CREDIT MANAGEMENT AND ISSUES OF BAD DEBTS IN COMMERCIAL BANKS IN NIGERIA
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2.1 THEORETICAL FRAME WORK
The need and criteria for lending have been extensively discussed in the literature review.
U.B.S Dictionary of Banking and finance(1981) defined bank credit as the ability to borrow money on the promise of future repayment.The prudential guidelines(1990) succintly convey a more comprehensive definition of credit,it defines credit facility as the aggregate of all loans,advances,overdrafts,commercial papers,bankers acceptances,bill discounted,leases, guarantees and other loss contingencies connected with a bank´s credit risks.Also,the definition of credit proposed by the CBN Monetary policy circular(1992) agrees with the view above.Generally,we could conclude that credit includes all commitments by a bank that has risk exposure and that may result in financial loss to the bank.Mandel (1974) described credit simply as the right of a lender to receive money in the future in return for his obligation to transfer the use of funds to another party in the interim. The facility is as old as man, though in the primitive society it was known as “mutual aid”, because it was based on ancient customer of ensuring substance of all members of the community. Credit therefore arises out of the need to bridge the gap between the surplus and deficit economic units such that the highest level of satisfactory function is performed by the financial institutions notable among which are the Money-deposit banks.
In agreeing with this view, Corley (1970) and Adeniyi (1985) stated that credit is a crucial factor in growth process of any economy and that by lending banks provide a valuable services to the community as they serve to channel money from those who have idle fund to those who put the money in to constructive use.
Furthermore, Acher and O.Ambrose opined that Money-Deposit banks are in business to make loans. They however, added that the loan should work out in such a way that it will not seriously endanger the loan portfolio and solvency of the bank . This view that appreciates that though some dangers may arise , lending is, and should be a major activity of Money-deposit banks. The techniques and complexities of lending have been changing with growth in the society.
Perhaps that is why Mather (1955) describes banking as an art as well as a science. He went further to say that in addition to the wealth of technical and legal knowledge, a bank manager should develop the aptitudes to assess every request for an advance according to innumerable factor pertaining to the political borrower. He then identified three basic principles that should guide all bank lending viz, safety ,profitability and suitability. In addition to the principle enunciated by matter, other important guiding factors include the character and integrity, management accounting and technical skill of the borrower as well as his capacity for hard work and his experience in the particular field for which the finance is required and the possibility of the proposed investment generally sufficient profits. To ensure repayment of the advance.
The importance of these traditional cannons of lending not withstanding ,Pitcher (1970) criticized undue radiance emphasis on them by the lending banker. He argued that the character of the borrower must be a prime factor in any lending decision. He also said that the integrity of the borrower must be undoubted especially where the security is inadequate to cover the maximum amount to be advanced. He however, wondered whether honesty is simply enough to ensure the success of an enterprise,in this difficult demanding conditions of our time. The answer is obviously “No” for instance all the integrity in the world will be little helpful to the managers of a company that are rapidly sinking into oblivion perhaps,because they did not adopt their products to meet the needs of a changing market or take appropriate corrective action to counter a disproportionate risk in over head costs and fall in trade. Therefore we could not but agree with him(pitcher) when he advocated that the banker should also consider the capital and capability of the customer and also enlist the aid of management accounting and other newer technique of credit analysis to improve their lending decision.
Bad debts are emotive words of bankers because they present losses to the banks. However,for the purpose of this study,there are various reasons for the occurrence of bad debt in money-deposit banks.Experience of bad debt has its impact on the banking operations.
CAUSES OF BAD DEBT
The causes of bad debt could be based on four main classified causative agents.They are as follows´´
- Borrowers or customers
- Nature related factors
BORROWERS OR CUSTOMER
i. Ignorance: Customers are ignorant of the fact that bank like other commerical ventures, are out to make profit by selling their products(loan) instead,they understood it to be a place where government and other well-to-do people store their money.Consequently,they regard amount borrowed to be`` National cake´´rather than as an article purchased which must be paid for.On the part of our elite in white,they regard money borrowed as part of their gratuity which should not be paid.Furthermore, it is the improper evaluation of projects for meeting borrowers needs.
ii. some customers because of inadequate preparation or technicalities inherent in the purpose for which the loan is taken,do not properly assess their loan requirements and as a result,loans approved fall short of actual needs.Consequently,the customer cannot operate on a level profitable enough to enable repayment occasioning at time in bad debt on a serious note.
- Some customers or borrowers over-invest the loans approved on infrastrures to the detriment of actual purpose.This creates a situation where little or none would remain to other factors thereby occasioning bad debts.
BANKS: This concerns efficient disbursement and amortization schedule by banks.This relates to:
1) Poor evaluation of customer: the first point which readily comes to mind for the bad debts is poor before giving out loan to them.The pre-requisite for giving out loan to the customer is the consideration of the following:
CHARACTER: The likelihood that a customer will try to honour his obligation.
CAPACITY: The subjective appraisal of the customer´s ability to pay.
CAPITAL: The general position of the customer.
COLLATERAL: Assets that customers may offer as security to obtain credit in case of bad debt.
- Improper evaluation of profits by banks,a situation whereby funds become
inadequate for projects.This affects the loans resulting to bad debts.
Political instability contributes indirectly to bad debts in banking industry by the government refusing to pay contractors in some projects awarded but there abandoned by a new government of many projects in an attempt to revamp our economy,incapacitate the contractors and affects repayment of the loan borrowed.
NATURE RELATED FACTOR:(NATURAL HAZARD)
Nature contributes in creating bad debt in our banking industry. Natural hazards include something like fire engulfing the factory where the loan is invented,in the case of agriculture,poor rainfall and pest may cause low harvest which will not give the farmer enough to repay the debt.
For these purpose the research shall appraise lending procedure and loan management of Union bank.
CONDITION: Impact on general or specific economic trend.
- High interest chargeable by banks,sometime occasioned a situation of bad debts because the interest increases the amount to be paid.
- Absence of forum by banks for enlightenment education of customers resulting to lack of procedure on report judgement for joint solution.
- Poor supervision of loan extended: loan diverted to a non-income yielding venture results to delay of payment or default totally.Therefore loan given should be traced to the extent of seeing where it is invested by the bank.
- Late and inconvenient disbursement on loans by banks either because of the risk factor inherent or due to inadequate staff or other bureaucratic and administrative delay. Convenient amortization schedule also contribute in credit management policy of the bank.The researcher shall proffer suggestions on his findings.The work is divded into five chapters.Chapter one contains the introduction,chapter two contains the literature review on the product topic discussing the history of Union bank as well as the management of loan and credit including the policy and procedure in Union bank of Nigeria plc,Research design and methodology are discussed in chapter three,Data analysis/discussion of findings and test hypothesis are contained in chapter four and chapter five comprise summary of findings,recommendation and conclusion.
Both loan complication and risk of loss are hardly divorced from the lending operations. Proportion of the total loans and advances made by the banker would usually become sticky. That is why even the best managed banks provide for bad and doubtful debts in their normal course of business. The best option for a banker wishing to avoid bad debts would not lead.
However, this is not so, since interest carried on lending constitute a great proportion of banks earnings. Agreeing that bad debts are emotive. Words to bankers , Dandy (1975) enumerates some factors that may cause bad and doubtful debts to arise. These factors include:
- Excessive lending or security values
- Bad management of borrowers bank account
- Incomplete knowledge of customers activities
- Bad judgment.
- Extraneous factors such as over trading, over- reliance on trade customers, optimistic balance sheet, misrepresentation and dishonesty of customers.