Debt Recovery Techniques In The Banking Sectors Issues, Problems And Prospects (A Case Study Of Union Bank Nig Plc)

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Debt Recovery Techniques In The Banking Sectors Issues, Problems And Prospects (A Case Study Of Union Bank Nig Plc)


Abstract


The objective of the study was to assess the issues, problems and prospects of debt recovery techniques in the banking sector using a case study of Union Bank Nigeria PLC. The research was centered on finding out the debt recovery problems that banks face when it comes to debt recovery, the debt recovery procedures that banks use to retrieve their money, to find out the causes of loan default in banks, as well as the effects that loan recovery has on the bank an finally offer possible solutions to the problems of debt recovery. The study also looks at literature review from previous studies, which include theoretical as well as empirical reviews and conceptual framework. The study was conducted at Union Bank PLC, Head Quarters, Lagos state. A convenience sampling technique was used and it was aided by use of a questionnaire. Data collection was done through primary and secondary sources, it was analyzed to assist with the findings and recommendations. In the study it was found that despite the debt recovery obstacles that banks face, possible solutions would greatly assist in the management of debts. Based on the major findings of the research, the recommendations made included the bank carefully selecting its borrowers, strict monitoring of loans, reminders to borrowers, use of collection agencies and payment plan for borrowers who have difficulties repaying their debts.


Table of Content


Chapter One

1.0 Introduction

  • 1.1 Background to the Study
  • 1.2 Statement of the Problem
  • 1.3 Objectives of the Study
  • 1.4 Research Question
  • 1.5 Research Hypothesis
  • 1.6 Significance of the Study
  • 1.7 Scope of Study
  • 1.8 Limitation of the Study
  • 1.9 Definition of Terms
  • 1.10 Organisation of the Study

Chapter Two

2.0 Literature Review

  • 2.1 Conceptual Framework
  • 2.2 The Nature of Loan and Advances Granted by Banks
  • 2.2.1 Personal Loan:
  • 2.2.2 Agricultural Loan:
  • 2.2.3 Bridging Loan:
  • 2.2.4 Industrial Loan:
  • 2.2.5 Probate Loan:
  • 2.3 Problems Of Loan Default
  • 2.4 Causes Of Loan Default
  • 2.4.1 Bank-Related Factors:
  • 2.4.2 Customer-Related Factors:
  • 2.4.3 Uncontrollable Factors
  • 2.5 Effects of Loan Default
  • 2.6 Theoretical Framework
  • 2.6.1 Theories of Liquidity Management:
  • 2.6.2 The Real Bills Doctrine or Commercial Loan Theory:
  • 2.6.3 The Anticipated Income Theory:
  • 2.7 Empirical Review
  • 2.7.1 Debt Recovery Techniques of Banks
  • 2.7.2 Problems Facing Debt Recovery in Banks
  • 2.7.3 Effects of Loan Default on Commercial Banks
  • 2.7.4 Reasons for Loan Default In Banks
  • 2.7.5 Measures to Help Reduce Default on Loans

Chapter Three

3.0 Research Methodology

  • 3.1 Research Design
  • 3.2 Population
  • 3.3 Sample and Sampling Technique
  • 3.4 Instrument for Data Collection
  • 3.4.1 Primary Data
  • 3.4.2 Secondary Data
  • 3.5 Validity of the Instrument
  • 3.6 Reliability of the Instrument
  • 3.7 Method of Data Collection
  • 3.8 Data Analysis

Chapter Four

4.0 Results and Discussion

  • 4.1 Result
  • 4.2 Questionnaire for Bank Officials
  • 4.3 Questionnaire for Small Scale Industries

Chapter Five

5.0 Summary, Conclusion and Recommendation

  • 5.1 Summary
  • 5.2 Conclusion
  • 5.3 Recommendation
  • References
  • Appendix

Chapter One


1.0 Introduction

1.1 Background to the Study

Virtually, every business has a credit relationship with a financial institution, especially banks. Some rely on periodic short term loans to finance temporary working capital needs. Others primarily use long-term loans to finance capital expenditure, new acquisitions or permanent increases in capital. Regardless of the type of loan, all credit request mandate a systematic analysis of the borrower’s ability to repay as at when due.

Commercial banks carry on ordinary banking business with the general public, changing cash for bank deposits and bank deposits for cash, transferring bank deposit from one corporation to another, giving bank deposit in exchange of bills of exchange, providing of trustees and executor’s services, providing safe custody of funds and valuables as well as foreign exchange remittance.

