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CBN’s Global Standing Instruction explained

 Interestingly, not every loan default is as a result of a lack of capacity to repay, but there’s also the question of willingness. Actually, most loan defaults are due to borrowers’ unwillingness to repay. After years of abuse by recalcitrant debtors, Nigerian banks and the Central Bank of Nigeria (CBN) launched the  Global Standing Instruction (GSI), a very strong financial regulation to aid loan recovery in Nigeria. 

The regulation went into effect from July 2020. But then, what exactly is the GSI?

What is GSI and what does it do? 

GSI was created as a last resort for banks and financial institutions to recover outstanding loans from chronic debtors, despite having funds to repay their loans in other banks, have simply absconded from their legal responsibilities. The GSI is a mandate given by a borrower which authorizes the creditor bank (the bank that gave the loan) to recover their debt from any or all other accounts held by them with other financial institutions in the case of default. 

Before now, borrowers who defaulted on their loans to a particular financial institution were still able to maintain their bank balances in other institutions, even if those balances were sufficient enough to repay their debt. This made it very easy for borrowers to avoid non-repayment. So if Person A took a loan of 10 Million from Bank X, they could keep their bank account with Bank X empty and refuse to pay back, while they had maybe even up to 30 Million in their accounts with banks Y and Z. Now, GSI works to allow Bank X execute the borrower’s mandate to debit their accounts in Bank Y and Z to settle the past due loan with them. 

Objectives of GSI

The GSI policy was introduced as the CBN’s way of addressing the frequent occurrences of deliberate loan default; the consequences of which are a threat to the stability of the financial sector. 

The GSI policy was issued to achieve the following: 

  1. Facilitate an improved credit repayment culture;
  2. Reduce Non-Performing Loans (NPLs) in the banking industry
  3. Watch-list consistent loan defaulters.

How does GSI work? 

Currently, GSI only applies to individual borrowers and does not extend to corporate bank account holders. GSI can be triggered on savings, current, joint, individual domiciliary and investments/deposit accounts; as well as electronic wallets. For it to work effectively, all the qualifying bank accounts must be linked to the borrowers’ bank verification number (BVN). failure to do this on the borrower’s part will put such BVN on the watch-list of relevant anti-graft agencies. This includes the Economic and Financial Crimes Commission (EFCC). 

During the loan application, the creditor bank has the responsibility to educate the borrower extensively about the use and implications of the GSI mandate. After which, the customer is to execute this mandate (physically or digitally) and the creditor bank keeps a copy. 

The Nigeria Inter-Bank Settlement System (NIBSS) serves as the intermediary between the creditor bank and the other PFIs and is therefore responsible for executing the master GSI agreement and all relevant back-end operations. All PFIs must be connected to the NIBSS Instant Payment Platform (NIP) for this to work. In the case of default, the creditor bank will trigger the GSI to call NIBSS’ NIP end-point which will conduct a balance enquiry and issue debit instructions to the concerned PFI. NIBSS completes the GSI process by instantly transferring the collated funds to the borrower’s account held with the creditor bank. However, only the principal and accrued interest can be recovered using GSI. The creditor bank can’t use GSI to recover penalties from default. 

Previously, the GSI had a limit on the amount and number of recovery attempts. However in a circular released in January this year, the CBN announced an amendment to the GSI policy which states that the GSI recovery attempts are now “continuous and unrestricted”. This means each mandate is valid for the entire lifetime of the past due loan, until it’s fully repaid.

What happens if the GSI is misused or ignored? 

As much as the CBN issued the GSI to adopt a firm stance against wilful loan default, it doesn’t take lightly to the misuse of GSI or any errors related to its execution by PFIs.

If any creditor bank activates a GSI mandate in error, such bank will be liable to a fine of N500,000 per incident. 

A PFI that refuses to grant permission for an account status inquiry or a debit instruction will be fined N100,000 per incident. 

PFIs will also be required to pay a fine equivalent to the account balance at the time if they shield an eligible account from a GSI debit mandate. You can read more about the responsibilities of PFIs and penalties for GSI violations. 

Which lenders are authorized to use GSI to recover loans?

Only CBN licensed financial institutions can recover loans using GSI. So commercial banks, microfinance banks, finance companies, investment banks and mortgage banks are authorized to use GSI. This means money lenders who operate with a moneylenders license can’t access GSI services to recover their past due loans.

Money lenders are also advocating to be included in the GSI policy, as their businesses are also threatened by wilful loan default. However, there is no response to that yet.

In the meantime, money lenders can make use of direct debit services from providers such as Remita, which allows lenders to trigger automatic debits from borrowers’ bank accounts tied to their loan profile. Fortunately this service is available to lenders for free when they sign up on Lendsqr.

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