The Impact Of Effective Credit Documentation In Commercial Bank

Project and Seminar Topics with material for Banking and Finance

The Impact Of Effective Credit Documentation In Commercial Bank


Abstract


The Impact of effective credit Documentation in commercial banks. The level and Magnitude of credit Mis-management has continued to increase in the financial system at an alarming rate, and very soon, the banks capacity to perform it’s traditional function of financial intermediation will be impaired and obviously, the real section of the economy will be adversely affected. It is in view of this fact that the need for this research exercise arose, taking a through look into the scene of “portfolio management problems in commercial Banks” with first bank Plc Kaduna branch as case stitches.

  1. The research exercise states from chapter one with the statement of general problems, objectives, significant, scope limitation and delimitations, definition of terms, historical background of first bank and it’s organizational structure.
  2. Chapter two being the literature review dealt with issues like functions/debt management concept, etc. the central banks production guide lines for license banks also outline.
  3. Chapter three (research methodology) discussed research methods with particular emphasis on the method employed for this research exercise these methods employed were also justified.
  4. Chapter four data presentation and methodology presents some adverse effect of credit mis-management, also the analysis of response gotten from the respondents sampled out for the purpose of this research exercise.
  5. Lastly, chapter five shows the whole event in summary form then concluded by mentioning the various recommendations on how to improve on credit management in commercial banks

Chapter One


1.0 Introduction

Credit generally denotes loans and advances made either directly or indirectly by a creditor (lender) to a debtor (borrower) on the principles of different payment. The banks as a lender, provides credit facilities by making funds available to customers in agreed terms and condition of payment. The gain of this credit to the bank is supposed to be huge profit instead of this over the year, modern banks (particularly commercial banks) have been recording huge amount of bad debt provision which increase with each consecutive.

The term credit is the granting of money (loans) and advances to borrowers with the general expectation that they would honour their obligation to repay the fund with or without interest when due.

Credit is the means by which we are able to obtain immediate benefit of goods and services upon the promise of payment at a future date.

One of the main reasons for obtaining credit is that money which is our recognized unit of exchange is kept in relative short supply and although we may have enough credit for those items which we require but can not immediately afford and as these problems is not confined to individuals. A banks objective is to make money and one of the methods used to achieve this is by loans.

However, loans are only granted to those whom they have every confidences in and then as often as not, demand some form of security. The motive for leaning money is therefore to acquire profit for themselves and not out of favour to the customer. Although, we are not able to adopt such stringent attitudes, our motives for granting credit must be the same.

It is however, dishearten to note that not withstanding the level and magnitude of impact that the banks have on economy in terms of importance which is unarguably immense. Whenever money is always certainly a risk of not getting it back from such customers. It is this (non-payment of loan) that has made it necessary for this research to go into the area of credit management.

The impact of effective credit management as a process is very essential for banks because poor credit revaluation leads to poorly unstructured loans facilities that reduce the profitability and liquidity of the bank.


1.1 Historical Background of the Case Study

First bank of Nigeria Plc is a leading banking institution in Nigeria with over a hundred years of banking experience, founded in 31st march1894 by a shipping magnate from Liverpool, sir Alfred Jones. It commenced as a small business bank in the office of elder Dampster and co. in Lagos. Today, first bank of Nigeria Plc has diversified into a wide range of network of banking activities and services including commercial, merchant and international banking. And has become appetent factor in the development of the country.

It was incorporated as Limited Liability company in London, with it’s head office in Liverpool under the corporate name “Bank of British West Africa; with a paid up of twelve Thousand Pounds sterling (£12,000) it commenced business after it had absorbed it’s predecessors assets in the African banking of the pre-eminent position which the bank was established in the ban king industry in west Africa.

The bank in it’s early years grew rapidly working in close corporation with the colonial government in performing the traditional roles of a central bank.

In 1896, a branch was opened in Accra, Gold coast (now Ghana) while another was established in Freetown sierra Leone in 1898. This marked a milestone in bank’s internationally banking operations thereby justifying it’s west African coverage operationally.

The second branch in Nigeria was situated in the old Calabar in 1900 and two year later, it’s services had extend to Northern Nigeria with a branch network of 291 in 1996 spread throughout the federation, including London. The bank has the highest number of branches in the banking industry.

The banking has experience a phenomenal growth over years with a share capital of 55.6 million in 1980, which rose to N68.4 million in 1995, the bank’s total assets currently stand at N69.82 million, supported with a deposit based of N41.641 million.

When the bank began operation in 1894, it has a staff of six composing of 3 Europeans and 3 African today, the bank is virtually fully Nigerianlized. This of course has been the result of planning responsiveness of the yearning of the Nigeria people and government as well as the banks determination to identify with the aspiration of the country in it’s march towards national development.

As a result of corporate policy to divas it’s portfolio of non-core activities and in order to meet the bank of England’s regulatory requirement the banks foreign partners, the standard chattered banks of Africa Plc, have reduced their shareholding to 9.9% following the offer of 120.941.195 share to the Nigerian public, thus bringing the equity holdings by Nigerian to 90.1%.

The bank has maintained its leadership in financial long-term loan to the colonial government. To day, the banks boast of a diversified loan portfolio to various sectors of the economy. The banks rural banking record is unmarked by army bank’s while its agricultural credit facilities through the community farming loan schemes have given the common man and farmers a tremendous access to the much needed bank credit.

In meeting the challenges of the second century the First Bank of Nigeria Plc. Is committed to put a smile on the face of every customer.


1.2 Statement of General Problem

The incidence of credit mis-management” in the financial system has not Luther to attract due attention and discussion until recently. The depth of distress in financial system which could be essentially traceable to credit mis-management as well as a few other forms of frauds appeared to have brought to the need to address this economic malaise.

