Appraisal On The Impact Of Effective Credit Management On The Profitability Of Commercial Banks
(A Case Study Of Intercontinental Bank Plc And First Bank Of Nigeria Plc)
Effective credit management plays a pivotal role in shaping the profitability of commercial banks by mitigating risks and enhancing overall financial health. Through meticulous assessment of borrowers’ creditworthiness, monitoring of loan portfolios, and proactive measures to address potential defaults, banks can minimize credit losses and maintain a sound asset quality. Efficient credit management also contributes to improved liquidity and capital adequacy, fostering a stable financial environment. Moreover, by optimizing interest rate spreads and minimizing non-performing assets, banks can enhance their net interest income, ultimately bolstering profitability. Additionally, a robust credit management system enables banks to attract quality borrowers, build a positive reputation, and cultivate long-term customer relationships, thereby supporting sustainable growth and financial success.
This study is focused on the impact of effective credit management on the profitability of commercial banks. The study is divided into five chapters. Chapter one deals with introduction, general over view of the study, statement of problems, objectives of the study, limitation and definitions of the terms. Chapter two consist of general introduction of research topic and of literature review.
Chapter three deals with research methodology, research design, and source of data, population and sample size and method of data. Chapter four deals with the data presentation, analysis and test of hypothesis.
Chapter five consists of summary, conclusion and recommendation. From the research work, research recommendation which reveals that credit mangers deals with various credit appraisals effective management should be adopted for the profitability of the banks.
i Title page
ii Approval page
iii Dedication
iii Acknowledgement
iv Abstract
v Table of content
CHAPTER ONE
1.0 introduction 1
1.1 General overview of study 1
1.2 Statement of problems 3
1.3 Objectives of the study 4
1.4 Scope of the study 5
1.5 Statement of hypothesis 5
1.6 significance of the study 6
1.7 limitations of the research 7
1.8 definitions of terms 7
CHAPTER TWO
2.0 Literature Review 10
2.1 Background to profitability to a commercial
Bank 10
2.2 Principles and consideration to good lending 11
2.3 Basis for credit formulation 14
2.4 Comparative analysis of different forms of credit administration
Administration 21
2.6 signs of a bad loan 27
2.7 government regulation on over credit 29
2.8 problem of credit management and Administration 32
2.9 profit and loss account (of your case study) 34
2.10 references 38
CHAPTER THREE
3.0 methodology 39
3.1 Research Design 39
3.2 sources of data 40
3.3 population and sample size 41
3.4 method of data analysis 42
3.4.1 administration of data collection instrument 42
3.5 statistical data to be used in data analysis 42
CHAPTER FOUR
4.0 presentation and analysis of data 44
4.1 presentation of data 44
4.2 analysis of data 50
4.3 test of hypothesis 52
CHAPTER FIVE
5.0 summary, conclusion and recommendations
5.1 summary 59
5.2 conclusion 60
5.3 recommendation 61
Bibliography 64
Questionnaire 66
INTRODUCTION
1.1 GENERAL OVERVIEW OF THE STUDY.
Granting of loans and advances of credit is one of the banks services of investment policies. Among the crucial growth process is the adequate supply of credit to the different economic units to carry on their activities efficiently and smoothly. There is therefore the need for transferring of funds from the surplus units to the deficit units of the economy. In this wise, commercial bank plays vital role in the allocation of financial resources of capital formation.
There are many opportunities for profit improvement or maximization through effective credit management since lending of money has been widely known and accepted as an important function of the banking industry (i.e. commercial banks) a function which the industry is better placed to perform in view of its position as a finance intermediary.
The basis principles of lending are the same for all types of credit be it personal institutional credit.
The criteria used to determine the data of credit application to grant or not, have however been the genesis of heavy bad debts in the banking industry especially commercial banks. a bank considers a loan or credit to be a bad debt when the possibility of its repayment is the serious doubt and this doubt many be as a result of the following under listed points.
1) Wrong choice and use of lending principle.
