Why GSI fails for borrowers with unpredictable income

A few months ago, we put forward a compelling case for making Global Standing Instruction (GSI) the go-to method for loan repayment in Nigeria. With its potential to streamline recovery processes and minimize defaults, GSI seemed like the answer to many of the challenges lenders face nationwide.

The concept is straightforward: by allowing banks to automatically recover outstanding loans from borrowers’ accounts in any Nigerian bank, GSI promised a more secure and efficient lending environment. But as we championed the upsides of GSI, one critical consideration emerged: the growing number of Nigerians whose incomes are becoming increasingly unpredictable. 

Take, for example, a young professional like Kiki. Just a year ago, her monthly salary was stable and predictable, but with the rising tide of inflation and economic uncertainty, she was forced to pivot to freelance work. Her income varies wildly from month to month, and she barely scrapes by some months. Kiki is not alone; the informal economy in Nigeria is swelling, driven by inflation and an unstable job market, with more people relying on unpredictable income sources to make ends meet.

As we continue to advocate for GSI’s broader adoption, especially if our proposal becomes law and lenders of all sizes can access it. It’s essential to recognize that this tool is not without its challenges. A key challenge is using GSI to recover loans from borrowers like Kiki, whose income is unstable. While GSI offers a promising framework for loan recovery, lenders must be prepared to tackle the specific difficulties that arise when dealing with borrowers facing irregular income.

Today, we’ll be highlighting three major challenges lenders may encounter when using GSI to recover loans from borrowers with unpredictable income:

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Limitations in timely loan recovery

One of the most significant challenges in using GSI for borrowers with unpredictable income is the delay in its activation. Contrary to popular belief, GSI cannot be triggered immediately upon a missed payment. Instead, the loan must first be classified as a “bad debt,” which typically occurs after 90 days of non-payment for traditional banks or immediately for microfinance banks once the due date has passed. This waiting period can be problematic for lenders dealing with a borrower with an unstable income.

For instance, a borrower might have the funds available sporadically within that 90-day window, but if the GSI isn’t triggered until after this period, the opportunity for recovery may be lost. By the time the loan is classified as a bad debt, the borrower might have already depleted their account, making recovery far more difficult.

Increased risk of default and incomplete recovery

The risk of default is inherently higher for borrowers with unpredictable income, and GSI’s limitations can worsen this problem. The system is designed to recover only the outstanding principal amount, not any accrued interest, fees, or penalties. Even when lenders successfully trigger GSI, they may still face shortfalls if borrowers lack enough funds to cover the full debt and additional charges.

For example, the interest and penalties could accumulate significantly if a borrower misses multiple payments. However, GSI only recovers the principal, forcing lenders to use less efficient methods to collect the remaining balance. This impacts the lender’s profitability and complicates the overall recovery process.

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Strategic evasion by cunning borrowers

The introduction of GSI has made many borrowers aware of the consequences of defaulting on their loans. However, this awareness has led borrowers to actively evade the system, undermining its effectiveness.

One notable tactic involves shifting funds to financial institutions that have not yet been integrated into the GSI framework. Such as fintech platforms like Kuda and OPay. By keeping their funds in these “GSI-free” accounts, borrowers can effectively shield their money from automatic debits, even when they default on their loans. This kind of calculated evasion poses a significant risk to the lending ecosystem, as it impairs banks’ ability to recover loans and also damages the trust between lenders and borrowers.

What are the practical solutions to tackle these challenges?

We’ve curated three practical solutions to help lenders tackle the challenges of GSI loan recovery for borrowers with unpredictable income.

Flexible repayment structures

Introduce income-based repayment plans tailored to borrowers with irregular cash flow. You should offer repayment options that align with your borrower’s earning patterns. For instance, a freelancer or gig worker may experience fluctuating income, making it challenging to adhere to a traditional fixed monthly repayment schedule. By implementing income-based repayment plans, you can allow borrowers to make smaller payments during low-income periods and larger payments when their income increases.

Enhanced risk assessment

Traditional, one-size-fits-all credit scoring often falls short when evaluating borrowers with variable income streams. By integrating with a flexible loan management software, lenders can design specific risk models for different borrower segments, incorporate a broader range of data points such as spending patterns and income variability, and adjust scoring criteria based on the unique characteristics of borrowers with unpredictable income. This software can integrate multiple data sources, including transaction histories, credit bureau reports, and even non-traditional data like rent and utility payments.

Expanding GSI accessibility

Advocate for policy changes to broaden GSI access to all licensed financial institutions, including fintechs and microfinance banks. The current restriction of GSI to traditional banks creates a loophole that borrowers can exploit by moving their funds to institutions not covered by GSI. Expanding GSI access to more financial entities would close gaps and improve loan recovery effectiveness. Lenders should actively work with industry associations to lobby the Central Bank of Nigeria (CBN) for policy amendments that permit broader access to the GSI system. Collaboration between banks, fintechs, and microfinance institutions is essential to creating a unified GSI framework that includes all players.

Making GSI work for all, not some

While GSI offers many benefits, its traditional risk assessment and loan recovery approach often misses the mark for those with fluctuating financial situations. To make GSI more effective, lenders should offer flexible repayment options that align with borrowers’ income patterns, improve risk assessments to account for income variability, and advocate for broader access to GSI. These steps can bridge the gap between GSI’s potential and its current challenges, leading to better loan recovery outcomes. As always, we are available to answer your questions and address your concerns. Drop us a message at [email protected].