CREDIT MANAGEMENT AND THE INCIDENCE OF BAD DEBT IN NIGERIA MONEY-DEPOSITE BANKS. (A CASE STUDY OF UNION BANK OF NIGERIA )

CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND OF THE STUDY

It is an accepted fact in Economic discourse that intermediaries such as Banks and Non-Bank financial institutions exist to ensure the transfer of financial surplus units to financial deficit units in any economy. Financial intermediaries make these funds available to deficit units or more broadly borrowers. In the process of inter-mediation, the financial intermediaries incur costs and even losses. Hence the need to sustain investor confidence in the system through the provision of adequate controls.

The need for an effective and efficient system of debt administration, control and recovery is today of central importance to institutional lend-ers. We have come a long way from the days of easy and cheap money supply of the 1970’s. People will recall the halcyon era of the Udoji awards and oil boom when absorptive capacity was low and economic activity was essentially cash and carry. That was the era of “arm chair” banking.

Not so in the Shagari era of the early 1980’s when the bubble burst and economic stabilization measures were introduced. Money became tight and defaults in loan obligations started. Today institutional lenders are groaning under the weight of massive volumes of non-performing assets. Total bank credit to the domestic economy rose by 83.5% from 18.47 billion in December 1989 to 33.0 billion in September 1990. Outstanding non-performing loans stood at about 7.6 billion in 1990. Up until mid-1989, it was still relatively easy to source funds in the desired volumes but tight monetary policy has since changed all that. The introduction of the prudential guidelines on loan loss provisions and the big bang of March 5, 1992 when the Naira went into free fall has put pressure on the cost of funds and reduced lending. There has been a lot of talk about bank defaults and the time has certainly arrived for these institutional lenders to take a fresh look at debt management.

In a modern economy,there is distinction between the surplus economic units and the deficit economic units and inconsequence a separation of the savings investment mechanism.This has necessitated the existence of financial institution whose jobs include the transfer of  funds from savers to investors. One of such institution is the money deposits banks, the intermediating roles of the money-deposit banks places them in a position of “trustees´´ of  the saving of the widely dispersed surplus economic units as well as the determinant of the rate and shape of the economic development.The techniques employed by bankers in this intermediary function should provide them with perfect knowledge  of the outcomes of lending such that funds will be allocated to investments  in which the probability  of full payment is certain.However,in practise no such tool can be found in the decision of the lending banker. Virtually all lending decisions are made under creditors on uncertainty. The risk and uncertainty associated with lending decision, situation are so great that the concepts of risk and risk analysis need to  be employed by lending bankers in order to facilitate sound decision-making and judgement.This statement implies that if risks are to be objectively assessed,lending decisions by the money-deposit banks should be based less on quantitative data and more on principles too subjective to provide sound and unbiased judgement.Furthermore,the banks depend heavily on historical information as a basis for decision making.

Apparently aware of the inadequacies of his decisions base,the lending banker has often sought solace in tangible and marketable assets as security giving the impression that lending against such securities is an insurance against bad debts.this makes the banker complacent with  his loan portfolio.The increasing trend of provisions for bad and doubtful debts in most money-deposit banks is a major source of concern not only to management but also to the shareholders who are becoming more aware of the dangers posed by these debts.Bad debts destroy part  of the earning assets of banks such as loans and advances which  have  been described as the main source of earning and also determines the liquidity  and solvency which generate two major  problems, That is profitability and liquidity, has to earn sufficient income  to meet its operating costs and to have adequate return on its investments.

1.2    STATEMENT OF THE PROBLEMS

The problem for this study is to appraise the prevention and recovery of bad debt of a typical Money-deposit bank (the Union bank of Nigeria Plc) with a view  of finding the causes, consequences  of bad debts in banks, recovery and prevention of bad debts. Year after year, banks suffer much from the part of full loan extended which has  for one reason or the other proved unrecoverable. Banks lose millions of Naira in various  bad debts yearly and despite efforts by bank management, committee of chief inspectors and the bankers committee on the other hand, the wave of bad debts in banks is still on alarming proportion. This is gathered from a combination of literature reviews on the topic.

On the other hand, many banks experienced a lot of bad debts when the new government abandoned the project awarded to the contractors by civilian government. These contractors borrowed to execute the project awarded to them but could not repay the loan, due to government action on revamping the economy thereby abandoning the project. Other experiences were during the time of draught or poor rainfall and pest. These however  led to low harvest  which did not give the farmers enough  time to repay their debt.

Again, experience may arise in respect of lapses on the part of the banks credit officers. For instance, there may be excesses  over approved facility, unformatted facilities and expired facilities not renewed on time. In each of these cases the customer may easily  deny even owing the bank all or part of the amount. Money deposit banks have always borne the burden alone, but this may not continue in  future as the banks may be unable to take the risk of lending more but when eventually they do, they would seek the best  way  they come out of the risk with a realistic reward which they are clearly failing to achieve at present.

     1.3      OBJECTIVES OF THE STUDY

• To determine and appraise the lending procedure of banks using Union bank of Nigerian plc as a case study-with a view to highlighting the effectiveness and adequacy or otherwise the credit management policy of Nigerian banks in preventing and reducing the occurrence and consequences of bad debts.
• To highlight the rate at which inadequate collateral security provision by borrowers increases the incidences of bad debt in Nigerian.
• To determine whether fund diversion has any effect on bad debt of money deposit banks in Nigerian.
• To ascertain the extent to which government intervention in lending policies of money deposit banks has influenced bad debts in Nigerian money deposit banks.
• To highlight the extent to which improper project evaluation influence bad debt of money deposit banks in Nigerian.

