The Current Economic Impact on Debt Recovery In the Banking Sector

1.0 INTRODUCTION

Debt has long existed since the beginning of time. Man, when faced with financial difficulties and the inability to provide for their daily needs will resort to obtaining loans, credits and accumulate debts for survival. A Debtor and Creditor relationship is then created. As long as man and his daily endeavours exist, the issue of indebtedness cannot be eradicated. People incur debts all over the world in varying sums and for different purposes.

Banks are readily available to grant their customers loans. In the comfort of their homes, customers are granted instant loans with little or no interest. Bank loans are a very valuable tool for the growth and sustainability of businesses in Nigeria particularly since we are not exactly a credit-oriented society. In fact, a loan can be a powerful tool to raise capital and scale a business, when utilized correctly.

Bank loans could be short-term loans with low interest rates or long-term loans with higher interest rates. There is a wide variety of loan options with different peculiarities available to customers and a properly obtained loan can be a nifty tool to catalyze the growth of a business.

There are other loan agencies besides the Bank in Nigeria. In recent years, there are instant loan apps which customers utilize to access loans for businesses and for personal reasons. The Bank and any other Loan agencies recover loans advanced to customers with interest.  It is however typical for Debtors to exploit all options available to escape the burden of liquidating their debt. Economic issues of a country also reflect on its citizens. Inflation, corruption, unemployment, high cost of living etc. are factors affecting the ability of a debtor to liquidate his/ her debt to the bank or any other loan agencies.

Debt Recovery in the banking sector is at a snail pace where debtors are unable to fulfill their obligations by liquidating all loans advanced.

1.1 WHAT IS A DEBT?

According to Black’s Law Dictionary, Debt is defined “as a specific sum of money due by certain or express agreement; or by bond for determinate sum, a bill or note, a special bargain, or a rent reserved on a lease, where the amount is fixed and specific, and does not depend on any subsequent valuation to settle it”^[1]

By implication, it can be inferred that for a money claim to be regarded as a debt, the money must be a specific sum, a certain, fixed or liquidated amount of money. There must be a due date which must have passed and such due date must arise from some agreement by parties to it called the “Debtor” (the person who owes the debt) and “Creditor” (the person who claims or is entitled to recovery)^[2].

1.2 WHAT IS DEBT RECOVERY?

There is no issue that bothers the Bank and other loan agencies in the business of rendering credit services more than the difficulties in recovering debts owed by their customers. The procedure to retrieve such debts is the Debt Recovery process.

Debt Recovery is simply the process of securing payment from debtors, be they individuals, businesses or companies, for the monetary debts owed to other companies or individuals which were not paid as at the time and in a manner agreed between the Debtor and Creditor.^[3]

Debt recovery is crucial because it has a direct impact on a debtor’s credit score.  The more a debtor defaults in liquidating his/her debt, it reflects on their credit score. However, there are several procedures to which debts can be recovered in Nigeria legally.

1.3 PROCEDURES FOR DEBT RECOVERY IN NIGERIA

In Nigeria, there are several legal alternatives for recovering debt from individuals and business organizations. It is important to note that owing a debt is a civil wrong, and not criminal wrong. Thus, the police and other security agents may have no power to arrest a debtor except where the debtor, through the commission of a crime incurs such debt.

THE PROCEDURES FOR DEBT RECOVERY

Step 1: Amicable settlement of the disagreement between the Debtor and Creditor in accordance with the procedure agreed to by the parties in their agreement. Payment structure could be agreed upon.

Step 2: Consultation with a lawyer or debt collectors/agency. Self-help is not an option. This is because the law frowns upon extrajudicial measures at debt recovery. Examples of such extrajudicial measures include the use of threats, violence, malicious destruction of the debtor’s goods or property, or the arrest and detention of debtors by the Police.

With the use of self-help, a debtor may successfully prosecute an action for the enforcement of his fundamental rights and for the award of punitive compensatory and monetary damages against the creditor. Thus, it is advisable to follow due process when recovering debts^[4].

Vital documentation such as delivery notes, invoices, written agreements, letters, emails, memos, and so on must be provided to the lawyer/debt collector for proper scrutiny.

Step 3: The lawyer or debt collector will examine and evaluate your claims regarding the debt portfolio. Efforts would be made on contacting the debtors. They are reminded of their outstanding debt and payment is requested.

Step 4: A Demand Letter will be written by the lawyer/debt collector to the debtor. This step is mostly taken due to the unresponsive attitude of the debtor. The demand letter introduces the person on whose behalf the debt is to be collected, the amount owed or current amount owed where interest has accrued, and specifying the amount owed or current amount owed where interest has accrued.

Step 5: An action by the creditor’s lawyer can be brought against an obstinate debtor using the fast-track court method known as the “Undefended List Procedure” or “Summary Judgment Procedure,” or other procedures provided for under various statutes for debt recovery.

The appropriate court to institute a legal action for debt recovery depends on the debt sum. In Nigeria, an action for debt recovery can be instituted at the Magistrate Court, the State High Court or the Federal High Court.

