CREDIT MANAGEMENT IN THE BANKING INDUSTRY
CHAPTER ONE
INTRODUCTION
1.1 GENERAL OVERVIEW OF THE STUDY
The provision of banking services to the economy of a country such as Nigeria has remained a life wire through which the economy grows. The provision of these services requires every attention because of its importance growth, the bank provides loans and advances which could either be long-term or short-time. The inevitability of these services rendered by the banks in economic growth explains why the government has been so keen in stipulating aggregate ceiling on credit creation as well as sectorial allocations in the government credit guidelines contained in the monetary circulars. The banks and other financial institutions are therefore, required to comply with these specifications during any fiscal year.
The type of bank and its deposit base in line with the credit guideline determine the credit creation ability of that bank. While answering to this clarion call of financing economic growth of the nations, banks also have to guide against incidence of loan defaults as this risks their own business position as they read mainly with depositors funds, which could be demanded any time by these depositors. Therefore, banks are required to be prudent in credit extension to avoid or at least minimize the incidence of loan default, which has caused eventual collapse of many banks in recent time.
In view of the obvious consequences a bank could face if so engulfed in loan losses and band debts, this work poised to research on the management of bank loans to minimize the incident of substandard, doubtful and lost loans in Nigerian banks.
Meanwhile, classification is made if bank loans according to performance. These classifications include: the active, substandard, doubtful and lost loans. The active loans are those ones which were purely made with full consideration of the cannons of good lending and have no shown and sign of good default in terms of repayment.
The substandard loans are those made with some irregularities or duly expired but not yet renewed and indicates signs of default. The doubtful loans are those loan whose accounts are kept dormant for a long period of time. The lost loans are those that have defiled all attempts of recovery and thus, written off the banks assets.
Loan and advance constitute the major sources of operating income of banks as they act the most profitable assets for employment of bank funds. In as much as banks desire income from loans and advances through interests accruable to these facilities, they also run the risk of losing both the principal and interest if the credit administration procedure is weak.
Banks being well aware that some of their loans and advances must always appears bad in spite of qualitative and quantitative techniques applied, set aside huge amount of money as provisions for lost and doubtful loans. The existence of substandard loans despite all these measures has found its roots in the character of the borrowers and the experience of credit officers.
Having gone this far, it is discernible that the issue is not fashioning a system whereby incidence of loan default can entirely be stopped. The crux of the matter is to fashion a system from the onset whereby the incidence of substandard, doubtful and loans losses can be cushioned to a bare minimum.
1.2 STATEMENT OF PROBLEM
The peculiar nature of services rendered to the economy by the banking industry is the basis of its problems. It mobilizes funds from surplus units and makes them available to the deficit units for productive ventures. Thus, management of credit is the most sensitive and delicate aspect of the banking industry and are faced with problems such as:
