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 in-consequence 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.
- Has
inadequate collateral security provision by borrowers caused bad debt in
Union bank of Nigeria plc?
- Does fund
diversion have any effect on bad debt of Union bank of Nigeria Plc?
- To what
extent has government intervention in lending policies of money deposit
bank influenced bad debt in Union
bank of Nigeria Plc?
- 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.
1.8 THE
LIMITATIONS OF THE STUDY
The limitations of this study
include some of unavoidable constraints and problems encountered in the
process.They are as follows:
i)
FINANCE: The problem of finance was not left out in the course of
research to this study. This type of study required adequate money and time to
enable the researcher visit the
necesssary places for collection of data.Insufficient fund hindered an
in-depth study of this research since it was financed from meager pocket money
of the researcher.
ii)
NON-AVAILABILITY OF RECORDS: This is one of the most important limiting
factors in the course of the study.This includes the problems of easily getting
the appropriate data due to bureaucracy which hinders the information flow in
the country.
iii)
NONCHALANT ATTITUDE OF BANK OFFICIALS: The reluctance of bank
officials to reveal information on the need for this study,for fear of breach
of duty of secrecy to customers exposure of banks administrative short-comings.
iv)
IGNORANCE OF RESPONDENT /BORROWERS: Most bank customers were semi-illiterates and most often it was very difficult to
collect adequate data required from
them.
v)
TIME: Since this study is one of the many courses offered by the
researcher,the researcher was constrained by time to carry out an indent research on the study.
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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