In 2019, the Central Bank of Nigeria issued a directive mandating banks to increase their loan portfolios. This was further to the Monetary Policy Committee (MPC) meeting held on 19th and 20th of September 2019 where members lamented the significantly low credit to the private sector relative to the absorptive capacity of the economy and the need to grow consumer, mortgage and corporate credit to drive aggregate demand and increase output growth.

The effect of this directive was a surge in personal loans as conditions for loan applications and disbursements were relaxed by Banks in compliance with the Directive. While Banks have complied with the directive, there have been fears about probable spate of default obligation and increase of non-performing loans.

Further to its mandate to promote sound financial system in Nigeria and enhance loan recovery across the banking sector, the Central Bank of Nigeria published a circular on Operational Guidelines on Global Standing Instruction (GSI) for individuals on 13 July 2020. The GSI aims to facilitate improved credit repayment culture, reduce Non-Performing Loans in the banking industry and serve as a watchlist for consistent loan defaulters. Although the circular takes effect from 1st August 2020, it is stated to have a retrospective effect and applies to eligible loans granted from 28 August 2019.

PERVASIVE IMPLICATION OF THE CIRCULAR
Without recourse to a Defaulting Borrower, a Creditor Bank can recover past due obligations (Principal and Accrued Interest) from a defaulting Borrower through a direct set-off from deposits/investments held in the Borrower’s bank accounts with other Participating Financial Institutions. Disbursement of loans is dependent on execution of the GSI Mandate by the Borrower in either hard copy or digital form.

What this means is that a customer who takes a personal loan from the Bank will have all other personal accounts linked to the loan. Hence, if a defaulting Borrower abandons a loan account in Bank V and maintains a credit balance with Bank M; Bank V, under the GSI, is at liberty to recover the loan owed to it by appropriating the funds in Bank M.

Under the old regime, a Borrower could have a loan account and other accounts with the same Bank. In the event of a default on the loan account, the Creditor Bank had no business applying the right of set-off in respect of credit balance standing in the other accounts of the Borrower except same is expressly given by the Borrower. Under the GSI regime, a Creditor Bank is not only at liberty to set-off the loan using the credit balance of the Borrower in other qualifying accounts in its own bank but can recover same using the credit balance in the accounts of the Borrower held with other participating financial institutions. The affected account types which the Creditor Bank can apply the GSI in a bid to recover loans from the Borrower are: Individual Savings Account, Individual Current Account, Individual Domiciliary Accounts, Investments/Deposits Accounts (Naira and Foreign Currency), Electronic Wallets and Joint Accounts…