APPRAISAL OF THE LENDING AND CREDIT MANAGEMENT POLICIES OF A TYPICAL MONEY DEPOT BANK

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND OF THE STUDY

In a modern economy, there is distinction between the surplus economic units and the deficit economic units and in consequence a separation of the savings investment mechanism. This has necessitated the existence of financial institution whose job include the transfer of found from savers to investors. One of such institution is the money deposit banks, the intermediating roles of the money deposit bank place them in a position of trustees of the saving of the widely depressed surplus economy units as well as the determinant of the rate and shade of the economic development .the techniques employed by banker in the intermediary function should provide them with perfect knowledge of the out-come of lending such that funds will be allocated to investments in which the probability of full payment is certain.

However, in practice no such tools can be found in the decision of the lending banker.  Virtually all lending decision are made under creditors on uncertainty associated with lending decision, situation are so great that the concept of risk and risk analysis needs to be employed by lending bankers in order to facilitate sound decision making and judgment. This statement implies that if risk are to be objective assessed, lending delicious by the money deposit bank should be base less on quantitative data and more on principle too subjective to proved sound and unbiased judgment. Furthermore the bank depends heavily on historical information as a basis for decision making.

Apparently aware of the inadequacies of his decision base the lending banker has often sought solace in tangible and marketable assets as security giving the impression that lending against such security is an insurance against bad debt. This makes the bankers complacent his loan portfolio. The increasing trend of provision for bad and doubtful debt in most money deposit banks is a major source of concern not only to management but also to the shareholder are becoming more aware of the dangers posed by these debts. Bad depts. destroy of the earning asset of bank such as loan and advance which have been described as the main source of earning and also determines the liquidity and solvency which generate two major problems that profitability and liquidity, has to earn sufficient income to meet its operating cost and to have adequate return on its investment.

1.2 STATEMENT OF THE PROBLEM

The problem for this study is appraised the lending and credit management policies of a typical money depot bank (the union banks of Nigeria plc)with a view of finding the causes, consequence of bad debts in banks. Year after year, banks suffer much from the part of full loan extended which has for one reason or the other proved unrecoverable. Banks lose millions of naira in various bad debts yearly and despite effort by bank management, committee of chief inspector and the banker committee on other hand the wave of bad debt in bank is still on alarming proportion. This is gathered from a combination of literature reviews on the topic.

On the other hand, many banks experienced a lot of bad debts when the new government abandoned the project awarded to the contractors by past government. These contractors borrowed to execute the project awarded to them to them but could not repay the loan, due to government action on ramping the economy thereby abandoning the project. Other experiences were during the time of draught or poor rainfall and pest. These however led to low harvest which did not give the farmers enough time to repay their debt. 

Again, experience may arise in respect of lapses on the part of the banks credit officers. For instance, there may be excesses over approved facility, unformatted facilities and expired facilities not renewed on time. In each of these cases the customer may easily deny even owing the bank all or part of the amount. Money deposit banks may be unable to take the risk of lending more but when eventually they do, they would seek the best way they come out of risk with a realistic reward which they are clearly failing to achieve at present.

1.3   BACK GROUND OF THE STUDY

i.      to determine and appraise the lending procedure of banks using union bank of Nigerian plc as a case study with a view to highlighting the effectiveness and adequacy or otherwise the credit management policy of Nigerian banks in reducing the occurrence and consequences of bad debts.

ii.     To highlight the rate at which inadequate collateral security provision by borrower increases the incidences of bad debt in Nigerian.

iii.    To determine whether fund diversion has any effect on bad debt of money deposit banks in Nigerian.

iv.    To ascertain the extent to which government intervention in lending policies of money deposit bank has influenced bad debts in Nigerian money deposit banks.

v.     to highlight the extent to which improper project evaluation influence bad debt of money deposit banks in Nigerian.

1.4   RESEARCH QUESTIONS       

In view of the consequences of bad debt in Nigerian money deposit banks, it is necessary to formulate some research question which will enable the researcher formulate statistical tables for testing hypothesis

1.     Has inadequate collateral security provision by borrower caused bad debt in union bank of Nigerian plc?

2.     Does fund diversion have any effect on bad debt of union bank of Nigeria plc?

3.     To what extent has government intervention in lending policies of money deposit bank influenced bad debt in union bank of Nigerian plc?

4.     To what extent does improper project evaluation influenced bad debt of union bank of Nigeria plc?

1. RESEARCH HYPOTHESIS

The following hypotheses were as follows.

1. Ho: inadequate collateral provisions by borrowers does not increase the incidence of bad debt in union bank of Nigeria plc

Hi: inadequate collateral provisions by borrowers increase the incidence of bad debt in union bank of Nigeria.

• Ho: fund diversion does not affect bad debt in union bank of Nigeria plc

Hi:        fund diversion affects bad debts in union bank of Nigeria plc.

• Ho:       government intervention in lending policies of money deposit banks has no influence on union bank of Nigeria plc bad debt.

Hi:    government intervention including policies of money deposit banks has direct influence on union bank of Nigeria plc, bad debt.

• Ho: improper project evaluation has no significant relationship with bad debt in union bank of Nigeria plc.

Hi: improper project evaluation has direct relationship with bad debt in union bank of Nigeria plc.

1.   PURPOSE OF THE STUDY

It is hardly an exaggeration that the difference between the success and the failure in the banking industry is in the effective management of the bank’s loans and advance. Efficient loan management is vital to the protection of assets and the achievements of adequate returns to investment. Though much work abound in the literature of the technique of lending, the methods of securing such lending and the pit alls that await the unwary banker by comparison it appears to be very little in point on the subject of loan management and recovery.

A study of this subject will therefore be a welcome addition to the existing volume of banking literature.

