Credit Policy And Debt Recovery Effort In Nigerian Commercial Banks (A Case Study Of Guaranty Bank Plc, Kaduna)
Banking activities consist of function that varies performance and risk. The risks that a bank is general are neither of non-performance by those that are supposed to, on that of having a run i.e. cash shortage which can in some cases be avoided through a prudent management of the resources available. The other risk is that of non-performance i.e. those granted and not being able to meet the condition subsequent to the loan or advances granted and is the aim of the study to examine how these loans are being granted and measure involved in collection or retrieving the said loans or advances granted. Taking Guaranty Trust Bank (GTB) as a case study , I have to consult the senior accountant and deputy treasurer of the bank to find out what effort the bank takes in trying to recover the debt. What the stages of their maturity re. I will also get my data collection from the annual report of the company to see the bank financial stand. I will also try to get the Chairman’s report of the company statement and also other necessary information needed to see how this bank operate in issuing out loan, and how they recover this loans and also suggest further ways of implementing the principles of leasing policy in Guaranty Trust Bank (GTB).
1.1 Background of the Study
To every nation, the existence of banking industry is inevitable. This necessitates the need for deposit and credit mobilization. Osayeme (1936) reported that lending has become a vital function in banking operation because of its direct effect on economy, growth and business development.
A bank is an organization that accepts money in different account and honours cheque drawn upon it, return of the same amount on demand by depositor or at a specified maturity date.
According to Haisbury Laws of English, a bank or banker in an individual, partnership or corporation whose sole or predominant business in banking, that is the receipt of money on current or deposit account and the payment of cheque drawn by the collection of cheques paid in by a customer.
The above definition is suitable for the description of a commercial bank, commercial as a bank of common people are organized on a joint stock company system with primary aim of making a profit as any other business venture carried out, if the profit is not forthcoming, then the rate of patronage and intimacy must be improved between the buyer and the seller.
This is done by granting of credit to customer of financing in modern business. In order to protect the creditor (that is, he person who gives out loans), certain policies must be complied with. These protective weapons are credit standard credit terms and collection efforts. By credit stand we mea the criterion which a form followed in selecting a customer for credit extension. Credit terms could be the stipulation under which credit is extended to customer, for instance, it expected that a customer will pay his credit obligation of later than 35 days. A collection policy is needed because not all debtors pay their debt in time, some customers are slow payers, while some are not payers.
The aim of collection effort is to speed up the payment. However, the motive of granting credit facilities with the aim of increasing the volume of profit have become somehow difficult to realize by commercial bank a business today operate in harsh erratic economic climate. As a result, granting of credit to assessment have both positive and negative impact on the commercial banking sector (especially in Nigeria).
To survive in Nigeria (banking business), it is wise for commercial banks to increase their liquidity (cash). This can be brought about by effective credit assessment and a design of comprehensive policy in granting credit. Banks must follow clear, and sequential procedures to recover their debt, it is not done, there is great tendency for them to lose the whole amount.
1.2 Statement of Problem
It is important to recognize the two fundamental functions which a banker must perform. It must attract deposit on one hand and attract borrowers and users of services on the other hand. Those average positioned were at a staggering level of performance. This menace is as a result of high level of bad debts with associated problems brought about distress in many banks. Hence tribunal came to place to recover these bad debts.
Despite the strict conditions that prevail lending of procedure commercial bank still find their administration difficult because of the fluctuating effect of some factors such as economic policy and more so that the attitudinal tendencies credit, in that all banks are exposed to available fund at all times of boom, hence their lending ability is high. But in period of depression, lending money will mean exposing the bank into a greater risk.
Then the problem of human beings their attitude is evident in question like what is the intent of borrowers before and after credit facility has been granted him? business was frustrated by promulgation of decree?
1.3 Objectives of the Study
- To know the concept of credit policy and debt recovery in an organization.
- To identify the relationship between customers and bankers.
- To understand how to recover debt in an organization
- To know how to interact with customers when it comes to attending to their needs.
The complexity of modern business environment and the increased volume of transactions have conferred credit as a vital tool in the development of banking industry. Lack of sound lending policy initiate operation lapses in commercial bank which affect levels of efficiency and effectiveness in the performance. This study attempts to appraise the credit policy and debt collection efforts of commercial with a sample bank of Guaranty Trust Bank (GTB) evaluating whether it is in conformity with efficient financial management.
1.4 Research Hypothesis / Questions
- H1: Credit policy and debt recovery has a significant impact in Nigerian commercial bank.
- H0: Credit policy and debt recovery has no significant impact on Nigerian commercial bank.
1.5 Research Questions
- What is the concept of credit policy and debt recovery in an organization?
- What is the relationship between the customers and bankers?
- How can debt be recovered in an organization?
- How can an organization go about credit policy?
