Evaluation Of Bank Lending And Credit Management In Nigeria (A Case Study Of First Bank)
The recapitalization of the banking sector in Nigeria since 2005 has brought about a total change in commercial bank lending behavior and credit management in Nigeria. With the growth in entrepreneurial activities in Nigeria, the demand for bank loans is at the increase. Small and medium scale business owners are constantly looking for business credit to expand their operations and sustain their businesses. This gap between business owners demanding for bank loans and the in-ability of commercial banks to totally remedy the situation is disturbing and needs proper attention from the government.
Employees of first bank Nigeria plc, Uyo Branch were used for the study. Findings from the study are limited to First bank plc, Uyo.
Concerning methodology, data was gotten from both primary and secondary sources. Questionnaires issued to respondents constitute the primary source
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 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 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.
- There is high correlation between lending and Bad debt portfolio in Nigerian Commercial Banks.
- 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.
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
- That all Commercial Bank grant facilities to worthy clients with high expectation of 100% repayments of principal plus interests
- 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 herein should be regarded as those referred to their usage in this research work.
Some of the “words” are defined as follows.
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.
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 the happening 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 financial transactions, which bring savings surplus units together with savings deficit units so that savings can be redistributed into their most productive uses.
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 third party to secure the indebtedness of the customer with the advantage that in the event of bankruptcy or liquidation of the borrower, the value of such securities may be ignored in the proof of dividend against the fail estate.
Summary, Conclusion and Recommendation
So far we have established that lending constitutes an important function of commercial banks. Therefore its management or Administration should be given adequate attention. The Management of a loan begins with the appraisal stage and this reveals a initial if the proposal is worth considering, the source of repayment, the adequacy of such a source and the key credit issues.
A customer who is aware that his conduct with respect to the credit taken are not being monitored or if monitored at all, it is done by fraudulent officials that would accept bribes is likely to be dishonest in fulfilling his obligation with the bank. He would deceptively and surely divert the credit for personal use or to riskier ventures. Lending assessment and credit Administration are predicated on subjective and historical information and at times on future projection. These sources of information are not absolutely reliable, hence the need for frequent review of these sources, strict monitoring of loans and advances and strict adherence to general and internal lending policies. This would afford the Banker the opportunity of knowing which techniques or sources of information is faulting and identify any deteriorating trend or warning signals before abrupt collapse of the business. Thus lending and credit administration is a vital factor in achieving the profit objectives of the Banking Industry. Any negligence or dereliction in the executive of the administrative machineries would be detrimental to the image of any commercial Bank.
Having established the fact that some banks share capital is being gradually eroded due to the incidence of Bad debts. Most industry observers will sooner or later being to loose confidence in the Banking sector. And if commercial Banks fail then the community at large will suffer. Therefore in this study some recommendations have been made which is believed can be helpful in reducing the increasing level of doubtful debts and also in recovering the Bad debts.
(i) A Charge to Credit Administrators and Bank Management
Credit Administrators and Bank Management must ensure that loan policies and credit guidelines are effectively implemented and strictly adhered to in all cases. It is evident from the investigation conducted that most of the loan that became Bad and doubtful debts today were granted in violation of the loan policies and credit guidelines. The personality of the customer and other selfish interest of the approving officer though not expressed has been brought into play in credit decisions. Any officer found to have given or approved loan in violation of the loan policies, credit guidelines and lay down procedure should be dismissed and prosecuted and such loan be recovered immediately. This calls for more monitoring and the establishment of more controls. Proper checking and counter checking should be done by an independent officer before the final disbursement.
In line with the above, loan policies and credit guidelines should be in writing to enhance consistency and protection and should be fully communicated to all credit officers and approving officers. Any change in policy or guidelines must be duly communicated to all branches. This would enhance effective and efficient implementation.
(ii) Allocation of authority
The allocation of authority to line lending officers is a must in any credit Administration plan. The subject of delegation of authority leads into that of joint responsibilities for the recruitment, training and retention of capable lending officers. With the advent of more complex and specialized kinds of commercial lending and in consideration of the complex and unpredictable nature of the human character, there is the need to use experts who should be given adequate authority to carry out the Administration of lending. They should be given higher naira lending limit, because doing this would eliminate to some extent certain doubts and this may have a definite tendency to increase their self-confidence.
