AN ASSESSMENT OF CREDIT MANAGEMENT IN NIGERIA COMMERCIAL BANKS (A CASE STUDY OF UNION BANK OF NIGERIA PLC)
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AN ASSESSMENT OF CREDIT MANAGEMENT IN NIGERIA COMMERCIAL BANKS
(A CASE STUDY OF UNION BANK OF NIGERIA PLC)
ABSTRACT
The purpose of this research is to examine the impact
of credit management on commercial banks. The introduction of the
prudential guideline in banking industry, the volume and value of loans and
advances classified into non-performing account has continued to increase in
bank lending. Obviously this has adverse effect on banks since it affects
their cash flow and impair profitability. Most loans and advances go bad
because of the inadequacy in credit management and recovery procedure of banks.
Appraisal of lending vis a vis the credit management of banks and the impact of
the application of prudential guidelines on credit, form the major objective of
this study. Union bank of Nigeria Plc Okpara Avenue Enugu was used as a
case study with a view to highlight the effectiveness, the adequacy or
otherwise of the credit management policy of Nigerian commercial banks with a
view to finding the causes and consequences of non-performing loans and
advances. The consequences causes upon this, the researcher employed a
population size of 500 Staff Bank Plc, Okpara Avenue, Enugu made up of the
management accounting and administrating staff of the bank. The
population sample randoming selected is 119 staff of the bank. The
researcher also employed simple percentage frequency statistical to analysis of
the data collected. The researcher finding show that there exist policy
frame work fork for credit management in Commercial Bank in Nigeria, the
problem however has been problem execution and fellow up. It is the recommendation
of the researcher that lip services should not be the practices in credit
management of the Commercial Bank should ensure diligent and prudent credit
management in the Banking Industry.
TABLE OF
CONTENTS
CHAPTER 1; INTRODUCTION
Background of the Study
Statement of the
Problem
Purpose of the Study
Scope of the
Study
Significance of the study
Hypothesis
Definition of Terms
CHAPTER 2: REVIEW OF RELATED
LITERATURE
The role of commercial Banks in Nigeria Economy
Causes of Non-performing accounts/ credits
Techniques though which banks can minimize
The purpose and importance of commercial
banks in Nigeria
Historical Background of Union
CHAPTER 3: RESEARCH
METHODOLOGY
The Design of the Study
Population of the
Study
Sample and Sampling Techniques
Instrument for Data
Collection
Validity Reliability of Instrument
Method of Data
Collection
Method of Data
Analysis
CHAPTER
4: DATA PRESENTATION AND ANALYSIS
CHAPTER 5: DISCUSSION OF
RESULTS
Discussion of Findings
Recommendation
Limitation of Study
Suggestion/ Area for further studies
Conclusion
Appendix
I
Appendix II
CHAPTER ONE
INTRODUCTION
Background of
the Study
Banking is
essentially an international business especially now that domestic financial
markets in many countries are being internationalized. In modern economy
there is a distinction between the surplus and economic units and the deficit
economic units. Consequently, there is a separation of savings and
investment mechanism. This has necessitated the existence of financial
institutions whose job includes the transfer of funds from savers to
investors. One of such institutions is the commercial banks.
The intermediating roles of commercial banks places them in a position of
‘Trustees’ of the savings of surplus economic development. The techniques
employed by bankers in this intermediating functions should provide them
perfect knowledge of the out-come of a lending such that funds will be
allocated to investors in which the probability of full repayment is unity.
However, in
practice, the reverse has always been the case. Almost all lending
decisions are made under condition of uncertainty, the risk and uncertainty
associated with lending decision situation are so great that the concepts of
risk and risk analysis need to e employed by lending bankers in order to
facilitate sound decision making and judgement.
This implies that
all risks should be objectively assessed. Unfortunately, many Commercial
Banks have based their lending decision on subjective principles. In most
cased emphasis is placed more on security offered for the loan rather than
paying attention to the proper monitoring of the loans and the insisten that
recovery potential of credit should be from the projected cash flow.
This has led to
the increasing cases of non-performing advances. The structural
adjustment programme (SAP) introduced in 1980 had led the adoption of a wide
range of economic liberalization and de-regulation measures which in turn had
resulted in the emergence of more banks and other financial intermediaries.
Consequently, it
became imparable to strengthen and extend the powers of the central Bank of
Nigeria to cover these new institutions in order to enhance effectiveness of
monetary policy and the regulation and supervision of banks and non-banks
financial institutions.
Perhaps, it is
necessary to point out the deregulation, which does not mean the absence of
regulations. Banking industry is generally considered to be more
regulated than any other sector of the economy. This is largely due to
the crucial intermediation played by the operations in the industry. The
various deregulation measures brought about benefits, opportunities and
problems. The industry is now more competitive and this has to a large
extent increased concern about abuses and violation within the industry.
It is in the
light of the foregoing that the need for prudential guidelines and the recent
review of the banking decree should be seen.
The prudential
guidelines were issued by the banking supervision department (BSD) of the
Central Bank of Nigeria (CBN) on 7th November 1990 through circular
letter No BSD/90/28/vol.1/11 to all licensed banks and their auditors. It
is aimed at ensuring a stable, safe and sound banking system. It is meant
to serve as a guide to bank as follows.
a.