- What are the tactics needed to collect debts from creditors?
1.6 Significance of the Study
Credit policies are certain guideline which any well established organization adopts before granting credits. The policy could be tight or loose. Tight credit policy leads to loss of sales and at the same time loss of handling account receivable or debtors accounts.
Therefore, the credit policy of any organization could be determined by the trade-off between opportunity cost and credit administration and bad-debt losses. In the case of debt settlement by customer, not all customers are willing to pay-in-time or pay at all.
Certain incentives have to be given by the organization in order to speed up the payment. Such as cash discount and this research work is aimed at selecting the best way of collecting so as not to loose the whole amount by defaults which may in turn be bad debt.
The condition of the debtor must be well observed that is, his financial capability. The research therefore, hopes that by this suggestion given, may assist in minimizing losses and stabilize on maximize earning.
1.7 Scope of the Study
This study will expose itself to the analysis and procedure for granting credit and debt collection effort in commercial banks. It will utilize the opinion of Guaranty Trust Bank Kaduna and the summary or balance sheet which is clearly elucidates the bank annual report and accounts.
1.8 Historical Background of Guaranty Trust Bank (GTB)
Guaranty Trust Bank Plc was incorporated as a limited liability company licensed to provide commercial and other banking services to the Nigerian public in 1990 and commenced operation in February, 1991.
In September 1996, Guaranty Trust Bank Plc became a publicly quoted company and won two Nigerian Stock Exchange President’s merit award. In February 2002, the bank was granted a universal banking license and later appointed a settlement bank by the Central Bank of Nigeria (CBN) in 2003, Guaranty Trust Bank undertook its second share offering in 2004 and raised over N11 billion from Nigerian investors to expand its operations.
On 26th July 2007, Guaranty Trust Bank became a very first sub-saharan bank and First Nigerian Joint Stock Company to be listed on London, stock exchange and Deutsche Borse. The IPO raised its $750,000,000. In the same year, they successfully placed Nigeria’s first private Eurobond issue on the International Capital Market.
The long-term debts of Guaranty Trust Bank Plc are rated BB by Standard and Poors and AA by Fitch Ratings, which are the highest ratings for a Nigerian bank. They introduced online banking and SMS banking in Nigeria and a Naira denominated MasterCard as well as the platinum and world signal cards and with Guaranty Trust Bank on wheels mobile branches. On the 12th March 2008, Guaranty Trust Bank was given a license for the United Kingdom by the Financial Services Authority.
GTB is a partner of Eko Atlantic City a new made Island (820 km) in the Atlantic ocean, adjacent to Victoria Island Lagos. It will be the home of the new financial district. The building of Eko Atlantic city started in 2009 and is expected to be finished in 2016. To commemorate the bank’s 20th anniversary, the Nigerian Postal Service issued a set of GT Bank Anniversary postage stamps. This was the first time in Nigeria that a corporate organization was honoured in such a way. In 2011, the bank became the biggest in Nigeria by market capitalization.
The Bank has over 10,000 employees and furthermore Guaranty Trust Bank has cordial relationship with the customers and bankers and they have a credit policy and the way to recover their debts, when the customers has reached his or her limits for paying the debts. The bank knows how to recover their debts.
- Mrs Osaretin Demuren is Chairman
- Segun Agbaje is Managing Director/CEO
- Cathy Echeozo is Deputy Managing Director
Other members of the Board of Directors are as follows: Akindele Akintoye, Adebayo Adeola, Andrew Alli, Olabode Augusto, Ibrahim Hassan, Hezekiah Onyinalola.
1.9 Definition of Terms
The firms credit terms state the credit period the size of the discount it may, the cash discount period and the date of the credit begin. It is concisely stated that such expression as 3/20 net 30 EOM. These term contain all the key information concerning the length of the credit period (30 days) the cash discount (3%), the cash discount period begins at the end of the month.
This refers to the numbers of days until payment in full is required regardless of whether cash discount is offered or not.
The Cash Discount Period:
This specifies the medium of number of the days after the beginning of the credit period that the cash discount can be taken. Typically the cash discount period is between five and twenty days (5-20), the cash period varies between different business organization.
This relates to the decision about who will be granted credit. If the firm extends credit sales to about the stronger customers, it would never have had debt losses on other hand, it would be properly losing sales and the profit that were forgone as a result of cost sales could be for larger than the cost that were involved.
A collection policy is the procedure the firm follows to collect or obtain payment of past due accounts. A collection policy is necessary because not all customers do pay their debts in time. Collection policy aims at accelerating collecting form slow paying customers and so reduce bad debt losses.
Average Collection Period (ACP):
This determines the speed of payment by customers. It measure the number of days for which credit sales remain outstanding, the larger the average collection period. The higher the firm investment in account receivable.
