GSI: CBN’s guidelines brighten outlook for NPLs



Banks, OFIs to start implementing guidelines on GSI for individuals as from August 1, 2020


Tony Chukwunyem The likely surge in non-performing loans (NPLs) in the banking industry due to impact of the COVID-19 seems to have been reduced by the Central Bank of Nigeria (CBN)’s release of operational guidelines on the Global Standing Instruction (GSI) for individuals, findings by New Telegraph show.


In a circular posted on its website last Monday, the apex bank directed deposit money banks (DMBs) and other financial institutions (OFIs) to start implementing the operational guidelines for individuals as from August 1, 2020.


It stated that the guidelines, which were developed in collaboration with stakeholders, would facilitate, “a seamless implementation of the GSI process, including eligible loans granted from August 28, 2019,” adding that the objectives of the GSI include, “facilitating an improved credit repayment culture; reducing non-performing loans in the Nigerian banking system and watch-listing consistent loan defaulters.”


CBN had announced in December 2018 that it was planning to introduce a new mechanism called the Global Standing Instruction, 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.


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


Specifically, CBN stated: “The GSI shall serve as a last resort by a creditor bank, without recourse to the borrower, to recover past due obligations (Principal and Accrued Interest only, excluding any Penal Charges) from a defaulting borrower through a direct set-off from deposits/investments held in the borrower’s qualifying bank accounts with participating financial institutions.”


Although still above the prudential benchmark of 5.0 per cent, Nigerian lenders’ NPLs ratio has been heading south in recent months as a result of aggressive debt recovery strategies adopted and implemented by lenders coupled with CBN’s measures.


For instance, CBN Governor, Mr. Godwin Emefiele, recently disclosed that the NPL ratio of the industry dropped to 6.6 per cent at the end of April 2020 from 11 per cent in April 2019. In a report released by CBN on its Monetary Policy Committee (MPC) meeting in May, Emefiele said: “I note the continued moderation of NPL ratio from 11.0 per cent in April 2019 to 6.6 per cent in April 2020 amidst growing private sector credits.” He said the reduction in NPLs underlined the CBN’s continued drive to de-risk lending.


However, in the wake of the sharp drop in oil prices as well as the devastating impact of coronavirus, there have been predictions in some quarters of a likely surge in Nigerian lenders’ bad loans. Fitch Ratings, in a report released in May, for instance, stated: “Nigerian banks’ credit profiles face severe risks from the oil price slump and operating environment disruption due to the coronavirus pandemic,” adding that “asset quality deterioration linked to high exposures to the oil and gas sector is the biggest threat to ratings.”


According to the credit rating agency, “operating environment risks inevitably rise in Nigeria when oil prices fall. Oil exports represent 95 per cent of the country’s export revenue and  strongly influence the broader economy. Falling oil revenue may also lead to further currency devaluation.


Accordingly, the slump in oil prices raises the risk of a recession. Operating environment risks are compounded by economic and financial market disruption amid measures to counter the pandemic, putting pressure on all borrowers.”


But with the implementation of the GSI by lenders set for August 1, some financial analysts believe this would help curb NPLs. As Cowry Asset Management Limited put it in a note obtained by this newspaper at the weekend, “we commend the apex bank on its efforts in ensuring reduction in banks’ NPL ratios as the implementation of the GSI should effectively reduce the number of loan defaulters and improve financial system stability.



“This should further engender trust, going forward, and improve risk appetite of financial institutions in furtherance of the apex bank’s directive to improve the loan to deposit ratio beyond 65 per cent as well as financial inclusion, hence increasing credit to the private sector.


This, in addition to other intervention programmes across sectors, appears timely and should impact positively on an economy on the verge of falling into recession.”


Other financial experts have, however, pointed out that while the GSI is a commendable initiative, the fact that it does not apply to corporate accounts could significantly limit its positive impact on reducing NPLs.


Analysts at Proshare expressed this concern in a note last week when they stated that “while the initiative by the CBN appears a step in the right direction, it is important to note that there remain areas of concern which the guideline/GSI is yet to address.


“The GSI guideline states that the CBN shall ensure uninterrupted availability of the Credit Risk Management System (CRMS) platform and connectivity to Nigeria Inter-Bank Settlement System (NIBSS) platform, it remains silent on the roles of credit bureaux.


“Also, of concern is the issue of the GSI being limited to individual accounts. According to a recent FBNQuest Capital Research report, individual and consumer-related 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 per cent 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,” the analysts added.


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