2) Failure by the customer to meet credit repayment as agreed and when due.
3) Customer’s occasional request for credit.
4) Frequent attempt by customer to exceed existing limit without prior arrangement.
5) Overdraft balances always at the peak bad debts do have serious negative effect on the banks liquidity and profitability and if they are allowed to persist, undoubted will lead to bank failure.
It is generally accepted that lending is the most risky function performed by the commercial banks and it is therefore important that lending must be done efficiently.
In granting loans to customers, banks are expected to critically consider various factor’s which should enable them to assess the risk associated with the loan and the willingness and ability of the borrower to pay.
1.2 STATEMENT OF PROBLEMS
The following are problems associated with this study
a. BANK AS FINANCIAL INTERMEDIARIES: banks find it difficult to operate efficiently in the face of many borrowers.
b. BANKS AS DEBTORS: banks owe the customer at any point in time, a duty to make funds available to depositors on demand.
c. BANKS AS CREDITORS: banks find it difficult to properly assess and identity credit worthy customers which ensure repayment to guarantee equilibrium of funds flow.
d. COMMERCIAL BANKS AS COMMERCIAL OUTLETS: bank owes it as a duty to the shareholder to maximize profit.
1.3 OBJECTIVE OF THE STUDY
Commercial banks are general all purpose retail banks. they mobilize deposits of all sizes, both from the depositors and shareholders.
They lend these mobilized funds to willing customers for investment purpose as stated earlier, loans are the most important, most profitable and most risky asset of the banks, not kept liquid due to problems of the loans, banks may be unable to meet their obligations to depositors and public confidence will be lost. These problem loans affect the liquidity of banks, reduce their ability to create deposit, restrict further lending to prospective borrowers, which affect the profitability of the banks.
Therefore, the objectives of the study are:
1. To find out the best ways to manage loans which adversely affects the depositor’s banks and the economy will be a thing of the past.
2. To find out the usefulness of the central bank credit guideline giving to commercial banks
3. To recommend possible ways of making credit policy guideline more effective and beneficial to both commercial bank and their customers.
1.4 SCOPE OF THE STUDY.
The study of the effective credit management on the profitability of commercial banks will review to an extent the level at which the bank is fairing.
This study will also review how positive and unable the bank is in finding project through lending and how lending and borrowing has affected the profitability and liquidity of commercial banks.
The choice of united bank being necessary is that it has passed through all the era of banking policies and regulations in the country.
1.5 STATEMENT OF HYPOTHESIS
Based on the above stated purpose of this study the following hypothesis was made.
1. Banks have adequately financed projects in our economy.
2. Low interests have favoured the borrowing customers.
3. Proper training of credit officers leads to better relationship between commercial banks and their credit customers.
1.6 SIGNIFICANCE OF THE STUDY
1. Loans are important as well as the most lucrative assets of commercial banks credit.
2. It is therefore important that credit proposals be properly articulated and evaluated right form the on set.
3. It is crucial to avoid and minimize bad debts.
4. The collection of vital information for lending and the analysis of the proposal cannot therefore be over looked to be less important.
5. It should be noted that the risk element in credit proposal are usually not easy to quantify.
6. Many banks today are out of business because of poor and bad credit management.
7. This study is therefore aimed at providing an avenue for efficient credit management.
1.7 LIMITATION OF THE STUDY
The study has the following limitations.
It is limited to two commercial banks first bank and intercontinental bank plc. The study is limited to time.
Information used are not all product of primary research but are largely obtained from banks and books.
Lastly one of the major limitations is the respondents to the questions asked to the bankers who were not ready to reveal or disclose certain information concerning their banks to outsiders.
1.8 DEFINITIONS OF TERMS
BAD DEBT: these means irrevocable debts of an organization CANNON: generally accepted standard on which an idea or subject is based.
CREDIT FACILITIES: this include loans, overdrafts, advances, commercial papers, lease, and guarantee etc. that is those form of credit connected with a banks credit risks.