Though commercial banks differs from country to country, their profit and banking motives are the same. Their activities are of interest to their customers, workers (staff), and above all, shareholders. The commercial objective of the bank is to maximize profit, though other social and economic functions tends to deflect banks from profit maximization. The aims and objectives of commercial banks have therefore paved way for their customers to make and obtain credits, in form of loan of which the researcher is interested in.

Lending has become a vital function on operation because of its direct effect and impact on economic growth and business development.

In a market oriented economy, there are two main participants that move the economic growth; these are the suppliers of invisible funds and the users of the funds for productive purposes. These two participants are spread widely in the economy and may not have direct relationship with each other. For this, there is the need to have an intermediary to link them up. The banking sector mobilize surplus funds from small and big savers who have no immediate need for such funds. The users of these funds are the business entrepreneurs and investors who have brilliant ideas on how to create additional wealth in the economy but lack the necessary capital to execute their ideas. These groups of people approach banks to obtain loan.

Subsequently, lending is a risky venture which banks only engage on after a rigorous and satisfactory analysis of the project for which lending is being made. The main preoccupation of banks is extending loans to their customers. Thus, the formulation and implementation of such lending policies are some of the important responsibilities of the management of the bank. The lending policy of a bank must be specific on how much loan will be made available to whom, what period and for what reason. For this reason, lending policies should be well documented so that lending officers will be able to know the areas of prohibition and the area of where they can operate. Also, such policies should be subjected to periodic review to make the banks keep abreast with the dynamic and innovation nature of the economy as well as competing with other changing economic sector.

Therefore, the basic objectives of credit analysis is to assess the risks involved in extending loans to bank customers. In financial circle, risk typically refers to the volatility in earnings. Lenders are particularly concerned with adverse fluctuation in net income or cash flows, which hinder the borrower‟s ability to service a loan. Some risks can be measured with historical and projected financial data, while others such as those associated with borrower’s character and willingness to repay a loan are not directly measurable.

Banks in recent times has failed as a result of loan recovery problems. Loan is the major source of bank profitability. However, in going about their lending activities, banks have their own objectives among which are profitability, growth, safety, suitability and liquidity.

Loan, when not recovered could adversely affect banks. It is easily granted than recovered. It usually needs proficiency i.e. competency and expertise in the recovery process. It sometimes become an uphill task to recover. When they are not recovered, the impact is often disastrous to the bank. It can lead to illiquidity, insolvency and even distress as the case may be. There is therefore a need for arriving at strategies for efficient loan recovery.


1.2 Statement of the Problem

The recovery process is defined as the set of well-coordinated, appropriate, and timely activities, aimed at the full recovery of loans from clients. The process is intended to convert the Bank’s receivables into liquid assets as quickly and efficiently as possible, while at the same time maintaining the goodwill of the client in case of future transactions. Loan recovery is an important service within the Bank that helps to both maintain clients and free up money for lending again. It is a strategic process that is key to generating good habits and a payment culture among clients. It can also be seen as a business activity whose primary objective is to generate returns for the institution, converting losses into income. Recovery of debt is very vital for the performance of a bank and the economy’s financial environment and wellbeing. When it comes to debt recovery it is not always that banks recover their debt and it is for that reason that this research is being carried out to assess the issues, problems and prospects of debt recovery techniques in the banking sector using a case study of Union Bank Nigeria PLC.


1.3 Objectives of the Study

The aim of this study is to assess the issues, problems and prospects of debt recovery techniques in the banking sector using a case study of Union Bank Nigeria PLC.

Specifically, the objectives of the study include to;

  1. To understand the debt recovery techniques of Union Bank Nigeria PLC
  2. To identify the problems of debt recovery in Union Bank Nigeria PLC
  3. To establish the effect of loan default on Union Bank Nigeria PLC
  4. To identify the situations leading to bank loan default
  5. To determine measures to help reduce defaults on loans in Union Bank Nigeria PLC

1.4 Research Question

The following research questions are formulated to guide this research:

  1. What are the debt recovery techniques of Union Bank Nigeria PLC?
  2. What are the problems of debt recovery in Union Bank Nigeria PLC?
  3. What is the effect of loan default on Union Bank Nigeria PLC?
  4. What are the situations leading to bank loan default?
  5. What are the measures to help reduce defaults on loans in Union Bank Nigeria PLC?

