CHAPTER
ONE
1.1 BACKGROUND OF THE STUDY:
Virtually,
every business has a credit relationship with a financial institution,
especially banks. Some rely on periodic short term loans to finance temporary
working capital needs. Others primarily use long-term loans to finance capital
expenditure, new acquisitions or permanent increases in capital. Regardless of
the type of loan, all credit request mandate
a systematic analysis of the borrower‟s ability to repay as at when due.
Commercial
banks carry on ordinary banking business with the general public, changing cash
for bank deposits and bank deposits for cash,
transferring bank deposit from one
corporation to another, giving bank deposit in exchange of bills of exchange,
providing of trustees and executor‟s services, providing safe custody of
funds and valuables as well as foreign exchange remittance.
Though commercial banks differs from
country to country, their profit and banking motives are the same. Their
activities are of interest to their customers, workers (staff), and above all,
shareholders. The commercial objective of the bank is to maximize profit,
though other social and economic functions tends to deflect banks from profit
maximization.
The aims and objectives of commercial
banks have therefore paved way for their customers to make and obtain credits,
in form of loan of which the researcher is interested in.
Lending has become a vital function
on operation because of its direct effect and impact on economic growth and
business development.
In a market oriented economy, there
are two main participants that move the economic growth; these are the
suppliers of invisible funds and the users of the funds for productive
purposes. These two participants are spread widely in the economy and may not
have direct relationship with each other. For this, there is the need to have
an intermediary to link them up. The banking sector mobilize surplus funds from
small and big savers who have no immediate need for such funds. The users of
these funds are
the business entrepreneurs and
investors who have brilliant ideas on how to create additional wealth in the
economy but lack the necessary capital to execute their ideas. These groups of
people approach banks to obtain loan.
Subsequently, lending is a risky
venture which banks only engage on after a rigorous and satisfactory analysis
of the project for which lending is being made. The main preoccupation of banks
is extending loans to their customers. Thus, the formulation and implementation
of such lending policies are some of the important responsibilities of the
management of the bank. The lending policy of a bank must be specific on how
much loan will be made available to whom, what period and for what reason. For
this reason, lending policies should be well documented so that lending
officers will be able to know the areas of prohibition and the area of where
they can operate. Also, such policies should be subjected to periodic review to
make the banks keep abreast with the dynamic and innovation nature of the
economy as well as competing with other changing economic sector.
Therefore, the basic objectives of
credit analysis t=is to assess the risks involved in extending loans to bank
customers. In financial circle, risk typically refers to the volatility in
earnings. Lenders are particularly concerned with adverse fluctuation in net
income or cash flows, which
hinder the borrower‟s ability to service a loan. Some risks can be measured
with historical and projected financial data, while others
such as those
associated with
borrower‟s character and willingness to repay a loan are not
directly
measurable.
1.2 STATEMENT OF PROBLEMS:
Banks
in recent times has failed as a result of loan recovery problems. Loan is the
major source of bank profitability.
However,
in going about their lending activities, banks have their own objectives among
which are profitability, growth, safety, suitability and liquidity.
Loan,
when not recovered could adversely affect banks. It is easily granted than
recovered. It usually needs proficiency i.e. competency and expertise in the
recovery process. It sometimes become an uphill task to recover. When they are
not recovered, the impact is often disastrous to the bank. It can lead to
illiquidity, insolvency and even distress as the case may be.
There is therefore a need for
arriving at strategies for efficient loan recovery.
That is the peak of the problem.
1.3 OBJECTIVES OF THE STUDY
Having
known that lending objectives of a commercial bank is to provide growth,
profitability and liquidity, and its representing chunk of deposit as a source
of income to the bank, the cumulative effect of loan default will be a loss of
confidence in the banking system.
The researcher therefore aimed at:
1. Finding out the several problems facing loan recovery
2. The effects of loan default on commercial banks
3. The measures that will help to reduce the incidence of
loan default.
1.4
RESEARCH
QUESTION
1. What are the several problems faced during loan recovery?
2. What type of loan do commercial banks grant?
3. Who are the loan beneficiaries of commercial banks?
4. Are there measures to reduce the
limit of loan default?
5. What are the effects of loan defaults on commercial banks?
6. What are the sectorial allocation of commercial bank‟s loan?
7. What are measures that will help to reduce the incidence
of loan default?
1.5
RESEARCH
HYPOTHESIS
Ho – the measures taken by banks do not
reduce the incidence of loan default.
H1 The measures taken by banks to reduce the incidence of loan default
1.6
SCOPE OF
THE STUDY
The
research work is to analyze the problems of loan recovery on commercial banks
(First Bank Plc) in Ojo-Alaba, Ojo Local Government Area of Lagos State.
Due
to limited time and the level of this project work, the researcher decided to systematically
and meticulously narrow it down to a study that will cover two distinct areas
namely:
The
problem of loan recovery and how to control loan default.
The
researcher wants to avoid unnecessary details that are not concerned with the
problem of loan recovery in commercial banks.
The
study is limited to first bank branch in Ojo-Alaba, Lagos State.
1.7 SIGNIFICANCE OF THE STUDY
This
study is intended to analyze the problems of loan recovery in commercial banks
in Nigeria and their poor system of management of loan. The result of this
study will be immense important to some of us and even the bankers in
particular. Banks will become conscious in their loan disbursement. They have
to determine the kind o people that will benefit from the loan disbursement,
the type of loan to give the criteria to use in granting loan and the
procedures to be used for loan recovery.
1.8
DEFINITION
OF TERMS
In
the course of the study, the researcher makes use of some words that needs to
be defined so as to carry the reader along.
LOAN: This is the act of allowing a borrower to make a temporal
use of
funds at its disposal. It is also a more formal
arrangement by which a bank agree to lend an agreed amount to a customer
usually for a given period.
RISK: It is the measure of uncertainly inherent in any decision
making process.
PROFITABILITY: It is used as index for measuring
managerial performance. It means yielding or bringing profit or gain.
LIQUIDITY: This is the word that banks used to describe their ability
to satisfy demands for cash in exchange for deposits.
BANKING: It is an agency through which debts and credits are
converted and exchanged between owners.
BAD AND DOUBTFUL DEBT: Bad debts are those which are not recoverable,
though they are written off as loss. Doubtful debts are those of which the
recovery in full or part is uncertain.
CAPITAL: It is the equity value of the bank educated to the present
value of its future earnings.
1.9 LIMITATIONS OF THE STUDY:
In
the course of the study, the researcher was faced with several constraints. One
of the constraints was the short time period within which
the
research was to be completed. Another factor was shortage of cash which
prevented the researcher from traveling to source the data. Also, most of the
credit analysis criteria in commercial banks were not disclosed to offer the
necessary data required. Their frequent postponement of appointment coupled
with the fact that commercial banks in Nigeria are vast in population i.e.
First Bank Branches. The researcher could not get to all of them, therefore a
sample was taken to represent all.
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