CHAPTER
ONE

                                         INTRODUCTION

1.1
      BACKGROUND OF THE STUDY

           
   In a modern economy,there is
distinction between the surplus economic units and the deficit economic units
and inconsequence a separation of the savings investment mechanism.This has
necessitated the existence of financial institution whose jobs include the
transfer of  funds from savers to
investors.one of such institution is the money deposits banks,the
intermediating roles of the money-deposit banks places them in a position of
“trustees´´ of  the saving of the widely
dispersed surplus economic units as well as the determinant of the rate and shape
of the economic development.The techniques employed by bankers in this
intermediary function should provide them with perfect knowledge  of the outcomes of lending such that funds
will be allocated to investments  in
which the probability  of full payment is
certain.However,in practise no such tool can be found in the decision of the
lending banker.Virtually all lending decisions are made under creditors on
uncertainty.The risk and uncertainty associated with lending decision,
situation are so great that the concepts of risk and risk analysis need to  be employed by lending bankers in order to
facilitate sound decision-making and judgement.This statement implies that if
risks are to be objectively assessed,lending decisions by the money-deposit
banks should be based less on quantitative data and more on principles too
subjective to provide sound and unbiased judgement.Furthermore,the banks depend
heavily on historical information as a basis for decision making.

         Apparently aware of the inadequacies
of his decisions base,the lending banker has often sought solace in tangible
and marketable assets as security giving the impression that lending against
such securities is an insurance against bad debts.this makes the banker complacent
with  his loan portfolio.The increasing
trend of provisions for bad and doubtful debts in most money-deposit banks is a
major source of concern not only to management but also to the shareholders who
are becoming more aware of the dangers posed by these debts.Bad debts destroy
part  of the earning assets of banks such
as loans and advances which  have  been described as the main source of earning
and also determines the liquidity  and
solvency which generate two major 
problems, That is profitability and liquidity, has to earn sufficient
income  to meet its operating costs and
to have adequate return on its investments.

1.2    STATEMENT
OF THE PROBLEMS

     The problem for this study is to appraise the
lending and credit management policies of a typical Money-deposit bank(the
Union bank of Nigeria Plc) with a view 
of finding the causes,consequences 
of bad debts in banks.Year after year,banks suffer much from the part of
full loan extended which has  for one
reason or the other proved unrecoverable.Banks lose millions of Naira in
various  bad debts yearly and despite
efforts by bank management, committee of chief inspectors and the bankers
committee on the other hand,the wave of bad debts in banks is still on alarming
proportion.This is gathered from a combination of literature reviews on the
topic.

           On the other
hand,many banks experienced a lot of bad debts when the new government
abandoned the project awarded to the contractors by civilian government.These
contractors borrowed to execute the project awarded to them but could not repay
the loan,due to government action on reramping the economy thereby abandoning
the project.Other experiences were during the time of draught or poor rainfall
and pest.These however  led to low
harvest  which did not give the farmers
enough  time to repay their debt.

             Again, experience
may arise in respect of lapses on the part of the banks credit officers.For
instance, there may be excesses  over
approved facility,unformatted facilities and expired facilities not renewed on
time.In each of these cases the customer may easily  deny even owing the bank all or part of the
amount.Money.deposit banks have always borne the burden alone,but this may not
continue in  future as the banks may be
unable to take the risk of lending more but when eventually they do,they would
seek the best  way  they come out of the risk with a realistic
reward which they are clearly failing to achieve at present.

     1.3    
 PURPOSE/OBJECTIVE OF THE STUDY

(i)          
To determine and appraise the
lending procedure of banks using Union bank of Nigerian plc as a case
study-with a view to highlighting the effectiveness and adequacy or otherwise  the credit management policy of Nigerian banks
in reducing the occurrence and consequences of bad debts.

(ii)        
To highlight the  rate at which inadequate collateral security
provision by borrowers increases the incidences of bad debt in Nigerian.

(iii)      
To determine whether fund
diversion has any effect on bad debt of money deposit banks in Nigerian.

(iv)      
To ascertain the extent to
which government intervention in lending policies of money deposit banks has
influenced bad debts in Nigerian money deposit banks.

(v)        
To highlight the extent to
which improper project evaluation influence bad debt of money deposit  banks in Nigerian.

1.4               
RESEARCH QUESTIONS

                   In view of the consequences of bad debt in Nigerian
money deposit banks,it is
neccessary to formulate some research question which
will enable the researcher  formulate
statistical  tables for testing hypothesis.

1. Has inadequate
   collateral security provision by borrowers caused bad debt in Union bank
   of Nigeria plc?
2. Does fund diversion have
   any effect on bad debt of Union  bank of Nigeria Plc?
3. To what extent has
   government intervention in lending policies of money deposit bank influenced
   bad debt in Union  bank of Nigeria
   Plc?
4. To what extent does
   improper project evaluation influenced bad debt of Union  bank of Nigeria  plc?

