Evaluation of bank lending and credit management in nigeria ( a case study of first bank)

Thesis Overview

<p> </p><div><p><b>INTRODUCTION</b></p><p><b></b></p><b><p><b>&nbsp;</b></p><p><b></b></p><b><p>Commercial<br>Banks operate to mobilize deposits from the populace and<b></b></p><b><p><b></b></p><b><p>keep. Some in trust payable on<br>demand. Through the performance of this role, Banks act as reservoir for<br>surplus funds and thus lend safe portion of these funds to clients that have genuine<br>needs for them. The banks have special responsibility to ensure effective<br>management of these funds kept in trust with them by depositors. Chester A Rude<br>puts it that the way and manner in which funds are handled “determines whether<br>they are laying a sound foundation or creating future problems for either the<br>borrower, themselves or the economy” If bankers unnecessary withhold credit,<br>the business suffer and so do the economy.</p><p>Lending activities are<br>prominent at all levels of our economy, which gave rise to loan management and<br>credit administration. This credit analysis, documentation, disbursements and<br>monitoring of loan to ensure repayment of both principal and interests on due<br>dates becomes pertinent.</p><p>One of the goals credit extension is to achieve<br>prompt repayment on due dates thus loan management typically involves credit<br>appraisal and administration.</p><p>Lending carries a reasonable portion of resource exposure<br>of commercial Banks in Nigeria. Therefore, the ability of a bank to generate<br>much profit is largely a function of effective and efficient management of its<br>lending portfolio. Due to its trustee status and in order to protect the<br>depositors Nigerian banks are being</p></b></b></b></b></div><b><b><b><div><p>xi</p><p>guided in their operations by so many regulatory bodies in<br>order to avert bad lending and liquidity problems. Operations and prudential<br>guideline by the Central Bank of Nigeria are always in place.</p><p>Inspite of measures, which is<br>aimed at protecting depositors and other public interests, the incidence of bad<br>and doubtful debts resulting from lending activities has been on the increase<br>in commercial Banks in Nigeria. This is as a result of negation in the primary<br>objectives of granting credit and profit objectives of banks, hence the need<br>for an appraisal of the present lending and credit administration techniques.</p><p>1.1 &nbsp; &nbsp; &nbsp; &nbsp;<br><b>STATEMENT OF THE PROBLEM</b></p><p>Most Commercial Banks in<br>Nigeria are currently being threatened by huge bad debt burden. This incidence<br>has eroded the confidence in the industry and eroded shareholder funds in most<br>cases. Have BOFID (1993) and prudential guidelines helped in arresting these<br>trends? The roles of regulatory framework is analysed to ascertain level of<br>assistance to the financial system.</p><p><b>1.2 &nbsp; &nbsp; &nbsp; &nbsp;<br></b><b>OBJECTIVES OF THE STUDY</b></p><p><b></b></p><b><p><b>&nbsp;</b></p><p><b></b></p><b><p>In<br>the light of credit polices of commercial Banks vis-à-vis regulatory<b></b></p><b><p><b></b></p><b><p>guidelines,<br>this research work has the objectives to evaluate or appraise various<br>techniques in the Administration of Bank lending from the point of disbursement<br>to the point of recovery at the same time identify causes of increased level of<br>bad debt profanation. The research has also identified reasons</p></b></b></b></b></div><b><b><b><div><p>xii</p><p>for<br>bad debts provisioning and recommend appropriate strategies that may be<br>appropriate in reducing debts write off.</p><p>The study also has objective<br>of ascertaining credit appraisals and the effect bad debt provisions on income<br>of Commercial Banks.</p><p><b>1.3 &nbsp; &nbsp; &nbsp;<br></b><b>HYPOTHESIS:</b></p><p><b></b></p><b><p><b>&nbsp;</b></p><p><b></b></p><b><p>1. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; <br>There is high correlation between lending and<br>Bad debt portfolio in Nigerian Commercial Banks.</p><p>2. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; <br>The credit policies of Banks and regulatory<br>guidelines if properly implemented can help reduce bad and doubtful portfolios<br>in Nigeria Banks.</p><p><b>1.4 &nbsp; &nbsp;<br></b><b>SIGNIFICANCE OF STUDY</b></p><p><b></b></p><b><p>The current spate of liquidity problem<br>vis-à-vis distress syndrome being experienced in the Banking industry is a<br>function of lending policies and poor credit management. This trend has given<br>rise to colossal losses of shareholders fund and depositors had earned savings.