The CBN/Bankers’ Committee Resolution on Accessing Balances of Loan Defaulters Across all Banks — How About Government Defaults?
By Adebayo Adewolu
Banks’ ability to access the deposits of loan defaulters across all other banks is a game-changing initiative coming out of the recent Central Bank of Nigeria (CBN) and the Bankers’ Committee (BC) meeting. While the primary objective of allowing for the better management of credits risks within the industry is laudable, the initiative’s implementation requires further interrogation. One of the issues for consideration is the role of the various levels of government and their MDAs in the rate of loan defaults. The government at all levels could be considered a contributor to the bad loans situation. This is due to the challenge occasioned by the failure of the government to honour duly signed and executed contracts. As such, the initiative could be assessed to be one-sided.
The CBN and the BC have agreed that loan defaults will be settled using deposits made in other banks by defaulters via their Bank Verification Number (BVN) and the Tax Identification Number (TIN)[1] amongst other documents. This is believed to have come up again as a result of the conflict of interest between credit access by CBN and control of loan books by the commercial banks. Undoubtedly, financial inclusion is paramount in every society, which is why the responsible authorities across nations implement strategies to ensure that all citizens have access to the core of banking services — access to credit.
However, this new initiative may perpetuate some injustice if followed to the letter. Consider a scenario where ABC Limited is awarded a project by the Federal Government of Nigeria (FGN) to complete a 275km highway within a stipulated period for N300 billion payable in 4 equal tranches distributed along the lifetime of the project. Sequel to the awarded contract, and as is usual in projects of this nature, ABC Limited, a private construction company with multiple bank accounts goes to Bank A for a loan to finance the project and scale up operations. Imagine that while this project is ongoing, the FGN defaults on their contractual obligations by failing to pay the agreed fees at the stipulated time. This will entail that ABC Limited will default on their loan repayment to Bank A. By the CBN/BC initiative, Bank A’s recourse against ABC Limited will be to access ABC Limited’s deposits in all other banks, funds which may have been provided to ABC Limited by customers for other projects. This cessation of funds will consequently affect ABC Limited’s ability to deliver on other projects, and if those customers trigger their remedies under the law for a refund, more bank accounts would be assessed, more money reallocated and the cycle continues.
It is noteworthy that in 2015, the Federation of Construction Industry (FOCI) disclosed that the government owed its members over N500 billion, claiming that 14% of that figure was for one company alone[2]. Fortunately for some contractors, the then Minister of Power, Works, and Housing — Babatunde Fashola revealed in 2017 that the FGN has disbursed N47.17bn to N62 bn to contractors being payment for outstanding debts owed contractors, but no mention was made on the residue of this debt[3]. Also, the Gombe State Government sworn in on May 2019 suspended all contracts awarded by the previous administration claiming that there were illegalities perpetrated by the previous government. Some of the projects were already at the execution stage, and as of August 2019, it was reported that the State Government still owes contractors about N5.76 billion[4]. In 2017, contractors in Delta State faulted the State Government over unpaid debts from executed projects worth N100 billion[5]; the Kaduna State Government was also called out by the Kaduna Drainage Contractors over an outstanding N2 billion debts in 2018[6]; Niger Delta Development Commission (NDDC) was reported to owe its contractors N450 billion[7]. These amongst many others are instances where the Government has defaulted on duly executed contracts, and it is therefore evident that the Government both at the State and Federal levels play a significant role in loan defaults.
The scenario above and the quoted data on the Government’s contractual defaults paint a scary picture of what will become of contractors. The highlighted contractual defaults will affect their credibility and credit ratings. It will also result in the lethargy of banks and other financial institutions to provide funds to them for the purpose of financing their projects/procurements. Where, in any case, or stroke of luck these projects/procurements are completed, these contractors may end up being unable to repay the loans they took to finance those projects/procurement. This then results in the epileptic operations of contractors, lack of implementation of projects, loss of confidence in the construction industry all of which will serve as impediments to the achievement of the desired economic and social benefits of such projects. The question then is, how will this policy be enforced? Will it be enforced strictly against that local construction company/individual who defaults after he/she has received funds from a foreign client/local bank or financial institution to execute a project knowing that the reason for the default is the failure on the part of the Government to honour their financial contractual obligations to him/her?
There is no doubt therefore that the recent initiative by the BC will hurt contractors who default on their loan obligations as a result of the Government’s default on its loan obligations to them. This is a menace that needs proper attention by all the tiers of the Government. In obtaining loans, borrowers are often required to agree to clauses that should there be a default, the bank would have a right to access the borrower’s accounts with other banks. Other remedies also available to the banks upon the borrower’s default includes but is not limited to the enforcement of the borrowers’ assets which were used to secure the loan.
While the need for this resolution is recognised, especially the growth impact it could potentially have on financial inclusion, enough consideration should be had to the unique circumstances of the “loan defaulters,” the role of the Government in such default and the method of implementing the initiative. My suggestion is that policy for its implementation is generated which, before its development, will be subject to extensive stakeholder reviews to ensure that despite the benefits, it does not result in adverse unintended and punitive consequences.
[1] https://punchng.com/loan-defaulters-to-lose-deposits-in-other-banks/
[2] https://www.premiumtimesng.com/news/more-news/275428-half-n300bn-owed-construction-firms-by-nigerian-govt-have-been-paid-contractor.html
[3] https://punchng.com/fg-pays-n47bn-to-62-contractors-says-fashola/
[4] https://www.dailytrust.com.ng/gombe-govt-owes-contractors-n5-76b.html
[5] https://m.guardian.ng/news/contractors-fault-delta-government-over-unpaid-debts-from-executed-projects/
[6] https://allafrica.com/stories/201812140393.html
[7] https://www.punchng.com/nddc-owes-contractors-n450bn/amp/
