Management Of Bad Debts In Commercial Bank (A Case Study Of First Bank Of Nigeria Plc, Ibadan Challenge Branch)
This project studied the management of bad and doubtful debts by Nigeria commercial banks. It noted problems associated with the wide spread development of bad account by banks as being occasioned by so many changes that are unfolding as a result of the deregulation of the Nigerian Financial System. It viewed the incidences of bad debts as one of the greatest problems facing both old and new generations of banks today with adverse consequences on their profitability level.
This project traced the origin of bad accounts to a number of factors some which may be internal, external or by act of God. e.g. the death of the owner of business. It was help that an account becomes bad the very day the facility is granted. Carelessness on the part of lending officers and his inability to interpret and respond promptly to warning signals may cause an untold loss in addition collusion by lending officers with the borrowers and absence a clearly defined lending guideless by banks may be responsible for high loan default. It is even difficult to identify control once a facility has been agreed by management.
The most effective way of limiting one’s losses however is to stop paying out but trading margins are particularly important.
Table of Content
- Title Page
- Table of Contents
- 1.1 Background of the Study
- 1.2 problems of the Study
- 1.3 Objective of the Study
- 1.4 Significance of the Study
- 1.5 Research of the Study
- 1.6 Plan of the Study
2.0 Literature Review
- 2.1 Meaning of Bad Debt
- 2.2 Management Of Bad Debt
- 2.3 Effects of Bad and Doubtfully Debts
- 2.4 Risk Analysis
3.0 Research Methodology
- 3.1 Historical Background of First Bank
- 3.2 Sample and Population of the Study
- 3.3 Population
- 3.4 Method of Data Analysis
- 3.5 Validity of Instrument
- 3.6 Administration of Instrument
- 3.7 Observed Problem
- 3.8 Limitation of the Study
4.0 Data Presentation and Analysis
- 4.1 Data Presentation
- 4.2 Data Analysis
- 4.3 Test of Hypothesis
- 4.4 Findings
5.0 Summary, Conclusion and Recommendations
- 5.1 Summary
- 5.2 Conclusion
- 5.3 Recommendation for Improved Management of Bad Loan
1.1 Background of the Study
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 policy guideline document issued by the central bank of Nigeria in January of every year regulates the activities of the entire economy the banking sectors is responsible for carrying out most of the policy issue contained there in the sectors is also subjected to frequent controls and reputations. In popular jargon, the banking sectors has become one of the most critical sectors and commanding heights 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 people the banking sector is without doubt of the fastest growing industries in the country today from total of 26 in 1980 the number of commercial and merchant banks in the country growing steadily to 40 in 1985 where it stabilized until it increased to about 49 in 1987 beginning from 1987 and following the introduction of structural Adjustment programme (SAP) in 1986 there had bean 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 1998 witnessed 21 new enchants 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 banks operating in the country. From N12million and N20million for merchant and commercial bank respectively paid up capital increased to N40million and N50million 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 grated challenges facing in particular the old generation of bank usually referred to as the “Big three. The 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 make the s in the country assess themselves fully thereby determine how healthy or prudent they are in their loan credit management.
Most bankers 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 is faced problem or so-called work out loans.
Another important reason is to decline in the economic fortune which gripped the Nigerian economy.
1.2 Problems of the Study
With many banks in large proportion given out loans and overdraft to their customers. The bank is therefore, taking the risk some of the customers may never pay back the loans or overdraft given to them.
This is normal business risk and such bad debts are normal business or running expenses.
The researcher therefore will like to find reasonable solution to the following question.
- What is the causes of bad debt
- Why provision for bad debt are made
- How bad debt are written off.
- How banks as financial institutions managing bad debts.
- How banks estimate provision for bad debt.
1.3 Objective of the Study
The broadax objectives of the study is to analysis the effects of rising machine of bad debts on banks operation since 1986 when the federal government adopted SAP. The focus is largely on the credit policy on the credit policy of banks and how to manage SAP. The focus on how to manage 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 produced on the reporting system of banks. The study will vigorously interpret the profit reporting system of bank before and after prudential guideline 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 Significance of the Study
The motivation for the study arises from the research interest in tracking the effect of economic reforms within the structural adjustment programme since the deregulation of financial system of the economic reforms is expected to alter the volume and pattern of lending by banks and the profitability of banks. It is necessary to investigate the extent to which profit that are being declared by banks actually reflect their true profitability position. Whether adequate precaution have been taken in their granting loans. The structural weakness of these banks is referred in the heavy bad debt portfolio, which is fact eroding their capital base. The introduction of prudential guidelines has therefore exposed the weak foundation and the misfortune arising from bank debt structure. Data generated from the annual reports of banks with regards to the volume of the bad debts have been fraught difficulties until the introduction of the prudential guidelines.