(iii) Establishment of an efficient credit department
The entire review and approval system presumes the existence of an efficient and effective credit department where credit files and credit analysis can be prepared effectively to support the loan officer. This is the heart of the entire Credit Administration process. An efficient credit department should be established to develop facts that are both timely and accurate, permitting more correct credit decisions. In addition, interest rates should be responsive to competition, risk, cost of handling the loan, maturity of loan, gross yield, and fees for commitments. A few customers interview expressed sincerely that they run away from paying bank loans because after two or three attempts of payment, all you have done is to reduce the level of accumulated interest. So they got discouraged from continuing.
(iv) Combination of Techniques
A combination of the appraisal techniques would be very useful in each case. Therefore rather than relying on either character or collateral or capability, all these factors should be considered vigorously in each case as it has been proved from the study that each of these has some limitations. Document of charge over assets pledged should be properly filed and legally perfected.
(v) Bank Account
In examining the conduct of a customer’s bank account, care must be taken to ensure that certain details are ascertained. The investigation have shown that some customers deceive their bankers that adequate turn over was being generated by them whereas what was been done could be referred to as “kite flying” or “cash recycling”. That is, making a credit lodgment from sources that is unrelated to their operations with simultaneous withdrawals of such funds thereby giving a false impression of a swinging account. Therefore adequate care must be taken to check:
- The source of payment into account
- Director of checks paid out on the account
- Frequency of excess request.
(vi) Customer – Bank Dialogue
This should be encouraged. Bankers must not and ought not to absolutely rely on the information and data supplied by customer, inviting the customer for a quarterly appraisal discussion to obtain information on performance and prospect of the business are equally necessary.
(vii) Realistic Program of Repayment
The purpose of any loan should be based upon repayment. It is therefore desirable that the borrower and the Bank have realistically defined program of repayment agreed upon in writing at the time the loan is made. Bankers have be found to have neglected this important aspect. Primary and secondary source of prepayment must be feasible and evident preferably from the proceeds of the business – being financed. Most importantly bankers must insist on secondary source of repayment especially where factors exist that could threaten the primary source. This is better than solely and wholly relying on collateral if the primary source fails. Bankers all agreed that realisation of collateral should be only but a last resort.
(viii) Assuming Owners Perspective
Assuming ownership Perspective particularly in real estate loan rather than a secured lender is another sure way of recovering Bad debts. This means that Bankers have to think like real estate investment firm to make such an adjustment of position necessitates conversion of “credit files” to “property files”. Properties must be identified by metes and bounds. In other words by their exact location. Rather than looking to the property owner to deal with these items, it becomes necessary for lenders when dealing with distressed loans should mentally step into the role of the owner. In the course of the investigation, it was discovered that some careless bankers relying on Honesty have only known the address of the location of the assets used as collateral but had not really inspected such an assets used as collateral but had not really inspected such an asset to see for themselves. Eventually the honest customer after collecting his money becomes dishonest the following day. Bankers should thus be prepared for a foreclosure should it become necessary
(ix) Centralised Reporting system of Doubtful Debts
Doubtful Debts program reporting system should be centralised starting with a consistent risk grading. This is to avoid inconsistent risk assessment and categorising loans. Management of problems assets for example, includes correctly identifying risk of loss and adequacy of reserves. This presupposes the existence of a competent asset review function and realistic subjections of the segmented loan portfolio to an objective economic for cast. Once the magnitude of the problem in the is determined along with the time period in which they might either become improved or result in loss, then a succint plan can and must be developed to deal with the situation. This plan should result in the development of a precise mission statement supplemented with objectives and goals. In addition a method of measuring result should be formulated. Finally adequate resource must be committed to the task, particularly personnel. Most banks recruit unqualified people on the Directors instruction without regard to any background training in Accounting and Finance. Most of these people become accountants and Managers without any deep knowledge of credit. It is important to recruit the right caliber of staff and establish a reward system for those considering a career dealing with problem loans, including advancement potentials. If management recognize that their level of Bad and doubtful debts is increasing and only give lip statement to its management, staffing and motivation, the problem will in my opinion persist in greater dimension. There is no way a wrong person can do the right things.
