The Central Bank of Nigeria (CBN) has indicated that defaults on loans will be settled using deposits made in other banks. The conclusion was arrived at following an agreement with the Nigeria Inter-Bank Settlement System (NIBSS) Plc. and the Bankers’ Committee.

The disclosure was made by CBN’s Deputy Governor, Financial Services System, Aishah Ahmad while addressing journalists after the Bankers Committee meeting in Abuja on Monday.

According to Ahmad, the directive is aimed at encouraging banks in the country to increase lending in the face of existing challenges. “We are not unaware of the challenges/reasons why credit has not been growing. Part of that was the appetite of banks to lend especially when you have customers that willingly refuse to pay their loans,” she noted.

The official further revealed that the apex bank has come up with a new clause that will be “included in the offer letters that will be granted going forward” as regards loan defaults.

“This is going to be a credit risk protection clause,” Ahmad explained. “Basically, it will contain the BVN details and TIN of the customers and more or less it will be a commitment on the part of the customers that you agree that should you default on the loan, the total amount of deposits you have across the banking industry would be applied towards repaying the loan.”

A breakdown by Nairametrics of how the process will work suggests that the new system might be handled by the NIBSS on behalf of the banks in exchange for fees. The procedure is as follows:

• A bank lends money to a customer under the typical terms and conditions. However, all banks which sign up to this arrangement will have to get their borrowers to sign a right of setoff against their balances across any bank.
• Right of setoff has existed among banks in the past but hasn’t been as effective as it should be. This arrangement should now make it easier for banks to benefit as NIBSS will basically operate it on their behalf.
• Once a customer defaults on their loans, relying on BVN, NIBSS will first recover the loans from the defaulter’s balance in any account within the bank. If that is not enough, it will proceed to other accounts deposited in other banks.
• We understand this service only applies to individual accounts only. Thus, it may not function for accounts that have more than one signatory.
• They will also only recover Principal Amounts as this may not apply to penalties, fees, and charges.
• The Federal Inland Revenue Service can also request for tax payment to be deducted at source using BVN and Tax Identification Number (TIN) to debit customer accounts.
• From what we read, the banks will continue to recover their money from any accounts tied to the BVN until it is fully paid. They might also limit to just 90 percent of the amount in the bank.
• All financial institutions that accept deposits can partake in this scheme.

This initiative is part of the recent collective efforts by the CBN to get Nigerian banks to increase lending to Small and Medium Enterprises (SMEs) and the private sector rather than focusing on a few debtors. Addressing the problem of Non-performing Loans (NPLs) through this measure as well as the collateral registry is expected to help reduce credit risk.

However, it is unclear how FinTech firms operating in the lending space will benefit from this initiative as most of them are not deposit-taking banks or institutions.

Meanwhile, the apex bank in a directive has warned the public to beware of people who send fraudulent messages under the guise of loan givers for small scale businesses. In the disclaimer titled Beware of Fraudulent Loan Offers, CBN said the email address [email protected] was a false address which should not be associated with them.

The CBN also added that it does not deal directly with any prospective small business owner, as it has laid down procedures for accessing intervention funds which are disbursed through Deposit Money Banks (DMBs), Development Finance Institutions (DFIs), Participating Financial Institutions (PFIs) and Microfinance Banks (MFBs).