Don’t have access to GSI? Use direct debit to achieve same result

As a digital lender running virtually 99% of their business online, you’ve done everything right: carefully vetted your borrowers, set reasonable interest rates, and even sent out gentle reminders for repayment. But when the due date arrives, payments don’t. One borrower tells you they’ve “lost access to their account,” another says their card is blocked, and yet another has gone completely off the radar. Sound familiar? This is the headache that many lenders in Nigeria face.

According to the CBN, loan defaults have been a rising concern in Nigeria, with the average default rate in the microfinance sector hovering around 32% in 2022. Traditional banks are fortunate to have the Global Standing Instruction (GSI), allowing them to sweep through all accounts belonging to a borrower to recover debts automatically. But for many microfinance banks (MFBs) and money lenders, GSI is out of reach. Do you give up and brace yourself for missed payments? Not at all. With the right strategies in place, you can substitute GSI with direct debit and still achieve similar results. 

Let’s break this down, starting with what GSI is and how it works.

What is GSI and how does it work?

The Global Standing Instruction (GSI) was introduced in July 2020 by the Central Bank of Nigeria (CBN) in collaboration with Deposit Money Banks (DMBs) to curb the growing problem of loan defaults. In 2020 alone, the banking sector recorded a non-performing loan (NPL) rate of 6.0%, costing billions in lost revenue. Nigerians, as you may know, sometimes have a knack for evading repayment commitments. Maybe the debit card “mysteriously” stops working, or bank accounts suddenly go dormant. This led to the birth of GSI, a system that gives banks the power to sweep across multiple bank accounts of a borrower linked to their Bank Verification Number (BVN) and recover debts automatically.

Here’s how it works: when a customer takes out a loan, GSI gives banks the authority to debit any of the customer’s accounts across Nigerian banks once the repayment is due, even if the customer has hidden the funds elsewhere. However, it’s not a free-for-all, there are restrictions to prevent misuse. But here’s the kicker: GSI is only available to traditional commercial banks. If you’re a microfinance bank or a money lender, you don’t have access.

So, what’s the alternative? Enter direct debit.

What is Direct Debit and how does it work?

Direct debit  is not new, but many underestimate its potential. It is an equally powerful tool available to all lenders, not just the big banks. It allows you to automatically deduct loan repayments from a borrower’s bank account at regular intervals, based on a signed mandate. Unlike GSI, direct debit requires the borrower’s upfront consent, but once the mandate is in place, you gain the ability to deduct loan payments without the borrower needing to initiate the process.

In Nigeria, direct debit transactions grew by 20% in 2023, reaching ₦150 billion, thanks to its effectiveness in automating payments for everything from utility bills to loan repayments. The system works seamlessly with most payment gateways. It’s also becoming a preferred method for lenders who want to avoid the hassle of chasing borrowers for payments.

How to substitute direct debit for GSI

If you’re a lender without access to GSI, here’s how you can make direct debit work in your favor:

Collect comprehensive account information

Compulsorily, at the point of loan application, gather all the borrower’s bank account details. Since every account is linked to a BVN, you can use platforms like NIBSS (Nigerian Inter-Bank Settlement System) to pull this information, with the borrower’s consent.

Set up direct debit mandates

Ensure that the borrower authorizes an e-mandate (N50 debit)  to allow automatic deductions from their accounts. If they claim a particular account is inactive, request an account statement to verify.

Monitor and execute repayments

With the mandates in place, you are able to automate deductions. Even if one account doesn’t have enough funds, the system can make partial debits from other accounts. This ensures you recover the loan in bits or full.

A smarter solution for secure loan repayment

To wrap things up, while the Global Standing Instruction (GSI) might still be reserved for big traditional banks, direct debit provides a smart, accessible option for microfinance banks (MFBs) and non-bank lenders. With direct debit mandates, lenders can rest easier knowing their loan repayments are automated, reliable, and on time. If you’re considering a direct debit system that fits your unique needs, Lendsqr is here to help you get those same benefits as GSI. Book a free demo.