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Banks seek new legal power to tackle bad debts

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By Babajide Komolafe

BANKS have commenced moves to acquire new legal powers to strengthen loan recovery which deteriorated in the first quarter of 2019 when the industry suffered a major decline in the amount of recoveries made.

Financial Vanguard analysis of the Q1’2019 financial results of ten banks showed that loan recoveries dropped by 47 percent, year-on-year, to N3.1 billion from N5.8 billion in Q1’2018.

The ten banks are Access Bank, Guaranty Trust Bank, FBN Holdings, UBA, and Zenith Bank. The others include Fidelity Bank, Stanbic IBTC Bank, Sterling Bank, Union Bank, and Wema Bank.

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The banks blamed the sharp decline on the lull in economic activities following the general elections held during the quarter.

However, loan recovery experts who spoke to Financial Vanguard cited other factors including the yuletide holidays, the legal system and  unwillingness of debtors to repay.

Loan recovery performance

The trend was led by the five Tier 1 banks which recorded 70 percent decline in loan recovery, down to N1.26 billion in Q1’19 from N4.2 billion in Q1’18.

GTBank and Zenith Bank recorded zero loan recovery in Q1’19, as against N487 million and N310 million recorded in Q1’2018 respectively.

UBA followed with 82 percent decline as loan recovery fell to N454 million in Q1’19 from N2.5 billion recovered in Q1’18. FBN Holdings and Access Bank followed with 14 percent and 13 percent decline in loan recovery during the quarter.

While FBN Holdings’ loan recovery dropped to N672 million in Q1’19 from N780 million in Q1’18, Access Bank’s loan recovery fell to N134 million in Q1’19 from N154 million in Q1’18.

The five Tier 2 banks in this report, however, fared better as loan recovery declined by 63 percent with just two of the banks recording decline.

The two banks are Stanbic IBTC Bank which suffered 48 percent decline in loan recovery down to N734 million in Q1’19 from N1.4 billion in Q1’18, and Wema Bank which recorded 84 percent decline to N0.9 million in Q1’19 from N5.1 million in Q1’18.

On the other hand, Sterling Bank recorded 61 percent increase in loan recovery, up to N259 million in Q1’19 from N161 million in Q1’18. Union Bank recorded N806 million loan recovery in Q1’19, up from zero recovery recorded in Q1’18.

Loan recovery challenges

Some of the banks who spoke to Financial Vanguard, though blamed the decline in loan recovery on the election and other factors, expressed optimism of reversing the trend in the remaining part of the year.

Some of the factors, according to Wema Bank, include slow economy, slow judicial process and difficulty of selling pledged assets. “Business is slow, hence even willing obligors are unable to repay. On the other hand, court cases take time to conclude, hence recovery via disposal of pledged properties is hard to achieve. In addition to these is the difficulty getting buyers for pledged properties”, the bank said in a statement to Financial Vanguard.

Corroborating the above, FBN Holdings said: “Loan recovery was affected by the elections, and lull in the environment”.


Loan recovery performance


The bank holding company, however, expressed optimism, saying: “We have made better progress after the elections. Our staff are actively following up on recoveries with the support of recovery agents.

Zenith Bank also cited the general downturn in economic activities occasioned by the election, but expressed confidence of better loan recovery performance in the remaining part of the year.

Also sounding optimistic, Access Bank said: “Although, the bank did not make as much recoveries in Q1’ 2019 compared to Q1’ 2018, the outlook for recoveries for 2019 signifies that it will outstrip 2018 numbers. This is also on the back of significant non-performing loans on-boarded from the merger with former Diamond Bank.”

Also explaining the factors that undermined loan recovery efforts in Q1’19, a loan recovery expert and one of the Asset Management Partners, AMPs, of the Asset Management Corporation of Nigeria, AMCON, Mr. Labi Lawal, chief executive officer, Hopedek Global Resources Limited, said: “So many factors were responsible for the decline during that quarter. The first is the yuletide holiday prior to the opening of the year. The election also contributed. During that period there was concentration of funds on electioneering.

“From the legal perspectives, most of the courts were just coming in during that period. Most of the cases had been adjourned beyond the quarter; hence there was no impending judgement or likelihood of judgement with which you can compel a debtor to pay. But holistically, the election played a major role.”

New legal powers

Notwithstanding the above, the banks are, however, exploring how to acquire special legal powers, similar to that of AMCON, that will allow them to execute temporary takeover of   all the assets of a debtor or debtor company as well as that of the directors of the firm and their families.

According to section 49 and 61 of the AMCON Act, the corporation has the powers to approach a court for an ex-parte motion to temporarily foreclose all the identifiable assets belonging to a debtor or debtor company, its directors and senior management staff pending the determination of the substantive suit.

This is complemented with section 61 of the AMCON Act which defines a debtor or debtor company to include the borrower, beneficiary of the debt, the guarantor of the borrower, guarantor or director of a debtor company.

In recognition of the effectiveness of the special powers in these provisions especially in deterring the use of legal actions to block loan recovery efforts, some banks’chief executive officers have agreed to jointly seek similar legal powers for the banking industry.

Confirming this development to Financial Vanguard, a remedial management expert and also an AMCON Asset Management Partner, Mr. Kayode Olusanya said: “We have suggested to the banks to write to the CBN, the National Assembly that this special power should be extended to the banking industry. Some of the CEOs have agreed and given us the go ahead to develop the conceptual framework for its extension to the industry.”

While confirming that the hash economic environment is a major impediment to loan recovery, Olusanya cited insincerity and unwillingness to pay on the part of debtors has the greatest challenge.


Greatest challenge


Speaking to Financial Vanguard on the challenges of loan recovery, he said: “The hash economic environment, which is very unpredictable leads to the geometric rise in non-performing loans, NPLs, and decline in loan recovery. Because of the hash economic environment, loan recovery is very difficult

“However, most customers of banks are not sincere. Most citizens especially the prominent ones, use fake identification, which makes it difficult to unravel their identity, hence recovery becomes impossible even if the person is a judgement debtor. While the economic situation is very challenging, the level of insincerity is very worrisome.

Furthermore, most of the NPLs in the industry are naked loans, meaning loans were granted without credible investigation, assessment, appraisal of the tangible security and collateral. Once a loan is a naked loan, the customer will not be willing to pay.

“Another challenge is undeterminable litigation timeline. The debtor rushes to the court, and can lock the bank in court for 30 years. During that period, most of the bank’s staff involved in the loan documentation would have either been transferred or have left the bank.

“This makes it difficult to provide the court with details of the loans like the outstanding balance, interest therein executed, CBN allowed rate. And these are details you must establish in court.

“But in the case of AMCON, the loan recovery success is based on its peculiar Act which gives a comprehensive definition of a debtor to include: the firm, the directors and senior management especially those who signed the loan documents. The Act empowers AMPs to trace and identify all the assets of entities defined as debtors. The Act empowers AMPs to trace and identify all assets whether pledged or not. You can approach a court to get ex-parte motion to temporarily foreclose the asset you have traced pending the determination of the suit. This makes the debtor to be on   the defence. It has forced recalcitrant debtors to negotiate because they are not comfortable.”


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