Newsletter on CBN’s Guideline on Global Standing Instruction

Pursuant to the powers conferred on the Central Bank of Nigeria (CBN)  by Section 2 (d) of the Central Bank of Nigeria Act, 2007; to promote a sound financial system in Nigeria, the CBN has taken the initiative of reducing non-performing loans  (NPLs) in the nation’s banking sector. On Monday 13th of July 2020, the CBN issued a guideline on Global Standing Instruction (GSI) to enhance loan recovery and monitor chronic loan defaulters.

The objectives of GSI include, to facilitate an improved credit repayment culture; reduce Non-Performing Loans (NPLs) in the banking industry; and watch-list persistent loan defaulters. The guideline contains lists of sanctions to be meted on banks and Other Financial Institution (OFIs) in cases of violation or misapplication of the GSI.

The CBN revealed that the initiative is launched in conjunction with the Nigeria Inter-Bank Settlement System Plc. (NIBSS) (using its Nigeria Central Switch) and the Bankers’ Committee to allow lenders recover loans from the accounts of loan defaulters from any bank or financial institution within the country.

Accordingly, the Guidelines regulating the operations of the Global Standing Instruction has been issued for implementation by all banks and OFI’s with effect from August 1, 2020. Banks and OFI’s have the responsibility of ensuring that accounts in NIBSS’ ICAD are correctly tagged with the correct Bank Verification Number, and with maintaining connectivity to the Nigeria Central Switch.

The focal points of the Guideline are:

  • That going forward, interested loan applicants, would have to consent to a new clause  to be introduced into loan agreements, which mandates that in the event of default, the bank is allowed to debit the borrower’s accounts in any Nigerian bank where funds may be found to offset the borrowers indebtedness.
  • In the event that a customer defaults on their loans, first recovery will be made from the defaulter’s balance in the account within the creditor’s bank via the defaulter’s BVN. If the credit balance in such an account is not enough to offset the outstanding, the creditor is entitled to trace, using the defaulter’s BVN and proceed to other accounts deposited in other banks.
  • The guidelines apply to savings accounts, current accounts, domiciliary accounts, investment accounts and joint accounts.
  • It is to 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 Guideline raises pertinent questions such as, what happens to the common law rights of a person who is a joint account owner with a loan defaulter? Would this initiative, without more (such as the government tackling underlining economic issues affecting businesses and the economy in Nigeria) address defaults in loan repayments?  How does the GSI solve the problem of the existing high volume of loan default which predate the GSI?

Whilst the GSI is a laudable initiative, its effects on the issues raised above and many more issues to arise in the coming days, vis a vis the handling of these issues by key players, will determine the effectiveness of the new Guideline in creating an improved credit repayment culture and environment in Nigeria.