MANAGEMENT OF BAD DEBT IN THE NIGERIAN BANKING SYSTEM SCOPE AND REMEDIES
This project work analyzed the incidence of bad debt in the banking industries as well as the effect on the individual borrowers and shareholders. The project work also stressed on the cause of bad debt and its implication on the economy. At the same time, it states earlier in suggestion on solution which found have been very much effective in stopping the incidence of bad debts in the banking system but have been left unconsidered.
The project also highlighted that establishment of data banks, public education, banking legislation as well as standardization of bad debts provision and recruitment of qualified bank employees as important ways of combating bad debts in our banks.
Conclusively, it has been discussed in the project that high level of loan risk can be attributed to poor credit evaluation and pattern of loan investment in the banks.
More so, that banks apparent poor performance in loan management as characterized by increasing level of bad debts provisions can be attributed to external interference, style and degree of management efficiency.
It emphasized that the shareholders allegations of mounting bad debts in a fact their seems that obstruct dividends prospects it.
1.2 Objective of the study
1.3 Credit management
1.4 Securities for bank lending
1.5 Causes of bad debt
1.6 Definition of terms
2.1 Summary of findings
Banks have been credited generally with enviable role of being a very important source of funds or capital for the development of the economy.
This recognition largely emanates from the roles assumed by most banking institution in mobilizing various deposits and channeling some towards feasible and viable ventures.
The size, type and level of such profitable outlets along with other complimentary factors contribute to economy well being of the country in which the banks is situated. As a result of this, banking institutions have been an agent of economic growth and perhaps economic development.
This deposit which are loanable funds can only be made available to the bank, if customers make substantial deposits which bank in turn employ to make loan and advances available to borrowers so as to generate interest which may accrue from the advance.
This enables the bank to run its day to day administrative costs, remain in business and pay satisfactory dividends to its shareholders.
The project work therefore is aimed at evaluating the following points:
i. To evaluate the problems of bad debts in bank lending.
ii. To identify its remote and immediate causes.
iii. To determine its effects to the economy in general
iv. To make recommendations on how possible.
1.3 CREDIT MANAGEMENT
The primary function of commercial banks is the extensions of credit to borrowers. In making credit available to banks render great services not only to borrowers but also to the economy is general. Through their actions, production is increased, capital investment are expanded, employment opportunities generated and a higher standard of living is realized. Hence, the monetary authorities pay greater attention to the level of bank loan and advances.
Ade and Wole asserted to this when they said that “The most important asset item in the balance sheet of the commercial bank is loan and advances”. For both the bank environment and the country at large, the size of its activities in this field can make a very significant impact on the level of economic activities.
The importance of credit management therefore cannot be overemphasized as it is the major source of income to a bank.
According to Adekanya (1988), the more money banks can lend, the higher their profit. However, this function is constrained by several factors which is ignored might lead to liquidation of a bank.
Therefore, it is absolutely essential for enemy bank to effect a careful balance between the maximization of lending in pursuit of profit and the minimization of liquidity to the lowest level consistent with safety.
However, it has been observed that with high rate of returns are risky investment of a bank. Therefore bank management has to balance profitability and acceptance rate of risk.
In fact, the act of large scale ending is never easy, whatever the skill of the banker may be or precaution he may take bad debt is unavoidable in lending hence, the object should be to provide the level and impact to risk at least to an acceptable rate. The ability to lend without loss of money is the major concern and aim of modern banking.
And to achieve this, bankers should not only bring into practice his skills and experience but also should exercise due care and precautions. In other words, the principles of good lending should be following. This may vary from banker but the basic aim is to minimize the incidence of bad debts.
Dyer suggests that the borrower’s competence in the business, past experience, source of repayment, period of the advance etc should be considered in addition to security, to cover the, borrowing. It is also essential that customers, whether an individual or co-operation should be of unquestionable character and in addition prove that the money should be used in funding the proposed project as agreed with the bank.
1.4 SECURITIES FOR BANK LENDING
The need for security for bank lending arises as a result of high probability of credit rise. The bank should not rely in security while making decision as to lend or not in that the last favourable action to a bank is the exercise of the right of firm closure. The security is there, as the last resort and should not be seen as a substitute to product and through credit analysis. Writing on the security for bank lending, Adeniyi (1981) emphasized that “Bank lending is based principally in trust and faith in the customer and this business, the subject matter for which the loan is being sought. But because of the high incidence of the risk of recovery bankers generally insist on obtaining securities for loan granted”.
Therefore, the bank will look just closely the facts and figures concerning the services of repayment as it would do if no security was to be lodged.
1.5 CAUSES OF BAD DEBT
One of the major principles of classical banking is to ensure effective lending and to accomplish this, the bank competence, skill and ability must not be questionable. In other words, the incidence that leads to default be directed at the time request is being evaluated or in the course of operations of the loan by the borrower.
However, there are some factors that cannot be dictated by the banker and such factors are the real risk factors. These includes:
i. Incomplete knowledge about the customer.
ii. Bad management of loan account by the customer as well as poor supervision and monitoring of the loan accounts by the banker.
iii. Misappropriation and dishonesty on the part of the borrower over trading by borrower, dishonesty on the part of the bank officials, level of the risk of sectional lending and changing in economic conditions.
iv. Government interference in the operation and management of the bank.
However, for what ever purpose higher level of bad debts provision signifies bad management and indiscretion of management in lending. Good integrity.
According to Walter (1926) he explained clearly when he said “if the customer has a personal account, the manager may be able to form an opportunity as to whether or not he or she lives beyond existing means if the account suggests that means are modest, yet customers drive around in a very expensive car and generally appear to be living extravagantly, the manager may doubt suitability for advance”.
A banker must ensure that the amount sought by the customer is adequate in relation to the project. If the amount is too much, there is the tendency that the surplus will be directed to uneconomic venture and hence inability of customer to repay the loan. On the other hand, insufficient borrowing will lead to incompletion of the project and hence poor debt recovery rate. The banker should as much as possible ascertain the purpose for which the loan is being sought in order to guard against illegal tending which the law does not condone. To ascertain this, the banker, should utilize all available source of information to him.
Walter (1926) explained clearly when he said “In recovering his money, he is largely passive, he will open credit account with no more than assurance, by introduction or reference that his customer is a respectable person. But when he has to lend, he has to assure himself by inquiring in economy way in his power, that his loan will in the first place for what period, the advance is required and what is the prospect of its required and what is the prospect of its repayment by the expiration of the period. His chief goal must be for the liquidity of his advance.
In addition, the bank should ascertain and evaluate the financial commitment of the borrower in the project and ensure that it is appropriate.
1.6 DEFINITION OF TERMS
BANK: Otherwise specially stated, bank in this refers to
commercial banks is described by the banking act, 1969 as a bank whose business includes the acceptance of deposits, withdrawable by cheques includes loans and advances.
CAPITAL: This is the amount used for the commencement of
business with addition subsequently made. It is also a set aside wealth for the production of more wealth.
LOAN CREDIT RISK: This is the profitability that borrower may
not repay the loan granted him by the bank.
MONEY RATE: This entails the probability of the value of
money increasing or decreasing.
MARKET RISK: The probability of the interest rate changing.
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