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Bad debts: GSI operation takes off amid legal concerns

  • Banks to seize deposits, investments of loan defaulters

 

 

Financial institutions in the country are expected, from today, to begin implementation of Central Bank of Nigeria (CBN’s) guidelines on the  Global Standing Instruction (GSI) for individuals, even as lawyers and stakeholders are raising concerns over certain provisions of the rules, which according to them, have the potential of creating legal challenges for creditors.

 

The apex bank had, on  July 13 this year, directed Deposit Money Banks (DMBs) and Other Financial Institutions (OFIs) to start implementing the operational guidelines on the GSI for individuals as from August 1, 2020.

 

According to the regulator, the GSI will be a last resort for a creditor bank, which, without recourse to delinquent borrowers, can recover its debts by seizing the deposits and investments that such borrowers have in other banks.

 

The CBN had announced in December 2018 that, as part of efforts to curb bad    debts in financial institutions, it was planning to introduce the GSI mechanism, which will use the Bank Verification Number (BVN) of depositors to detect bad borrowers who refuse to pay their loans but would go ahead to take additional loans from other unsuspecting banks.

 

In fact, in the guidelines it unveiled last month, the CBN said the objectives of the GSI include, “facilitating an improved credit repayment culture; reducing Non- Performing Loans (NPLs) in the Nigerian banking system and watch-listing consistent loan defaulters.”

 

However, while banking industry operators as well as financial analysts have welcomed the introduction of the GSI, legal practitioners told New Telegraph, at the weekend, that there were some grey areas of the GSI provisions that may affect the attainment of the initiative’s objectives.

 

Specifically, the lawyers raised issues about the applicability of the GSI to the operation of joint accounts.

 

For instance, in an email response to New Telegraph’s questions, a Port Harcourt-based legal practitioner, Chike P. Chukwunyem, said: “In my view, even though GSI says joint accounts can be affected, the legality is debatable given that joint accounts belong to at least two or more individuals.

 

Where the mandate to operate the joint account is a joint mandate, can one party unilaterally sign it away without the consent of the other party, I doubt seriously.

 

“Another issue is that the customer must sign up to the GSI mandate in the loan agreement or letter of offer for it to be effective. If for some reason the customer is given an unauthorised loan or overdraft by a branch manager without any letter of offer, the GSI would certainly not apply.”

 

Also, commenting on the GSI guidelines in a recent article, a Senior Advocate of Nigeria (SAN), Kemi Pinheiro, citing several cases, said: “The settled position of the law is that a loan agreement can only be enforced against a party to it…

 

 

A joint account cannot be subject of a garnishee order for debt by one of the parties…. Consequently, the application of the Guidelines to joint accounts would constitute a breach of the right of the non-defaulting party, and render the creditor bank and/or the participating bank liable in damages.”

 

In addition to expressing doubts over the GSI’s applicability to joint accounts, legal practitioners and financial analysts have also faulted the CBN for restricting the initiative only to individual – current, savings and domiciliary – accounts and not making it apply to corporate accounts.

 

According to analysts, by excluding corporate accounts, the GSI initiative would not make significant impact in reducing industry NPLs given that corporate customers are responsible for most of the bad debts in the country. As analysts at Proshare put it in a recent note:

“Also, of concern is the issue of the GSI being limited to individual accounts.

 

According to a recent FBNQuest Capital Research report, individual and consumerrelated loans account for just a fraction (10%) of the sector’s entire loan portfolio.

 

“The report noted that to achieve meaningful impact, the GSI should be extended to loans in the corporate segment of a bank’s risk asset portfolio which accounts for more than 65% of the sector’s total average loans outstanding.

 

“The FBNQuest report, however, accepted that there may be complications in the implementation of the GSI if extended to the corporate loans segment of banks risk asset portfolios.”

 

 

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