1.5      RESEARCH HYPOTHESIS

          The following  hypothesis were drawn as follows.

1.     
Ho: inadequate  collateral provisions by borrowers does not
increase  the incidence of bad debt  in Union bank of Nigeria plc.

Hi: Inadequate collateral provisions by borrowers  increases the incidence of bad debt in Union
Bank of Nigeria.

2.     
Ho: Fund diversion does not
affect bad debt in Union Bank of Nigeria

      Plc.

           Hi: Fund diversion affects bad debts
in Union Bank of Nigeria Plc.

3.     
   Ho: Government intervention in lending
policies of money-deposit banks    

              has no influence on Union  Bank of Nigeria Plc bad debt.

              Hi: 
Government intervention in lending policies of money-deposit   

                 banks have direct influence on
Union Bank of Nigeria Plc,bad debt.

4.     
Ho: improper project evaluation
has no significant relationship with bad debt in Union  Bank of Nigeria plc.

Hi:  improper project
evaluation has direct relationship with bad debt in Union Bank of Nigeria plc.

1.6      SIGNIFICANCE
OF THE STUDY

          It is hardly an exaggeration that the
difference between the success and the failure  in the banking industry is in the effective
management of the banks loans and advance.Efficient loan management is vital to
the protection of assets and the achievements of adequate returns to investment.Though
much work abound in the literature  of
the techique of lending,the methods of securing such lending and the pitfalls
that await the  unwary banker.By
comparison it appears to be very  little
in point on the subject of loan management and recovery.

            A study of this subject will
therefore be a welcome addition to the existing volume of banking literature.

           
Effective loan management recognized that beyond the application of
sound banking principles whenever a loan is made,there is need for urgency in
appreciating the point when a loan begins to look doubtful,in arriving at a
decision as to the appropriate action and in taking that action.This will
enable the bank  to at least obtain full
payment including accrued interest  or at
worst to mitigate the capital loss in the face of increased competition among
banks,future profits are likely to be harder to come by and since bad debts are
a charge against profits,it is appropriate that we review the
methods,proportions and margins of lending to bad and doubtful debts.

              Hence the significance of this
study to bankers will enable them to appreciate an appraisal  of their lending and control mechanism now
that they are expected to lend under tight monetary conditions.The economy as a
whole will benefit from the study 
because if the level of bad debts is reduced,banks will be left with
more profits to enable them make the expected contributions to the development
of the economy.

1.7
       THE SCOPE OF THE STUDY

               In the study of credit
management in Nigeria,Union  Bank of
Nigeria Plc was used for my analysis.All references therefore relate to Union
Bank of Nigeria plc.

              A Six-year period covering
1988-1993 will be studied.

1.8      THE 
LIMITATIONS OF THE STUDY

               The limitations of this study
include some of unavoidable constraints and problems encountered in the
process.They are as follows:

       i)  
FINANCE: The problem of finance was not left out in the course of
research to this study. This type of study required adequate money and time to
enable the researcher visit the 
necesssary places for collection of data.Insufficient fund hindered an
in-depth study of this research since it was financed from meager pocket money
of the researcher.

       ii)  
NON-AVAILABILITY OF RECORDS: This is one of the most important limiting
factors in the course of the study.This includes the problems of easily getting
the appropriate data due to bureaucracy which hinders the information flow in
the country.

        iii) 
NON-CHALLANT ATTITUDE OF BANK OFFICIALS: The reluctance of bank
officials to reveal information on the need for this study,for fear of breach
of duty of secrecy to customers exposure of banks administrative short-comings.

         iv)  
IGNORANCE OF RESPONDENT /BORROWERS: Most bank  customers were semi-illiterates  and most often it was very difficult to
collect  adequate data required from
them.

          v)   
TIME: Since this study is one of the many courses offered by the
researcher,the researcher was constrained by time  to carry out an indent research on the study.

1.9           DEFINITION OF TERMS

       DEBT: This is what one owes to another
person.

       LOAN: A Loan is a credit arrangement,a
security is pledged and must be repaid with interest over a stipulated period
of time.

       OVERDRAFT:  This is a credit arrangement by banks to
their customer to withdraw money over and above that what he has in the
account.

        DEFAULT:  This means failure to pay one´s debt for
credit extended which has fallen due.

        HYPOTHESIS:  This is a tentative statement of conclusion.It
is a statement of claim which is to be proved right or wrong having been
confirmed with facts.

         Ho: 
Null Hypothesis: the hypothesis that is being tested.

         Hi:   
Alternative Hypothesis: the hypothesis that will be accepted if the null
hypothesis is rejected.

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