Credit Management And The Incidence Of Bad Debt In Nigeria Money-Deposit Banks (A Case Study Of Union Bank Of Nigeria Plc)
This research work was undertaken to assess the credit management and the incidence of Bad debts in Money-Deposit Banks. This work was intended to achieve the following objectives: to appraise and determine the lending procedure of banks, to highlight the extent to which improper project evaluation influence bad debt of Money-Deposit Banks. Relevant data were collected from both primary and secondary sources. Questionnaire was the main primary data collected instrument employed while data from various relevant publications constituted the sources of secondary data. Upon the analysis of data, the following conclusions were drawn; that sound lending requires a clear-well articulated and easy accessible policy document which spells out the philosophy of lending. On the basis of the above findings, it was recommended that banks should ensure that loans given out to customers should be backed by adequate collateral security. Finally, it is the opinion of the researcher that the management of the Money-Deposit Banks should prevent the incidence of bad debts in Nigerian Banks.
Table Of Contents
- Title page
- Certification page
- Table of content
- 1.1 Background of the study
- 1.2 Statement of the problems
- 1.3 Purpose̸ Objective of the study
- 1.4 Research Questions
- 1.5 Research Hypothesis
- 1.6 Significant of the study
- 1.7 Scope of the study
- 1.8 Limitations of the Study
- 1.9 Definition of terms
- 2.1 Theoretical Framework
- 2.2 Government control over credits
- 2.3 Credit Administration in Union bank of Nigeria plc
- 2.4 Lending and Credit Analysis
Research Design And Methodology
- 3.1 Research Methodology
- 3.2 Research Design
- 3.3 Area of Study
- 3.4 Population for the Study
- 3.5 Sample Size Used
- 3.6 Instrument For Data Collection
- 3.7 Validation of the instrument
Data Presentation And Analysis
- 4.1 Data presentation and summary of findings
- 4.2 Provision and Analysis of Data Question
- 4.3 Test of Hypothesis
Summary Of Findings, Recommendations, Conclusion.
- 5.1 Summary of Findings
- 5.2 Recommendations
- 5.3 Conclusion
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 practice 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 revamping 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
- 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.
- To highlight the rate at which inadequate collateral security provision by borrowers increases the incidences of bad debt in Nigerian.
- To determine whether fund diversion has any effect on bad debt of money deposit banks in Nigerian.
- To ascertain the extent to which government intervention in lending policies of money deposit banks has influenced bad debts in Nigerian money deposit banks.
- 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 necessary to formulate some research question which will enable the researcher formulate statistical tables for testing hypothesis.
- Has inadequate collateral security provision by borrowers caused bad debt in Union bank of Nigeria plc?
- Does fund diversion have any effect on bad debt of Union bank of Nigeria Plc?
- To what extent has government intervention in lending policies of money deposit bank influenced bad debt in Union bank of Nigeria Plc?
- 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.
- 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.
- 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.
- 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.
- 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 technique 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.
1.9 Definition Of Terms
This is what one owes to another person.
A Loan is a credit arrangement, a security is pledged and must be repaid with interest over a stipulated period of time.
This is a credit arrangement by banks to their customer to withdraw money over and above that what he has in the account.
This means failure to pay one´s debt for credit extended which has fallen due.
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.
Summary Of Findings, Recommendations And Conclusion.
5.1 Summary Of Findings
In the course of the topic, credit management and the incidence of bad debt in Nigeria Deposit-Money banks (A case study of Union Bank of Nigeria plc) the researcher had the following findings.
- In the test for the first hypothesis, which was aimed at determining whether inadequate collateral provision by borrowers increases incidence 5 in chapter 4 was posed and the responses received showed that 40 or 80% of the responses received were of the opinion that inadequate collateral security provisions by the customers affects the incidences of bad debt in Union Bank to a great extent where as 10 or 20% believed that it affects the incidences of bad debt to an extent. The researcher states as his findings that inadequate collateral security provisions by borrowers increases the incidence of bad debts in Union Bank.
- In the test for the second hypothesis which was aimed at determining whether fund diversion affects bad debts in Union Bank. Question 6 in chapter 4 was posed and the responses received showed that 47 or 94% of the responses received accepted that fund diversion has a contrary view. The researcher states as his findings that fund diversion affects bad debts in Union Bank of Nigeria plc.
- In the test for the third hypothesis which was aimed at determining the extent of which government intervention in lending policies of Money-Deposit Banks. Question 8 in chapter 4 was posed and the responses ceiling posses a problem to Union Bank in granting loans while 2 or 4% had a contrary view. The researcher states as his findings that government intervention has direct influences on Union Bank of Nigeria plc bad debt.
- In the test for the fourth hypothesis which was aimed at determining the effects of the incidences of bad debts in Money-Deposit Banks with regards to improper evaluation of projects, question 9 in chapter 4 was posed and the responses received showed that 50 or 100% of the responses received were of the opinion that improper project evaluation has significant relationship with bad debts in Union Bank. The researcher states as his findings that improper project evaluation has significant influence on the bad debt of Union Bank of Nigeria plc.
Based on the findings by the researcher in course of this research study, the researcher
therefore made the following recommendations.
In the first findings, which states that inadequate collateral security provisions by borrowers increases the incidence of bad debts in Union Bank, banks should ensure that loans given out to customers are backed by adequate collateral security. This means that loans should be given to individuals and corporations with adequate collateral security.
In the second finding which states that fund diversion affects bad debt in Union Bank, there should be close and proper monitoring of loans before and after disbursement. Infact, the monitoring should continue for the entire life of the loan.
In the third findings which stipulates that government intervention has a direct influence on Union Bank bad debt in Nigeria, government should as much as possible reduce the incidence of conflicting policy pronouncements which have adverse effect on business projection. Again, much as interest earnings constitute a great proportion of the gross earning of banks, the bank should be caution in increasing the rates charged on a loan.
In the fourth finding which states that improper project evaluation has significant influence on the bad debt of Union Bank, the bankers should lay relatively more emphasis on the integrity of the borrower, the ability of the project to pay itself and previous experience with the customers also advances department should be staffed with qualified and resourceful officers capable of making seasonal decisions based on credit analysis. These staff should benefit from regular training and re-training programmed in landing appraisals. The services of quantitative analysis who will appropriate data and can predict the provision for bad debts to be necessary.
To manage loan and credit effectively, efforts have to be made to obey and respect the cannons of good lending and ensure adequate control and supervision on the facility extended within the frame work of government regulation and guidelines. Sound lending requires a clear, well articulated and easily accessible policy document which spells out the philosophy of lending. This will ensure that loan losses are kept at a minimum via a programmed which permits constant supervision on the projects being financed, easy identification of delinquent loans and instituting effective corrective measures.
It is instructive to note that no one can have complete control of his environment, which is Banking is dominated by external factors such as economic and political situations and unpredictable behavior of human beings.
All these factors are subject to change and therefore increase the risk of bank lending, losses are normal in the business of lending money but they must not be disproportionately high lending. Officers are therefore expected to continuously evaluate their loan portfolios and make adequate provisions for losses. The issue of bad debts cannot be ruled out in banking business but the incidence can be minimized with prudent lending philosophy and proper grasp of economic and political environment factors.
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