</p><p>Therefore this research work is apparently<br>going to be useful to top level managers who may find the recommendation and<br>suggested strategies useful in managing credit portfolios. In similar manner,<br>branch and credit managers will be guided on loan disbursement to ensure strict<br>adherence to lending guidelines and economic analysis of environment.</p><p>Banks shareholders would be<br>able to acquaint themselves on the adverse effect of bad debts hitherto covered<br>by management of their respective Banks.</p></b></b></b></div><b><b><b><div><p>xiii</p><p>Again students of Finance will find this piece of academic<br>work useful in their academic pursuits.</p><p><b>1.5 &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<br></b><b>SCOPE OF STUDY</b></p><p><b></b></p><b><p>The research work limit itself to one<br>case-study i.e FIRST BANK PLC. The investigation was conducted at Branch level<br>and annual reports material made available to the researcher.</p><p>The research focused on lending process before<br>and after disbursement up till final repayments with emphasis on effects,<br>causes and remedies of Bad Debt.</p><p>The assumption of this research include<br>the following</p><p>(i) &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<br>That all Commercial Bank grant facilities to<br>worthy clients with high expectation of 100% repayments of principal plus<br>interests</p><p>(ii) &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; <br>That all Commercial Banks in Nigeria are<br>governed by same operational guidelines offered and professional conduct as<br>issued by Central Bank of Nigeria in addition to their internal policies</p><p>The study is limited to<br>facility with repayment tenor of between 1 – 5 years duration.</p><p><b>1.6 &nbsp; &nbsp; &nbsp;<br></b><b>DEFINITION OF TERMS</b></p><p><b></b></p><b><p>In order to have a common knowledge and understanding<br>between Research work and the meaning transmitted to its targeted<br>beneficiaries, it beholds that a clear and unambiguous definition of words<br>often used in the study be given. Although the words may have numerous<br>meanings, the one given</p></b></b></div><b><b><div><p>xiv</p><p>herein should be regarded<br>as those referred to their usage in this research work.</p><p>Some of the “words” are<br>defined as follows.</p><p>i) &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; <br><b>LENDING</b>: A process by which a<br>Bank customer is founds for specifiedpurpose and specified period of<br>time with a promise to repay the amount borrowed and applicable interest.</p><p>ii) &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<br><b>CREDIT</b>: This involves giving<br>(receiving) goods or purchasing powernow in return for a promise to<br>receive or re-pay the goods or purchasing power later. It is the sale of goods,<br>services or money claims in the present in exchange for promise to pay (usually<br>money) in the future. It includes a power to to repay both principal and<br>interest instalmentally or in lump – sum in the future. BAD AND DOUBTFUL DEBT.<br>This may be defined as a loan or debt, which has become irrecoverable at date<br>of maturity. A loan may be termed bad or doubtful on event of borrowers failure<br>to repay the loans in accordance with terms and conditions of the agreement.</p><p>iii) &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<br><b>ANTICIPATORY DEFAULT</b>: On<br>the other hand recognizes thehappening of certain events which are ipso<br>factor conclusive evidence of default whether or not the loan or the interest<br>has fallen due”</p><p>(Banking<br>digest and Finance Vol. 5).</p><p>iv) &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; <br><b>FINANCIAL INTERMEDIATION</b>: This<br>is defined as financialtransactions, which bring savings surplus units<br>together with savings deficit units so that savings can be redistributed into<br>their most productive uses.</p></div><p>xv</p><p>v) &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; <br>SECURITIES: This may be defined as something<br>that provides safety, freedom, from danger or anxiety, something valuable for<br>example a life insurance policy given as pledge for the repayment of a loan or<br>fulfillment of a promise or undertaking.</p><p>vi) &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;<br><b>COLLATERAL SECURITY</b>: This<br>is any security deposited by a thirdparty to secure the indebtedness of<br>the customer with the advantage that in the event of bankeupty or liquidation<br>of the borrower, the value of such securities may be ignored in the proof of<br>dividend against the fail estate.</p></b></b></b></b></b></b></b></b></b></b></b> <br><p></p>