LOANS: a credit facility extended by one party (lender) to another (borrower) subject to specific terms and conditions agreed upon by both parties.
OVERDRAFT: an account drawn over. It is a short term revolving time agreed with the bank.
POLICY: guideline.
PROBLEM LOANS: all types of credit facilities granted by banks to their customer for whom the customers are unable to repay within the agreed time and conditions.
TERM LOAN: credit facilities granted for a period normally more than one year.
LIQUIDITY: money or goods that can be sold to repay debts.
Security: goods or property pledged against money borrowed.
GUARANTEE: a promise usually in writing by one person to pay the present or future debts of another, such a promise must be made to the person to whom the debts is or will be due or paid.
CONVEYANCE: the dead by which interest on lend for e.g. mortgage lease, charge or vesting instrument is conveyed to a purchaser.
PORTFOLIO: collection of shares or investment.
SHARE PROJECT MATERIALS ON:
Impact Of Effective Credit Management On The Profitability Of Commercial Banks:
The impact of effective credit management on the profitability of commercial banks is a critical and well-studied topic in the field of finance and banking. Effective credit management plays a pivotal role in the success and sustainability of commercial banks. Here is an appraisal of the key aspects of this relationship:
- Reduction of Credit Risk: Effective credit management helps commercial banks reduce credit risk, which is the risk of borrowers defaulting on their loans. Banks carefully assess the creditworthiness of borrowers, establish credit limits, and monitor the credit portfolio to minimize the chances of default. This directly impacts profitability as lower default rates lead to fewer loan losses and higher net income.
- Improved Asset Quality: Good credit management practices lead to a higher quality loan portfolio. Banks that maintain a portfolio of high-quality loans are less likely to suffer from non-performing loans (NPLs). NPLs can erode a bank’s profitability by requiring provisions for loan losses and causing write-offs. Effective credit management can prevent the deterioration of asset quality.
- Enhanced Interest Income: Lending is a primary source of revenue for commercial banks. Effective credit management can lead to more loans being disbursed to creditworthy customers. This increases the interest income generated from loans and, subsequently, boosts the bank’s profitability.
- Reduced Operating Costs: Effective credit management also involves efficient and streamlined processes for credit origination and administration. This can result in cost savings through reduced administrative expenses and a lower need for collections and loan recovery efforts. Cost savings contribute positively to a bank’s profitability.
- Regulatory Compliance: Effective credit management ensures that banks comply with regulatory requirements related to lending, such as capital adequacy and risk management standards. Non-compliance can result in fines and penalties, negatively affecting profitability. Conversely, adherence to regulations can enhance a bank’s reputation and trustworthiness.
- Customer Relationship Management: Proper credit management involves building and maintaining strong relationships with borrowers. Satisfied customers are more likely to use a bank’s other services, such as deposits, investments, and wealth management. This cross-selling can boost overall profitability.
- Capital Allocation: Effective credit management helps banks allocate capital efficiently. It ensures that capital is directed toward the most profitable lending opportunities while avoiding excessive exposure to risky loans. This optimizes the risk-return trade-off and enhances profitability.
- Market Perception: Banks with a reputation for prudent credit management attract more investors and depositors, as they are seen as safer institutions. A strong market perception can lead to lower borrowing costs and improved access to capital, both of which positively impact profitability.
- Economic Conditions: The effectiveness of credit management is often more apparent during economic downturns. Banks with robust credit management practices are better equipped to weather economic challenges, which can protect profitability during tough times.
- Long-Term Sustainability: Effective credit management is not just about short-term profitability but also about the long-term sustainability of a bank. By avoiding excessive risk and ensuring a healthy loan portfolio, banks can thrive over the years, leading to sustained profitability.
In conclusion, the impact of effective credit management on the profitability of commercial banks is substantial and multifaceted. It encompasses risk reduction, revenue enhancement, cost reduction, regulatory compliance, and overall financial stability. Banks that prioritize and excel in credit management are more likely to achieve sustainable profitability and maintain a competitive edge in the financial industry.