EFCC’s agric loan recovery efforts trigger questions on due diligence

In this piece, FEMI IBIROGBA takes a look at the Bank of Agriculture’s (BOA’s) efforts to recover failed loans, what should have been done to prevent failure and steps to prevent re-occurrence.

Sequel to Federal Government’s directive to the Bank of Agriculture (BOA) to recover non-performing loans within 90 days, the bank has partnered with security agencies, especially the Economic and Financial Crimes Commission (EFCC). Some of the loans were given to farmers at nine percent interest rate since 2015.

Minister of Agriculture and Rural Development, Chief Audu Ogbeh, while inaugurating the new management of the bank said: “You have some debts to recover, and I do not know how much is owed your bank, try and get the money back. You may feel free to inform farmers who owe you that in the next 90 days, you expect them of thinking of paying back.”

Kabiru Mohammed-Adamu is the managing director and chief executive officer.
A question paramount, however, is that which is better and cheaper between exercising due diligence in disbursing agricultural loans and using security agencies or financial crimes commissions to recover failed loans?
Due diligence, either in banking or elsewhere, is taking precautionary steps to prevent failure, damage or danger. In business, it involves meticulous investigation into the financial history, business transactions, public image and reputation of the new clients, suppliers, agents or intending partners.

The theory behind due diligence holds the view that doing careful investigation contributes, to a great extent, to informed decision making by enhancing the amount and quality of information available to decision makers and by ensuring that this information is tactically used to deliberate on the decision at hand and all its costs, benefits, and risk factors.

In banking and finance, it is the careful procedure to know more about clients, either corporate or individual. The parlance, more appropriately, is Know-Your-Customers (KYC).

The Central Bank of Nigeria (CBN), taking due diligence higher, introduced Biometric Verification Number (BVN) some years ago, and to the banking sector, it becomes a potent tool of KYC, to a great extent.

The BVN is an interconnectivity information technology capable of tracking financial and banking records of prospective clients if used as mandated by the CBN.

Part of due diligence in the context of the BOA should have been following up of loan utilisation as intended and presented to the bank. Were all these steps taken when the anchor borrower loans of the government were disbursed to the so-called farmers? If yes, what is the problem?

In view of the role BOA is expected to play in the food security drive of the country, due diligence must be paramount. Loan recovery efforts point to only one thing, that the essence of the loan or the expected increase in food production is a failure. Probably farmers have failed in adding to food increase as one of the objectives of the anchor borrower programme. And perhaps they have also failed in making their own lives better.

Loan approval criteria
A loan application in any bank has some requirements to meet, if it is not viewed as a national cake, as many farmers and Nigerians do. The criteria include business name registration or a registered union cum cooperative society; collateral security; track record of honest transactions, record keeping and an existing business to be expanded. Commercial banks hardly give loans to business or farming greenhorns. Some commercial banks routinely organise small-scale business management covering record keeping, business progress evaluation through profit and loss accounting, and linkage to technical expertise in the chosen area of agriculture the clients belong. These measures, experts say, are better, cheaper and more reasonable than recovery efforts after failure.

Project Manager, Facility Department of an old generation bank who craved anonymity, said the BOA should have followed five major due diligence procedures before disbursing its loan facilities.

They include character of the loan applicant. Is he a reputable individual? Is he recommended by a person of integrity? The second factor is capacity to repay the loan. Is the applicant capable of repaying the facility requested based on the past financial history? The third factor is the capital the applicant already has. He must have got a certain percentage of the total loan he applies for. This called the owner’s equity. The fourth factor is collateral security.

According to the project manager, the fifth procedure is the condition of the loan. If the loan is given for agric purposes, then it must be used for the same. The farmers must comply with the condition of approving the loan, he added.

Follow-up of loan utilisation by farmers
Part of due diligence is adequate follow-up by the bank to ensure compliance of loan takers to the agribusiness proposals presented to the bank. Much more emphasis should be placed on this. It is on record that farmers do divert loans meant for agricultural purposes to other uses, and with the foregoing more proactive steps should be taken to prevent rather than treat non-compliance.
Mr Akin Olusuyi, Managing Director of Oluji Cocoa Products Ltd, berated the bank for a poor job. He said it should have done all necessary things to prevent the loans from becoming bad.

He also pointed out that BOA involving EFCC in loan recovery is an indication of failure on its capability in managing its affairs, saying how would it look like if every organisation goes after its debtors with the security or loan recovery agents?

He queried the category of people the loans were given to, saying “were they real farmers? If they were farmers, what due diligence procedures were followed?”

“We are just deceiving ourselves in this country. What I will say is that if the bank cannot manage its loan portfolios, and has to depend on another agency to recover the loans, it has failed,” Olusuyi said.

On-the-field monitoring of client’s agribusiness
Monitoring and evaluation of the client’s business is a component of due diligence. The bank should intensify monitoring and evaluation efforts on the agribusinesses of the loan applicants, help them grow and become established, making loan repayment cheaper and easier for the farmer, rather than applying medicine after death.

Reports from farmers might not be reliable, and if this is so, independent reports must be generated by the bank to establish the healthiness or otherwise of the business, and take proactive steps in turning the tide if the business is failing.
Professor Kolawole Adebayo, Project Director, Cassava: Adding Value for Africa (C:AVA) Project agreed that the bank should have been more careful in disbursing the facilities, but defaulting in loan repayment might be as a result of natural farm disasters, farm destruction through cattle rearing and other factors.

He, however, supported the collaboration with the security agents and EFCC not only to retrieve the loans from those who intentionally diverted the loans to other uses, but also insiders in the BOA who might have collaborated with fraudsters pretending as farmers.
He advised the bank to be considerate of farmers who ran into real problems with recorded evidence, while it should prosecute all who had presented false pieces of information to unduly have access to agricultural loans, as well as their internal collaborators within the bank itself.

Speaking on the way forward, Olusuyi said the bank should be reorganised, contending that it is too far away from real farmers by concentrating its branches in the state capital cities.

Due diligence would have achieved three things. One, loans would not have become non-performing; two, marginal food increase would have become a reality and resources spent on loan recovery would have been conserved.