At its meeting which took place on 18 February 2020, the Banker’s Committee approved the implementation of the Global Standing Instruction (GSI) for individuals. The GSI is designed to work with the Bank Verification Number (BVN) of bank borrowers to detect and check bad borrowers who have defaulted on existing facilities. It provides a platform that on the one hand allows banks and other financial institutions visibility of the credit history of borrowers and based on that, make an informed lending decision. On the other hand, it allows lenders (banks and other financial institutions) to recover outstanding loans from accounts linked to the borrower. Accordingly, at the heart of the GSI policy are the enablement of an improved debt repayment culture, a drop in the non-performing portfolios of Nigerian banks and what the Central Bank of Nigeria (CBN) has described as the “watch-listing of consistent loan defaulters.”
To ensure a hitch-free implementation of the GSI, the CBN, in collaboration with its stakeholders, has developed guidelines (the “Guidelines”) to regulate the implementation of the GSI ahead of 1 August 2020 which has been designated by the CBN as the effective date. Even though the effective date for implementation is 1 August 2020, loans granted from 28 August 2019 are eligible to be featured on the GSI platform. Recall that effective 26 August 2019, banks were already mandated to include in the terms and conditions of their offer letters and loan agreements, an undertaking which allows banks to set-off indebtedness from monies standing to the credit of the borrower in any bank account within the same bank or other banks.
What Borrowers Must Know
The Statutory Basis for the GSI Regime
The Central Bank of Nigeria Act (“CBN Act”), 2007 sets out the objects of the CBN as the apex bank in Nigeria. Section 2(d) of the CBN Act requires the “CBN to promote a sound financial system in Nigeria”. The CBN relies on this provision as the basis upon which it has introduced the GSI regime. Unsustainable growth in bank risk assets poses a danger to the financial system. Accordingly, the CBN acts within its statutory remit by taking steps to ensure the soundness of the financial system, including ensuring that borrowers repay their debts.
Accounts to which the GSI Applies
The GSI focuses on individual accounts. These individual accounts include savings, current and domiciliary accounts. Other accounts to which the GSI will apply are investment or deposit accounts as well as electronic wallets.
Portion of the Debt Covered by GSI
The Guidelines excludes penalty charges. Penalty charges are default interest rates that financial institutions charge customers for failing to make payments on loans and advances as at when due. It is charged in addition to the agreed interest rate on the facility. The Guidelines clearly stipulate that penalty charges are not recoverable through GSI. Accordingly, only the principal amount and accrued interest (without default interest) can be recovered by a lender through the GSI platform.
The Operation of the GSI
As part of the loan application documentation, a borrower will be required to execute an authorisation for the recovery of the amount specified by the lender from any or all of the accounts which are maintained by the borrower (the “GSI mandate instrument”) in Nigeria. This GSI mandate instrument will be reviewed and validated by the lender before disbursement of funds. In the event of a default, participating financial institutions are obligated to honour electronic instruction from a lender to initiate a GSI transaction, subject to the provisions of the CBN Prudential Guidelines.
The CBN continues to play an important role as the apex regulator in the Nigerian financial system. However, it remains to be seen how the GSI regime will be implemented and whether it will have a positive impact in reducing the non-performing loan portfolios of Nigerian banks and other financial institutions.
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