Analysis Of Credit Management Techniques In The Commercial Banks
(A Case Study Of First Bank Oceanic And Diamond Bank Plc)
Credit management is a critical aspect of the financial operations in commercial banks, encompassing a range of techniques aimed at assessing, monitoring, and controlling credit risk. Banks employ various tools and strategies to evaluate the creditworthiness of borrowers, including thorough financial analysis, credit scoring models, and collateral assessment. Additionally, effective credit management involves setting appropriate credit limits, monitoring borrower behavior, and implementing risk mitigation measures. To enhance the overall quality of the loan portfolio, banks often diversify their credit exposures across different sectors and types of borrowers. Regular reviews of credit policies and risk assessment frameworks are crucial for adapting to dynamic market conditions and ensuring the soundness of the bank’s lending activities. Successful credit management not only safeguards the financial health of the bank but also contributes to maintaining stability in the broader financial system.
The major purpose of this study was to determine the analysis of credit management techniques in the Nigerian banking system. The population of the study consisted of staff from the three selected banks in Imo State; the sample for the study was 45 staff out of 60, which was drawn using simple random sampling. Two hypothesis were formulated which guided the study. A 19 item questionnaire was developed validated and tested for its reliability; chi-square was used to test the hypothesis at 0.05 level of significance. The major findings are Goodwill is the major factor that influence the banks Mode of advancing loans to customers, Poor credit analysis result to bad debts, Poor supervision of credit officers causes bad debts. The findings had led us to conclude that success in accessing credit mismanagement and the causes lies in the ability of the bank to fashion out workable credit management techniques and following it to the core, the implementation of these procedures.
Title page
Approval page
Dedications
Acknowledgement
Abstract
Table of contents
CHAPTER ONE
1.0 Introduction
1.1 General overview of the subject matter 1
1.2 Statement of the problem 4
1.3 Purpose of the Study 5
1.4 Significance of the study 8
1.5 Statement of hypothesis 8
1.6 Scope of stuffy – 8
1.7 Limitation of study- 9
1.8 Definition of terms 10
CHAPTER TWO
Review of related literature
2.1 Background to credit Administration by commercial banks in Nigeria 11
2.2 Principle of good credit 14
2.3 Credit facilities available to bank customers 17
2.4 Classification of credit according to performance 21
2.5 Credit management techniques 25
2.6 Causes of poor quality credit 33
2.7 Credit considerations for different classes 35
CHAPTER THREE
3.0 Research methodology 43
3.1 methods of data collection 43
3.2 Data sources 43
3.3 Sampling plan 44
3.4 Tools used in analysis of research data 46
3.5 Features of the instruments used 47
3.6 Validity of response /reliability of data 48
CHAPTER FOUR
4.0 Presentation & Analysis of data 49
4.1 Presentation of data 50
4.2 Analysis of data 56
4.3 Hypothesis testing 62
4.4 Summary 69
CHAPTER FIVE
5.0 Summary, Conclusion and recommendation 71
5.1 Summary of findings 71
5.2 Conclusions 72
5.3 Recommendation 73
Bibliography 76
Appendix I 79
Appendix II
INTRODUCTION
1.1 GENERAL OVERVIEW OF THE STUDY
The provision of banking services to the economy of a country such as Nigeria has remained a life wire through which the economy grows. The provision of these services requires every attention because of its importance growth, the bank provides loans and advances which could either be long-term or short-time. The inevitability of these services rendered by the banks in economic growth explains why the government has been so keen in stipulating aggregate ceiling on credit creation as well as sectorial allocations in the government credit guidelines contained in the monetary circulars. The banks and other financial institutions are therefore, required to comply with these specifications during any fiscal year.
The type of bank and its deposit base in line with the credit guideline determine the credit creation ability of that bank.
While answering to this clarion call of financing economic growth of the nations, banks also have to guide against incidence of loan defaults as this risks their own business position as they read mainly with depositors funds, which could be demanded any time by these depositors.
Therefore, banks are required to be prudent in credit extension to avoid or at least minimize the incidence of loan default, which has caused eventual collapse of many banks in recent time.
