Assessment Of Credit Management In Commercial Banks
(A Case Study Of Union Bank Of Nigeria Plc)
Credit management in commercial banks is a crucial function aimed at assessing, monitoring, and controlling the credit risk associated with lending activities. Banks play a pivotal role in facilitating economic growth by extending credit to individuals, businesses, and other entities. The credit management process involves evaluating the creditworthiness of potential borrowers, setting appropriate lending terms and conditions, and continuously monitoring the repayment performance of existing loans. Effective credit management helps banks strike a balance between risk and return, ensuring that loans are granted to viable borrowers while minimizing the likelihood of default. It involves the establishment of robust credit policies, utilization of risk assessment tools, and ongoing portfolio management to optimize the bank’s overall credit quality and financial performance.
The purpose of this research is to examine the impact of credit management on commercial banks. The introduction of the prudential guideline in banking industry, the volume and value of loans and advances classified into non-performing account ahs continued to increase in bank lending. Obviously this has adverse effect on banks since it affects their cash flow and impair profitability.
Most loans and advances go bad because of the inadequacy in credit management and recovery procedure of banks. Appraisal of lending vis a vis the credit management of banks and the impact of the application of prudential guidelines on credit, form the major objective of this study. Union bank of Nigeria Plc Okpara Avenue Enugu was used as a case study with a view to highlight the effectiveness, the adequacy or otherwise of the credit management policy of Nigerian commercial banks with a view to finding the causes and consequences of non-performing loans and advances. The causes are excessive lending on security values and bad management of borrowers. Having analysed the data, the following findings were made, the principal objective of bank lending is to generate revenue, the loan deposit ratio affects the liquidity position of commercial banks, non- performing account kept on increasing the frequent occurrence of non- performing accounts was discovered to be as result of the banks inability to put in place an effective process of loan recovery, implementation of prudential guidelines by Nigerian commercial banks reflect the real income of banks. In conclusion, the prudential guidelines reduced the profitability of commercial banks and made banks classify their loans clearly. In the recommendation, the researcher suggested that the provisions of the prudential guidelines should be adhered to and an effective loan monitoring unit should be set-up in al commercial banks.
Title Page i
Approval page ii
Dedication iii
Acknowledgement iv
List of Table v
Table of Content vii
Abstract x
CHAPTER ONE
1.0 Introduction 1
1.1 Background of the Study 1
1.2 Statement of the Problem 6
1.3 Purpose of the Study 6
1.4 Scope of the Study 7
1.5 Significance of the study 7
1.6 Hypothesis 8
1.7 Definition of Terms 9
CHAPTER TWO
2.0 Review of Related Literature 11
2.1 The role of commercial Banks in Nigeria Economy 11
2.2 Causes of Non-performing accounts/ credits 13
2.3 Techniques though which banks can minimize 15
2.4 The purpose and importance
of commercial banks in Nigeria. 20
2.5 The positive impacts of the prudential guideline
on Nigeria banking industry and the economy. 23
2.6 Historical background of union 26
CHAPTER THREE
RESEARCH METHODOLOGY 29
3.1 The Design of the Study 29
3.2 Population of the Study 29
3.3 Sample and Sampling Techniques 30
3.4 Instrument for Data Collection 32
3.5 Validity Reliability of Instrument 33
3.6 Method of Data Collection 33
3.7 Method of Data Analysis 35
CHAPTER FOUR
4.0 Data Presentation and Analysis 37
CHAPTER FIVE
DISCUSSION OF RESULTS 61
5.1 Discussion of Findings 61
5.2 Recommendation 64
5.3 Limitation of Study 65
5.4 Suggestion/ Area for further studies 65
5.5 Conclusion 66
Appendix I 67 Appendix II 68
INTRODUCTION
1.1 Background of the Study
Banking is essentially an international business especially now that domestic financial markets in many countries are being internationalized. In modern economy there is a distinction between the surplus and economic units and the deficit economic units. Consequently, there is a separation of savings and investment mechanism. This has necessitated the existence of financial institutions whose job includes the transfer of funds from savers to investors. One of such institutions is the commercial banks.
The intermediating roles of commercial banks places them in a position of ‘Trustees’ of the savings of surplus economic development. The techniques employed by bankers in this intermediating functions should provide them perfect knowledge of the out-come of a lending such that funds will be allocated to investors in which the probability of full repayment is unity.
However, in practice, the reverse has always been the case. Almost all lending decisions are made under condition of uncertainty, the risk and uncertainty associated with lending decision situation are so great that the concepts of risk and risk analysis need to e employed by lending bankers in order to facilitate sound decision making and judgement.
