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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.
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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