Default risk is the likelihood that a customer will fail to pay the credit obligation.
Loan and Over Drafts:
A loan involves the often of a fixed amount to a borrower for a specified term. Interest is payable at a specified rate on the amount of the loan irrespective of whether the borrower actually drawn the whole amount or not the bank.
Summary, Conclusion and Recommendations
The study was geared towards substantiating the already laid down credit policies of Guaranty Trust Bank, the essence of these policies is to guide the creditors from losing their facilities to the customers. Most of the information derived is from annual report and magazines.
The financial summary for five years was studied by the researcher and their loans and advances were analyzed. Gross investment were also studied, it was also disputed that the figures fluctuate from year to year, it could be traced to the permeation of administration system of this bank by civil service practice which are undynamic.
There was also the establishment of policy lending in the bank which is a situation where loan are granted without constituting the necessary credit appraisal nor the necessary security required to secure the loan. Among those that have brought the issuance of loan on personal basis are government officials as well as top officers of the bank.
Apart from the laid down policies of the bank, the bank made it a policy to select some of its officers from sponsored course in credit appraisal. This is aimed at ensuring that the policies of the bank which course in credit appraisal.
This is aimed at ensuring that the policies of the bank which still take place once in a while, which tends to go against the rules of the producers of credit department in the banks. Very often, the bank finds itself in a situation where loans based on personal relationship or for favoured hopes be gotten in the future.
Despite this “policy lending” in the banks have been responsible for the high rate of loans repayment by the banks customers.
The project has succeeded in shedding more light on polishing the importance of credit policies in any organization. In any business cycle trade credit must exist. In fact without granting credit the business ceases to exist. The amount given as loan or credit can only be received with the help of these policies. The essence of the policy is to guide against defaulters. Some of the customers are not willing to pay back the loan or credit despite the policies and the created book of account or account receivable.
As regard to Guaranty Trust Bank, facilitates are granted by loan officers or credit officers and the recovery is by them and other external people who are all human. Therefore the greatest obstacle to complete explanation o bad debt in the books of these bank is lack of perfect information and understanding the psychology of the borrower. Since human behaviour is highly dynamic it would take more of lending offices to zero off bad account from the bank. However, it is gladdening to note that of deposit from some well established firms and other entrepreneurs have galvanized the banks to pushing vigorously the recovery of bad debts. With the spate of sale pledged properly of banks, more pressure on committed customers and scarce of raising interest rate the developed bad and doubtful debt are reducing.
Finally, have identified credit policy or criterion that must be adopted before credit facilities are granted in commercial banks and the advice used for revering bad debts the purpose of the study is regarded fulfilled whenever they are not exhaustive.
5.3 Limitation of the Study
In conducting any research work, there are bound to be some setbacks or constraints faced by the researcher in the course of gathering materials. Some of these problems include:
i) Time Factor:
The study is for only a few months, which was combined with other academic works, within this limited time, one is expected to collect, write and analyze the data so far collected. Also the time granted to the researcher by the bank management to vital information such as the operational manual was very short.
ii) Non-availability of Adequate Data:
Within school in chapter 2 the literature review some of the textbooks consulted were not readily available in the school library or were outdated, the researcher had to source such textbook from other higher institutions such as the State Polytechnic, Zaria, the National Library in Kaduna on the part of the bank chosen as study area.
Due to security and security reasons, some of the information requested by the researcher were not made available to me and several protocols had to be observed before the bank could grant access to the bank’s five years financial summary.
However right a policy or strict or regulation may be a loophole or oversight always comes up either in commission or omission. In supplement to the control measure already existing in commercial banks the underlisted measures should be adopted towards efficient recovery and minimization of bad account.
- Commercial banks should lay emphasis on the exposure of their loan officers to intensive practical and theoretical behavior training within and outside the bank. This will help greatly in reducing and eventually eliminating mistakes in analyzing and approving loan application that will result into bad debt in the short or long term.
- Government should allow the use of bankruptcy act to recover must of the loans from defaulters. Declaiming of any corporate or individual customers bankrupt either is denying them a lot of privilege and opportunities hence they will pay back their debts to the bank.
- Any lending officer of the bank manager connected with erection of only hardcore account or bad debt should be instructed to recover same from the customer. Clear removal of pre-primed should be attached to the success or failure of the staff concern, it should be carried out without fear or favour.
- Enhancement of increases of remuneration of bankers in all ramification through promotion and higher appointments.
- Erection of department solely responsible for debts from customers, ad realization of collateral pledge in case of default, at the branch level of the bank.
- Publication of customer who have defaulted in payment + (plus) owing in daily newspapers.
- Finally, all policy formulation and execution of the bank managements should adopt participation role and carry all staff along and credit analyst officer should be discouraged from practicing fraud and dishonest by promotion and cash award constant transfer could also be used.
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