This implies that all risks should be objectively assessed. Unfortunately, many commercial banks have based their lending decision on subjective principles. In most cased emphasis is placed more on security offered for the loan rather than paying attention to the proper monitoring of the loans and the insisten that recovery potential of credit should be from the projected cash flow.
This has led to the increasing cases of non-performing advances.
The structural adjustment programme (SAP) introduced in 1980 had led the adoption of a wide range of economic liberalization and de-regulation measures which in turn had resulted in the emergence of more banks and other financial intermediaries.
Consequently, it became imparable to strengthen and extend the powers of the central Bank of Nigeria to cover these new institutions in order to enhance effectiveness of monetary policy and the regulation and supervision of banks and non-banks financial institutions.
Perhaps, it is necessary to point out the deregulation, which does not mean the absence of regulations. Banking industry is generally considered to be more regulated than any other sector of the economy. This is largely due to the crucial intermediation played by the operations in the industry. The various deregulation measures brought about benefits, opportunities and problems. The industry is now more competitive and this has to a large extent increased concern about abuses and violation within the industry.
It is in the light of the foregoing that the need for prudential guidelines and the recent review of the banking decree should be seen.
The prudential guidelines was issued by the banking supervision department (BSD) of the Central Bank of Nigeria (CBN) on 7th November 1990 through circular letter No BSD/90/28/vol.1/11 to all licensed banks and their auditors. It is aimed at ensuring a stable, safe and sound banking system. It is meant to serve as a guide to bank as follows.
a. Ensure a more prudent approach in their credit portfolio classification, provisioning for non-performing facilities, credit portfolio disclosure and interest accrued on non-performing assets.
b. Ensure uniformity of their approach in (a) above
c. Ensure the reliability of published accounting information and operating results.
Until recently, users of financial statement of licensed banks have had cause to express concern over the quality of such statements in view of the varied and in most cases inconsistent practices adopted by banks. Specifically a number of persons felt concerned that banks earnings were being overstated as interest was being taken on non performing assets. Also comparisons of banks performances became difficult.
The prudential guidelines were therefore issued to protect the interest of depositors thereby promoting public confidence in the banking system.
On the other hand, the increasing trend of provisions for non- performing credits in most commercial 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 non- performing credits facilities. These destroy part of the earnings assets of the bank such as loan and advances, which are classified as the main sources of earnings, and also determines the liquidity and solvency of banks. In other words, non-performing credits generate two major problems i.e, non-profitability and liquidity problems. A commercial bank like any other business enterprise has to earn sufficient income to meet its operating costs and to have adequate returns on its investment.
Having regard to these problems a prudent banker should be cautions to lend and manage loan and advances effectively and efficiently with a view to minimise the problems caused by classified credits.
In this study we shall survey the possibility of reducing the occurrence of non-performing credits through improved standard of lending and effective controls. For the purpose of the commercial banks being mostly affected, we shall appraise the lending procedure and credit management of union bank of Nigeria Plc and assess the effectiveness or otherwise of the existing credit management policy of the bank. We shall suggest on how to improve any inadequacy highlighted by out findings. C.B.N guideline (1990).
1.2 STATEMENT OF THE PROBLEM
Since the introduction of the prudential guidelines in banking industry, the volume and value of loans advances classified into non-performing account has continued to increase. The increase has remained even at faster rate than the increase in bank lending.
Obviously, this has adverse affected on banks since it affects their cash flow and impairs profitability. It is believed that most loans and advances go bad because of the inadequacy in credit management and recovery procedure of banks.
1.3 PURPOSE OF THE STUDY
The main purpose of this study is to examine the appraisal of lending vis-a-viz the credit management of bank.
1.4 SCOPE OF THE STUDY
The scope of this study covers only the appraisal of the Nigerian commercial banks credit management. Because, it is difficult for the researcher to cover all the banks in the study, the study is therefore restricted to Union Bank Okpara Avenue Enugu.
1.5 SIGNIFICANCE OF STUDY
This study indicates that whenever a credit is granted that there is need to urgently appreciate the point when such credits begins to look doubtful. This will enable the bank to at least obtain full repayment including accrued interest at worst to reduce the eventual occurrence of capital loss. Since provisions for non-performing credits are changes against profit, it is appropriate that we review the methods proportions and margins of lending to non-performing facilities. Hence the significance of this study to bankers, besides bankers will be able to appreciate an effective appraisal of their lending and control mechanism, especially 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 non-performing advances is reduced banks will be left with more profits to enable them make the expected contribution to the development of the economy.
1.6 HYPOTHESIS
Ho1: The principal objective of bank lending is not to generate revenue.
Hi1: The principal objective of bank lending is to generate revenue.
Ho2: The loan deposit ratio does not affect the liquidity position of a commercial bank.
