In the context of this article, I would like us to understand borrower-behaviour as the actions or inactions (failure to act) of a borrower toward a lender after the borrower has entered into a credit agreement with the lender. Indeed, it is said in law that “you cannot place something on nothing and expect it to stand. It will collapse”. In this respect, the foundation for a contractual relationship between a borrower and a lender has been laid in the Borrowers and Lenders Act 2008 (Act 773) (currently under amendment).
Section 72 of the Act makes it mandatory for a banker (lender) before entering into a contract with a borrower to provide the borrower with a pre-agreement disclosure. Section 72 (2) states that “a lender regulated by the Bank (Bank of Ghana) shall not conclude a credit agreement with a prospective borrower unless the lender provides the prospective borrower with a pre-agreement statement and quotation in the form specified in the Schedule”. The schedule basically indicates the necessary information which the lender must provide to the borrower before the actual contract is entered into by both parties to the transaction.
It is presumed that after satisfying all the necessary requirements and entering into a valid contract (credit agreement), the borrower should comply with his/her side of the transaction to repay the loan on schedule – but is this always the case from our experiences? The undercurrents of the relationship can only be felt in the life of the contract. As Shakespeare succinctly put it “there’s no art to find the mind’s construction in the face”. That is, it is difficult to know whether anyone bears you ill-will or not by reading his/her face.
A banker in a handshake with a customer
A banker who gives a loan and expects to earn income on it, learns to appreciate the deeper meaning of the wisdom in Shakespeare’s words from his/her customers’ behaviour when the repayment period of their loans set in. This write-up attempts to highlight some of these possibilities. The repayment ability on one part and the willingness on the other side help bring out some four (4) distinctions in the behavioural tendencies of borrowers.
It is an established fact that borrowers (employees of agencies and departments) who enter into a loan agreement with financial institutions from which they draw their salaries regularly are likely to remain able and willing to repay the loans to the last pesewa in the agreement. This is because their loan commitments are usually deducted at source. However, any incidence of job-change by some of these persons could result in defaults – unless there is a deliberate commitment from them to service the loan after entering into new employment.
Secondly, there is a group of borrowers who should be able – they have sufficient resources to enable them to repay the loans but are just unwilling to do so. In the case of this category of customers, one of the reasons which may be encouraging them to be unwilling to repay their loans is poor monitoring of the credit facility. Indeed, business customers among other borrowers take advantage of this lapse to reinvest (plough-back) the resources (money) into their businesses or other projects.
Interestingly, some customers also have the wherewithal to repay their loans on schedule, but are equally unwilling to do so due to legal reasons. For instance, when the lender is unable to initiate proper documentation of the loan with a pre-loan agreement, a savvy customer and a litigant could exploit the weaknesses in the transaction to his/her advantage. We should be cognisant of the fact that the Act makes it permissible for a borrower to sue the lender for damages if he/she has suffered a loss as a result of the contravention (failure by the lender to provide him/her with a pre-loan agreement).
A borrower may be emboldened by this provision in the Act to refuse (be unwilling toward) repayment of the credit facility, even though he/she has sufficient resources are available. To note, there are also very shrewd borrowers who sometimes use a bank as a channel to sell their property (buildings) when they are unable to get ready-buyers for those houses on the open market. They rush to their bankers to take loans using the property as collateral – with the intention of not paying back though they have other resources. To my mind, these borrowers want the bank (lender) to realise such property in a fallback compensation.
Another behavioural disposition deserving of attention is that there are some borrowers who, in fact, are willing to repay their loans but remain unable to do so. There are many reasons which could account for this situation. For instance, when the borrower has only one income stream and unfortunately loses a job (through retrenchment, lapse of contract etc.) then it is obvious that this borrower will not be able to repay the loan even though he/she could have a strong sense of willingness to retire the facility.
