CBN Right of Set-Off - A Case of Regulatory Over-Reach?

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Tuesday, December 24, 2019  / 03:34 PM /  OpEd By Yinka Ogunnubi / Header Image Credit: Ecographics     

 

At the 345th meeting of the banker's committee on the 26th of August, 2019, a decision was taken or rather an instruction was handed down by the Central Bank of Nigeria (CBN) through the Governor. It is called the "CBN Right of Set-Off" and it basically allows the CBN to utilize the deposit of a customer in another bank to off-set a defaulting obligation.

 

The committee resolved that banks shall have access to utilize the deposits of defaulting customers across the banking industry to regularize their non-performing loans.

 

The instructions contained three undertakings that with effect from August 26th 2019, the terms and conditions in the offer letters and loan agreements must among other things contain the following undertaking to be signed by prospective obligors, viz:

 

  1. "By signing this offer letter/loan agreement, and by drawing on the loan, I covenant to repay the loan as at when due. In the event that I fail to repay the loan as agreed, and the loan becomes delinquent, the bank shall have the right to report the delinquent loan to the CBN through the Credit Risk Management System (CRMS) or by any other means and request and request the CBN to exercise its regulatory powers to direct all banks and other financial institutions under its regulatory purview to set-off my indebtedness from any money to your credit in any bank account and from any financial assets that may be holding to my benefit"

 

  1. "I covenant and warrant that the bank shall have the power to set-off my indebtedness under this loan agreement from all such monies and funds standing to my credit/benefit in any or all such accounts or from any other financial assets belonging to me and in the custody of any bank."

 

  1. "I hereby waive any right of confidentiality whether arising under common law or statute or in any manner whatsoever and irrevocably agree that I shall not argue to the contrary before any court of law, tribunal or any administrative authority or anybody acting in judicial or quasi-judicial capacity"

 

It didn't stop there.

 

It also instructed that with effect from Aug 26th, all offer letters and loan documentations must contain undertaken for provision of the Bank Verification Number (BVN) of the obligor for individual loans and that of the directors of the company and its Tax Identification Number (TIN) for corporate loans for ease of identification of other deposits of the individual or the corporate borrower as the case may be. While for personal guarantees, the BVN of the guarantor should equally be provided.

 

The implication is simple.

 

If a bank should for whatsoever reason declare a default of a loan or that your loan is delinquent, they can request the CBN to invoke the utilization of your deposit in any other bank for the repayment of that obligation.

  

Related Links

  1. Banker's Right of Set Off: Explained
  2. CBN Issues Consumer Protection Regulations

  

I'm quite concerned about many aspects of these guidelines and I will try to explain why.

 

Yes, I understand the intention of the CBN. Given our current challenges with toxic loans, previously high (but now reducing NPL ratios) and recovery of AMCON debts which recently needed an amendment of the AMCON Act to aid the recovery of debt, the CBN feels the need to enhance the credit risk management culture especially and ensure that depositors funds are better protected. So yes I get it. But I'm still concerned that in doing so, the CBN might just be enshrining and instituting an illegality. 

 

Let's be honest, the "Right of Set-Off" is not new. It has been in the works since the CRMS system was instituted and redesigned. If you opened an account or borrowed from a bank in the last 5 years, you would have signed off on documents authorizing the bank to offset any loan you from any credit balance (in any currency) within the bank or any of its affiliate in the event of a default.

 

Now that to me seem fair and understandable. What you would not have done is to sign away your right to confidentiality or to argue your case before any court of law. With the new guidelines, some banks even go the extra mile of asking customers to indemnify them and the CBN from losses that may be incurred in exercising this right.

 

Effectively this means that should a company take a loan from Bank A to implement a Project A and 2 years down the line, it takes another loan from Bank B to implement a Project B, if Bank A declares a default (whether valid or not), the CBN can ask Bank B to offset Bank A's loan from the credit balances and the company is barred from arguing his case in a court of law. 

 

Yes this is entirely possible. Read the undertaking again. The CBN did not make any distinction whether the "Credit" deposit in the other bank came as a result of a loan granted by another bank or even capital market funding like a CP or bond. It just simply says "Money Standing to your Credit". In fact, it went further to include money … from any financial assets that may be holding to my benefit".

 

I'm beginning to see a trend among agencies of government to (through the back door) gain legal access into confidential information of individuals and corporate entities. Whether it's coming by way of Tax Identification Number (TIN) on account holders or by way of asking them to waive their rights to confidentiality. 

 

The right to privacy of a Nigerian is guaranteed by Section 37 of the 1999 Constitution. Even the bank customers "Bill of Rights" affirm the right of the customer to freedom from disclosure of account details by banks as well as intrusion into bank account by third party. The question is does consenting to disclosure based on a CBN guideline negate an individual or Corporate Entities right to privacy as guaranteed by the constitution? And does a consent to this disclosure exclude the individual or Corporate Entity from challenging the decision of a bank or the CBN to declare a default or request a set-off? 

 

I leave these questions for legal experts to ponder and answer. For now, most corporates (who are already getting letter of addendum from their banks) will have no choice but to sign these new clauses otherwise their credit lines will be withdrawn by banks. The Year 2020 will be interesting on several fronts.


Merry Xmas and Happy New Year 


Download Here - CBN Right of Set-Off


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