The Government has given indications of an impending debt restructuring that will involve Bond Swaps including zero coupon bonds for domestic bondholders with possible “haircut” for institutional investors which includes the banks. The Government has however assured individual Treasury Bill holders that their investments are safe and this is a relief. There has been concerns as to the impact of these decisions on depositors’ funds with the banks with stories of some banks being unable to meet repayment of depositors funds or reducing the amount expected by way of interest earned by the customer, with strange reasons being attributed to the debt restructuring of GOG securities. So whereas the Government has assured individuals with Treasury Bills that they are safe from any “haircut” it seems some banks have started giving the “haircuts” on deposits.
The relationship between the bank and the customer is contractual and no bank has the unilateral right to vary such contracts without prior notice and express consent by the customer. Of course there are express and implied duties owed by a customer to the bank but non includes the duty of a customer to accept a unilateral modification of the contract by way of debtor-creditor relationship when customers have made deposits and have an accrued or communicated right of an earned interest.
The rights of the bank with respect to the debtor-creditor relationship does not allow the bank to pass on the possible risk of a “haircut” on their investment in GOG securities as institutional investors to customers who have made deposits upon agreed and fixed rate of return in either a savings or fixed deposit account. I will try to keep the reasons simple and any reference to a bank includes a deposit taking institution as per the Banks and Specialised Deposit-Taking Institution Act, 2016 (Act 930).
BUSINESS OF BANKING
The business of banking with respect to deposit taking is simple. The bank makes an offer to the general public that, if you give me your money, I will repay you when you need it at an agreed interest rate. I walk into the bank with my money and they open an account for me. Per Commissioners of Taxation V. English, Scottish & Australian Bank , I become a customer of the bank with the bank being a debtor and the customer a creditor. As Justice Mensah-Homiah also said in her judgment in the case of Ampofo Twumasi Ankrah v Noble Dream Financial Services, “ Generally, a person whose money has been accepted by a bank to be paid back on demand is a customer of the Bank”.
Having established that depositing money in an account opened in your name by the bank makes you a customer of the bank, thereby invoking a debtor-creditor relationship, let us delve into the duties of the bank with respect to this relationship.
THE DEBTOR-CREDITOR RELATIONSHIP
This is a principal relationship in the Banker-Customer relationship. It has been well established in the case of Joachimson v Swiss Banking Corporation that amongst the various implied duties of a bank to its customer, is to repay the customer’s funds upon a written demand and also to obey the mandate of the customer. This obliges the bank to pay on a customer’s written demand either by way of a cheque or withdrawal slip the amount deposited in the account as long as the cheque is complete and regular on the face of it or the signature is duly verified to be that of the customer.
It has also been established in Foley v Hill that money paid into an account is under the control of the bank, it is the banker’s money, and can deal with it as it deems fit. The money becomes the property of the bank and there is no duty on the bank to account to the customer how the funds were used. The customer cannot therefore determine who the bank should lend to or where to invest. The customer can of course demand to be paid in cash but not in the same exact notes deposited as established in the case of Libyan Arab Bank v Bankers Trust.
By Burnett v Westminster Bank, for any express terms to even be binding upon a customer, they have to be brought to the notice of the customer and must be reasonable. Also by way of contract law, any new express term cannot take retrospect effect on an existing contract to affect accrued rights of the customer, well not without consent.
This debtor-creditor relationship reverses when the bank, now creditor, lends money to the customer, now debtor. When a bank (creditor) lends money to a customer (debtor), the customer is obliged to repay the money with the agreed interest, irrespective of the fact that the purpose for which the loan was sought has been achieved or not. In case of SG-SSB Ltd v Amos Aluminum Link Co, Ltd, a customer who was granted an overdraft got the stock destroyed by flood and could not pay back the facility with interest on due date. It was held that the customer’s obligation is to repay the loan and even if the business has flopped due to no fault of the customer, it does not change the obligation of the customer to repay the loan contracted for. The obligation of a borrower on a loan contract is to repay the loan not the performance of the purpose for which the loan was sought, therefore it was for the customer to repay the loan and not to rely on the proceeds from its business to fulfil its obligation under the contract.
