Reports reaching Nairametrics indicate the Central Bank of Nigeria (CBN) in conjunction with the NIBSS and the Bankers’ Committee have agreed to launch an initiative that will allow lenders to recover loans from deposit accounts of loan defaulters from any bank or financial institution in the country. 

Media reports monitored by Nairametrics reveal this decision was announced by Aishah Ahmad, the Deputy Governor of the CBN at the end of the meeting of the Bankers’ Committee held in Abuja on Monday 26th of August.  

Reasons: According to TheCable, Ahmad said the directive was to encourage banks to increase lending in the country with more comfort. 

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  • Confronting credit challenges: Ahmad said, “We are not unaware of the challenges/reasons why credit has not been growing. Part of that was the appetite of banks to lend especially when you have customers that willingly refuse to pay their loans.  

“In this respect, we have come up with a new clause that will be included in the offer letters that will be granted going forward.” 

  • Leveraging on BVN and TIN: According to the report, Ahmad also said, “This is going to be a credit risk protection clause. Basically, it will contain the BVN details and TIN of the customers and more or less it will be a commitment on the part of the customers that you agree that should you default on the loan, the total amount of deposits you have across the banking industry would be applied towards repaying the loan.” 

How this will work: Nairametrics also understands that the new system might be handled by the NIBSS on behalf of the banks in exchange for fees. This is how we understand it will work: 

  • A bank lends money to a customer under the typical terms and conditions. However, all banks which sign up to this arrangement will have to get their borrowers to sign a right of setoff against their balances across any bank. 
  • Right of setoff has existed among banks in the past but hasn’t been as effective as it should be. This arrangement should now make it easier for banks to benefit as NIBSS will basically operate it on their behalf. 
  • Once a customer defaults on their loans, relying on BVN, NIBSS will first recover the loans from the defaulter’s balance in any account within the bank. If that is not enough, it will proceed to other accounts deposited in other banks. 
  • We understand this service only applies to individual accounts only. Thus, it may not function for accounts that have more than one signatory 
  • They will also only recover Principal Amounts as this may not apply to penalties, fees, and charges.
  • The Federal Inland Revenue Service can also request for tax payment to be deducted at source using BVN and Tax Identification Number (TIN) to debit customer accounts.  
  • From what we read, the banks will continue to recover their money from any accounts tied to the BVN until it is fully paid. They might also limit to just 90% of the amount in the bank. 
  • All financial institutions that accept deposits can partake in this scheme.

It is however not clear how FinTEch firms also operating in the lending space will benefit from this initiative. Most of them are not deposit-taking banks or institutions.  

Why this is important: The CBN has mandated Nigerian banks to increase lending to SME’s and the private sector in general rather than concentrate on a few obligors (debtors).  

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  • Recent report from the National Bureau of Statistics revealed that about 1,887,877 obligors (debtors) borrowed about N15.2 trillion as at the first quarter of 2019.  
  • Out of this amount, the top 100 debtors alone borrowed N7.4 trillion or 47% of total credit to the private sector. Top 5 customers alone borrowed N2 trillion. 

To provide bank and other lending institutions comfort and as an incentive, the CBN believes moves like this will help reduce default rates among banks. Non-performing Loans (NPL) was 9.36% as of June 2019, the lowest in about 40 months. Initiatives like these as well as the collateral registry is expected to help reduce credit risk. 

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