• RESEARCH QUESTIONS

In view of the consequences of bad debt in Nigerian money deposit banks, it is neccessary to formulate some research question which will enable the researcher  formulate statistical  tables for testing hypothesis.

1. Has inadequate collateral security provision by borrowers caused bad debt in Union bank of Nigeria plc?
2. Does fund diversion have any effect on bad debt of Union  bank of Nigeria Plc?
3. To what extent has government intervention in lending policies of money deposit bank influenced bad debt in Union  bank of Nigeria Plc?
4. To what extent does improper project evaluation influenced bad debt of Union  bank of Nigeria plc?

1.5      RESEARCH HYPOTHESIS

The following  hypothesis were drawn as follows.

1. Ho: inadequate collateral provisions by borrowers does not increase  the incidence of bad debt  and recovery in Union bank of Nigeria plc.

Hi: Inadequate collateral provisions by borrowers  increases the incidence of bad debt and recovery in Union Bank of Nigeria.

2. Ho: Fund diversion does not affect bad debt in Union Bank of Nigeria

Plc.

Hi: Fund diversion affects bad debts in Union Bank of Nigeria Plc.

3. Ho: Government intervention in lending policies of money-deposit banks has no influence on Union  Bank of Nigeria Plc bad debt.

Hi:  Government intervention in lending policies of money-deposit

banks have direct influence on Union Bank of Nigeria Plc,bad debt.

4. Ho: improper project evaluation has no significant relationship with bad debt in Union Bank of Nigeria plc.

Hi:  improper project evaluation has direct relationship with bad debt in Union Bank of Nigeria plc.

1.6      SIGNIFICANCE OF THE STUDY

It is hardly an exaggeration that the difference between the success and the failure  in the banking industry is in the effective management of the banks loans and advance. Efficient loan management is vital to the protection of assets and the achievements of adequate returns to investment. Though much work abound in the literature  of the technique of lending, the methods of securing such lending and the pitfalls that await the  unwary banker. By comparison it appears to be very  little in point on the subject of loan management, prevention and recovery of bad debts.

A study of this subject will therefore be a welcome addition to the existing volume of banking literature.

Effective loan management recognized that beyond the application of sound banking principles whenever a loan is made, there is need for urgency in appreciating the point when a loan begins to look doubtful, in arriving at a decision as to the appropriate action and in taking that action.This will enable the bank  to at least obtain full payment including accrued interest  or at worst to mitigate the capital loss in the face of increased competition among banks, future profits are likely to be harder to come by and since bad debts are a charge against profits, it is appropriate that we review the methods, proportions and margins of lending to bad and doubtful debts.

Hence the significance of this study to bankers will enable them to appreciate an appraisal  of their lending and control mechanism now that they are expected to lend under tight monetary conditions.The economy as a whole will benefit from the study  because if the level of bad debts is reduced, banks will be left with more profits to enable them make the expected contributions to the development of the economy.

1.7        THE SCOPE OF THE STUDY

In the study of prevention and recovery of bad debts, Union  Bank of Nigeria Plc was used for my analysis. All references therefore relate to Union Bank of Nigeria plc.

A Six-year period covering 1988-1993 will be studied.

1.8      THE  LIMITATIONS OF THE STUDY

The limitations of this study include some of unavoidable constraints and problems encountered in the process.They are as follows:

1. i) FINANCE: The problem of finance was not left out in the course of research to this study. This type of study required adequate money and time to enable the researcher visit the  necesssary places for collection of data.Insufficient fund hindered an in-depth study of this research since it was financed from meager pocket money of the researcher.
2. ii) NON-AVAILABILITY OF RECORDS: This is one of the most important limiting factors in the course of the study.This includes the problems of easily getting the appropriate data due to bureaucracy which hinders the information flow in the country.

iii)  NON-CHALLANT ATTITUDE OF BANK OFFICIALS: The reluctance of bank officials to reveal information on the need for this study,for fear of breach of duty of secrecy to customers exposure of banks administrative short-comings.

1. iv) IGNORANCE OF RESPONDENT /BORROWERS: Most bank  customers were semi-illiterates  and most often it was very difficult to collect  adequate data required from them.
2. v) TIME: Since this study is one of the many courses offered by the researcher,the researcher was constrained by time  to carry out an indent research on the study.

1.9           DEFINITION OF TERMS

DEBT: This is what one owes to another person.

LOAN: A Loan is a credit arrangement,a security is pledged and must be repaid with interest over a stipulated period of time.

OVERDRAFT:  This is a credit arrangement by banks to their customer to withdraw money over and above that what he has in the account.

DEFAULT:  This means failure to pay one´s debt for credit extended which has fallen due.

HYPOTHESIS:  This is a tentative statement of conclusion.It is a statement of claim which is to be proved right or wrong having been confirmed with facts.

Ho:  Null Hypothesis: the hypothesis that is being tested.

Hi:    Alternative Hypothesis: the hypothesis that will be accepted if the null hypothesis is rejected.

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