A borrower may also become incapacitated through sickness or accident, or face a difficult business environment; and though s/he may have the willingness to repay his/her loan, s/he is unable to do so due to these circumstances beyond his/her immediate control.
Financial institutions have tried to reduce this risk (sickness, accident or death) with loan protection insurance policies (like employers Liability/Workmen’s Compensation). Nonetheless, the policy does not cover unemployment. It is an undeniable fact that job security is far from reality in the present-day labour market of Ghana. Hence, it would not be out of place for insurance companies to enhance their loan protection policies to cover individuals who, through no fault of theirs, lose jobs to have a cushion that absorbs their loan repayment/s.
It is also important to know that some of our customers show strong commitment in terms of human willingness to service their loans, but are unable to honour these obligations due to inability of the user agencies (third-parties) to pay them on time for projects they execute. In fact, contractors which perform public sector projects and other related projects in the private sector have on many occasions complained of the delay in payment of their contract proceeds.
Interestingly, poor credit decisions on the part of both the borrower and lender can trap the borrower in a condition which makes him/her be unable to repay the loans despite that he/she might have shown the signs of willingness to repay the facilities. This mutual mistake may have arisen from inability of the borrower to provide adequate information to the lender, while the lender on the other hand also fails to verify and confirm any piece of information (on income sources, resources) the borrower provides.
Thus, poor advisory services from the lender result in advancing loan amounts which suffocate the borrower’s ability to meet scheduled repayment commitments. To give the borrower respite for a breath, the lender should extend the repayment period by re-scheduling the loan for the customer to reduce the regular commitments – even though a longer period means more payments due to the time-value of money.
Furthermore, among all the behavioural tendencies there is one that poses the most challenging tasks for a lender to manage. This is the group of borrowers who remain unwilling (no resources) and unable to pay their loans. To establish some of the sources of information for this category, it is worth knowing the security set-up’s level of efficiency and effectiveness concerning the maintenance of loan files (hard files) as well as the IT platform of your company. In fact, weak internal control systems could serve as a trigger for unethical conducts which motivate some staff to delete customer records from the system. Would a borrower repay his/her loan after compromising the system through unscrupulous staff?
We can cite another example of this borrower-behaviour from people who take MASLOC (Microfinance and Small Loans Centre) loans to support our case, although the Centre is not under regulatory purview of the Bank of Ghana and not necessarily bound by provisions of the Borrowers and Lender’s Act. It is an open secret that the majority of the Centre’s borrowers consider loans granted to them as gifts/rewards for political patronage and do not commit to paying back. The loans are mismanaged, and the borrowers lock themselves up in conditions of inability and unwillingness to defray their indebtedness.
Managing the Relationship
Indeed, from the discussion, we can now develop a matrix of four (4) groups of behavioural tendencies: the able and willing group; the unable but willing group; the able but unwilling group; and the group that’s very hydra-headed to manage – the unable and unwilling. The lesson we can take from these behavioural tendencies is that we cannot use a one-size-fits-all approach in dealing with borrowers.
Regarding the able but unwilling to repay borrowers, the practical approach is to identify their sources of income and apply to the court for a garnishee order which sanctions these institutional sources to make a regular payment to you, the lender. This approach helps to avoid the usual courtroom litigations which could take a longer time.
Though letters of undertaking (payment in joint names-bank/borrower) are normally used in initial stages of the transaction in respect of those executing contracts, their effectiveness is not as strong as the garnishee order from the court – since some institutions are reluctant to be bound by these letters of undertaking.
Take a deep breath, my dear reader! If you are a banker (lender) and have been confronted with extreme disappointments resulting from non-repayment of loans by your borrowers, do not be too emotional and digest the venom of your spleen. You need solace and inspiration. Before you involve yourself in the loan recovery strategies, I would appeal for you to hang the portrait of Shakespeare in your office with the inscription “There’s no art to find the mind’s construction in the face”.
Thank you for your time; God bless!
The writer is a Chartered Banker