Ensure a more prudent approach in their credit portfolio classification,
provisioning for non-performing facilities, credit portfolio disclosure and
interest accrued on non-performing assets.
b.
Ensure uniformity of their approach in (a) above
c.
Ensure the reliability of published accounting information and operating
results.
Until recently, users of financial statement of
licensed banks have had cause to express concern over the quality of such
statements in view of the varied and in most cases inconsistent practices
adopted by banks. Specifically a number of persons felt concerned that
banks earnings were being overstated as interest was being taken on non
performing assets. Also comparisons of banks performances became difficult.
The prudential guidelines were therefore issued to protect the interest of
depositors thereby promoting public confidence in the banking system.
On the other hand, the increasing trend of provisions
for non- performing credits in most commercial banks is a major source of
concern not only to management but also to the shareholders who are becoming
more aware of the dangers posed by these non- performing credits
facilities. These destroy part of the earnings assets of the bank such as
loan and advances, which are classified as the main sources of earnings, and
also determines the liquidity and solvency of banks. In other words,
non-performing credits generate two major problems i.e, non-profitability and
liquidity problems. A commercial bank like any other business enterprise
has to earn sufficient income to meet its operating costs and to have adequate
returns on its investment.
Having regard to these problems a prudent banker
should be cautions to lend and manage loan and advances effectively and efficiently
with a view to minimise the problems caused by classified credits.
In this study we shall survey the possibility of
reducing the occurrence of non-performing credits through improved standard of
lending and effective controls. For the purpose of the commercial banks
being mostly affected, we shall appraise the lending procedure and credit
management of union bank of Nigeria Plc and assess the effectiveness or
otherwise of the existing credit management policy of the bank. We shall
suggest on how to improve any inadequacy highlighted by out findings.
C.B.N guideline (1990).
Statement of the Problem
Since the introduction of the prudential guidelines in
banking industry, the volume and value of loans advances classified into
non-performing account has continued to increase. The increase has
remained even at faster rate than the increase in bank lending.
Obviously, this has adverse affected on banks since it
affects their cash flow and impairs profitability. It is believed that
most loans and advances go bad because of the inadequacy in credit management
and recovery procedure of banks.
Purpose of the Study
The main purpose
of this study is to examine the appraisal of lending vis-a-viz the credit
management of bank.
Scope of the Study
The scope of this
study covers only the appraisal of the Nigerian commercial banks credit
management. Because, it is difficult for the researcher to cover all the
banks in the study, the study is therefore restricted to Union Bank Okpara
Avenue Enugu.
Significance of Study
This study indicates that whenever a credit is granted
that there is need to urgently appreciate the point when such credits begin to
look doubtful. This will enable the bank to at least obtain full
repayment including accrued interest at worst to reduce the eventual occurrence
of capital loss. Since provisions for non-performing credits are changes
against profit, it is appropriate that we review the methods proportions and
margins of lending to non-performing facilities. Hence the significance
of this study to bankers, besides bankers will be able to appreciate an
effective appraisal of their lending and control mechanism, especially 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 non-performing
advances is reduced banks will be left with more profits to enable them make
the expected contribution to the development of the economy.
Hypothesis
Ho1: The principal
objective of bank lending is not to generate revenue.
Hi1: The principal
objective of bank lending is to generate revenue.
Ho2: The loan deposit ratio
does not affect the liquidity position of a commercial bank.
Hi2: The loan-deposit
ratio affects the liquidity position of a commercial bank.
Ho3: Classified debts have an
relationship with the security obtained for the loan granted.
Hi3: Classified debt have
relationship with the security obtained for the loan granted.
Ho4: Non-performing credit do
not depend on loan recovery processes.
Hi4: Non performing
credit depends on loan recovery processes.
Definition of Terms
Profitability: A tendency for the bank to have excess of
revenue over expenditure resulting in profits.
Liquidity: This refers to the ability of the bank to meet its financial
obligations to the customer, or it can mean the case with which banks can raise
funds to meet with depends demands.
Loan-Deposit Ratio: This refers to the amount
Bank “Run”: A situation where the banking public withdraws their deposits in
large numbers from a bank feared to be going distress.
NDIC: Nigerian Deposit insurance Company: An institution established to provide insurance
services for bank deposits.
Performing Credits:- A credit facility is deemed to be performing if payments of both
principal and interests are up to date in accordance with the agreed term.
Non-Performing Credits:- A credit facility should be deemed as non-performing when any of
the following conditions exists.
i.
Interest or principal is due are unpaid for 90 days or more.
ii.
Interest payments equal to 90 days interest or more have been capitalized,
rescheduled or rolled over into a new loan.
Standard advances
Non performing
credit/ advances are classified into substandard, doubtful and lost
credits. Substandard advances are the ones whose principal and or
interest remain outstanding for more than 90 days but less than 180 days.
Doubtful Advances:- The principal or interests remain outstanding for at least 180
days but less then 360 days.
Lost Advances:- Lost advances are the ones whose principal and or interest remain
outstanding for 350 days or more CBN prudential guideline (1990).
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