ABSTRACT
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 i
CERTIFICATION ii
DECLARATION iii
DEDICATION iv
ACKNOWLEDGEMENT v
ABSTRACT vii
TABLE OF CONTENTS
CHAPTER ONE
1.0 Introduction 1
1.1 Background
of the Study 1
1.2 problems
of the Study 4
1.3 Objective
of the Study 4
1.4 Significance
of the Study 6
1.5 Research
of the Study 8
1.6 Plan of
the Study 9
CHAPTER TWO
2.0 Literature
Review 10
2.1 Meaning
of Bad Debt 10
2.2 Management
Of Bad Debt 11
2.3 Effects
of Bad and Doubtfully Debts 18
2.4 Risk
Analysis 22
CHAPTER THREE
3.0 Research Methodology 25
3.1 Historical
Background of First Bank 25
3.2 Sample
and Population of the Study 26
3.3 Population 28
3.4 Method
of Data Analysis 29
3.5 Validity
of Instrument 31
3.6 Administration
of Instrument 32
3.7 Observed
Problem 33
3.8 Limitation
of the Study 36
CHAPTER FOUR
4.0 Data
Presentation and Analysis 38
4.1 Data
Presentation 38
4.2 Data
Analysis 41
4.3 Test of
Hypothesis 47
4.4 Findings 49
CHAPTER FIVE
5.0 Summary,
Conclusion and Recommendations 51
5.1 Summary 51
5.2 Conclusion 55
5.3 Recommendation
for Improved Management
of Bad Loan 57
REFERENCES 59
CHAPTER
ONE
1.0 INTRODUCTION
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.
i. What
is the causes of bad debt
ii. Why
provision for bad debt are made
iii. How
bad debt are written off.
iv. How
banks as financial institutions managing bad debts.
v. 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.
a. Other
customer
b. The
banks and
c. 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.
CHAPTER
TWO
2.0 LITERATURE REVIEW
2.1 MEANING OF BAD DEBT
Bad debt is an accounts renewable that will likely
remain uncollectible and will be written off. Bad debt appear as an expenses on
the company’s income statement this reducing net income. In general companies
make an estimate of bad debt expenses that might be incurred in the current
time period based on past records as part of the process of estimating earing
most companies make a bad debt allowance since it is unlikely that all of their
debtors will pay them in full
There are a list of possible scenarios that may
exist concerning a bad debt these are
- Customer
not willing to pay a proportion of the loan sum
- Customer
not willing to pay all the sum of the loanable funds
- The
customers business had falls and nothing is ever likely to be received
2.2 MANAGEMENT OF BAD DEBT
Since we say bad debt is a normal business expenses
with respect to the types of service provided. The management of bad debt has
to do with the ways to reduce the amount ways to recover some of these bad
debt.
Critical analysis has to be done before loans are
given to recover some of these bad debt customers so as to ensure of bad debt
and prompt payment of interest and recoupment of the principal amount.
These can
take the form of the followings:
- Recruitment of competent, educational qualified
personnel to lending and credit department
- Training of personnel from time to time
- Leading controller should be built to reduce
incidence of personality man kind of lending which often results to bad debt
- The reasons for the loan
- If the security supply the customer can off set the
loan
- How long the customer has been dealing with the
bank
- The viability of the project which the loan is to
be use for
When the above mentioned are carefully analyzed by
the bank then there would be reduction in the amount of bad debt there by
increasing the profit and reduce the exposes of the bank
Right
now, with cash tight and business slowing down, companies need to go after the bad debts as a way to raise needed cash.
They need to go after the receivables even it if means getting just something
now!
Like
all significant economic change, it creates opportunities for those who have it
in them to deal with it. During economic downturns, one of
the main reasons why businesses go under is because they run out of cash. However sound your business is in other ways,
successful cash flow management should be your main
priority.
A
recent study on the growing sicknesses in industries and businesses reveal that
BAD DEBT is the one major cause for
bankruptcy. In a buoyant economy, selling on credit has a number of advantages, especially when it generates a larger volume of business as well as widens one’s market share. In fact,
selling on credit often ‘Makes’ or ‘Breaks’ a sale and at most times gives one that
edge over competition. Yet, one cannot afford to take this area of
credit control lightly, as too many companies everyday are mounting with debts that are increasingly doubtful of
recovery.
The
volatile business conditions of recent years have created
problems of cash flow and interest charges never before
encountered.
Companies
large and small have, in many cases for the first time, come to realize that
the trade debtors or receivables, on the balance sheet represent a very
substantial and expensive consumer of capital employed.
They are also now beginning to accept that, in total, trade debtors represent
an investment in the market -place on which the expected return is the profit
to be earned only when payment has completed the sale. At the same time, like
all investments, those trade debtors are subject to the risks arising from the
effect of the economic climate on that market-place
generally.
Has
it ever occurred to you that before the customer buys your goods, both are
interested (he in your goods and you in his money), but once he gets the goods
he is not interested-it’s only you (for your money!!).
A
company can have the finest product, a superb sales record and the most
dedicated workforce, but if it does not get paid (…. and on time!) it will
die. An unpaid debt is a loan being financed by your
company – it means that many companies are prevented from achieving their full
potential, because instead of using borrowed money to
develop and grow their business, they are having to borrow money just to fund
their own sales ledgers.
Research
consistently shows that a typical invoice will on an average be settled in not
less that 72 to 78 days. A widely quoted survey by Intrum-U.K. fixed the period
at 72 to 78 days. As 30 day terms are normal, the extra 48 days have a
significant effect on profit and loss. It can even be the critical factor
affecting a company’s survival.
Good
cash collection procedures therefore can make the difference between a
profitable business and one forced into liquidation because of
slow payments and default on outstanding debts.
Managing
credit and collecting money are the 2 most important and vital factors which
decide the fate of any business.
Here
are some of the most common reasons:
- Few sales induction programmes offer
advice or are held in getting payment, with the result that money is rarely
mentioned at the sales call presentation.
- Some salespeople, understandably too,
have enough difficulty getting the order without putting it at risk by haggling
over payment terms.
- Too many salespeople think only in
terms of getting the best deal for the customer and
forget that they are obliged to get the best terms for their company as well.
You may be thinking this does not apply to your organization and if that is the case you are fortunate indeed. However several companies do have such problems and the only differing factor is the name of the company. If this problem exists within your own organization, recognize the futility of changing the system; as the root cause of the problem is elsewhere — in the attitudes/improper training of the people in collection procedures / techniques. Until such time as you can bring about a change with a proper training, your cash flow difficulties will continue to escalate. Gerard A. (ID 755)
AVOIDING
BAD DEBTS
There
are a number of precautionary measures you can take:
- Make sure new clients and customers provide information about their credit worthiness, including credit references, and a c