In summary, the above debtor-creditor relationship in which ever form it takes, between the bank and the customer is contractual and parties are obliged to repay whatever amount has been borrowed with the agreed interest on due date no matter the circumstance. The creditor, be it the bank or customer, is not interested in what happens to the debtor after giving the money. Now let us look at the obligations under different accounts opened by the bank.
TYPES OF ACCOUNTS AND THEIR OPERATION
There are three types of “vanilla” accounts that banks open. Current account where mostly banks do not pay interest and can use the money deposited to generate income/profit for itself and only obliged to pay the money upon demand by way of a cheque by the customer. There is also the savings account where the bank agrees with the customer that any income/profit generated from the use of the money will be shared with the customer at an agreed proportion, that is rate of interest as long as the money remains with the bank. The other is a fixed deposit, where the bank contracts with the customer to give a fixed rate of return on a fixed amount for a fixed duration.
It is a contractual relationship and not that of trustee-beneficiary, hence when the funds are deposited they become the property of the bank. By these contractual arrangements, the customer cannot determine what the bank does with the money as longs as the money is paid when demanded and as per the agreed terms. In fact, the customer does not care whether the bank, invested the money and lost the investment, lent it out to someone who could not pay back, kept the money idle without doing anything with it or it got stolen. Likewise, it is not the business of the customer to enquire as to how much income/profit the bank is making on the money deposited to demand more, as long as the agreed interest is being paid but of course can negotiate and agree on the rate of interest to be paid at the point of making the deposit. The exception to the customer’s right to demand payment of its deposit may be during times when the bank is being wound up.
Having looked at the ramification of the debtor-creditor relationship and the operation of the three basic accounts banks open, let us consider the effect of the GOG debt restructuring on the banks.
EFFECT OF GOG DEBT RESTRUCTURING ON BANKS
Banks upon taking deposits do two basic things, either invest in securities to get investment income or lend to other customers to get interest income. By investment, they mostly buy GOG Treasury bills or bonds. The risk in lending is high but so are the returns, so some banks wanting to play safe may invest more in GOG instruments. I am yet to see the proportion of assets held by banks by way of loans and advances as against GOG instruments but have no doubt that in times of the uncertainties during the COVID-19 era, banks increased their investment in GOG securities which was attractive with the high interest rates being offered, presumably risk free, instead of lending to customers with its associated higher default risk.
Any debt restructuring by the Government as announced by the Minister of Finance by way of bond swaps and zero coupon bonds will bring liquidity challenges to the banks who were relying on the coupon payments. We are also not too sure if institutional investors in Treasury Bills will be subjected to “haircuts. If they will then the banks who were playing safe in GOG securities and not lending to customers will be exposed. They will have assets by way of investments but face liquidity challenges affecting their ability to meet customer deposit withdrawal demands. This will be the same as the banks who had assets by way of loans, with repayment challenges from customers, for which Bank of Ghana had to “pull the plug” on them due to their inability to meet customer demands for the repayment of deposits.
I will now be addressing the issue of whether or not, banks can refuse to pay customers the agreed returns on their deposits just because they have had “haircuts” on their investments in GOG securities or have had their investments restructured, though from what I have said so far the answer in your mind should be an obvious no.
REFUSAL OR INABILITY TO PAY DEPOSITS AND INTEREST
Banks have a contractual obligation to repay customers’ deposit with any agreed interest. Whatever banks use the deposits for is not of concern to the depositor. The bank cannot therefore refuse to repay with the reason that a customer they gave a loan to was unable to pay back or has rescheduled payment, same as the Government they invested funds with has refused to pay back or rescheduled payment.