Effective loan management recognized that beyond the application of sound banking principles whenever a loan is made, there is need for urgency in appreciating the point when a loan begins to look doubtful, in arriving at a decision as to the appropriate action and in taking that action. This will enable the bank to at least obtain full payment including accrued interest or at worst to mitigate the capital loss in the face of increased competition among banks, future profits are likely to be harder to come by and since bad debts are a charge against profits, t is appropriate that we review the methods, proportions and margins of lending to bad and doubtful debts.

Hence the significance of this study to bankers will enable them to appreciate an appraisal of their lending and control mechanism now that they are expected to lend under tight monetary conditions. The economy as a whole will benefit from the study because if the level of bad debts is reduced, banks will be left with more profits to enable them make the expected contributions to the development of the economy.

1.      SCOPE AND LIMITATION OF THE STUDY

In the study of credit management in Nigeria, union bank of Nigeria plc was used for my analysis. All references therefore relate to union bank of Nigeria plc.

A      six year period covering 1988 – 1993 will be studied.

The limitations of this study include some of unavoidable constraints and problems encountered in the process. They are as follows:

1. Finance: the problem of finance was not left out in the course of research to this study. This types of study required adequate money to enable the researcher visit the necessary places for collection of data. Insufficient fund hindered an in depth study of this research since it was financed from meager pocket money of the researcher.
2. Non availability of records: this is one of the most important limiting factors in the course of the study. This includes the problems of not easily getting the appropriate data due to bureaucracy which hinders the information flow in the country.
3. Non challant attitude of bank officials: the reluctance of bank officials to reveal information on the need for this study, for fear of breach of duty of secrecy to customers and exposure of banks administrative short comings.
4.  Ignorance of respondent /borrows: most bank customers were semi illiterates and most often it was very difficult to collect adequate data required from them.
5. Time: since this study is one of the many course offered by the researcher, the researcher was constrained by time to carry out an indent research on the study.

1.8   DEFINITION OF TERMS

Debt: this is what one owes to another person.

Loan: loan is a credit arrangement; a security is pledged and must be repaid with interest over a stipulated period of time.

Overdraft: this is a credit arrangement by banks to their customer to withdraw money over and above what he has in the account.

Default: this means failure to pay one’s debt for credit extended which has fallen due.

Hypothesis: This tentative statement of conclusion. It is a statement of claim which is to be proved right or wrong having been confirmed with facts.

Ho: null hypothesis: the hypothesis that is being tested.

Hi: alternative hypothesis: the hypothesis that will be accepted if the null hypothesis is rejected. 

CHAPTER TWO

LITERATURE REVIEW

2.1    THEORETICAL FRAME WORK

The need and criteria for lending have been extensively discussed in the literature review.

U.B.S Dictionary of Banking and finance (1981) defined bank credit as the ability to borrow money on the promise of future repayment.

The prudential guidelines (1990) succinctly convey a more comprehensive definition of credit; it defines credit facility as the aggregate of all loans, advances, overdraft, commercial papers, bankers’   acceptances, bill discounted, leases, guarantees and other loss contingencies connected with a bank’s credit risk. Also, the definition of credit proposed by the CBN Monetary policy circular (1992) agree with the view above. Generally, we could conclude that credit includes all commitment by a bank that has risk exposure and that may result in financial loss to the bank.

Mandel (1974) described credit simply as the right of a leader to receive money in the future in return for his obligation to transfer the use of found to another party in the interim. The facilities is as old as man, through the private society it was known as mutual aid, because it was based on ancient customer of ensuring substance of all member of the community is performed by the financial institution notable among which are the money deposit banks.

In agreeing with this view, Corley (1970) and Adeniyi (1985)stated that credit is a crucial factor in growth process of any economic and that by lending banks provides a valuable service to community as they serves to channel money from those who have idle fund to those who put the money in to constructive use.

    Furthermore, Acher and O. Ambrose opined that money-deposit bank is in business to make loans. They however, added that the loans should work out in such a way that it wills not seriously endanger the loan portfolio and solvency of the bank. This views that appreciation that though some danger may arrive, lending is and should be major activities of money-deposit banks. The techniques and complexities of lending have been changing with growth in the society.

    Perhaps that is why Mather (1955) described banking as an art as well as a science. He went further to say that in addition to the wealth of techniques and legal knowledge, a bank manager should develop the aptitude to assess every request for an advance according to innumerable factor pertaining to the political borrower. He then identified three basic principle that should guides all bank lending viz, safety profitability and suitability. In addition to the principle enunciated by matter, other important guiding factor include the character and integrity, management accounting and technical skill of the borrower as well as his capacity for hard work and his experience in the particular field for which the finance is required and the possibility of the proposed investment generate sufficient profits. To ensure repayment of the advance.

    Despite the importance of these traditional cannons of lending, pitcher (1970) criticized undue radiance emphasized on them by the lending banker. He argued that the character of the borrower must be a prime factor in any lending decision. He also said that the integrity of the borrower must be undoubted especially where the security in inadequate to cover the maximum amount to be advanced. He however, wondered whether honesty is simply enough to ensure the success of an enterprise in this difficult demanding condition of our time. The answer is obviously “NO” for instant all the integrity in the world will be little helpful to the managers of a company that are rapidly sinking into oblivion perhaps because they did not adopt their products to meet the needs of changing market or take appropriate corrective action to counter a disproportionate risk in over head cost and fall in trade. Therefore we could not but agree with him (pitcher) when he advocated that the banker should also consider the capital and capability of the customer and also enlist the aid of management accounting and other newer technique of credit analysis to improve their lending decision.

      Bad debts are emotive words of bankers because they present losses to the banks. However, for the purpose of this study, there are various reasons for the occurrence of bad debt in money-deposit bank. Experience of bad debt has its impact on the banking operations.