The incidence of huge bad debt in the banking industry has not only attracted the attention of the monetary authorizes but the public at large.

There is a growing concern in these sectors of increased potential for back failures if the problems is not urgently address. The fear may not be out of place when viewed against recent development in the industry. In January 1991, the central bank of Nigeria took over control of Nigeria which was established in 1933 by the defunct western region.

This research is going to optically analyze the “inefficient credit management” procedure adopted by some banks which is the initiator of bad debts incidence thereby reducing it’s liquidity ratio.

The research is aimed at finding the cases and solution to such problems a “Bad debts for effective and efficient management


1.3 Objective of the Study

  1. To examine the various considerations and analysis in the impact of credit management for lending purposes in the principal industries especially the commercial banks.
  2. To assist practitioners in the banking industries to acquire the high decree of unperforming credits as presently carried in their debt portfolios and to assist in sound and reasonable credit aimed at minimizing the incident of bad debt.
  3. To suggest the portion of lending (i.e advances and loans) that should be allotted to individuals customers.
  4. iv. To find out from all available data the lending structure of banks (commercial banks) in Nigeria with particular emphasis on the selected banks located in Nations.
  5. To stir or stimulate interest in this area for prospective students who may wish to develop their career in the area or field of credit management.
  6. To serve as a useful preliminary paraphernalia (tool) or materials for further study in the field of credit management.

1.4 Significance of the Study

It is the hope to evaluate credit management process and the subsequent problems of un-performing loans and the increasing incidence of bad debt that this study is made. It is also hoped that it will serve as a useful tool (material) to those who may wish to further in the field or credit portfolio in Banks with view to or in an attempt to identify those credit that are “performing” against these credit with a high degree of default in order to enhance debt management practices in the Nigerian banking environment

The impact of credit management as a system or a process is very essential for banks, because poorly structured loan facilities result in bad debts and losses which in-turn goes to reduce the profitability and the liquidity of the Banks.

Taking into cognizance the above significance it use hope that the material as a product of this research shall assist the practitioner in the banking industry to promote their skills on the impact of credit management.


Chapter Five


Summary Conclusion and Recommendation

5.1 Summary

The major concern of this study in the high increase in bad debts as a result of poor credit management. However in the course of this research, the various principles of good lending and the factors that led to bad debts and the necessary credit analysis that is required for good lending were discussed.

The study was tailored towards the management of bad debts, the causes of such bad debt and the control being used to monitor the bad debts of first bank Plc. The bad debts of the bank under study are seen to be averagely not too high.

In the literature review, in-depth of the concept of bad management was observed. The contributions of the central bank of Nigeria towards the efficient and effective running of the credit activities by commercial banks with the provision of prudent guidelines to follow so as to have a good debt management was also reviewed. An analysis of the principles of good lending was considered to establish either a given application for loan or advance, it qualified for further evaluation.

It was discovered that deliberate actors of the customers, convince the bank employees and the unnecessary interference of government on behalf of well connected customers are some issue that stir up bad debts in banks.

It is also easy to accept the view that commercial banks in the country only make profit on paper without the required financial prudence in the management of it’s loan portfolio. Nevertheless, if commercial banks are to cautious apply the control as seen in this study, there is no doubt that loans resulting bad debt will be greatly reduced if not eliminated.


5.2 Conclusion

The study has succeed in identifying the major steps for the management of credit in commercial banks with first bank as a case study.

The study discovered what constitutes bad debts and how these bad debts came about. It should be noted that banks are the principle of our national economic and where it is allowed to collapse by poor management the whole economic will record a show, if not stunned or negative growth.

It is noticed that lack of good credit has rightly aided poor credit performance as interest risk or credit proposal may not be identified before approval. Under influence, cohesion in recommending credit and approval of credit not recommended has encouraged poor credit. Request which other wise would have been rejected are accepted and procedures which ought to have been observed and ignored. The bank now conduct frequent follow ups on the credit customers either directly or through the credit officers or through internal and external debt collection agents. A situation, which was not common in the past, especially before the introduction of stabilization securities by the central bank of Nigeria.

Finally, success has been achieved in this study since one is able to see and identify the various cases of bad debt and doubtful debts in commercial banks.


5.3 Recommendations

Our bank must be assisted to get over the problem of bad debts and who so ever takes loans should or must see it as his honourable obligation to pay back or redeem such loan. Commercial banks constitute the primary sources of industrial and commercial loans in most economics. Therefore production, distribution investment, consumption and the need of the government are also often financed through the commercial banks, loans; thus in addition to the various ways and majors taken from the management of credit, the under listed measures should be adopted as compliment for the recovery and to minimize bad account. On the basis of the foregoing purpose of findings and the conclusion the following are put forward as recommendation:-

  1. The central bank of Nigeria being an apex bank should ensure strict compliance to the Decree No 24 of 1986 which seeks to check frauds abusive and corruptible tendencies being perpetrated increasingly with impurity by banks and bankers.
  2. The bank must continue to recruit according to merits. The most qualifies and efficient employees must be maintained.
  3. Efforts should be made to stop officers, stockholders, and related interest of affected banks from borrowing money directly or the purpose of commercial undertaking.
  4. To fully guarantee deposit welfare and guard effectively against bank failure, including bad debts. The central bank should stiffen the relevant legislation in banks poor collateral infrequent repayment returns and above all bad debts airing from nepotic loans and guarantees should be presented.
  5. The banks should endeavour to go fully computerize this definitely enhances the quality of credit analysis and management of credit portfolio.

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