1.5 Research Hypothesis

  • HO1 There is no significant effect of debt recovery techniques on the performance of Union Bank Nigeria PLC
  • HA1 There is a significant effect of debt recovery techniques on the performance of Union Bank Nigeria PLC

1.6 Significance of the Study

The study will help lessen problems of debt recovery by offering possible solutions. The results that the study will be of great importance to bankers in the industry as well as Union Bank in particular. It will help Union Bank to be mindful when paying out loans and to help them to determine better the people that they will grant loans to. It will help improve the revenue status of the bank in question and other banks as well and the function of the banking industry as a whole. It will also provide useful information to those who want to embark on future research on the topic as it will add to literature available and finally it will also play an important role in the partial fulfilment of a Bachelor’s Degree in Banking and Finance.


1.7 Scope of Study

The study was conducted in Union Bank Nigeria PLC. The content of the study will be limited to the issues, problems and prospects of debt recovery techniques in the banking sector using a case study of Union Bank Nigeria PLC. This study is limited to the debt recovery procedures of banks, the debt recovery problems banks face, the effects of loan default on banks, reasons for loan default in banks and measures to help reduce default on loans.


1.8 Limitation of the Study

In the course of the study, the researcher was faced with several constraints. One of the constraints was the short time period within which the research was to be completed. Another factor was shortage of financial resources which prevented the researcher from traveling to source the data. Also, most of the credit analysis criteria in commercial banks were not disclosed to offer the necessary data required. Their frequent postponement of appointment coupled with the fact that commercial banks in Nigeria are vast in population i.e. Union Bank Branches. The researcher could not get to all of them, therefore a sample was taken to represent all.


1.9 Definition of Terms

Debt:

Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase.

Debt Recovery:

Is the process of pursuing payments of debts owed by individuals or businesses. An organization that specializes in debt collection is known as a collection agency or debt collector.

Commercial Bank:

A commercial bank is a financial institution which accepts deposits from the public and gives loans for the purposes of consumption and investment to make profit.


1.10 Organisation of the Study

This study is organized into five chapters. Chapter one included the background of the study, research problem, research objectives and questions as well as limitation of the study. Chapter two contains the literature review. Chapter three includes the methodology. Chapter Four contains the results and discussion of key findings of the study. Chapter Five finally looks at the summary, conclusions, and recommendations based on the findings.


Chapter Five


5.0 Summary, Conclusion and Recommendation

5.1 Summary

This study has a large extent attempted to assess the issues, problems and prospects of debt recovery techniques in the banking sector using a case study of Union Bank Nigeria PLC. The objective was to find out the problems encountered by commercial banks during loan recovery. From the findings, the major causes of these problems as analyzed could be classified into: Adversity, Mismanagement, and Fraud. Lending, being a vital function in banking operation is no longer what it use to be. This is because lending entails a lot of risks on the part of the lending banker. The lending policies are no more strictly adhered to. The issue of loan recovery problems arises when the repayment of the granted loan does not follow as planed and agreed. And if not properly checked, it will have an adverse effect on the operations of the commercial banks and will pose a threat to their expectations. However, at the end of the study, the following observations were made: Most banks grant short-term loans; Banks does no accept only collateral affected by the defaults; Banks have been seriously affected by the defaults; Banks are not idle but have applied tactical recovery measures; Some of the measures are effective


5.2 Conclusion

This study was carried out to assess debt recovery in banks. The study established debt recovery procedures of banks, effects loan default has on the bank, causes of loan default as well as solutions to the problem of debt recovery. Overall, the study revealed that, despite debt recovery being inevitable banks need to put in place more strict measures in order to control the process of debt recovery.


5.3 Recommendation

Based on the findings of this study, the following are recommended;

  • The study recommends that Union bank should select borrowers carefully and making sure the information, they provide is also carefully looked at to avoid borrowers misleading loan officers on their loan applications.
  • Union Bank should further make sure that once a loan or loans are given out, they are monitored from the beginning. This will help the bank to keep an eye on all the existing loans as well as give them a better picture of the debtors that are likely to default and those that are not.
  • Union bank should give timely reminders to all debtors. It can greatly improve the debt recovery process as it allows the debtor or borrower to stay committed to repaying the loan.
  • Union bank should also hire collection agencies to help the bank with debt recovery as they are trained and can recover debt for the banks with ease.
  • When Union bank finds itself in a position where a debtor is unable to repay a debt, banks should sit and plan with a debtor on a better way in which they can pre pay the loan in order to avoid default and make it easier.

Debt Recovery Techniques In The Banking Sectors Issues, Problems And Prospects (A Case Study Of Union Bank Nig Plc)


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