- Firstly, it is a policy objectives of the monetary authority to recognize only income that is earned and not paper profits.
- Secondly, it is also the objectives of the monetary authority to confirm with4t he international prudential guidelines.
- Thirdly, it is to make banks more prudent in their lending decision thus reducing incidence of bad and doubtful account.
- Finally, it is to encourage bankers to become solid financially able in Ibadan the customers are partially sophisticated.
Of serious limitation of the study is the problem of data collect ion. Through thus is not peculiar to this study. It must be recognized that not until the prudent guidelines came into effect November 1990. Most banks nor do they realize the need to make adequate provision of data for bad and doubtful debts. What banks did at best was a make petty provisions for those classes of debts.
1.5 Research of the Study
The course of action employed in this research in order to achieve its objective were both a case study and survey methods.
According to Aliazu (1981) a case study involves the study of one group at a point in time and arriving at a conclusion in relation to the situation of that one group. While the survey method is one in which the representation sample of the population is studied and the entire result generalized.
Most financial institutions and industrialist sampled preferred to remain anonymous. One of the logs in the wheel of progress is carrying out survey studies is the difficulty encountered in data collection.
Institution and individuals are usually not ready to release information. The strategy of anonymous was adopted in this work to enable easy access to information needed for the study.
1.6 Plan of the Study
The remaining part of work is organized into four chapters. In chapter two, the study reviews some existing literature on bad debt management with view and conclusion as generated among the various authors. Chapter three of the study contains the methodology. In the chapter, I tried to present the methods by which the result which terms basis of my samples and how the questionnaires were administered. The forth chapter derives from the third and contains my analysis of the questionnaire and my basic deductions.
Finally, chapter five contains a summary of my findings, recommendation and conclusion.
5.0 Summary, Conclusion and Recommendations
This 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 interms of assets and deposit base with over #8.56 billion deposit in 1999 terms of profitability, the bank is also ranked high 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 #205millom. This in fact testifies to the assertion that the bank is a leader both good and bad times. The study has been able to show that the lose rising from bad and doubt fill account depends on so many factors these s factors as we have and related prominent among economic environment or adverse financial trends, government economic policy, the legal and institutional framework and the internal control system of the leading institutions of significance, is the ability of the leading offices to make accurate decisions since most of the bad accounts results from bad judgments or wrong decisions. Other factors that may fuel the development of bad debts are: Fraudulent information, loss of debits 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 borrower, acts Good, 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 officers against load or any other financial exposure must be such that do not depreciate involved must be such that much be easily realizable. When security 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 restructured 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 by customer.
- Safeguard security, that is ensure that the security port folio are in order and easily realizable.
- Call in guarantees if any
- Realize security if any / possible
- Petition for wading up in case of a corporate entity and or appoint a receive/manager.
- Proceed on legal action, through more cumbersome
- Sale of asset or sue for fore closure.
What is the next action look like depend on the nature of the next business, the promoter(s) the type and status of the securities held, 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 account that wound 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 care which depends on the quality and discipline of the manager and inspection team of the bank.
The bank effective way of limiting one’s losses now ever, is to stop paying out. Thus limits imposed in credit decisions must be respected and the temptation to permit a customer to encroach his credit celling must be resisted.
Where it is unavoidably necessary to subscribe additional funds to a customer to save those that had already gone in 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 debts erodes the share holders confidence in the management and threading the asset base of bank and its long run survival. It is therefore important that an internal mechanism is built in which enable the bank to review 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.
5.3 Recommendation for Improved Management of Bad Loan
Most bankers cannot unequivocally declare that they have been untouched by problem 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 hanging 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 Fisrt Bank of Nigeria Plc. Our recommendation, is also influenced by the size of first bank and its long year’s 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 the 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 complement. 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 restraint in dealing to gain to the borrower’s attain or cooperation 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 to avoid being laced in a position of being faced with accusation, or economic coercion as a result of pressuring the borrower to do certain things clearly far.
Management Of Bad Debts In Commercial Bank (A Case Study Of First Bank Of Nigeria Plc, Ibadan Challenge Branch)
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