AN APPRAISAL OF THE LENDING AND CREDIT MANAGEMENT AGEMENT POLICIES OF A TYPICAL MONEY-DEPOSIT BANK
1.0 BACKGROUND OF THE STUDY
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. (2009) 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 are 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
(i) That all Commercial Bank grant facilities to worthy clients with high expectation of 100% repayments of principal plus interests
(ii) 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.
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 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.
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.