Effect Of Bad Debt Management On Money Deposit Banks In Nigeria (A Case Study Of First Bank Of Nigeria Plc)
Table of Content
- Title page
- Table of content
- 1.1 Statement of the Problem
- 1.2 Research Question
- 1.3 Objectives of the Study
- 1.4 Research Hypothesis.
- 1.5 Definition of Terms
- 1.6 Plan of the Study
2.0 Literary Review
- 2.1 Meaning of Bad Debt
- 2.2 Management of Bad Debt of Nigeria Money Deposit Bank in Nigeria.
- 2.3 Effects of bad and doubtful debt on Nigeria Money Deposit Banks in Nigeria.
- 2.4 Risk Analysis on Money Deposit Bank in Nigeria
3.0 Research Methodology
- 3.1 Sources of data
- 3.2 Population of the Study
- 3.3 Sample Size
- 3.4 Methods of Data Collection
- 3.5 Methods of Data Analysis.
- 3.6 Limitations of the Study
4.0 Data Presentation, Analysis and Interpretation
- 4.1 Data Presentation of Result
- 4.2 Data Analysis
- 4.3 Test of Hypothesis
- General Statement of the Hypothesis
- 4.4 Interpretations of results.
5.0 Summary, Conclusion and Recommendation
- 5.1 Summary
- 5.2 Conclusion
- 5.3 Recommendation
Among the industrial sectors in Nigeria today, banking sector arouses the public interest most it is the most visible and of the fastest growing section in the economy a past from the fact that the monetary of every public guideline document issued by the central bank of Nigeria in January of every tear regulates the activities of the entire economy the banking sectors is responsible for carrying out most of the policy issued to frequent controls and reputations.
In popular jargon, the banking sectors has become one of the most critical sectors and commanding height of the economy with wide implications on the level and direction of economic growth and transformation and such sensitive issues as the rates of unemployment and inflation which directly affect the lives of the people banking sector is without doubt of the fastest growing industries in the country today from total 26 in 1980 the number of commercial and merchant banks in the country growing steadily to 40 in 1985 where it stabilized until it increase to about 49 in 1987 beginning from 1987 and following the introduction of structural adjustment programme (SAP) in 1986 there had been a rapid growth in the number of bank increased by 15 i.e 30% to reach 66 and additional 15 joined it in 1989 which witnessed 21 new merchants to bring the total number of commercial and merchant bank to 102. before the government placed temporary ban on the opening of banks in 1991 there was not less than 125 bank operating in the country from N12 million and N20 million for merchant and commercial bank respectively paid up capital increased to N40 million and N50 million one notable implication from the development is the sudden rise in the volume of bad doubtful account which bank are compelled to carry in their books the increasing number of this problem loans had been on granted challenges facing in particular the old generation of bank usually reffered to as the “Big three First Bank of Nigeria Plc. The Union Bank of Africa Plc.
The problem posed by carrying large volume of bad loans or non-performing accounts was not fully recognized until in November 1990 when the central bank introduced the prudential guidelines in line with the general standard all over the world to ask the in the country assess themselves filling thereby determine how wealthy or prudent they are in their loan credit management.
Most banks cannot unequivocally declare that they have been introduced by problem loan. Certainly, it is a way of life in those tumultuous times of banking that virtually every one of them if faced problem or so-called works out loans.
Another important reason is to decline in the economic fortune which gripped the Nigeria economy.
1.1 Statement of the Problem
The researcher therefore would like
- What are the causes of bad debt?
- Why provisions for bad debt are made?
- How bad debts are written off?
- How banks are financial institutions managing bad debt?
- How banks estimate provision for bad debt?
1.2 Research Question
How can bank manage a bad debt?
- What is the effect of bad and doubtful debts
- What is the effect of rising machine of bad debts on bank operation?
- Can bad debt affect the profit making of bank?
- What are the signs to know when loan is going bad?
- What are the factors to consider when granting loan?
1.3 Objectives of the Study
The broadax objectives of the study are to analysis the effects to rising machine of bad debts on banking operation since 1986 when the federal government adopted SAP. The focus on how to mange loans and reclaim the collateral assets securing them. In specific terms the study will inquire into the rising waves of bad doubtful account in our banks in general and First Bank Nigeria Plc in particular the aim is to determine the share of the major actors or factor in granting a loan.
- Other customer
- The banks and
- The government or the economic environment.
Secondly, the study will examine impact of the prudential guidelines on the management of loans by banks since 1990 when the guidelines came into effect. What impact it has produces on the reporting system of bank. Before and after prudential guidelines and finally draw some policy lessons and predictions for the future.