In view of the obvious consequences a bank could face if so engulfed in loan losses and band debts, this work poised to research on the management of bank loans to minimize the incident of substandard, doubtful and lost loans in Nigerian banks.
Meanwhile, classification is made if bank loans according to performance. These classifications include: the active, substandard, doubtful and lost loans. The active loans are those ones which were purely made with full consideration of the cannons of good lending and have no shown and sign of good default in terms of repayment.
The substandard loans are those made with some irregularities or duly expired but not yet renewed and indicates signs of default. The doubtful loans are those loan whose accounts are kept dormant for a long period of time. The lost loans are those that have defiled all attempts of recovery and thus, written off the banks assets.
Loan and advance constitute the major sources of operating income of banks as they act the most profitable assets for employment of bank funds. In as much as banks desire income from loans and advances through interests accruable to these facilities, they also run the risk of losing both the principal and interest if the credit administration procedure is weak.
Banks being well aware that some of their loans and advances must always appears bad in spite of qualitative and quantitative techniques applied, set aside huge amount of money as provisions for lost and doubtful loans. The existence of substandard loans despite all these measures has found its roots in the character of the borrowers and the experience of credit officers.
Having gone this far, it is discernible that the issue is not fashioning a system whereby incidence of loan default can entirely be stopped. The crux of the matter is to fashion a system from the onset whereby the incidence of substandard, doubtful and loans losses can be cushioned to a bare minimum.
1.2 STATEMENT OF PROBLEM
The peculiar nature of services rendered to the economy by the banking industry is the basis of its problems. It mobilizes funds from surplus units and makes them available to the deficit units for productive ventures. Thus, management of credit is the most sensitive and delicate aspect of the banking industry and are faced with problems such as:
– Bad and doubtful debt, which are caused by poor credit management and other exogenous factors
– Poor credit and loan supervision by credit officials.
– Unqualified credit officers who would not abreast the tenets of good lending
– The sharp practices of some unscrupulous business men who are seeking the credits also constitute a major problem for banks
– Another problems facing banks is the acceptance of irregular worthless and unperfected securities as a cushion for bank lending.
1.3 OBJECTIVES OF STUDY
The general purpose of this study is to make an evaluation of banks credit management techniques and loan administration these include loan repayment and interest charge
– Drawdown: Withdrawal of money from an account.
– Dud cheques; Non performance cheques
– Doubtful debts: loan with all the weaknesses identified, it is characterized with problems in collections
– Letter of offer: Letter of notification of approval of loan request sent to a customer by a bank specifying the condition of offer.
– Lost Loans: Loan declare un-collectible and as such classified as lost loans.
– Memorandum of association: Brief outline of terms of a transaction or operation of a company.
– Perfection: this is putting credentials of collaterals
– Portfolios; list of investment
– Six-cees of credit: Capital, character, capacity, collateral, confidence and consideration
– Substandard loans: Loans with well defined problems ad weaknesses which could affect the ability of a borrower to repay.
With respect to the incidence of substandard and lost loans in Nigerian banks. We shall be looking at how banks carry out credit administration and management so as to:
– Determine to actual credit administration
– Determine whether banks actually sustain losses on loans and advances
– Established debt (lost loans) recovery of banks
– Identify whether poor credit analysis result to bad and doubtful debts
– Examine whether the use of credit analysis is significant for making good loans
1.4 SIGNFICANCE OF THE STUDY
This research work would make useful contributions on the efficient credit management in Nigerian Banks. This study would recommend possible solutions on how banks high incidence of bank debts, which had led to the failure, and distress of many banks may be solved. The study would also identify problems credit management and show ways of lubricating the operative machinery of credit control and make it more efficient
1.5 STATEMENT OF HYPOTHESIS
1. HA1: Poor credit analysis result in bad and doubtful debts.
2. HA2: The use of credit analysis is significant for making good loan.
1.6 SCOPE OF THE STUDY
This research study is limited to three selected banks in Owerri; it tends to find out the effectiveness of credit
– Management techniques in Nigerian banks in line with active loans, sub-standard loans and lost loan
This study tends to cover five years time frame of the banks, elected (2001-2006). These banks are:
– First banks Plc
– Oceanic bank plc and Diamond bank plc
1.7 LIMITATION OF THE STUDY
The researcher worked with some constraints worthy to be mentioned.
