Effective from August 1, banks will be able to debit the accounts of loan holders in other banks to settle defaults. This is according to global standing instruction (GSI) guidelines published by the Central Bank of Nigeria (CBN) on Monday. The CBN said the GSI, which was developed in collaboration with stakeholders, should be the last resort used by a bank to settle loan defaults.
The apex bank said the directive would apply to eligible loans granted from August 28, 2019. At its meeting that held on August 26, 2019, the bankers’ committee of the CBN agreed that loan defaults will be settled using customers’ deposits in other banks.
“The GSI shall 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 document read.
A bank setoff happens when a financial institution removes money from a deposit account to cover a missed payment on a loan.
The apex bank listed the objectives of the GSI to include facilitating an improved credit repayment culture, reducing non-performing loans (NPLs) in the banking industry and watch-listing consistent loan defaulters.
It warned banks not to use the GSI to recover penal charges that may have accrued on a credit/loan and included as part of outstanding balances/obligations of a borrower.
According to the guidelines, the account types that the standing instruction can be applied to include individual and joint savings accounts, current accounts, domiciliary accounts, investment/deposit accounts (naira and foreign currency), and electronic wallets.
Banks already have to get the credit history of customers before approving loans. The CBN said banks must regularly report to the CBN on recoveries made through the GSI and releases made to other banks. In the event of wrongful debit, the guideline provides that an erring bank would be made to take full liability and pay a flat fine of N500,000 per incident.