The Problems Of Debt Management In Financial Institution
The Problems Of Debt Management In Financial Institution
Abstract
A borrower’s savings capacity and collateral are associated with the amount of loan to be granted by a financial institution. Most often, when a debt is created, it becomes difficult to recover due to poor management by the lender as well as loan diversion by the borrower consequent to inability to pay back. Hence, this study investigated the challenges of debt management in guaranty trust bank plc.,(GTB) Lagos state. Questionnaires were administered to elicit data from the respondents and test the consistency and reliability of the research instrument. This study found out that there is a significant relationship between inadequate collateral provisions by borrowers and bad debt. Poor credit appraisal was found out to be the major cause of bad debt. Based on the findings of the study, it was recommended among others that financial institutions management should organize regular training programs for credit staff in areas like credit management, risk management and financial analysis so as to improve on the quality of credit appraisals, enable credit officers appreciate the need to comply with credit policy and further enhance monitoring credit.
Chapter One
Introduction
1.1 Background of the Study
The banking sector has been known for its intermediation role in providing financial assistance needed in the economy. This role is normally carried out in many ways, for example, granting of loans and advances to the customers, which constitute the major part of bank leading (Agu, 2010). In modern society, economic prosperity and progress depend largely on level of savings in the nation. A customer saves his excess funds in the bank for the purpose of realizing interest for future usage which otherwise, is made available to an investor for productive venture. When this happens, a debt is created. A debt has been described as an obligation to make future payment.
Often times, borrowers default due to fund diversion, or poor business knowledge. Consequently, the owners of these funds face the risk of not getting their money in good time or lose it entirely. The custodian of these funds may be saddled with challenges of struggling to repay or delay in payment and hence, debt management becomes necessary to guarantee confidence of the individual depositor that his money is safe. Debt management involves arrangement put in place for repayment of these credit facilities (Uremadu, 2004). According to ESCAP, (2006) Debt management encompasses more than the mere mobilization of domestic and external resources, recording this debt and making timely debt service payment. In the same vain it also fulfils a wider role in safe guiding the stability of the individual bank and thus the banking system as a whole. According to Jhingan (2008), the major operational business of commercial banks revolves around financial intermediation. In carrying out this business, the banks would source for funds from various members of the public. The funds of the customers are held in safekeeping of the banks and therefore, such funds must be made available to the depositors whenever they demand for them.
In modern society, economic prosperity and progress depend largely on level of savings in a Nation. It happens that someone’s savings is made available to an investor for productive venture like what happens in Commercial Banks. When this happens, a debt is created. A debt has been described as an obligation to made future payment.
It is against the borrower’s promise to make future payment. As a result of this, the owners of these funds face the risk of not getting their money in good time or losses it entirely when the custodian of these funds cannot manage them well hence debt management becomes a singvenon to guarantee the confidence of the individual depositor that his money is safe.
Debt management involves arrangement put in place for repayment of these credit facilities. In the same way, it is also fulfilling a wider role in safe guiding the stability of the individual bank and thus the banking system as a whole. At this juncture, the research mentioned that this work is based on the constraints in relation to Debt tagged on the problems of management in Nigeria Financial Institutions. Recently, the Banking sector undergo a traumatic experience whereby some Banks were judged distressed; this, however was a direct manifestation of improper debt management.
1.2 Statement of the Problem
The fundamental role of banks and non-banks financial institutions are to intermediate between the surplus and deficits sectors of the economy ensuring that it will generate new values that will make the economy grow. In performing this role, banks are exposed to credit risks, for instance, the possibility that the borrower will not repay the credit granted them when it falls due or even fail out right to repay. When this possibility becomes a reality, a bank is said to be set with challenges of debt loan and other credit facilities. Obviously, this has adverse effects on banks since it affects their cash flow and impairs profitability. It is believed that most loans and advances go bad because of the inadequacy in credit management and recovery procedure of banks. Credit risk is inherent to the business of lending funds to the operations linked closely to market risk variable. Credit risk management is carried out to minimize the risk and maximize bank’s risk adjusted rate of return by assuming and maintaining credit exposure within the acceptable parameters (Raghavan, 2003).
1.3 Objective of the Study
This study was meant to investigate the problem inherent on Guaranty Trust Bank Plc. debt management. The main objective of this study was to examine the challenges of debt management in GTB. Specifically, the objectives of the study include:
- To investigate the impact of inadequate collateral security provision by borrowers on bad debt in Guaranty Trust bank.
- To determine whether fund diversion has any effect on bad debt in GTB.
- To proffer solutions to the problems discovered
1.4 Research Hypotheses
The following null hypotheses will be drawn to guide the study as follows.
Hypotheses one
- H0: Inadequate collateral provisions by borrowers has no significant relationship with bad debt in Guaranty Trust Bank Plc.
- Hi: Inadequate collateral provisions by borrowers hasa significant relationship with bad debt in Guaranty Trust Bank Plc.
Hypotheses two
- H0: Fund diversion has no significant relationship with bad debt in Guaranty Trust Bank Plc.
- Hi: Fund diversion has a significant relationship with bad debt in Guaranty Trust Bank Plc.
1.5 Significance of the 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.
1.6 Scope and Limitation of the Study
This study is primarily concerned with the problem of debt management in financial institutions. This study covers GTB Lagos state branch. The researcher encountered some constraints, which limited the scope of the study. These constraints include but are not limited to the following.
a) Availability of Research Material:
The research material available to the researcher is insufficient, thereby limiting the study
b) Time:
The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
1.7 Definition of Terms
Lending:
A process by which a Bank customer is founds for specified purpose and specified period of time with a promise to repay the amount borrowed and applicable interest.
Credit:
This involves giving (receiving) goods or purchasing power now 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 repay both principal and interest, instalmentaly 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.
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).
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.
Securities:
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.
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
1.8 Organization of the Study
This research work is organized in five chapters, for easy understanding, as follows
- Chapter one is concerned with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
- Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
- Chapter three deals on the research design and methodology adopted in the study.
- Chapter four concentrate on the data collection and analysis and presentation of finding.
- Chapter five gives summary, conclusion, and recommendations made of the study
Chapter Five
Summary, Conclusion and Recommendation
5.1 Introduction
It is important to ascertain that the objective of this study was to have a critical analysis of the problem of debt management in financial institutions.
In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations are made, which in the opinion of the researcher will be of benefit in addressing the challenges of debt management in financial institutions.
5.2 Summary
This study aimed at having a critical analysis of the problems of debt management in financial institutions. Three objectives were raised to guide this study. These objectives include: To investigate the impact of inadequate collateral security provision by borrowers on bad debt in Guaranty Trust bank, to determine whether fund diversion has any effect on bad debt in GTB, to proffer solutions to the problems discovered.
5.3 Conclusion
Based on the above findings pertaining to the objectives of the study the following conclusions are drawn.
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 an initial if the proposal is worth considering, the source of repayment, the adequacy of such a source and the key credit issues.
5.4 Recommendation
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 begin 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.
- 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.
- 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.
- Establishment of an efficient credit department: The entire review and approval system presume 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.
- 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.
- 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 has shown that some customers deceive their bankers that adequate turnover was lviii 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: a. the source of payment into account b. director of checks paid out on the account c. frequency of excess request.
- 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.
- 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 been 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 lix 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.
- 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 asset 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
- 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 succinct 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.
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