LOAN GRANTING AND ITS RECOVERY PROBLEMS ON COMMERCIAL BANKS

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LOAN GRANTING AND ITS RECOVERY PROBLEMS ON COMMERCIAL BANKS

CHAPTER ONE.

INTRODUCTION

1.0 BACKGROUND OF THE STUDY

Greater prominence have been said to be associated with banking industry in Nigeria because of the role it plays in her economic environment. The banking industry plays a great influence and in the provision of credit facilities in Nigeria. However the tendency to incur financial losses due to failure to repay loans or credit facilities by borrowers which is regarded as credit risks are most often faced bybanking institutions in the financial sector (Muhammad &Shahid, 2012).

The bank’s credit function enablesinvestors exploits ventures that are considered profitable (Kargi, 2011). This function however, exposes the banks to the risk of credit default. Credit risk as defined in 2001 by the Banking Supervision of the Basel Committee as the possibility of an outstanding credit going absolutely or partially lost due to default effect (credit risk).

Default effect or credit risk is assumed an internal measurement factor of the performance of banks. The higher the level of bank’s exposure to credit risk, the higher the possibility of the bank to likely experience financial crisis and so on. Credit risk is the most formidable amongst the numerous risks faced by banks and the profitability of the banks is highly affected since a greater aspect of banks’ income accrues from granting credit facilities from which interest is generated. However, credit risk is found to be linked with interest rate risk by implying that interest rate increment enhances loan default possibilities. Interest rate risk and credit risk are related intrinsically to one another and not separately (Drehman, Sorensen &Stringa, 2008). According to Ahmad and Ariff (2007), the credit portfolio with greater non- performing assets limits the banks’ ability in achieving its stated objectives. Therefore, loans that are non-performing are expressed as the percentage of loan values which has not been service for 90 days and above. Consequence upon the huge rate of non- performing loans, credit risk management practices is highly emphasized by Basel II Accord.

Working in tune with the recommendations of the Accord is a sure approach to handling the risk of credit and generally the enhancement of bank performance. Through the effective management of the exposure of credit risk by banks, they end up facilitating the viability and profitability of their businesses and ultimately enhancing the systemic stability and smooth allocation of capital in the economy (Psillaki, Tsolas&Margaritis, 2010).

Banks have adopted various strategies of recovering their money, some orthodox, some unorthodox. It has been found that most borrowers are always willing to pay, but certain situation like economic recession, inflation, political instability, poor investment makes them not able to pay. According to Ojiegbe (2002), there are also the existences of bad borrowers in the banking industry whose primary assignment is to abandon their loan obligations in most banks and enter into new loan contracts with another bank. This low credit standard of borrowers along with poor management of portfolio and changes insensitivity in the economic environment by the bankers led to the banks witnessing rising non-performing credit portfolio. This ultimately causes many banks to fail and become insolvent.

It is quite unfortunate that in spite the degree of carefulness, skillful, experience or tact of a loan officer, most of the loan facilities granted to borrowers sometimes go bad. The introduction of the Prudential Guideline in 1990 for banks licensed in Nigeria enable banks to properly classify bad and doubtful debt. These guidelines made it compulsory for licensed banks to at least in a quarter, have their credit portfolios reviewed and credit classified (into non-performing loans and performing loans) appropriately (Mora, 2011).The introduction of these guidelines has assisted the banks to promptly identify the deterioration of loans held by banks. For a credit facility to be considered as non- performing, both the principal and accrued interest is unpaid for three months and more; or this interest payment must have been interest of 90 days or more may have been rescheduled, rolled-over or capitalized into a new credit facility (unless these facilities have reclassified and the borrower have made cash payment to the effect that interest payment outstanding does not exceed three months).

Over the years, bank loans and advances to the Nigerian economy has been on the increase. According to the CBN annual report in 2007, commercial banks’ credit to the core private sector grew by 98 per cent which has been the highest ever. However, this incremental trend could not be sustained due to the prevailing harsh economic situation and its effects on the business sector thus leading to increased default on loan repayment. Furthermore, some bank customers misconstrue the loans and advances received from banks as national cake, hence, they deliberately shy away from repayment. Thus, the banks are left with an enormous amount of doubtful andbad loans. The task of bad debts management is becoming an issue of serious concern in the banking system.

Furthermore, the recovery agent of banks has not helped matters as most of them report on the uncompromising attitude of the debtors to repay the loan without actually carryingout proper investigation. This is probably after they have accepted some form of gratification from the debtors in question.This situation made the Nigeriangovernment to establish the Asset Management Corporation of Nigeria (AMCON). The setup of AMCON in July 2010 was basically to solve the problem of the frequent and alarming degree of non-performing loans that affected banks in Nigeria (Mora, 2011). Thus, the creation of loan recovery machineries like the AMCON became relevant as a means of alleviating the menace of increasing non-performing debt portfolio in Nigerian banks.

A major function of the banking system is the transfer of funds from the surplus units to deficit units of the economy. This is achieved through deposit mobilization and onward lending to customers by ways of loans and advances.

Most investment companies in Nigeria today cannot equivocally declare that they have been untouched by problem of loans certainty; it is a way of life in these tumultuous times of investing that virtually all investors are faced with problem loans.

Whatever form of lending is adopted by commercialbanks in any given situation depends on the purpose of the borrower and the circumstances of the transaction. The important thing to understand is that regardless of the form investment lending takes, a debt is inevitably created between the Commercialbanks and customers.