Hi2: The loan-deposit ratio affects the liquidity position of a commercial bank.
Ho3: Classified debts have an relationship with the security obtained for the loan granted.
Hi3: Classified debt have relationship with the security obtained for the loan granted.
Ho4: Non-performing credit do not depend on loan recovery processes.
Hi4: Non performing credit depends on loan recovery processes.
1.7 DEFINITION OF TERMS
Profitability: A tendency for the bank to have excess of revenue over expenditure resulting in profits.
Liquidity: This refers to the ability of the bank to meet its financial obligations to the customer, or it can mean the case with which banks can raise funds to meet with depends demands.
Loan-Deposit Ratio: This refers to the amount
Bank “Run”: A situation where the banking public withdraws their deposits in large numbers from a bank feared to be going distress.
NDIC: Nigerian Deposit insurance Company: An institution established to provide insurance services for bank deposits.
Performing Credits:- A credit facility is deemed to be performing if payments of both principal and interests are up to date in accordance with the agreed term.
Non-Performing Credits:- A credit facility should be deemed as non-performing when any of the following conditions exists.
i. Interest or principal is due are unpaid for 90 days or more.
ii. Interest payments equal to 90 days interest or more have been capitalized, rescheduled or rolled over into a new loan.
Standard advances
Non performing credit/ advances are classified into substandard, doubtful and lost credits. Substandard advances are the ones whose principal and or interest remain outstanding for more than 90 days but less than 180 days.
Doubtful Advances:- The principal or interests remain outstanding for at least 180 days but less then 360 days.
Lost Advances:- Lost advances are the ones whose principal and or interest remain outstanding for 350 days or more CBN prudential guideline (1990).
Credit Management In Commercial Banks:
Credit management in commercial banks is a critical function that involves the process of assessing, granting, monitoring, and recovering loans extended to borrowers. Effective credit management is essential for a bank’s profitability and stability, as it helps mitigate credit risk and ensures that loans are extended to creditworthy individuals or businesses. Here’s an overview of the key components of credit management in commercial banks:
- Credit Policy and Procedures: Commercial banks establish a comprehensive credit policy that outlines their lending criteria, risk tolerance, and lending limits. This policy serves as a guideline for loan officers and credit analysts in making lending decisions. Well-defined procedures ensure consistency and compliance with regulatory requirements.
- Credit Assessment: This is the process of evaluating a borrower’s creditworthiness. It involves analyzing the borrower’s financial statements, credit history, collateral, and other relevant factors. Credit analysts use various financial ratios and credit scoring models to assess the risk associated with the borrower.
- Loan Origination: Once a borrower’s creditworthiness is assessed and approved according to the bank’s policy, the loan origination process begins. This includes preparing loan documentation, terms, and conditions, and ensuring all legal requirements are met.
- Credit Monitoring: Banks continuously monitor their loan portfolio to identify early signs of credit deterioration. This involves tracking borrowers’ financial performance, changes in their circumstances, and compliance with loan covenants. Automated systems and periodic reviews play a significant role in this process.
- Risk Mitigation: Banks use various methods to mitigate credit risk, including requiring collateral for secured loans, obtaining personal or corporate guarantees, and structuring loan terms to match the borrower’s ability to repay.
- Loan Classification and Provisioning: Banks categorize loans into different risk categories (e.g., performing, non-performing) and set aside provisions based on regulatory requirements. This is done to cover potential losses associated with defaulted loans.
- Credit Scoring and Decision Support Systems: Many banks use sophisticated credit scoring models and decision support systems to automate and streamline the credit assessment process. These systems help in making faster and more accurate lending decisions.
- Credit Review and Approval: Loans often go through a multi-tiered approval process within the bank to ensure that lending decisions are made impartially and in line with the bank’s credit policy.
- Loan Recovery: When borrowers default on their loans, banks initiate the process of loan recovery. This can involve negotiations with the borrower, legal action, or the sale of collateral to recover the outstanding debt.
- Regulatory Compliance: Commercial banks must adhere to regulatory guidelines related to credit risk management, including capital adequacy requirements and reporting standards.
- Training and Development: Banks invest in training and developing their staff, particularly loan officers and credit analysts, to enhance their skills in credit risk assessment and management.
- Portfolio Diversification: Banks often diversify their loan portfolios across different sectors and industries to spread risk. This helps reduce the impact of economic downturns on the bank’s overall credit exposure.
Effective credit management is crucial for maintaining a healthy loan portfolio, minimizing losses, and ensuring the bank’s long-term viability. It requires a balance between making profitable lending decisions and managing the inherent risks associated with lending money. Additionally, it’s important to adapt to changing economic conditions and regulatory requirements to remain competitive and compliant in the banking industry.