(x) Management Commitment
Management commitments to addressing the issue of Bad debts must be real. Bank Managers should ask themselves at the end of a given week, what percentage of my time was dedicated top reducing the level of Bad debts in my branch. Sadly, there is rarely sufficient commitment at the highest levels of operating unit management. Banks need the right caliber of management for the job. Not the kind of Directors who will approve loans for themselves and would not pay back. To determine both the need for an availability of the requisite staff, there must be in place:
- An adequate loan/asset review function with an appropriate risk grading and trend analysis capability
- A realistic application of an objective economic for cast to each segment of the portfolio to establish loss parameters over select time periods.
- An inventory of resources available to be employed and allocated to the management process for dealing with bad and doubtful debts.
The attitude of dealing with non-performing loans generally starts with the maximization of collection. In other words, “You promised to pay, so pay”. Depending on the stated objectives for each Bank and the forecasted level of problems, that attitude might need adjustment to include cost avoidance. Recovery potentials may be preserved through equity participation or warrants. However, close attention should be paid to the cost of carrying a non-earning asset, both a non-accruing loan as well as property to which the bank has taken title.
(xi) The Application of the Bankruptcy Act
In 1989, the Federal Government enacted the Bankruptcy act. The provisions were similar to the English Bankruptcy Act of 1914. It states that; “Every conveyance or transfer of property or charge there on made, every payment made, every obligation incurred and every judicial proceedings taken or suffered by any person unable to pay his debts as they become due from his own money in favour of any creditor or any person in trust for any creditor with a view of giving such a creditor or any surety or guarantor for the debts due to such creditors, a preference over the other creditors or any surety or guarantor for the debt due to such creditors a preference over the other creditors shall if the person making, taking, paying or suffering the same is adjudged bankrupt on a bankruptcy petition presented within six months after the date of making, taking or paying or suffering the same, be deemed fraudulent and void as against the trustee in the Bankruptcy.”
The object of such enactment usually is to ensure fairness between the creditors where the debtor is on the verge of bankruptcy. Nevertheless, it is possible for an alert creditor to press a debtor to reduce or repay the amount owing to him. This in my opinion would put pressure on those bank debtors who have the means to repay Bank loan but often refuse to pay either because they see the loan as a government grant or because they feel they have powerful connection within and outside the Bank such as Directors and other personalities in the society.
In conclusion it has been established that in giving out loans by a lending officer(s), an error or errors of judgement could occur. Whether the error is intentional or inadvertent, it means a loss of the principal asset, loss of interest receivables on such an asset and of course reduced profits. This subsequently reduces the Banks market rating and Public perception of the Bankers Management ability to make sound credit judgement.
Regardless of these implications, commercial banks in Nigeria are still swimming in enormous amount of Bad and doubtful debts. However, these trends notwithstanding, if the above recommendations can be carefully and patiently implemented effectively and efficiently, they will help to not only reduce the incidence of doubtful debts but also help in recovering those debts that have become unrecoverable over the years. And there will be no need for the Federal Government prudential guidelines on this issue.
Also from the presentations made so far the hypothesis has been proved that Bad and doubtful debts is threatening the commercial banks and that effective management has a relationship with the level of Bad debts.
5.4 Limitations to the Research
Like any other research, this study is not without certain limitations.
There is the problem of in adequate data and the unwillingness of Bank officials to release vital information. Their cold response is an a result of the notion that Bankers are ethically oriented towards secrecy and are bound by this implied notion not to release any information to outsiders on sensitive issues like lending, particularly if it is to be published.
Therefore, whatever data or information set forth in this work was obtained only through a rather patient and frankly tenacious investigation of a great many likely and unlikely leads. The concealment of information was in some cases deliberate and in some cases inadvertent.
But in the final analysis, it is strongly believed that the research work will serve as an academic reference to the Banking discipline especially as it affects lending and credit management in Commercial Banks.
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