The article on this topic (credit management and issues of bad
debts in commercial banks in Nigeria) is an extract from the literature
review of the project material. The complete project work would be made
available when you subscribe for the full material.
2.1. THEORITICAL FRAME WORK
Credit management and issues of bad debts in commercial banks in
Nigeria has been a topic of constant debate among economists and policy
makers. The need and criteria for lending have been extensively
discussed in the literature review.
The Webster Dictionary of Banking (1987) defined bank credit as the
process or ability to borrow money with a collateral with the promise
of paying on an agreed date. The prudential guidelines (1990) succinctly
convey a more comprehensive definition of credit, it defines credit
facility as the aggregate of all loans, advances, overdrafts, commercial
papers, bankers’ acceptances, bill discounted, leases, guarantees and
other loss contingencies connected with a bank´s credit risks. Also, the
definition of credit proposed by the CBN Monetary policy circular(1995)
agrees with the aforementioned viw.. Generally, we could conclude that
credit includes all commitments by a bank that has risk exposure and
that may result in financial loss to the bank. Mandel (1974) described
credit simply as the right of a lender to receive money in the future in
return for his obligation to transfer the use of funds to another party
in the interim. The facility is as old as man, though in the primitive
society it was known as “mutual aid”, because it was based on ancient
customer of ensuring substance of all members of the community. Credit
therefore arises out of the need to bridge the gap between the surplus
and deficit economic units such that the highest level of satisfactory
function is performed by the financial institutions notable among which
are the Money-deposit banks.
In agreeing with this view, Corley (1970) and Adeniyi (1985) stated
that credit is a crucial factor in growth process of any economy and
that by lending banks provide valuable services to the community as they
serve to channel money from those who have idle fund to those who put
the money in to constructive use.
Furthermore, Acher and O.Ambrose opined that Money-Deposit banks
are in business to make loans. They however, added that the loan should
work out in such a way that it will not seriously endanger the loan
portfolio and solvency of the bank . This view that appreciates that
though some dangers may arise , lending is, and should be a major
activity of Money-deposit banks. The techniques and complexities of
lending have been changing with growth in the society.
Perhaps that is why Mather (1957) describes banking as an art as
well as a science. He went further to say that in addition to the wealth
of technical and legal knowledge, a bank manager should develop the
aptitudes to assess every request for an advance according to
innumerable factor pertaining to the political borrower. He then
identified three basic principles that should guide all bank lending
viz, safety, profitability and suitability. In addition to the principle
enunciated by matter, other important guiding factors include the
character and integrity, management accounting and technical skill of
the borrower as well as his capacity for hard work and his experience in
the particular field for which the finance is required and the
possibility of the proposed investment generally sufficient profits. To
ensure repayment of the advance.
The importance of these traditional cannons of lending not
withstanding, Pitcher (1970) criticized undue radiance emphasis on them
by the lending banker. He argued that the character of the borrower must
be a prime factor in any lending decision. He also said that the
integrity of the borrower must be undoubted especially where the
security is inadequate to cover the maximum amount to be advanced. He
however, wondered whether honesty is simply enough to ensure the success
of an enterprise, in these difficult demanding conditions of our time.
The answer is obviously “No” for instance all the integrity in the world
will be little helpful to the managers of a company that are rapidly
sinking into oblivion perhaps, because they did not adopt their products
to meet the needs of a changing market or take appropriate corrective
action to counter a disproportionate risk in over head costs and fall in
trade. Therefore we could not but agree with him (pitcher) when he
advocated that the banker should also consider the capital and
capability of the customer and also enlist the aid of management
accounting and other newer technique of credit analysis to improve
their lending decision.
Bad debts are emotive words of bankers because they present losses
to the banks. However, for the purpose of this study, there are various
reasons for the occurrence of bad debt in money-deposit banks.
Experience of bad debt has its impact on the banking operations.
