GSI vs Direct Debit: Similarities and differences

The lending industry is a high-stakes game, with the potential for substantial returns but also significant risks. At the heart of these risks lies the challenge of timely repayments and loan recovery.

Non-Performing Loans (NPLs) have become a persistent thorn in the side of lenders, driving many to seek innovative solutions to mitigate losses and improve cash flow. One such solution that has garnered considerable attention is the use of Global Standing Instructions (GSI) for loan repayments.

We’ve lost count of the number of lenders who’ve approached us inquiring about GSI as a potential silver bullet for their repayment woes. While their enthusiasm is commendable, a closer look reveals a common misconception.

Often, what lenders envision when they discuss GSI aligns more closely with the concept of Direct Debit.

To clear the air and empower lenders to make informed decisions, let’s delve into the nuances between GSI vs Direct Debit. Understanding these distinctions is crucial for selecting the most effective repayment method and optimizing loan recovery efforts.

What is Global Standing Instruction (GSI)?

The Central Bank of Nigeria (CBN) introduced the Global Standing Instruction (GSI) in July 2020 to improve loan repayment rates and reduce the number of bad loans in the banking system. This policy was a direct response to the growing concern over non-performing loans (NPLs) that had begun to plague the banking sector.

In 2019, the CBN had issued a directive to banks to increase their loan portfolios, a move intended to stimulate economic growth. While this led to a surge in lending, it also raised red flags about potential defaults. To prevent this and maintain financial stability in a healthier lending environment, the CBN introduced the GSI.

The core objectives of GSI were to enhance loan recovery rates, instill a culture of credit discipline among borrowers, and watch-list consistent loan defaulters.

As per the GSI Guidelines, before a borrower can access a loan from any financial institution in Nigeria, they must ensure that all their bank accounts (savings, current, domiciliary, or joint) are linked to their Bank Verification Number (BVN).

By empowering banks to automatically recover outstanding loans from defaulting borrowers across the entire banking system, the CBN aimed to address the issue of willful loan defaults and reduce the burden of NPLs on financial institutions. We explained CBN’s GSI further in this article.

Featured read: 6 misconceptions about the use of GSI for loan recovery

What is Direct Debit?

Direct Debit is a payment method that allows businesses to automatically collect recurring payments from a customer’s bank account with their prior authorization.

This involves the customer granting permission to their bank to allow the specified recipient to withdraw agreed-upon amounts on specific dates.  

Direct Debit made its debut in Nigeria in January 2006, courtesy of the Nigeria Inter-Bank Settlement System (NIBSS). This period was significant in Nigeria’s cashless policy journey, with the founding of Interswitch in 2001 and eTranzact in 2003, as well as the introduction of GSM technology.

The need for businesses to automatically collect payments for subscriptions, bills, and other recurring charges from customers drove the adoption of Direct Debit. It also ensures customers make payments on time, improving cash flow for businesses and simplifying the process for customers since they don’t need to make manual payments or track due dates.

Automating recurring payments reduced the administrative burdens for both businesses and customers, while also contributing to the CBN’s cashless policy initiative.  While GSI and Direct Debit might sound similar, as we’ll explore in the next section, they serve distinct purposes and operate under different mechanisms.

Featured read: Which is better for loan repayments: Cards or Direct Debit?

GSI vs Direct Debit: Similarities

1. Both systems automate debt collection:

At their core, both GSI and direct debit automate the process of collecting payments directly from a borrower’s bank account. So, there is no need for manually persuading borrowers to repay their loans, making the collection process simpler, easier, and more effective.

2. The requirement for explicit borrower consent is central to both systems:

GSI mandates borrower authorization for their banks to debit any account they hold across the entire banking system in the event of loan default. Direct Debit equally requires a borrower to authorize lenders to withdraw funds from a particular bank account.

3. Both mechanisms rely on the borrower’s bank accounts as the primary source of funds:

This direct connection easily transfers funds from the borrower’s account to the lender’s designated account. It’s also important to integrate the systems with banking platforms so they can verify account information against the borrower’s authorization and debit the correct account.

