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Key Takeaways from the CBN GSI Guidelines and the Case for a New Approach

Debtors & Recovery	2679 VIEWS
Debtors & Recovery
2679 VIEWS

Wednesday, July 15, 2020 02:42 PM / by Proshare Research / Header Image Credit: CBN & EcoGraphics

The Central Bank of Nigeria (CBN), this week, issued the Global Standing Instruction (GSI) for the various eligible individual accounts such as Savings, Current and domiciliary accounts. Accounts also included in the GSI are joint accounts, investment/deposit accounts and electronic wallets. The GSI which will be managed by the Nigeria Inter-Bank Settlement System (NIBSS) is expected to kick-off on August 1, 2020.

As stated by the CBN, 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.

The GSI is expected to achieve three (3) main objectives and they are;

1. Facilitate an improved credit repayment culture;

2. Reduce Non-Performing Loans (NPLs) in the banking industry; and

3. Watch-listing consistent loan defaulters

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.

Furthermore, the objectives of the GSI aligns with the new approach articulated in the NPLs & Bad Debtors -The Case for A New Industry Approach Report published by DebtorsAfrica in May 2020.

The new approach, as stated in page 181 of the DebtorsAfrica report argued the case for the creation of a digital register which would, 'embed a customer's borrowing journey into a digital framework that can be reviewed by lending institutions'

The digital register replaces the old perishable "name" and "shame" approach earlier tried and differs from the functions of Credit Bureaux.

While 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% of the sector's total average loans outstanding (see chart 1 below).

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.

Chart 1: Individual Loans as a Percentage of Total Loan Portfolio