Elizabeth
CHAPTER ONE
1.0
INTRODUCTION
Commercial
Banks operate to mobilize deposits from the populace and
keep. Some in trust payable on
demand. Through the performance of this role, Banks act as reservoir for
surplus funds and thus lend safe portion of these funds to clients that have genuine
needs for them. The banks have special responsibility to ensure effective
management of these funds kept in trust with them by depositors. Chester A Rude
puts it that the way and manner in which funds are handled “determines whether
they are laying a sound foundation or creating future problems for either the
borrower, themselves or the economy” If bankers unnecessary withhold credit,
the business suffer and so do the economy.
Lending activities are
prominent at all levels of our economy, which gave rise to loan management and
credit administration. This credit analysis, documentation, disbursements and
monitoring of loan to ensure repayment of both principal and interests on due
dates becomes pertinent.
One of the goals credit extension is to achieve
prompt repayment on due dates thus loan management typically involves credit
appraisal and administration.
Lending carries a reasonable portion of resource exposure
of commercial Banks in Nigeria. Therefore, the ability of a bank to generate
much profit is largely a function of effective and efficient management of its
lending portfolio. Due to its trustee status and in order to protect the
depositors Nigerian banks are being
xi
guided in their operations by so many regulatory bodies in
order to avert bad lending and liquidity problems. Operations and prudential
guideline by the Central Bank of Nigeria are always in place.
Inspite of measures, which is
aimed at protecting depositors and other public interests, the incidence of bad
and doubtful debts resulting from lending activities has been on the increase
in commercial Banks in Nigeria. This is as a result of negation in the primary
objectives of granting credit and profit objectives of banks, hence the need
for an appraisal of the present lending and credit administration techniques.
1.1
STATEMENT OF THE PROBLEM
Most Commercial Banks in
Nigeria are currently being threatened by huge bad debt burden. This incidence
has eroded the confidence in the industry and eroded shareholder funds in most
cases. Have BOFID (1993) and prudential guidelines helped in arresting these
trends? The roles of regulatory framework is analysed to ascertain level of
assistance to the financial system.
1.2
OBJECTIVES OF THE STUDY
In
the light of credit polices of commercial Banks vis-à-vis regulatory
guidelines,
this research work has the objectives to evaluate or appraise various
techniques in the Administration of Bank lending from the point of disbursement
to the point of recovery at the same time identify causes of increased level of
bad debt profanation. The research has also identified reasons
xii
for
bad debts provisioning and recommend appropriate strategies that may be
appropriate in reducing debts write off.
The study also has objective
of ascertaining credit appraisals and the effect bad debt provisions on income
of Commercial Banks.
1.3
HYPOTHESIS:
1.
There is high correlation between lending and
Bad debt portfolio in Nigerian Commercial Banks.
2.
The credit policies of Banks and regulatory
guidelines if properly implemented can help reduce bad and doubtful portfolios
in Nigeria Banks.
1.4
SIGNIFICANCE OF STUDY
The current spate of liquidity problem
vis-à-vis distress syndrome being experienced in the Banking industry is a
function of lending policies and poor credit management. This trend has given
rise to colossal losses of shareholders fund and depositors had earned savings.
Therefore this research work is apparently
going to be useful to top level managers who may find the recommendation and
suggested strategies useful in managing credit portfolios. In similar manner,
branch and credit managers will be guided on loan disbursement to ensure strict
adherence to lending guidelines and economic analysis of environment.
Banks shareholders would be
able to acquaint themselves on the adverse effect of bad debts hitherto covered
by management of their respective Banks.
xiii
Again students of Finance will find this piece of academic
work useful in their academic pursuits.
1.5
SCOPE OF STUDY
The research work limit itself to one
case-study i.e FIRST BANK PLC. The investigation was conducted at Branch level
and annual reports material made available to the researcher.
The research focused on lending process before
and after disbursement up till final repayments with emphasis on effects,
causes and remedies of Bad Debt.
The assumption of this research include
the following
(i)
That all Commercial Bank grant facilities to
worthy clients with high expectation of 100% repayments of principal plus
interests
(ii)
That all Commercial Banks in Nigeria are
governed by same operational guidelines offered and professional conduct as
issued by Central Bank of Nigeria in addition to their internal policies
The study is limited to
facility with repayment tenor of between 1 – 5 years duration.
1.6
DEFINITION OF TERMS
In order to have a common knowledge and understanding
between Research work and the meaning transmitted to its targeted
beneficiaries, it beholds that a clear and unambiguous definition of words
often used in the study be given. Although the words may have numerous
meanings, the one given
xiv
herein should be regarded
as those referred to their usage in this research work.
Some of the “words” are
defined as follows.
i)
LENDING: A process by which a
Bank customer is founds for specifiedpurpose and specified period of
time with a promise to repay the amount borrowed and applicable interest.
ii)
CREDIT: This involves giving
(receiving) goods or purchasing powernow in return for a promise to
receive or re-pay the goods or purchasing power later. It is the sale of goods,
services or money claims in the present in exchange for promise to pay (usually
money) in the future. It includes a power to to repay both principal and
interest instalmentally or in lump – sum in the future. BAD AND DOUBTFUL DEBT.
This may be defined as a loan or debt, which has become irrecoverable at date
of maturity. A loan may be termed bad or doubtful on event of borrowers failure
to repay the loans in accordance with terms and conditions of the agreement.
iii)
ANTICIPATORY DEFAULT: On
the other hand recognizes thehappening of certain events which are ipso
factor conclusive evidence of default whether or not the loan or the interest
has fallen due”
(Banking
digest and Finance Vol. 5).
iv)
FINANCIAL INTERMEDIATION: This
is defined as financialtransactions, which bring savings surplus units
together with savings deficit units so that savings can be redistributed into
their most productive uses.
xv
v)
SECURITIES: This may be defined as something
that provides safety, freedom, from danger or anxiety, something valuable for
example a life insurance policy given as pledge for the repayment of a loan or
fulfillment of a promise or undertaking.
vi)
COLLATERAL SECURITY: This
is any security deposited by a thirdparty to secure the indebtedness of
the customer with the advantage that in the event of bankeupty or liquidation
of the borrower, the value of such securities may be ignored in the proof of
dividend against the fail estate.
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