Since we have learnt that the debtor-creditor relationship can be reversed, is a bank prepared to accept from a business customer who has borrowed money, that they have given goods on credit and that they can only pay the loan once they receive payment? What if the goods of the customer have been destroyed so cannot continue the business? In fact, what the banks do in such circumstances is to charge penal rate for the overdue amount, whilst charging interest on the unpaid penal interest, interest on interest, till the amount owed is paid. If it persists by remaining unpaid on expiry of the facility, the banks will sue for recovery from the law courts to get judgment to sell off any assets of the customer. Interest is even charged till final repayment of the judgment debt by the customer. At best, a negotiated settled by way of a “haircut” on the loan outstanding is agreed and has to still be paid by the customer who has no business to run. The bank as a creditor, as they say has “no mercy for the cripple”.
Why then should a depositor, now a creditor, accept anything less than what the bank would have done if the customer had borrowed money, and having challenges paying back through no fault his as in the Amos Aluminum Link Co, Ltd case?
Also, if the amount deposited can be used by the bank as it deems fit and the customer cannot question the bank as to how the funds were used as in Foley v Hill, why should the customer suffer for a decision of the bank to invest in GOG securities when there is debt restructuring? It is interesting to note that should a customer act on a professional advice of a bank and loses money, the bank as per Woods v Martins Bank Ltd can be held liable. Why then should a customer lose money when the bank has this time made its own investment decision with money which we are told to be the legal property of the bank and not the customer?
- Response by Bank of Ghana
If the stories circulating that some banks are unable to meet repayment demands are true, the Bank of Ghana, as the Regulator, must let the public know what rights customers have if a bank is unable to repay their deposits with interest during these times and the obligations of the bank to the customer. For now, it looks like the customers are on their own lamenting and some even ready to forfeit their interest and requesting the principal to be paid and even that seems to be a problem. This particular situation is tricky though. It looks like a plaintiff who is suing a defendant in court for the recovery of money but the defendant gave the money to the judge who has not paid. What will the judge do? What will Bank of Ghana do? By extension what will Government do?
Some of the banks that were closed down, having liquidity challenges, said they had given loans to contractors who had executed Government contracts but not been paid to be able to repay the banks, yet Bank of Ghana ignored the peculiarity of their situation. What will be the response this time when the liquidity challenges are because the banks have invested in Government securities and not been paid.
If it is right for some banks to be giving unilateral “haircuts” on repayment of deposits, because of their risk with GOG securities, the Bank of Ghana as an independent body of Government must let us know. If not, a directive to sanction banks involved in this would be helpful.
- Test at the Court
A customer who has a fixed deposit with a bank must instruct the bank on maturity to pay the money into the current account. The customer must then issue a cheque to a third party on the current account covering the agreed and expected principal and interest to be received. Should the cheque be returned unpaid, the customer must seek redress from the court. I cannot envisage the bank returning the cheque and for what reason?
In as much as I empathise with the situation banks currently find themselves, I see no legal basis for any bank to unilaterally refuse to repay depositors money with agreed interest with the reason being the impact of any Government debt restructuring. It is the bank that may have lost money and not the customer. A debtor-creditor relationship by way of a deposit by a customer is a contract that cannot be reneged on. The Central Bank must find a way to bail out such banks by way of a “bridge finance” to repay the customers but at whose cost.
Though the likelihood of a Government not being able to honour its domestic debt obligations is theoretically low, the impact is high and the risk management frameworks of the banks who are over exposed should have envisaged that in their risk assessment. What risk assessment did they do and response did they take when there were indications of Government’s high borrowing resulting in downgrades by the international rating agencies? The debt restructuring by Government seems to have exposed some banks on how they conduct their business of banking and it will be interesting to see the proportion of deposits that have been invested in GOG securities and given out as loans.
It will also be interesting to know what the Regulator will be doing to banks that will be facing liquidity challenges and unable to meet the demand of deposit and interest repayment of the customers as a result of the debt restructuring. The liquidity challenges, if any, will not be different from that experienced through delayed or non-repayment of loans that caused some financial institutions to be closed down.
Depositing money in a bank account is a contract with the customer being the creditor and bank the debtor. Whatever happens to the money is the bank’s business and the customer must be paid in full unless officially the is bank is under receivership.
The author is a Chartered Banker with over 20 years’ banking experience in senior management positions. He also holds an LLB. (Contact: [email protected])