The commercialbanks becomes the creditor and customer, the debtor. Review of loan facilities span served stages from the request stage to the repayment and when the facilities get bad.

In this research work, the aim is to outlines the prerequisite for loan, warning signals, management of problem loan as well as debt recovery strategies with the impact of the credit and debt recovery department towards recovering of such debt.

It appears that the review of a debt recovery structures should be related to review of analytical tools of credit facility towards its restructuring, preparing a workable game plan or pay out plan. In this project, the subsequent chapters will look at prevention of problem debts and various strategies for recovering credit facilities.

1.2 STATEMENT OF GENERAL PROBLEM

It is paramount to state as clearly as possible some of the prevailing problem of loan and debt recovery, how it has impeded the smooth operations of financial institutions and thereby hindering the banking sector chances of achieving its objectives.

The essence is to appreciate the magnitude and the vital roles which the commercialbanks plays as the lubricant to the economy, as a sector, it is the pillar of the economy. It is therefore as a result of these important roles that the researcher have taken pains to carryout an in depth research into the impact of credit and debt recovery department in commercialbanks with the view to identifying not only the problem loan, but the possible causes of this loan becoming bad debt and possibly make recommendation that will perhaps assist in solving these problems.

1.3 RESEARCH QUESTION

In the course of this research project, emphasis is to be made so as to answer the following research questions:

a) Criteria for judging the credit worthiness of an applicant

b) Is there any standard procedures for collecting loan?

c) Do financial institution review their lending and collecting policy?

d) Is there any step needed to be taken to recover loans from defaulters?

e) Does credit & debt recovery has an impact in Commercialbanks

1.4 RESEARCH HYPOTHESIS

For the purpose of achieving the objectives of this study, the information and relevant data will be collected and tested in subsequent chapters. The Null and Alternate hypothesis are given as follows:

Hi – Credit and Debt recovery plays a vital role in Commercial banks.

Ho – Credit and Debt recovery does not play any role in Commercial banks

1.5 OBJECTIVES OF THE STUDY

The aim of this research work is specifically:-

a) To uncover the root cause of the problem embodied in loan recovery

b) To comprehensively review how to conduct a credit interview / credit evaluation or ascertain the credit worthiness of a customer.

c) To intensively study how credit can be administered and debt recovery strategies

It is indeed the researcher’s hope that by the time these objectives are achieved, a clear picture of the problems will surface and subsequently recommendations on how to go about tackling the problem will be made, it is also the researcher’s hope that by the time this is done, the attitude of the commercial banks towards lending and the borrowers attitude will change as it is only when the money lends are paid back that the company remains in business.

1.6 SIGNIFICANCE OF THE STUDY

Like in all research work, the significance of this study are :

a) To provide additional material to carry out future research in this area

b) To increase and widen the scope of the researcher’s knowledge

c) To educate and enlighten the public on the impact of credit and debt recovery department towards accomplishing the organization objectives.

d) To assist the commercial banks in identifying some of its pressing loan problem with a view to take steps in recovering such loan which will make it achieve its overall objectives.

1.7 SCOPE OF THE STUDY

The researcher have decided to limit the area of coverage to Zenith bank plc, Warri Delta State, due to the nature of its activities particularly the department of Credit and Debt recovery division considering that they perform similar activities in the head office , other branches in the industries. It will be quite difficult if not impossible to cover the entire investment industry as it would involve traveling in order to have access to materials for information and other logistics which may eventually hamper the effort of the researcher.

1.8 LIMITED OF THE STUDY

When conducting a research, the researcher is faced with some constraints. The prominent constraints faced as a result of conducting the research are as follows:-

i) Financial constraints, the present economic hardship amplified by the increase in fuel price has limited the researcher’s movement for this purpose.

ii) Time constraints, academic work for the semester occupied most of the time required for the research work allowing limited time for the research work

iii) Facts and vital information’s regarded as secret are been hoarded from the research, thereby limiting the information’s required

iv) Problem of busy schedules, rescheduling of booked appointment s, receiving phone calls and unscheduled meeting.

1.9 DEFINITION OF TERMS

The terminologies used in this study are defined below for the clear and understanding of such terms by the readers.

SECURITY – Can be defined as a cash or fixed assets pledge by customers to secure loan.

DOCUMENTATION – This involves any written and endorsed papers that in one way or the other relates to the lending transaction.

DEMAND NOTICE – This is a reminder to the Client that a certain amount is due for repayment and the Client is advised to come along and meet his obligation.

STATUTORY NOTICE – This is a legal notice sent to the Client that he has certain period (usually three months) within which he must pay his loan.

FULL BACK ON GUARANTEE – This case applies in a situation where the loan is guaranteed by outside body.

LEASES – Is a contract between a lessor (the owner) and the lessee (the user) for hire a specific asset selected from a manufacturer or vendor of such assets by the lessee.

LOAN – Is the facilities extended through loan accounts for investment products of medium and long term nature where amortization is at predetermined intervals or made in full at the end of an agreed period.

SYNDICATE – Is simply the lending to one borrower by a group of banks or lending institutions.

CREDIT – Money given to a customer for later payment

CREDIT MANAGEMENT – Arrangement put in place of repayment of credit facilities

DEBT – Is the credit received by a borrower from a prime lender who may be a formal or informal financial institution.

BAD DEBT – Are debt are doubtful of recovery

FINANCIAL INSTITUTION – Refers to in this study represent mainly the banking sector and other investment houses.

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