Analysis: Can CBN’s GSI improve credit repayment, reduce non-performing loans in Nigerian banks?

Charles Abuede

The Central Bank of Nigeria (CBN) on Tuesday, in a circular released to all banks and other financial institutions, issued the guidelines to regulate the operations of the Global Standing Instructions (GSI), which is aimed at reducing the Non-Performing Loans in the Nigerian Banking System, facilitate an improved credit repayment culture and also to watch-list consistent defaulters.

The apex bank in a collaborative effort with stakeholders has developed the necessary protocols to facilitate the seamless implementation of the GSI process which includes eligible loans granted from August 28, 2019. The guidelines, which was issued on the CBN’s website and signed by Kelvin Amugo, director, financial policy and regulation department, will take effect from August 1, 2020

How will this policy by CBN reduce NPLs rate, reposition banks and watch-list loan defaulters?

Recent National Bureau of Statistics data on Selected Banking Sector show that with the non-performing loans (NPLs) rate in the Nigerian banking industry significantly declining by a significant 41% to N1.05 trillion in the last quarter of 2019, from the N1.79 trillion recorded during the preceding year, the banking sector in Nigeria has been able to activate their rate of loan recoveries as well as loan write-offs, hence, the recent decline.

Some studies have, however, shown that non-performing loans and its bearing on banking stability cannot be the same across different categories of banks due to:

Varying levels of market discipline,
Risk management strategies,
Regulatory and supervisory measures, and
The institutions’ sources of capital

Nevertheless, the introduction of special purpose vehicles to avoid systemic failure and revitalize the system as a way to mitigate the high rate of NPLs and high credit risk situation within the system has proven unsuccessful as the asset quality of Nigerian banks dropped significantly and NPLs are skyrocketing with attendant economic penalties. The obstinate increase in the NPLs cannot be far-fetched as the colossal inflow from oil receipts as well as returns on investment in the sector plunged significantly, complemented by unparalleled capital outflow, consequently throwing the banking system into a high credit risk situation as a result of the inabilities of the oil companies to repay loans.

What can be done to remedy the situation? And is the new guideline the way forward?

Experts who are familiar with the matter have reacted with different opinions. While some have labelled the new guideline as a responsive watchdog on the financial institutions who can wrongfully activate the GSI on an individual’s account and corporate individuals who are consistent loan defaulters, others have argued that the new guideline might see customers seeking alternative means to credit facilities from private equity firms or stir competitions among banks for the best loan rates.

Here are few highlights or implications of the new GSI policy by the Central Bank of Nigeria.

A customer who takes a loan in any bank can get the loan deducted from any other bank account connected to his bank verification number (BVN).
The loan deductions from your other accounts by the bank will only be that of capital and interest.
When a commercial bank wrongfully activates the GSI on a customer’s account, the apex bank will take appropriate measures to fine the defaulting bank. The fine is in the rate of N500,000 or N10 million depending on the procedure.
There is an elimination or reduction of the risks associated with commercial banks not granting loans owing to the previous loan history with them.

The GSI guidelines apply to all financial institutions within the country and this the new policy gives big business and corporate individuals the options of shopping for the best loan rates in the industry.

Although, the perception that the reduction in the banking system’s NPL ratio will in any way affect decisions by Nigerian banks to lend more easily has in no wise been accepted by financial experts, it can but it can be said that with the current oil price and non-diversified forex earnings, the forecast for the NPLs looks negative.