This research work tends to have taken the researcher to various parts of the country but was limited to Owerri area due to shortage of finance.
Time constraints was another big problems encountered by the researcher; there was limited time, which did not give much room for the researcher to carryout the research as it ought to be.
Dearth f standard information from the banks used as a case study and lack of research facilities was another challenge encountered by the researcher.
1.8 DEFINITION OF TERMS
– Active loans: Loans performing according to the terms of credit extension
– Cannons of good lending: Conditions which are strictly ensured before loans are granted.
– Bad debts: Also doubtful or lost loans
– Conditions: These are conditions to be met by a borrower as he enjoys withdrawals from his loan account.
SHARE PROJECT MATERIALS ON:
Analysis Of Credit Management Techniques In The Commercial Banks:
Credit management is a critical function for commercial banks, as it directly impacts their profitability, stability, and risk exposure. Effective credit management techniques are essential for banks to assess, monitor, and mitigate credit risk. Below is an analysis of some key credit management techniques employed by commercial banks:
- Credit Scoring Models: Banks use credit scoring models to evaluate the creditworthiness of potential borrowers. These models analyze various factors such as credit history, income, employment status, and outstanding debt to assign a credit score. The credit score helps in making quick and consistent lending decisions.
- Credit Policy: Commercial banks establish clear credit policies that define the lending criteria, risk tolerance, and procedures for approving and managing credit. A well-defined credit policy ensures consistency and compliance with regulatory requirements.
- Credit Underwriting: The underwriting process involves a thorough assessment of a borrower’s financial situation, including their income, assets, liabilities, and repayment capacity. Banks also consider industry and economic conditions when underwriting loans.
- Credit Monitoring: Once a loan is approved, banks employ credit monitoring techniques to track the borrower’s financial performance. This includes regular reviews of financial statements, credit reports, and other relevant data to identify early warning signs of potential default.
- Loan Covenants: Banks often include loan covenants in credit agreements to protect their interests. These covenants may require the borrower to maintain certain financial ratios or take specific actions to mitigate risk.
- Collateral Management: Banks may require collateral, such as real estate or assets, to secure loans. Effective collateral management ensures that the bank can recover its funds if the borrower defaults. Regular valuation and monitoring of collateral are essential.
- Diversification: Banks manage credit risk by diversifying their loan portfolios across different industries, geographic regions, and types of borrowers. This reduces the impact of economic downturns on their overall credit risk exposure.
- Stress Testing: Stress testing involves assessing how a bank’s loan portfolio would perform under adverse economic scenarios. It helps banks identify potential vulnerabilities and take proactive measures to mitigate risk.
- Credit Risk Models: Banks use sophisticated credit risk models to estimate the probability of default, loss given default, and exposure at default for individual loans and the entire portfolio. These models aid in setting aside appropriate provisions for potential losses.
- Credit Risk Mitigation Techniques: Banks often use credit risk mitigation techniques such as credit insurance, guarantees, and derivatives to transfer or reduce credit risk.
- Credit Review Committees: Many banks have credit review committees responsible for reviewing and approving credit exposures beyond a certain threshold. This adds an additional layer of oversight to the credit approval process.
- Regulatory Compliance: Banks must adhere to regulatory requirements related to credit risk management. Compliance with regulations such as Basel III ensures that banks maintain sufficient capital reserves to cover potential credit losses.
- Credit Education and Training: Continuous training and education of bank staff are crucial to ensure that they are knowledgeable about credit risk and the bank’s credit policies and procedures.
- Technological Solutions: Banks are increasingly adopting advanced technological solutions, including artificial intelligence and machine learning, to enhance credit risk assessment, fraud detection, and monitoring capabilities.
In conclusion, effective credit management is essential for the success and stability of commercial banks. These techniques help banks assess and manage credit risk while ensuring they meet regulatory requirements and make prudent lending decisions. The evolving landscape of finance and technology will continue to shape and improve credit management techniques in the banking industry.