Banks Debtors in Trouble as CBN Activates Inter-bank Debits

Banks Debtors in Trouble as CBN Activates Inter-bank Debits

  • Guidelines will improve repayments, reduce NPL ratios, serve as credit profiling tool and improve private sector credit
  • Only registered financial intuitions are authorised to activate the mandate and it only applies to individual accounts
  • Tellimer think this is a forbearance measure to cushion the growing NPL figures of banks owing to the CBN’s 65% LDR mandate

The Nigerian banks debtors are in trouble following the activation of the inter-bank debits by the Central Banks of Nigeria.

The Nigerian banking sector non-performing loan ratio will drop significantly as the apex bank introduce inter-bank debits which is expected to take off in August 1.Banks Debtors in Trouble as CBN Activates Inter-bank Debits

The CBN has now introduced a new set of guidelines that allows banks to debit loan defaulters of their funds in other bank accounts across the country.

Read Also:Analysts say Foreign Exchange Liquidity Looms Large in Banks

However, the newly introduced Global Standing Instruction (GSI) which take effect from August 1, 2020, shall serve as a last resort by a creditor bank.

Tellimer’s equity research analyst, Nkemdilim Nwadialor, explained that banks will be allowed without recourse to the borrower, to recover past due obligations.

These include both principal and accrued interest, but excluding any penalties from a defaulting borrower through a direct debit.

This direct debits could be from deposits/investments held in the borrower’s qualifying bank accounts with participating financial institutions (PFI’s).

The GSI mandate is effectively the creation of a credit profiling database

In addition to debiting the accounts of defaulter the GSI as maintained by the Nigeria Inter-Bank Settlement System (NIBSS), who is the custodian of BVN and holds records of all bank accounts in the country – is only applicable to individual or joint individual accounts.

Tellimer explained that the NIBSS will also create and maintain a watch-list of consistent loan defaulters to enable banks screen out problem lenders and disburse loans more prudently.

The GSI will be applied retrospectively for loans disbursed from August 28, 2019

According to the GSI guidelines as released yesterday, it requires lenders to properly educate borrowers about the mandate and its implications.

Tellimer said this will now be included in the loan application process going forward but also applied to eligible (individual loans) granted from August 28, 2019.

“Once a debtor within this category defaults on a loan, the GSI mandate is activated the creditor bank.

“Once triggered, the available accounts for recovery are identified, available balances for the accounts are retrieved and funds equal to the past due obligation(s) are recovered from these accounts”, Tellimer explained.

According to the report, anly recognized financial institutions are covered under the GSI.

Tellimer said a growing portion of private sector credit has come from fintech lenders such as Carbon, Migo, Branch; Fairmoney etc. who will undeniably benefit from the introduction of such a provision.

However, the GSI guidelines current only authorizes recognized finance institutions to initiate the GSI trigger, analyst said.

Tellimer stated that this is a positive for banks and could help to improve the NPL profiles

Tellimer explained that the move is positive for Nigerian banks as this could help improve bad loans profiles.

The firm’s analyst stated that consumer credit, lending to individuals and private households account for about 10% of loan book for our Nigeria coverage.

With the introduction of the CBN’s LDR mandate many banks lamented the potential rise in NPL’s that could follow with the implementation of the policy considering how little recourse the banks had in pursing defaulters.

The CBN in mediation with the financial institutions realized that the a biometric identification number (BVN) system implemented to curb or reduce illegal banking transactions which was introduced to reduce fraud in the banking system, could also be used to improve the private sector credit repayment culture.

Tellimer’s analyst said banks however need to tread with caution as the guidelines include penalties for even the slightest misconduct.

Meanwhile, the CBN list some sanctions for banks and other financial institutions in case of violation of any of its provisions.

The apex bank stated that where a Creditor Bank activates a Global Standing Instruction mandate in error when it is inconsistent with Prudential Guidelines a fine of N500,000 per incident is applicable

Also, where a PFI incorrectly places a CBN approved restriction on an eligible account in order to shield it from the GSI Trigger, the erring PFI shall be fined to the tune of the amount in that ‘restricted/shielded’ eligible account

If PFI fails to grant the GSI permission to perform a status enquiry check or to debit an eligible account, the PFI shall pay a flat fine of N100,000 per initial incident and each subsequent repeat regardless of the GSI Trigger Amount.

Again, CBN stated that where an account is debited in error due to an error from the PFI, the erring PFI shall pay a fine equivalent to the amount erroneously debited to the wrong account.

Stressing further, CBN indicates that where the arbitrator rules against the Creditor Bank for a disputed GSI claim, the creditor bank shall pay a fine of NGN10 million or 10% of the disputed sum, whichever is greater.

“Where a Creditor Bank includes Penal Charge in the GSI Trigger amount, in event of a Successful GSI Trigger, the Creditor Bank shall refund the full penalties charged to the borrower with interest from date of GSI trigger to refund date”, the CBN stated..

Banks Debtors in Trouble as CBN Activates Inter-bank Debits


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