4. Both systems increase a lender’s chances of recovering outstanding debts:

The Banking System Stability Review Report of the Central Bank of Nigeria (CBN) reports that Non-Performing Loan (NPLs) ratio fell from 4.9% in September 2022 to 4.2% in December 2022. Reports also show a decline of bad loans to 3.9% in June 2024 compared to 4.8% in April 2024. GSI contributes, in part, to this. Both systems give lenders renewed hope in recovering loans and avoiding late/missed payments.

5. GSI and direct debit operate in regulated environments:

Without regulation, people could easily misuse and manipulate these systems for personal gain. For example, lenders do not simply have unauthorized access to withdraw from a borrower’s account, otherwise they are no different from thieves. Instead,  there are robust regulatory frameworks guiding the use and operation of both systems.

The Central Bank of Nigeria issued the Operational Guideline on Global Standing Instruction (GSI) for Individual Bank accounts in July 2020, while the Revised Guidelines for Direct Debit Scheme was introduced in 2018. These regulations cover various aspects, including:

• Lenders and borrowers must communicate clearly and transparently about the agreement’s terms and conditions, including the debit amount, the debit date, and the lender’s identity.
• Mechanisms for handling errors or disputes so borrowers can rectify incorrect debits and seek redress.
• Protect borrowers’ personal and financial information, and ensure that you handle it securely and confidentially.
• Prohibition of harassment, intimidation, and unfair collection tactics.
• Protection from excessive debits, unauthorized access, and other forms of financial harm.

6. Both systems are applicable to various loan types:

GSI and Direct Debit can be applied to various loan types including personal, business, and corporate loans. Being that flexible means they are useful across various lending scenarios.

GSI vs Direct Debit: Differences

1. Both systems have different scopes of access:

GSI allows lenders to access all of a borrower’s bank accounts across multiple financial institutions in Nigeria. This includes savings, current, domiciliary, and joint accounts. Direct Debit typically applies to specific accounts agreed upon by the borrower and lender. It’s generally limited to the account where the direct debit mandate has been authorized.

2. There are different authorization processes for each:

GSI requires a one-time consent from the borrower during the loan application process, authorizing the lender to debit any of their accounts in any bank in the event of default. Direct Debit requires a specific mandate for each transaction or recurring payment, where the borrower explicitly authorizes the lender to debit a particular account.

3. Both systems serve different purposes:

GSI focuses primarily on loan recovery, i.e. recovering overdue loans, by accessing the borrower’s funds across all banks. This makes it less flexible as it is mainly designed for loan recovery and is initiated by the lender as a last resort when there is a default.

Direct Debit is often used for a broader range of purposes, including bill payments, subscription fees, and loan repayments, focusing on specific accounts. This makes it more flexible, as it can be set up for various types of transactions and can be adjusted or canceled by the borrower, depending on the terms of the mandate.

4. Both systems have different scopes of recovery:

GSI can only be used to recover the principal loan amount alone, while Direct Debit is used to recover the principal loan amount, interest fees and penalties for late payments.

5. GSI isn’t available to moneylenders yet while Direct Debit is:

GSI is only available to finance entities, lenders, and banks that are reporting and licensed to the Central Bank of Nigeria. You can read more about why lenders don’t have access here. Meanwhile, Direct Debit is available for lenders to use for loan recovery and repayments as long as the borrower authorizes it.

6. Both systems have different triggers for debit:

GSI can’t be used right away if a payment is late. The loan needs to be officially classified as a “bad debt” first. This happens after a set period of non-payment, which is usually 90 days for banks and 0 days for microfinance banks if the due date has passed.

As for Direct Debit, debits are initiated according to a pre-agreed schedule (e.g., monthly payments) or on a specific repayment date set by the borrower and lender.

7. They have different impacts on borrowers:

GSI has a more significant impact because it can target multiple accounts, potentially depleting funds across all of them to recover a loan. On the other hand, Direct Debit targets only the specific account linked to the direct debit mandate, giving borrowers more control.

Understand the distinction and optimize your loan discovery strategy

While both GSI vs Direct Debit provide automated ways to collect loan repayments, it’s important for lenders to understand their differences.

GSI is a powerful tool that lets financial institutions recover overdue loans by accessing all of a borrower’s bank accounts, but it’s currently only available to certain institutions.

Direct Debit, on the other hand, is more accessible and flexible, allowing lenders to collect payments from a specific account with the borrower’s consent. Learn how to handle payment collection like a pro with direct debit.