It is common to hear people say, ‘No, don’t pay the money into that bank account, I am owing the bank, I don’t want them to deduct my money, pay into my other bank account’. Well, if you fall into this category, or know anyone that falls into this category, you may need to read this article because the Nigerian policy on loan recovery has changed.
The Central Bank of Nigeria (CBN) is the regulator of the Nigerian financial and banking sector. Accordingly, it issues a banking license to persons desirous of carrying on banking business in Nigeria. As the key regulator of banking business and the financial sector in Nigeria, it is mandated by section 2(d) of the Central Bank of Nigeria (Establishment) Act to promote a sound financial system in Nigeria.
In furtherance of its duties under the law, CBN periodically issues regulations and guidelines. In July 2020, it issued the Guidelines on Global Standing Instruction (GSI) (Individuals), which shall hereinafter be referred to as the GSI Guidelines. These Guidelines have revolutionised the banking sector, loan and loan repayment practices and has made fundamental changes to hitherto settled legal banking principles.
There is a direct relationship between loan recovery and the soundness of every financial system. If bad loans are constantly recorded by financial institutions, it could precipitate the collapse of the financial system and threaten the economy. The GSI Guidelines were issued in the belief that enhanced loan recovery practices will promote a sound financial system. Consequently, the objectives of the guidelines are primarily to facilitate the improvement of the credit/loan repayment culture, reduce non-performing loans in the banking sector and to identify and monitor constant loan defaulters.
The relationship between a bank and its customer is contractual. One of the standard terms in a bank-customer relationship is that the bank will only obey the instructions or mandates of its customers. This means that withdrawals or debits cannot be made on the account of the customer without an express mandate given by the customer.
Where a customer has several accounts with a bank, the customer is deemed to have entered into different contracts with the bank in relation to each of the accounts held at that bank. Each of those accounts are required to be kept separate and distinct and the customer’s instructions given in respect of each of those accounts are to be complied with. In Mainstreet Bank Plc V. Dizengoff (West Africa) Nigeria Ltd (CA/YL/30/2013), the court explained this by stating that ‘The banker has no right to combine them[separate accounts] or transfer assets or liabilities from one account to another without reasonable notice of the intention so to do or without assent of the customer’.
Consequently, where a bank customer used Account A to access a loan at the bank and the loan remains unpaid, the bank cannot use money from the customer’s Account B to repay the loan, unless by the express mandate given by the customer.
It therefore becomes inconceivable that where a customer is in default of repayment of a loan collected from one bank, that money standing to his credit in an entirely different bank can be accessed by the creditor bank (the bank being owed) and used to repay his debts. That which was formerly inconceivable is now the standard practice by virtue of the GSI guidelines.
Key Provisions of the GSI Guideline:
i. GSI Mandate
A bank cannot deal with a customer’s account, except with the customer’s express instruction. The GSI guidelines, therefore require banks giving out loans to secure a prior standing instruction (mandate) that is applicable to all banks in which the customer/borrower has an account (hence the title of the guidelines as ‘Global Standing Instruction’).
A GSI mandate is defined in the guidelines as a written or digital instruction given by a borrower who is also an account holder in a participating financial institution (eligible banks), authorising the creditor bank (the bank from which he/she has borrowed money) to recover an amount specified by the creditor bank from any/all accounts maintained by the borrower/account holder across all participating financial institutions. A GSI mandate is simply a prior authorisation given to a bank to recover its money from any or all bank accounts operated by the borrower. This means that even if the account used to access the loan is not funded, the loan may be repaid from funds accessed from other bank accounts maintained by the borrower, upon issuing a GSI trigger by the creditor bank. A GSI trigger is an electronic instruction issued by a creditor bank in order to recover its money from the bank accounts of a borrower upon the borrower’s default. Prior to this, it would have been impossible for a bank to recover money from its debtor’s bank accounts in other banks.
The traditional and legally acknowledged duty of confidentiality owed a customer by its bank can be overridden by a balance enquiry initiated by a creditor bank under the guidelines.
Banks have an obligation to properly educate their customers/borrowers about the GSI mandate and its implications. It is also required that the GSI mandate is incorporated in the loan application process to ensure that prior consent is properly secured. This forestalls any liability on the part of the bank, when it chooses to trigger the GSI mandate process.
ii. Eligible Accounts
Not all accounts are eligible for a GSI. The following are the categories of eligible accounts:
a. Individual savings accounts;
b. Individual current accounts;
c. Individual domiciliary accounts;
d. Investment/deposit accounts (both naira and foreign); and
e. Electronic wallets.
The guidelines state that joint accounts are also eligible for a GSI mandate. Creditor banks may need to proceed with caution in initiating a GSI trigger on a joint account, because of the potential legal landmines that may be inherent in it. This is because setting off a GSI trigger on a joint account is tantamount to mandating a non-debtor (a person who did not borrow any money and who did not guarantee a loan taken by the borrower) to repay someone else’s loan. A GSI trigger may only be initiated in respect of accounts that have been linked to a customer’s bank verification number (BVN). However, such accounts can be watch-listed. These guidelines are inapplicable to corporate and business accounts.
Non-eligible/ unavailable accounts for a GSI trigger are accounts that have CBN approved/recognised restrictions, such as probate accounts, or accounts frozen pursuant to an order of court because of fraud. Outstanding or unrepaid loans cannot be serviced from such accounts.
A creditor bank can recover the principal sum, which is the loan amount or the total sum granted or disbursed to the borrower, as well as the accrued interest on the loan, stated in the loan agreement. However, a creditor bank is prohibited from recovering penal rate or charges. Penal rate refers to ‘the interest rate that financial institutions charge customers for failing to make payments on loans as at when due’. It is distinct from the interest rate and is usually charged in addition to it. There are penalties prescribed in the guideline for non-compliance by banks.
The GSI mandate’s strength lies in its potential to strengthen the Nigerian financial system, ensure the repayment of loans and discourage dubious loan practices on the part of bank customers, as well as bank staff.