Credit Creation And Management In Commercial Banks

(A Case study of union bank of nigeria, Ogui road enugu)

5 Chapters
|
53 Pages
|
7,557 Words

Credit creation and management are integral functions within commercial banks, playing a pivotal role in the broader financial system. When a commercial bank extends credit to borrowers, it initiates a process of money creation. Through the fractional reserve banking system, banks are required to hold only a fraction of their deposits as reserves, allowing them to lend out the majority of deposited funds. This lending, in turn, injects new money into the economy, contributing to economic growth. Effective credit management involves assessing the creditworthiness of borrowers, determining appropriate interest rates, and establishing repayment terms. Prudent risk assessment and monitoring are crucial to mitigate the potential for loan defaults, ensuring the stability of the banking sector and fostering a healthy financial environment. As such, the dynamic interplay between credit creation and management is central to the functioning of commercial banks and the overall health of the financial system.

ABSTRACT

The topic of this project is credit creation and management in Nigerian commercial books. The purpose of the study is to examine the impact of policies issued or introduced into the banking system.
The research outline covered the following points, revenue generation as a principal objective of bank lending, inefficient management of loan portfolio a fundamental problem of distressed banks. Loan/deposit ratio as it affects’ liquidity position of banks and the impact of prudential guideline.
Questionnaire was use in data collection using the random sampling method. The chi-square statistic was use in testing the hypothesis.
The finding were that level classified loans as bad or doubtful is still height though prudential guidelines reduce the profit of banks’ it increased value of the banks assets.
The recommendation is for the banks have an effective and efficient loan monitoring and recovery unit in place.

TABLE OF CONTENT

Cover page
Dedication
Acknowledgement
Table of content
List of tables
List of figures (if any)
Abstract

CHAPTER ONE:
INTRODUCTION
1.1 Background of the study
1.2 Statement of the problem
1.3 Purpose or objective of the study
1.4 Research hypothesis
1.5 Significance of the study
1.6 Scope of the study
1.7 Limitation of the study

CHAPTER TWO:
REVIEW OF LITERATURE
2.1 Role of commercial banks in Nigeria economy
2.2 Causes of non-performing accounts
2.3 Ways of minimizing occurrence of non-performing accounts
2.4 Importance of prudential guidelines
2.5 Impact of prudential guidelines
2.6 Summary of the related review literature

CHAPTER THREE:
RESEARCH METHODOLOGY
3.1 Research design
3.2 Area of study
3.3 Population of study
3.4 Sample and sampling procedure
3.5 Instrument for data collection
3.6 Validation of the research instrument
3.7 Reliability of the research instrument
3.8 Method of data administrator
3.5 Data analysis

CHAPTER FOUR:
DATA PRESENTATION AND RESULTS
4.1 Summary of results/findings

CHAPTER FIVE:
DISCUSSION OF RESULTS IMPLICATIONS AND RECOMMENDATIONS
5.1 Discussions of results
5.2 Conclusion
5.3 Implication of the research results
5.4 Recommendation
5.5 Suggestions for further research
5.6 Limitations of the study
Reference
Appendix

CHAPTER ONE

INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Banking is essentially an international business, especially not that financial marketing in many countries are being internalized.
In modern economics 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 made the existence of financial institutions’ whose jobs include the transfer of funds from savers (surplus) unit and investors (deficit) units. One of such institution is the commercial bank.

The intermediating role of the banks places them in a position of ‘Trustees’ of the savings of the surplus economic development. The techniques’ employed by bankers in this intermediating functions provide them perfect knowledge of determining the outcome of lending from such funds as well as ensuring that the funds will be allocated to investments which the probability of full repayment is well ascertained. However, in practice, the reverse has always been the case. Almost all lending decisions are made under condition of uncertainty, the risks and uncertainty associated with lending decisions and the cost of mobilizing fund or deposits used in such lending are so high that the concept of cost benefit and risks analysis need be employed by lending bankers in order to facilitate sound decision making and judgment.
This implies that all risks should be objectively assessed. Unfortunately, many commercial banks have based their lending decision on subjective principles. In most cases emphasis are placed on t he securely offered for loan rather than paying attention to the proper monitoring of the loans and the insistence that recovery potential of credit should be from the projected cash flow. This has led to increase case of non-performing credits.
The various economic reform policies introduced since 1980 to date has made the banking industry one of the affected sector of the economy. The policies led to period emergence of many banks to recently the shrinking of the members of bank through merger as a result of the increased in the capital base of commercial bank to twenty five billion naira (N2513) from member of about eighty-nine to twenty five commercial banks in the country.
Notwithstanding, the increase of room for non-performing credits in most commercial banks’ due to some of the requirement of some of the central bank publicities is a major source of concern not only to the management but also to the shareholders who are becoming more aware of the danger posed by these non-performing credit facilities.
These destroy part of the earning assets of the bank such as loans and advances, which are main sources of earnings and also determines the liquidity and solvency of banks. In other words non-performing credits create two major problems i.e. non-profitability and liquidity problems.
Having regard to these problems, prudent bank should be cautions to land and manage loans’ and advances effectively and efficiently with a view to minimize 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 control for the purpose of the commercial banks being mostly affected, we shall appraise the mobilization and 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 our findings.