1.4 LIMITATIONS TO AN ACTION FOR DEBT RECOVERY

For every financial institution such as a bank and every other loan agency, debt recovery should be of urgent priority. This is because, in Nigeria, there is a time limit on when a debt can be recovered. The Limitation of Statute Law provides that an action for recovery of debt cannot be brought after 6 years. This means that the law will not allow an action against a debtor if such action is not brought to court within the span of 6 years from the day in which the action arose^[5].

It is clearly stated that the right of action shall cease to exist and therefore not be exercisable after the expiration of the 6 years as was held in the case of Okonta & Anor V. Egbuna.^[6] An action for debt recovery arising from a simple contract must be brought within six (6) years from the date the contract was entered into and executed^[7]. However, the year the contract was entered into and executed is omitted^[8].

2.0 DEBT RECOVERY IN THE BANKING SECTORS

In the case of banks, loans and advances constitute the bulk of their assets given the nature of banking business. The recovery of loans from customers in debt are constrained by a number of factors, which includes the poor state of business of debtors, thus making recovery efforts difficult, protracted legal processes and the fact that many of the loans were irregularly granted and unsecured.

One of the most concerning is the unwillingness on the part of some debtors to honour obligations. Instead of seeking ways to settle their debts, some debtors prefer to ignore reason and leave the debt to accumulate with interest^[9].

A bank commences a debt recovery process when it seeks money (debts) it is owed. A bank takes recovery action for a number of reasons, but the most common is when a customer fails to make loan repayments (defaulters).

2.1 DEBT RECOVERY STEPS BY BANKS

1. By referring the matter to a specialist debt recovery team within the bank.
2. By seeking the services of an external debt collection agency to act on its behalf i.e. A law firm that specializes in Debt Recovery
3. By selling the properties over which the bank holds security. In the case of real estate. This is also known as a ‘mortgagee sale’.
4. By seeking judgment from courts to enforce the debt.^[10]

3.0 WHAT IS THE CURRENT ECONOMIC IMPACT ON DEBT RECOVERY IN THE BANKING SECTOR?

The current distress in the banking sector has been widely acknowledged as arising primarily from the non-performing loans which have been traced to a number of factors such as poor management, poor documentation, poor supervision, forgeries, loan policy etc.    

However, there are several economic issues affecting the progress of Debt recovery in the banking sector. These economic factors affect the ability of most debtors to fulfill their obligations to the bank. These factors impact negatively on the Banks effort at recovering debts.

1. INFLATION

In recent years, the rates/ prices of food products, housing rents, transportation, clothing and every other basic necessity for a comfortable life has increased exceedingly. The higher cost of basic necessities will result in more debtors/customers defaulting on their debts. Prices keep rising and there is no increase in wages, debtors experience a decrease in purchasing power. Debtors find it difficult to pay off previous debts thus allowing the increase in interest on the debt. 

2.    UNEMPLOYMENT

Debtors require money to repay all debts owed. A job provides wages; however where a debtor is unemployed or recently loses a job, the individual is left with less available income, if any. Loss of manpower negatively affects a business organization in fulfilling its financial obligations to the bank. The lesser the production or result, the lesser revenue is generated.

3.     CORRUPTION

“If you owe the bank 100,000 dollars, the bank owns you. If you owe the bank 100 million dollars, you own the bank”.  This is an old Wall Street saying which brings to mind the dangers of corruption and nepotism in the banking sector. Corruptions in the financial services are often ignored but it can have far reaching consequences on the economy and in an increasingly interconnected world, the entire globe.

Governance in banks is very crucial. The corruptions by banks are in the manner they extend loans and subsequently recover them. This has implications on the asset quality of the bank. Corrupt bank officials sanction loans to undeserving borrowers thus the negative impact on the effort of debt recovery. Integrity should be a ground value for the financial services.

CONCLUSION

In the recovery of debt from borrowers/debtors, banks encounter problems with the debtors due to their inability to pay or liquidate all owed debts. The factors leading to this are poor supervision, improper documentation, weak loan policy, poor management etc. However there are some economic factors affecting debt recovery in the banking sectors. These are inflation, unemployment and corruption of bank officials. If the world was perfect, every debtor will liquidate their debts. Banks in advancing loans should review their loan policy. Increase of non-performing loans and bad debts are detrimental to the bank. Debt recovery in the banking sector is a crucial process and due procedure should be followed.

FOOTNOTES:

^[1] Black’s law dictionary 10th edition

^[2] https://www.mondaq.com/nigeria/financial-services/1236286/procedures-for-debt-recovery-in-nigeria

^[3] https://www.tekedia.com/legal-methods-for-debt-recovery-in-nigeria/

^[4]https://www.resolutionlawng.com/procedure-for-debt-recovery-in-nigeria/

^[5] Section 18 Limitation of Statutes Law

^[6] Okonta & Anor V. Egbuna (2013) Lpelr-21253(Ca)

^[7] Section 20 (1) (a) Limitation of Statutes Law

^[8]https://www.mondaq.com/nigeria/financial-services/1236286/procedures-for-debt-recovery-in-nigeria

^[9]https://ndic.gov.ng/failure-resolution/debt-recovery/

^[10]https://bankomb.org.nz/about-us/information-sheets/suspending-a-banks-debt-recovery-process/#:~:text=A%20bank%20takes%20recovery%20action,to%20act%20on%20its%20behalf