An Evaluation Of Credit Management And The Incident Of Bad Debt In Nigeria Money Deposit Bank (A Case Study Of Union Bank Of Nigeria)
1.1 Background of the Study
In a modern economy, there is distinction between the surplus economic units and the deficit economic units and in consequence a separation of the savings investment mechanism. This has necessitated the existence of financial institution whose job includes the transfer of found from savers to investors. One of such institution is the money deposit banks, the intermediating roles of the money deposit bank place them in a position of trustees of the saving of the widely depressed surplus economy units as well as the determinant of the rate and shade of the economic development .the techniques employed by banker in the intermediary function should provide them with perfect knowledge of the out-come of lending such that funds will be allocated to investments in which the probability of full payment is certain. However, in practice no such tools can be found in the decision of the lending banker. Virtually all lending decision are made under creditors on uncertainty associated with lending decision, situation are so great that the concept of risk and risk analysis needs to be employed by lending bankers in order to facilitate sound decision making and judgment. This statement implies that if risk are to be objective assessed, lending delicious by the money deposit bank should be base less on quantitative data and more on principle too subjective to proved sound and unbiased judgment. Furthermore the bank depends heavily on historical information as a basis for decision making.
Apparently aware of the inadequacies of his decision base the lending banker has often sought solace in tangible and marketable assets as security giving the impression that lending against such security is an insurance against bad debt. This makes the bankers complacent his loan portfolio. The increasing trend of provision for bad and doubtful debt in most money deposit banks is a major source of concern not only to management but also to the shareholder are becoming more aware of the dangers posed by these debts. Bad depts. destroy of the earning asset of bank such as loan and advance which have been described as the main source of earning and also determine the liquidity and solvency which generate two major problems that profitability and liquidity, has to earn sufficient income to meet its operating cost and to have adequate return on its investment.
1.2 Statement of the Problem
The problem for this study is appraised the lending and credit management policies of a typical money depot bank (the union banks of Nigeria plc)with a view of finding the causes, consequence 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 effort by bank management, committee of chief inspector and the banker committee on other hand the wave of bad debt in bank are 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 past government. These contractors borrowed to execute the project awarded to them to them but could not repay the loan, due to government action on ramping 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 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 risk with a realistic reward which they are clearly failing to achieve at present.
1.3 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 borrower caused bad debt in union bank of Nigerian 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 Nigerian plc?
- To what extent does improper project evaluation influenced bad debt of union bank of Nigeria plc?
1.4 Object 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 borrower 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 bank 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.
1.5 Research Hypothesis
The following hypotheses were 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 increase 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 including policies of money deposit banks has 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 bank’s 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 pit alls 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, t 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 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.
1.8 Definition of Terms
This is what one owes to another person.
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 what he has in the account.
This means failure to pay one’s debt for credit extended which has fallen due.
This 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.
1.9 Plan of the Study
The purpose of this study is to identify the evaluation of credit management and the incident of bad debt in Nigeria money deposit bank.
The chapter one of this research work constitutes of introduction, statement of the problem, research question, objectives of the study, definition of the terms and lastly on this chapter the plan of study.
The chapter two of this research consists of literature review. The chapter three comprise of the research methodology; source of data, population of the study, sample size, method of data analysis, method of data collection and limitation of methodology.
The chapter four contains the data presentation analysis and interpretation.
While chapter five which is the last chapter consists the summary of findings, conclusion, recommendation and reference.
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 of bad debt table 4.6 in chapter 4 was posed and the responses received show that 40 or 80% of the responses by the customers affects the incidences of bad debt in union bank of 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. Plc. 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 contra view. The researcher states as his findings that find 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 passes a problem to union bank in granting loans while 2 or 4% had a contrary view. The researcher states as his finding that government intervention has direct influence 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 products. 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 relation sp with bad debts in union bank. The researcher states as his finding that the bad debt of union bank of Nigeria plc.
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 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.
In it 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 nor 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 incidences can be minimized with prudent lending philosophy and proper grasp of economic and political environment factors.
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 to borrowers increase 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 find 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 earning constitutes 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 resource full officers capable of making seasonal decision 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.
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