1.2 STATEMENT OF THE PROBLEM
Since the introduction of the prudential guideline in the banking industry, the volume and value of loans and advances classified into non-performing account has continued to increase. The increase has remained even of a faster rate than the increase in bank lending and credit mobilization. Obviously this has adverse effect on banks since it affects cash flow and impairs profitability. It is believed that most loans and advances go bad because of inadequacy in credit management and recovery procedure of banks.

1.3 PURPOSE OR OBJECTIVE OF STUDY
Appraisal of lending visa-vis the credit management of banks and impact form the major objective of this study, bearing in mind that the credit created or funds’ mobilized has costs too on them which worsens the profitability and liquidity of the banks.
We use union bank of Nigeria Plc as a test case with a view to highlight the effectiveness, adequacy or otherwise of the credit management policy of Nigeria banks. With a view to finding, the causes and consequences of non-performing loans and advances.

1.4 RESEARCH HYPOTHESIS
1. The principal objective of bank lending is to generate revenue true or false.
2. A fundamental problem of distressed banks is inefficient management of loan portfolio. True or false
3. Loan deposit ratio affects the liquidity position of commercial bank.
4. The prudential guidelines has improved the asset quality of commercial banks.

1.5 SIGNIFICANT OF THE STUDY
This study indicates that whenever a credit is granted. There is need to urgently appreciate the point when such credits begun to look doubtful.
This will enable the bank to at least obtain full repayments including interest or at least reduce the eventual occurrence of capital loss probability. Since provision for non-performing credits are charges against the profit of the bank. It is appropriate then, that we review the methods proportions and margin of lending or advancing non-performing facilities. Hence the significant 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 land 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 SCOPE OF THE STUDY
The research work covered the appraisal of the Nigerian commercial banks credit management and the effect on credit created. This study is intended to assess the adequacy or otherwise of the banks management efforts at minimizing losses arising from bad debts.
In the course of conducting this research many problems were encountered. Time coupled with transportation costs and materials cost. There was also problem of lack of co-operation from some of the officers in the loan and advances department of the banks visited.

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Credit Creation And Management In Commercial Banks:

Credit creation and management are fundamental functions of commercial banks. Banks play a crucial role in the economy by facilitating the flow of funds from savers to borrowers, and credit creation is a key aspect of this process. Here’s an overview of how credit creation and management work in commercial banks:

1. Credit Creation:

  • Deposit Multiplier Effect: Commercial banks have the unique ability to create money through the deposit multiplier effect. When customers deposit money in their bank accounts, banks are required to keep only a fraction of these deposits (called reserves) and can lend out the rest. This process multiplies the initial deposit, effectively creating new money in the form of loans.
  • Reserve Requirements: Central banks often set reserve requirements that commercial banks must maintain. These requirements dictate the minimum amount of reserves a bank must hold relative to its deposits. Banks can lend out the excess reserves, which then become new deposits in other banks, further fueling the money creation process.
  • Credit Assessment: Before extending credit, banks assess the creditworthiness of borrowers. They evaluate factors such as the borrower’s income, credit history, collateral, and purpose of the loan. This assessment helps banks manage the risk associated with lending.

2. Credit Management:

  • Credit Underwriting: Banks employ skilled underwriters who determine the terms and conditions of loans. This includes setting interest rates, loan amounts, repayment schedules, and collateral requirements. The goal is to structure loans in a way that mitigates risk while generating a profit.
  • Risk Management: Commercial banks manage various types of risks associated with lending, including credit risk (the risk of borrower default), interest rate risk (the risk of fluctuations in interest rates), and liquidity risk (the risk of not having enough funds to meet withdrawals and obligations). Banks use risk management tools and models to assess and mitigate these risks.
  • Loan Monitoring: After extending credit, banks actively monitor the performance of loans. This involves tracking borrower payments, collateral values (if applicable), and changes in the borrower’s financial situation. If problems arise, banks may work with borrowers to restructure loans or take legal action to recover their funds.
  • Regulatory Compliance: Banks must comply with various regulations related to lending and credit management, which are often set by government agencies or central banks. These regulations help ensure the safety and stability of the financial system.
  • Portfolio Diversification: Banks aim to diversify their loan portfolios to spread risk. By lending to a mix of individual and business borrowers across different industries and regions, banks reduce the impact of localized economic downturns on their overall financial health.
  • Credit Reporting: Banks report borrower information to credit bureaus, helping establish credit histories for individuals and businesses. This information is used by other lenders to assess the creditworthiness of potential borrowers.

In summary, commercial banks create and manage credit by taking in deposits, lending out a portion of these deposits, and carefully assessing, monitoring, and managing the associated risks. Effective credit creation and management are essential for the functioning of the financial system and the overall economy.