Finally, the study will aspire to provide the essential strategies that may be used for loan recovery once a debtor enters bankruptcy.
1.4 Research Hypothesis
The general hypothesis to be tested in the study
- Ho = Bad debt will not have positive impact on Nigeria money deposit bank.
- Hi = Bad debt will have positive impact on the Nigeria money deposit bank.
1.7 Significance of the Study
The motivation for eh study arises from the research interest in tracking the effect of economic reforms within the structural adjustment programme since deregulation of financial system of the economic reforms is expected to act the volume and pattern of landing by banks and the profitability of banks. It is necessary to investigate the extent to which profit that are being declare by banks actually reflect their true profitability position. Whether adequate precaution have been taken in their granting loans. The structural weakness of these bank is reffered in the heavy bad debt port folio, which is fact eroding their capital base. The introductory of prudential guideline has therefore exposed the weak foundation and the misfortune arising from bad debt structure data generated from the annual reports of banks with regards to eh volume of the bad debts have been fraught difficulties until the introduction of the prudential guidelines.
Firstly, it is a policy objective of the monetary authorities to recognize only income that is earned and not paper profits.
Secondly, it is also the objective of the monetary authorities to confirm with international prudential guideline.
Thirdly, it is to make banks more prudent in their lending decision through reducing incidence of bad and doubtful account.
Finally, it is to encourage bankers to become solid finally able in Ibadan the customers are partially sophisticated.
Of serious limitation of the study is the problem of data collection. Through thus is not peculiar to this study. It must be recognized that not until the prudential guideline came into effect November 1990. Most neither banks nor do they realize the need to make adequate provision of data for bad and doubtful debts what banks did at best was to make petty provisions for those classes of debts.
1.8 Scope of the Study
Malad and their rules differ from one country to another similarly the infrastructure, the role of financial institution and the attitude and type of introduction by regulation at least larger determined what types of investment instrument are available while exchanger central and tactic system effect the attractiveness of such instrument to foreign invests.
The base and reason of the project write up will be limited through and detailed investigated on the effect of bad debt in Nigeria money deposit bank in Nigeria economic particularly as it relate to the first bank of Nigeria plc.
1.9 Definition of Terms
The act of running a business or the process of controlling, planning, organizing and co-ordinating a business or an organization.
It is an account renewable that will likely remain uncollectible and will be written off.
The total number of people who live in a particular area, city or country.
The relationship between production trade and the supply of money in a particular region or country.
Nigeria Deposit Bank:
It is an institution that accept money from the public for safekeeping
The possibility of something bad happening at sometime in the future.
Two Types of Risk
A category of risk in which loss is the only possible outcome there is no beneficial result.
This type of risk involves gambling you might win, you might lose the outcome may be profit or loss example brokerage, smuggling e.t.c
It is the system that allows the transfer of money between savers (and investor) and borrowers.
Is the process by which the monetary authority of a country controls the supply of money in a country.
A general rise in the prices of goods and services in a particular country resulting in fall value of money.
Loans and Overdraft:
Loan is a money borrow from an individual while overdraft is the amount that you own a bank when you have spent more than what you have in your account.
The number of people not having a job.
Bands that deals with large business.
A national bank that does business with the government and other banks, and issued country currency.
A person or an organization that buys something from store/business.
A person who owns a bank or has an important ob at a bank.
1.10 Plan of the Study
- Chapter one contains introduction
- Chapter two contains literature review
- Chapter three contains data presentation analysis and interpretation of results.
- Chapter five contains summary, conclusion and recommendations.
5.0 Summary, Conclusion and Recommendation
The study has afar attempted to show that first bank of Nigeria plc is one of the leading banks in the country in almost all fronts. It is perhaps the leading bank in term of network of branches with over 280 branches spread over the thirty six states of the federation including the federal capital territory Abuja. It is indisputably the leading bank in the country in terms of asset and deposit base with over N8.56 billion deposit in 1990 terms of profitability, the bank is also ranked higher except in 1990 and 1991 when the application of prudential guidelines introduced in November 1990 took a great on their earnings and declared profit / loss position.
The bank for the first time ever in the history of its operation in the country since 1894 declared a controversial was position of about N205 million. This is fact testifies to the assertion that the bank is a leader both good and bad ones. The study has been able to show that the lose rising from bad and doubt fill account depends on so many factors these is factor as we have and related prominent among economic environment or advice financial lends, government economic policy. The legal and institutional frame work owns of significance, is the ability of the leading offices to make accurate decisions since most of the bad accounts results from bad judgment or wrong decisions. Other factors that may fuel the development of bad debts are fraudulent information loss of debts co-operation, disappearance or depreciation of collateral.
