No reprieve for Nigeria’s chronic loan defaulters

In July, the Central Bank of Nigeria enacted the Global Standing Instruction, which empowers banks to debit accounts of chronic loan defaulters in any bank within Nigeria. Has it worked?


Image : ariyo olasunkanmi/

A large number of businesses that took advantage of the CBN’s directive to banks to lend more to small businesses or be penalised have found themselves in difficulties over paying back the loans following the arrival of Covid-19. The banks have loaned over $9.06bn to businesses within one year.

Michael Stephens, who runs a gift items and souvenir business, a debtor whose account has also been flagged for noncompliance, said his business suffered a major setback earlier this year following a five-week economic lockdown due to the Covid-19 pandemic.

“For five months, we could not even open our office and there were staff salaries to pay. As we speak now, we have still not started business fully. It’s a trying time for us because the interest on the loans has not been suspended and the tenor of the facility has elapsed,” he said.

FBN Holdings Plc, United Bank for Africa Plc and Zenith Bank Plc expanded their loan books by the equivalent of about $1bn each in order to dodge heavy penalties from the CBN, S&P Global Market Intelligence calculations showed.

Ike Chioke, managing director, Afrinvest West Africa Limited, said many banks expanded their loan base following the CBN’s directive last year that they lend at least 65% of their deposits to customers in a new Loan to Deposit Ratio (LDR) plan, or be sanctioned through restriction on their deposits. Many of the loans have since gone bad and the banks are now relying on the Global Standing Instruction (GSI) policy instituted by the CBN to recover their funds despite losses caused to businesses by the Covid-19 pandemic.

Pay up or else…

The CBN insists that borrowers must pay back. “The CBN will not allow people to borrow money and refuse to pay again. That era has gone. If you take money, you will pay back the loan. If you borrow money and refuse to pay, we will take your money wherever you are keeping it,” CBN governor, Godwin Emefiele said.

Adedayo Bakare, Macro-Economist Strategist at Afrinvest West Africa Limited, said the NPLs will continue to rise. He said: “We expect that the NPLs will rise further between 2021 and 2022, and the CBN is even trying to recapitalise the banks to enable them to absorb the likely shock from the NPLs rise. As the banks do more lending, they are also aware that the risks are still very high”.

Kelvin Amigo, CBN Director, Financial Policy & Regulations said the exercise requires borrowers to sign a GSI mandate in hard copy or digital form, after which all qualifying accounts are linked to the borrower’s  Bank Verification Number (BVN).

“The GSI mandate form authorises the recovery of an amount specified by the bank from any/all accounts maintained by the borrower across all financial institutions. The GSI empowers banks and other financial institutions to debit accounts of chronic loan defaulters in any bank within the country to ease NPLs growth in the country,” he said.

Amigo says banks recovered $130,325 worth of bad loans from individual debtors in the first week of GSI implementation. “It was specifically introduced to support the banking industry in reducing the rate of unserviced loans, improve loan recovery and recovery efforts of banks. The amount recovered was, however, insignificant compared with the total of $4.29m worth of bad debts by 26,057 customers, triggered by the lending banks.”

He said more recoveries are expected as the CBN was still working on the GSI protocol for corporate debtors.

“The CBN’s move to force banks to lend more is significant because over the past two years we’ve seen banks develop apathy in terms of credit creation, which has hampered domestic economic growth,” said the organisation.

Forced to lend to real sector

Jerry Nnebue, an equities analyst at CardinalStone, sees the CBN’s of policy forcing banks to lend more as significant. He said that pre-CRR (cash reserve requirements) policy, the banks had a phobia towards creating loans, concentrating more on lucrative liquid assets in money markets and treasuries to declare huge profits.

The policy was aimed at forcing the banks into lending more to the real sector of the economy to boost economic growth. Defaulting banks are to pay a levy of additional CRR equal to 50% of the loan shortfall of the target ratio.

Adesola Adeduntan, managing director of First Bank Nigeria Limited, said the $130,325 recovered within the first week of GSI implementation was excellent, adding that the number of recoveries will increase in the next one year.

“GSI is what we have been looking forward to as a coordinated approach to addressing the NPL issue in the banking industry.

“You will agree with me that banks’ failure is not ordained, it’s just the behaviour of what we have. So, culture is a very big issue to credit; we need to address it,” he said.

Bayo Olugbemi, President, Chartered Institute of Bankers of Nigeria, said that the scourge of bad loans had been a long-standing menace to the Nigerian banking sector. According to him, the issuance of the GSI policy marks a new dawn in credit management and debt recovery processes.

International Finance Corporation approved a $50m loan for First City Monument Bank (FCMB) Limited to help it expand lending to SMEs. The funds will allow FCMB to support hundreds of businesses with trade financing and working capital loans.

Adam Nuru, FCMB’s Chief Executive said: “IFC’s loan facility will allow us to keep credit flowing to SMEs as well as corporate companies across all sectors of Nigeria’s economy, including in the health, pharmaceutical, food and trading industries.”

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