The growing cases of classified debt and the increasing trend in the yearly provision for bad and doubtful debt in commercial banks suggest that there may be errors in the administration of credit by commercial banks in Nigeria. With this background, the tending polices and credit management, in a typical commercial bank. The union bank of Nigeria plc was appraised with view to ascertain the cause of consequences of bad debts as well as to find ways and means of reducing the incidence of bade debt thereof, the researcher, thought test techniques in intended to determine the extent to which inadequate collateral security provision by borrower increase the incidence of bad debt in bank of Nigeria plc. He also investigated whether fund diversion has nay effect on bad debts of union bank from (2005-2010). A questionnaire was used to collect debt; this was supplemented with oral interview and published reports. Two hypotheses were formulated and tested with chi-square. The result of the test shows that inadequate collateral provision by borrowers increased the incidence of bad debt in union bank. Base on these, the researcher made his recommendations and conclusion that banks should lend to viable project and ensure that it is backed by adequate collateral. Ti is suggested that further research in this area should examine on community bank like federal mortgage bank of Nigeria (FMBN)
TABLE OF CONTENTS
Title page i
Approval page ii
Table of content vi
1.0 INTRODUCTION 1
1.1 Background of the study 1-2
1.2 Statement of problems 3
1.3 Objectives of the study 4
1.4 research questions 5
1.5 Statement of hypothesis 6
1.6 Significance of the study 6
1.7 scope of the study 6
1.8 Limitation of study 7
1.9 Definition of terms 8-9
2.0 REVIEW OF RELATED LITERATURE 10-12
2.1 Government control over credit 13-17
2.2 Provision and types of credit 18-25
2.3 Determination and granting credit facility 26-33
2.4 Securities for lending and perfection 34-41
2.5 Credit control and analysis 42-46
3.0 RESEARCH METHODOLOGY 47
3.1 Introduction 47
3.2 Theoretical framework 47
3.3 Sources of data 48-49
3.4 Sample size 50
3.5 test techniques 51
3.6 Data analysis 52
4.0 PRESENTION AND ANALYSIS OF DATA 53
4.1 Introduction 53-6
- 2 PRESENTATION OF DATA 64
4.3 Analysis of data of test 65-67
4.4 TEST OF HYPOTHESIS
4.5 INTERPRETATION OF RESULT 68-69
5.0 SUMMARY OF FINDING, CONCLUSION AND RECOMMENDATION
5.1 Summary 70-71
5.2 Conclusion 72
5.3 Recommendation 74
1.1 BACKGROUND OF THE STUDY
The primary function of commercial bank is the extention of credit to worthy borrower. In making credit available, commercial banks are rending a great social service, through their actions production is increased, capital investments are expanded and a higher standard of living is realized.
Banks makes it possible for industries to produce a layer quality of goods and services which many remain in stock as or reprocessed into another form.
A good example is food industry where the quality produced may be for in excess of what can be consumed immediately.
When credits are granted, they are expected to be paid at the expected schedule time. But when deadline are not met, the result is bad debt. Bad debt are debt which are unlikely to be paid which are written off from the account. To minimize the incidence of bad debt which are in most cases caused by poor credit management, there has to be adequate knowledge of credit management by thee vested with responsibility of granting loans to customers.
In the past when regulation and control was inadequate, there was high incidence of classified debts (doubtful debt) and many of these where later written off as bad debts which eventually reduce profit. Today, the central bank has woken up to the challenges of poor credit management which has brought about the “distress syndrome” in many banks. It has issued out many circulars and guidelines to commercial banks and a lot of returns firm weekly, monthly, quarterly, yearly and biyearly are expected be rendered to central bank of Nigeria.
1.2 STATEMENT OF PROBLEMS
Poor credit management could be attributed to talk of adequate credit policy adopted by the management.
Every banker should, as a matter of routine design its supervision and follow- up forms in such as way that all relevant and critical information would be collected at any given point in time in order to reduce bad debt.
Bad debt has been the major out come of poor credit management and of not properly regulated will affect the bank greatly.
Credit administration should involves follow up exercise, physical examination and supervision of end use of funds provided by the bank as loan or over draft where as advances controls shuts returns in an academic exercise details of which are copied from customer valance files and other records in the bank.
Credit managers must be well knowledgeable in the entire process of granting loan and must adhere strictly to the rules governing the granting of such credit. The reason for giving out credit must be well stated.
1.3 OBJECTIVE OF THE STUDY
The effective management of credit helps greatly in choosing its back mix and use with respect to loan maturity terms, interest rates and payment size and frequency. In other words, of shows the insight of knowing when to borrow how much to borrow and from where to borrow.
Above all the main objectives of credit management especially to a banking institution include;
- To obtain optimism liquidity
- To maximize profit
- To control cost of managing credit so as to keep it at a minimum.
- To keep the credit portfolio at an optimal level.
1.4 RESEARCH QUESTIONS
In the view of the consequence of bad debt in Nigeria commercial bank. It is necessary to formulate some research question which will enable the researcher formulate statistically testable hypothesis they are as follows.
- Has inadequate collateral security provision by borrowers caused bad debt in union bank.
- Does credit creation affect the profitability and liquidity ratio of fidelity bank
- Does fund diversion have any effect on bad debt of union bank?
- To what extent has government intervening in lending influenced bad debt in union bank.
- Has poor credit management made fidelity bank give out more credit than necessary.
Also to what extent is improper project evaluation does influence the bad debt of union bank.
1.5 STATEMENT OF HYPOTHESIS
HI: default in payment at the schedule time leads in bad and doubtful debt
HI: lack of adequate knowledge in credit management can affect the administration of credit
1.6 SIGNIFIANCE OF THE STUDY
According to Pandy (1999:376) granting of credit and its managements involves cost, to maximize the value of the bank. These costs must be controlled and they should remain within acceptable limit. These cost include the credit administration expenses, bad debt, losses and opportunity cost of funds tied in receivable (loans)
1.7 SCOPE OF THE STUDY
The study of sound credit management in Nigeria commercial bank is based mainly on the assessment of the adequacy or otherwise of the effort of the banks management towards mi minimizing losses arising from bad debt. The researcher chooses one of the three big commercial banks in Nigeria (union bank of Nigeria plc and fidelity bank) as his case study. All references therefore relates to union bank year period covering from 2005-2010 will be studied.
1.8 LIMITATION OF STUDY
- Granting of credit and its management involves cost and these cost include, the credit administration expenses, bad debt loses and opportunity cost of the fund tied in receivable (loan)
- In the process of administering credit banks in can risks and experience some losses when certain borrowers fail to repay their loan.
- Since banks borrow short and lend long, the failure to repay bank loan prejudices the banks capability to honour their own obligations
1.9 DEFINITION OF TERMS
- FINANCIAL INSTITUTION: – these are institutions or an establishment that deals mainly on money and other very liquid assets.
- CREDIT MANAGEMENT: – this refers to the ability to prudently maintain the resources available to a certain business.
- CREDIT: – the word credit concerns money given out by one party to another being backed up with adequate security. In this project, the meaning of credit is restricted to the extension of credit facilities as loans and advances.
- CREDIT POLICY: – this refers to the norms or guidelines for the extension of credit facilities of loans and overdraft.
- OOVERDRAFT: – these are rather short term loans with interest calculated on daily basis. If the consumer does not make full use of the facilities he made to pay for the portion utilized only comparatively. It is cheaper than loans.
6. COLATERAL: – this is used as added security by banks (i.e. material security) before loans are granted. This can be in form of land, car, building etc.