We have also attempted to show some warning signal, which are indicative of loan deterioration most of which are not controllable or only partially controllable by the borrowers, acts god and vulnerability to adverse treads, good loan management as we have shown requires cost / benefit / return analysis. The cost of managing a loan or pursuing repayment should be responsible else a bank or lending offices against bad or any other financial exposure must be such that do not depreciate involved must be such hat much be easily realizable. When securing against lending is important consideration must be given to the ability of the project to itself.
Once an account is identified as a problem account, assistance by way of suggestion for improvement of business in form of restructure operation and diversification should be initiated if it is discovered that the cause is due to lack of enterprises or poor promotion by the borrower, the facility should be called and classified into bad and doubt fill category. This is to engender realization efforts by the accredited staff. The issue of security should not be ignored since it remains of last hope of the bank at the end when the obvious happen, where the business is beyond redemption then the ultimate will be to minimize losses consequently, the following step are very urgent.
- Issue finding demand letter and call up the debt if there is no response y customer.
- Safeguard security, that is ensure that the security port folio are in order and easily realizable.
- Cal in guarantees if any.
- Realize security if any possible
- Petition for winding up in case of a corporate entity and or appoint a receive / manage
- Proceed on legal action through more cumbersome.
- Sales of asset or sue for fore closure.
What is the next action look like defend on the nature of the next business, the promoter(s) the type and status of the securities heed, the prevailing legal and fiscal regulations governing the business in question and the status of lending itself.
It is hardly possible for a bank to avoid completely the ugly incidence of bad and doubtful debt. It is even more difficult identifying those accounts that would go bad at anytime. However, it is always very important that a banker exercise pre-lending control once a facility has been agreed by arrangement. The options left open to a great extent on the care which caution and security have been respected before hand. To a great extent on the case which depends on the quality and discipline of the manager and inspection of the bank.
The bank effective way of limiting ones losses new ever, is to stop paying out. The limits imposed in credit decisions must be respected and the temptation to permit a customer to encroach his credit selling must be resisted.
Where it is unavoidably necessary to subscribe additional funds to a customer to save those that had already gone n one must be very careful and must ensure that the new fund will not go the way of previous ones. The additional fund being must be able to ease the burden on the customer’s business and bring about consideration improvement in his activities else, it may swell up the quality of bad account. In times of recession, extra caution needs to be observing since weak business are always in trouble.
Bad debt erodes the shareholders confidence in the management and threading the asset base of bank and its long new survival. It is therefore important than an internal mechanism is built in which enable the bank to renew periodically its strength and weakness and adjust accordingly before it is late. This is why the prudential guidelines is regarded as a hold attempt to safe guard shareholders in interest as well as the fortune of banks in this country apart from being in line with internationally accepted practice.
Most bankers cannot unequivocally declare that they have been untouched by problems loans. It is becoming a way of life in today’s volatile economic situation. Virtually all banks sustain problem loans. The only feasible approach to handing it is minimize its impacts, it is against this background that we recommend the following as a way of reducing bad debt accumulation by banks in particular First bank of Nigeria Plc. Our recommendation is also influenced by the size of first bank and its long year is experience in banking and impact of the Nigeria economy.
In the first place, first bank of Nigeria plc should as a deliberate policy review its recruitment policy with emphasis on eh recruitment of competent educationally the qualified and found personals to its lending and credit department. Most preferable are the qualitative accountants, economists, finance graduates and students that are well groomed in sound training in the act of credit analysis and advances must be emphasized and outside the bank to complete those advances must be emphasized on training being organized by the bank since most advance go had the very day they are granted in additional adequate lending control must be built into reduce incidence of personality or man know mankind of lending which often results in bad and doubtful account. In granting lending powers to the officers at the sport of lending special peculiarities of each region must be taken into cognizance.
Lending officers must realize the importance of undertaking business dealing in an atmosphere of a far course of conduct, lending officers should exercise maximum restraints in dealing to gain to the borrowers attain or co-operation as such action can be used against the bank in a law court.
Bank should never use exercise control over the borrower or unreasonable interference in its business or unreasonable interference in its business to avoid being laced in a position of being faced with accusation, or economic concern as a result of pressuring the borrower to do certain things clearly far.
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