The COVID-19 Pandemic has come and will all other things being equal soon be a thing of the past as the curves flatten in various countries including Nigeria. What may however linger are its effects on various aspects of human endeavors.
One key aspect of importance to all is the impact it will have on the finances of individuals and corporate bodies. As part of the effects of the pandemic, a lot of individuals and corporate bodies are likely to get the cash strapped and will seek the intervention of third parties, especially commercial banks for credit and loans.
The Central Bank of Nigeria (CBN), acting in its capacity as regulator of the Nigerian banking sector and in order to improve the credit culture and enhance credit risk management in the banking system mandated banks, by the Circular BSD/DIR/GEN/LAB/12/054, to include the following terms and conditions in offer letters and loan agreements to be signed by prospective obligors:
“By signing this offer letter/loan agreement and by drawing on the loan, I covenant to repay the loan as and when due. In the event that I fail to repay the loan as agreed, and the loan becomes delinquent, the bank shall have the right to report the delinquent loan to the CBN through the Credit Risk management System (CRMS) or by any other means, and request the CBN exercise its regulatory power to direct all banks and other financial institutions under its regulatory purview to set-off my indebtedness from any money standing to my credit in any bank account and from any other financial assets they may be holding for my benefit.
I covenant and warrant that the bank shall have power to set-off my indebtedness under this loan agreement from all such monies and funds standing to my credit/benefit in any and all such accounts or from any other financial assets belonging to me and in the custody of any such bank.
I hereby waive any right of confidentiality whether arising under common law or statute or in any other manner whatsoever and irrevocably agree that I shall not argue to the contrary before any court of law, tribunal, administrative authority or any other body acting in any judicial or quasi-judicial capacity.”
By simple illustration, what this means is that assuming Mr. ABL maintains an account with banks LBA Bank Limited and BLA Bank PLC., if Mr. ABL takes a loan of =N=500, 000 from LBA Bank Limited and the said clauses are included in their loan agreement, if Mr. ABL does not pay back the entire loan plus interest within the stipulated tenor, LBA Bank Limited with the approval of the CBN has the right to set off the indebtedness of Mr. ABL from the money standing to his credit with BLA Bank PLC and BLA Bank PLC will not be liable to Mr. ABL for releasing these funds.
One may ask if this sort of arrangement is practicable and how a bank can know if an obligor has funds with another financial institution. Well, all thanks to the electronic system of Bank Verification Number (BVN) now fully implemented in Nigeria, tracing accounts run by individuals has become easy-peasy.
However, there are legal implications that affect the operation and effectiveness of this new requirement by CBN. We will briefly expound our thoughts on these fore issues relating to the right of set-off, privity of contract and matters of banker-customer confidentiality.
Right of Set-Off
Ordinarily, a banker’s right to set-off is said to only arise in situations where a customer maintains more than one account with the said bank and at least one of this account is in debit and another in credit so that the customer is deemed to have agreed to the Banker’s right to set off any indebtedness. It is also known as the right to combine accounts. The Directive goes a step further than this recognized set-off principle. One doubts that this extension will stand if tested in the court of law.
Privity of Contract
The principle of privity of contract stipulates that only parties to a contract are bound by the terms of the contract. Although this principle is subject to certain exceptions, we are of the view that situation provided by the Directive does not come under any of the exceptions. We therefore consider as stated in the illustration above, the terms of the loan agreement between Mr. ABL and LBA Bank Limited cannot be enforced against BLA Bank PLC so that BLA Bank PLC, should not be obligated to part with Mr. ABL’s funds.
Banker-Customer Confidentiality
A banker’s duty of confidentiality is sacrosanct and is one that is taken seriously by the law. This right can however be waived by agreement of parties. For instance, in line with international best practice and in order to improve the credit system in any country, it is not out of place to have a credit bureau agency saddled with the responsibility of profiling and categorising debtors. Also, if the parties to a contract have agreed to that information regarding the transaction can be released to third parties, then it becomes binding. However, as the Requirement is a sort-of statutory obligation imposed by a regulator on banks and their obligors, it is not doubtful that a customer legally can refuse to waive his right to confidentiality.
Clearly, we understand that the Directive is one of the several ways the CBN is trying to reduce the rise in bad debts without recourse to the Judiciary. We, however, believe it is just a matter of time before the enforcement of this clause will be tested in the courts putting into consideration other legal alternatives available to banks to realize payments on credit facilities.
As things stand, currently and when the new-normal comes, we strongly advise that you read your loan agreements thoroughly and when in doubt about any clause, engage a competent Solicitor to do same on your behalf.
DISCLAIMER
This article does not create a Client/Attorney relationship. Readers are advised to seek from qualified Legal Practitioners, legal counseling to any questions or concerns arising from their specific factual situation. You can reach ABL Partners at contact@ablpartnerslp.com or +234 8182824007.