CAUSES OF BAD DEBT
The causes of bad debt could be based on four main classified causative agents. They are as follows´´
Borrowers or customers
Nature related factors
BORROWERS OR CUSTOMER
i. Ignorance: Customers are ignorant of the fact that bank like
other commercial ventures, are out to make profit by selling their
products(loan) instead, they understood it to be a place where
government and other well-to-do people store their money. Consequently,
they regard amount borrowed to be`` National cake rather than as an
article purchased which must be paid for. On the part of our elite in
white, they regard money borrowed as part of their gratuity which should
not be paid. Furthermore, it is the improper evaluation of projects for
meeting borrowers’ needs.
ii. Some customers because of inadequate preparation or
technicalities inherent in the purpose, for which the loan is taken, do
not properly assess their loan requirements and as a result, loans
approved fall short of actual needs. Consequently, the customer cannot
operate on a level profitable enough to enable repayment occasioning at
time in bad debt on a serious note.
Some customers or borrowers over-invest the loans approved on
infrastrures to the detriment of actual purpose. This creates a
situation where little or none would remain to other factors thereby
occasioning bad debts.
BANKS: This concerns efficient disbursement and amortization schedule by banks. This relates to:
1) Poor evaluation of customer: the first point which readily comes
to mind for the bad debts is poor before giving out loan to them. The
pre-requisite for giving out loan to the customer is the consideration
of the following:
CHARACTER: The likelihood that a customer will try to honour his obligation.
CAPACITY: The subjective appraisal of the customer´s ability to pay.
CAPITAL: The general position of the customer.
COLLATERAL: Assets that customers may offer as security to obtain credit in case of bad debt.
Improper evaluation of profits by banks, a situation whereby funds become
inadequate for projects. This affects the loans resulting to bad debts.
Political instability contributes indirectly to bad debts in banking
industry by the government refusing to pay contractors in some projects
awarded but there abandoned by a new government of many projects in an
attempt to revamp our economy, incapacitate the contractors and affects
repayment of the loan borrowed.
NATURE RELATED FACTOR
Nature contributes in creating bad debt in our banking industry.
Natural hazards include something like fire engulfing the factory where
the loan is invented, in the case of agriculture, poor rainfall and pest
may cause low harvest which will not give the farmer enough to repay
For these purpose the research shall appraise lending procedure and loan management of Union bank.
CONDITION: Impact on general or specific economic trend.
High interest chargeable by banks sometime occasioned a situation of
bad debts because the interest increases the amount to be paid.
Absence of forum by banks for enlightenment education of customers
resulting to lack of procedure on report judgment for joint solution.
Poor supervision of loan extended: loan diverted to a non-income
yielding venture results to delay of payment or default totally.
Therefore loan given should be traced to the extent of seeing where it
is invested by the bank.
Late and inconvenient disbursement on loans by banks either because
of the risk factor inherent or due to inadequate staff or other
bureaucratic and administrative delay. Convenient amortization schedule
also contribute in credit management policy of the bank. The researcher
shall proffer suggestions on his findings. The work is divided into five
chapters. Chapter one contains the introduction, chapter two contains
the literature review on the product topic discussing the history of
Union bank as well as the management of loan and credit including the
policy and procedure in Union bank of Nigeria plc,Research design and
methodology are discussed in chapter three, Data analysis/discussion of
findings and test hypothesis are contained in chapter four and chapter
five comprise summary of findings, recommendation and conclusion.
Both loan complication and risk of loss are hardly divorced from the
lending operations. Proportion of the total loans and advances made by
the banker would usually become sticky. That is why even the best
managed banks provide for bad and doubtful debts in their normal course
of business. The best option for a banker wishing to avoid bad debts
would not lead.
However, this is not so, since interest carried on lending
constitute a great proportion of banks earnings. Agreeing that bad debts
are emotive. Words to bankers, Dandy (1975) enumerates some factors
that may cause bad and doubtful debts to arise. These factors include:
Excessive lending or security values
Bad management of borrowers’ bank account
Incomplete knowledge of customers’ activities
Extraneous factors such as over trading, over- reliance on trade
customers, optimistic balance sheet, misrepresentation and dishonesty of