CREDIT MANAGEMENT AND THE INCIDENCE OF BAD DEBT IN NIGERIA MONEY-DEPOSIT BANKS. (A CASE STUDY OF UNION BANK OF NIGERIA PLC)
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CREDIT MANAGEMENT AND THE INCIDENCE OF BAD DEBT IN NIGERIA MONEY-DEPOSIT BANKS.
(A CASE STUDY OF UNION BANK OF NIGERIA PLC)
ABSTRACT
This research work was undertaken to assess the credit management and
the incidence of Bad debts in Money-Deposit Banks.This
work was intended to achieve the following objectives: to appraise and
determine the lending procedure of banks, to highlight the extent to which
improper project evaluation influence bad debt of Money-Deposit Banks.
Relevant data were collected from both primary and secondary sources.
Questionnaire was the main primary data collected instrument employed while
data from various relevant publications constituted the sources of secondary
data. Upon the analysis of data, the following conclusions were drawn; that
sound lending requires a clear-well articulated and easy accessible policy
document which spells out the philosophy of lending. On the basis of the above
findings, it was recommended that banks should ensure that loans given out to
customers should be backed by adequate collateral security. Finally, it is the
opinion of the researcher that the management of the Money-Deposit Banks should
prevent the incidence of bad debts in Nigerian Banks.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
1.1 Background of the
study
1.2 Statement of the
problems
1.3 Purpose̸ Objective of the
study
1.4 Research
Questions
1.5 Research
Hypothesis
1.6 Significant of the
study
1.7 Scope of the
study
1.8 Limitations of the
Study
1.9 Definition of
terms
CHAPTER TWO: LITERATURE REVIEW
2.1 Theoretical
Framework
2.2 Government control over
credits
2.3 Credit Administration in Union
bank of Nigeria
plc
2.4 Lending and Credit
Analysis
CHAPTER THREE: RESEARCH DESIGN AND METHODOLOGY
3.1 Research
Methodology
3.2 Research
Design
3.3 Area of
Study
3.4 Population for the
Study
3.5 Sample Size
Used
3.6 Instrument For Data
Collection
3.7 Validation of the
instrument
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Data presentation and summary
of
findings
4.2 Provision and Analysis of Data
Question
4.3 Test of
Hypothesis
CHAPTER FIVE: SUMMARY OF FINDINGS,
RECOMMENDATIONS,CONCLUSION.
5.1 Summary of
Findings
5.2
Recommendations
5.3 Conclusion
Appendix
Bibliography
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 inconsequence a separation of
the savings investment mechanism.This has necessitated the existence of
financial institution whose jobs include the transfer of funds from
savers to investors.one of such institution is the money deposits banks,the
intermediating roles of the money-deposit banks places them in a position of
``trustees´´ of the saving of the widely dispersed surplus economic units
as well as the determinant of the rate and shape of the economic
development.The techniques employed by bankers in this intermediary function
should provide them with perfect knowledge of the outcomes of lending
such that funds will be allocated to investments in which the
probability of full payment is certain.However,in practise no such tool
can be found in the decision of the lending banker.Virtually all lending
decisions are made under creditors on uncertainty.The risk and uncertainty associated
with lending decision, situation are so great that the concepts of risk and
risk analysis need to be employed by lending bankers in order to
facilitate sound decision-making and judgement.This statement implies that if
risks are to be objectively assessed,lending decisions by the money-deposit
banks should be based less on quantitative data and more on principles too
subjective to provide sound and unbiased judgement.Furthermore,the banks depend
heavily on historical information as a basis for decision making.
Apparently aware of the
inadequacies of his decisions base,the lending banker has often sought solace
in tangible and marketable assets as security giving the impression that
lending against such securities is an insurance against bad debts.this makes
the banker complacent with his loan portfolio.The increasing trend of
provisions for bad and doubtful debts in most money-deposit 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 debts.Bad debts destroy
part of the earning assets of banks such as loans and advances
which have been described as the main source of earning and also
determines the liquidity and solvency which generate two major
problems, That is profitability and liquidity, has to earn sufficient
income to meet its operating costs and to have adequate return on its
investments.
1.2 STATEMENT OF THE PROBLEMS
The problem for this study is
to appraise the lending and credit management policies of a typical
Money-deposit bank(the Union bank of Nigeria Plc) with a view of finding
the causes,consequences 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 efforts by bank management, committee of chief
inspectors and the bankers committee on the other hand,the wave of bad debts in
banks 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 civilian
government.These contractors borrowed to execute the project awarded to them
but could not repay the loan,due to government action on reramping 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 have always borne the burden
alone,but this may not continue in future as the 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 the risk with a realistic reward which
they are clearly failing to achieve at present.
1.3
PURPOSE/OBJECTIVE 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 borrowers 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 banks 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
neccessary to formulate some research question which will enable the
researcher formulate statistical tables for testing hypothesis.
1. Has inadequate collateral security provision by
borrowers caused bad debt in Union bank of Nigeria 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
Nigeria Plc?
4. To what extent does improper project evaluation
influenced bad debt of Union bank of Nigeria plc?
1.5 RESEARCH HYPOTHESIS
The following hypothesis were drawn 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 increases the incidence of bad debt in Union Bank of Nigeria.
2. 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.
3. Ho:
Government intervention in lending policies of money-deposit
banks
has no influence on Union Bank of Nigeria Plc bad debt.
Hi: Government intervention in lending policies of
money-deposit
banks have direct influence on Union Bank of Nigeria Plc,bad debt.
4. 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.
1.6 SIGNIFICANCE 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 banks 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 techique of lending,the methods of securing such lending and the
pitfalls 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,it 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.
1.7 THE SCOPE 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.
1.9
DEFINITION OF TERMS
DEBT: This is what one owes to
another person.
LOAN: A 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 that
what he has in the account.
DEFAULT: This means
failure to pay one´s debt for credit extended which has fallen due.
HYPOTHESIS: This is a
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.
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