3. All accounts including electronic wallets can be seized under the GSI, including joint accounts
2.4.Used for the recovery of only principal and interest. Penal charges excluded
2.5. All loans granted from August 2019
- OPERATIONS & IMPLICATIONS
GSI SIMPLE PROCESS FLOW
3.1. When you apply for a loan, your lending institution will give you a mandate form that essentially authorizes it to set-off your principal debt and interest against any balances you have in any other account in any other Bank. This is simply an extension of the right of set-off customarily enshrined in account opening forms and loan agreements beyond your lending bank to other Banks. It also extinguishes the need for the lending PFI to go through a court of proof of debt and garnishees. Essentially, all Bank accounts with your BVN are subject to a Global Standing Instruction (GSI) and can be triggered by the creditor PFI for payment when you default on your loan obligations. It does not matter if the account is owned jointly with your wife, child, or another person. Now because this affects joint accounts, it is unclear how this may affect partnerships. Clearly, if your partnership account has the same BVN, then the GSI applies to that account. The guidelines also make provisions for a situation where a partnership or joint account does not have the same BVN. It means the said partnership or joint account with the different BVN numbers not linked to the GSI will be watchlisted. When your account is watchlisted, assessing credit facilities is quite difficult if not impossible.
3.2. Your lending institution is under an obligation to fully explain the implications of your signing this mandate to you. They are to explain the full scheme to you and how it works.
3.3.NIBBS is central to the operations of this scheme via a GSI Mandate Agreement between the lending institution and NIBBS. This means the whole process is supposed to be electronically done. A GSI trigger starts the process of the GSI loan recovery: it is an electronic instruction
from a creditor bank to NIBBS to initiate a GSI instruction.
3.4. The guideline makes provisions geared towards preventing abuse of the scheme by financial institutions by fining them for wrongful triggers, for wrongfully shielding certain accounts from being subject to the mandate, refusal to allow debit, allowing withdrawals from an account that has been triggered. The most interesting penalty though is that of paying an additional fine of N10million or 10% where an arbitrator rules against the creditor PFI for a disputed GSI transaction. It is unclear though if this fine is paid to the customer or the CBN.
After a review of the guidelines, I believe over time it would achieve the intention (1) and (2) but will not make a significant impact on (3) for the simple reasons that it deals with only individual borrowings. The % of individual loan defaulters in the Nigerian banking system is not significant
considering the reduction in consumer lending since the 2008 capital market collapse.
The bulk of the loans that give the Banks headaches are business loans. The loans are taken by Mr. Charles operating as BMC Nigeria Limited. BMC Nigeria Limited is a separate person in law from Mr. Charles who will not have the same BVN number. Even if he did, the whole essence of limited is that his personal funds will not be taken in satisfaction of business failure. However, in our clime, small and growing businesses often lack the financial discipline of separating the company from promoter funds just as they often are unable to differentiate turnover and profitability. Until the guidelines on how this will apply to Limited Liability Companies, there is not much to grind our teeth over.
It is pertinent to note that in most consumer lending transactions, an underlying asset is being financed and the asset is usually the collateral for the lender. With GSI, the Bank’s first recourse will be to your other cash assets. Should this fail to satisfy your debt, then the asset will be pursued. Whilst the GSI cannot be applied for penal interest, they certainly can be applied over the asset collateral.
Conclusively, financial institutions should achieve a better collection rate with the GSI on the category of loans such as salary advances, credit cards, cars, and asset finance and mortgages. Unfortunately in a time of grave recession with job losses, the average individual borrower is doomed. The opportunity to restructure his debt into smaller repayments aligned to his now reduced cash flow is taken away
with the GSI giving his creditor the right to sweep all his cash left for perhaps new business for survival and taking care of his family