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Stemming the tide of non-performing loans – credit tribunal to the rescue

The President recently signed into law the Banks and Other Financial Institution Act (BOFIA) 2020. The Act replaces BOFIA 1991 and seeks to establish a more responsive and investment stimulating regulatory regime that will promote robust economic activities and inclusiveness, protect the financial institutions and safeguard the interests of all stakeholders.

Indeed banks, particularly Commercial Banks, play an important role in the creation of capital, promotion of commerce through enhancement of financial transactions and the general development of an economy. Apart from allocating funds from depositors to borrowers, banks play a catalytic role by providing a wide range of financial services and solutions that support commerce. It goes without saying that borrowing and lending are essential attributes of every economy, without which commerce would be impossible and development stalled.

The importance of lending and the value it adds to the economy notwithstanding, it has increasingly become the bane of most commercial banks in Nigeria. This is as a result of the non-utilisation of loans for the purpose for which they were granted or diversion, giving rise to an upward trend in the rate of Non-Performing Loans (NPL) in Nigeria. Commercial loans are considered non performing if the borrower fails to make payment within the period specified in the loan agreement. Recent information released by the National Bureau of Statistics disclosed that NPLs in Nigerian banks increased to N1.212 trillion as at June 2020, indicating an upward trend from the N1.059 trillion recorded in December 2019, with commerce and trade recording a total of N171.55 billion during the period the report covered. Furthermore, in July 2020, the Central Bank of Nigeria announced that 22 Nigerian banks had submitted requests to restructure 35,639 credit facilities of businesses that were impacted by the coronavirus pandemic.

As in the past, high NPLs continue to pose severe challenges to banks in particular and the economy in general as their accumulation increases the risks profile of commercial banks which if left unchecked would affect the solvency of these banks and the overall stability of the banking sector in particular and the financial system in general.

The Central Bank of Nigeria had introduced several interventions and initiatives to curb the tide of NPLs in Nigeria. These include the issuance of the Prudential Guidelines in March 1992 and 2010 and financial interventions, the high point of which was the N400 billion bailout of five commercial banks following the sack of their Executive Management in August 2009. The apex bank had also issued several circulars and guidelines on promoting effective corporate governance in banks, culminating in the issuance of the Code of Corporate Governance for Bank and Discount Houses in Nigeria and Guidelines for Whistle Blowing in the Nigerian Banking Industry. The CBN had also introduced the Global Standing Instruction (GSI) that allows banks to debit the accounts of loan holders in other banks to settle defaults, a move which reportedly led to the recovery of N50.32 million within nine days of the directive becoming operational.

Laudable as these interventions may seem, it is clear that they have not been sufficiently effective in reducing the cases of NPLs to tolerable limits. It is in this light that one welcomes the proposed setting up of Credit Tribunal under the newly enacted BOFIA 2020. BOFIA 2020 which itself has thrown the investment market into a frenzy seeks to put in place a tougher regulatory regime in the banking sector, provides for the setting up of a Credit Tribunal to improve loan recovery and address the incidence of high non-performing loans within the financial system. Credit Tribunals are quasi-legal institutions set up to process legal suits filed by banks against defaulting borrowers. The recourse to these Tribunals is certainly not unconnected with the travails and difficulties faced by Banks and Lenders in the recovery of loans via regular courts.

The use of Credit Tribunals dedicated solely to the recovery of aged and matured bank loans will not only work to stir the psyche of the borrowing and investing community in the right direction but would ensure the availability of investment loans and its recycling to different sectors of the Nigerian economy. Taking defaulters to the Credit Tribunal, apart from impacting the reputation of the defaulter, would protect the financial system from extending credit to such defaulters. It is assumed that such Credit Tribunals would have power to foreclose properties and assets alongside making other far reaching decisions that would not only assist in the recovery of non-performing loans, but also provide sufficient deterrence to would be defaulters. The Credit Tribunal couldn’t have come at a much better time than now when the regular courts are overwhelmed by routine civil and criminal matters. Indeed, having a specialized court to dispense matters relating to NPL and bad loans would assist with decongesting the courts and ensure speedy dispensation and resolution of loan related disputes.

It is in the light of the above that the introduction of Credit Tribunal under the new BOFIA 2020 is considered a right step in the right direction as its efficient implementation would assist in the speedy recovery of bad debts and loans and ensure the availability of ready credit to critical sectors of the Nigerian economy. It is however important that the Credit Tribunal is removed from the influence of the political class, some of whom are culprits in the loan defaulting chain. The Tribunals should be independently constituted and empowered to dispense justice without tying its operations to the apron string of any government agency.

Furthermore, due to the specialised nature of lending and often complicated recovery procedure, it is important that the regular judges are, as far as possible, excluded from the Bench of the Credit Tribunal, save for those judges with proven record of success in investment and banking related matters and those that demonstrate exceptional knowledge of the operations of financial institutions and banking facilities. It is suggested that Judges who will sit on the Credit Tribunal should be drawn from the financial services sector and from amongst lawyers with sufficient knowledge of investment and loan administration and commercial practice in Nigeria.

Constant training and re-training of judges are also important to ensure they are up to speed with developments in the baking and financial sectors locally and globally. It is also important that the present substantive and procedural laws on debt recovery be updated to accommodate the specialized objectives of the Credit Tribunal. To this end, it is suggested that the Credit Tribunal should follow streamlined legal procedures that emphasise speedy adjudication of cases and swift execution of judgments. The CBN should also be clear on the monetary threshold of claims to be filed at the Credit Tribunal to avoid crowding the Tribunals with frivolous suits.

Ozor is a Partner, DCSL Law. Kindly forward comments and reactions to cozor@dcsl.com.ng.

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