LOAN GRANTING AND ITS RECOVERY PROBLEMS ON COMMERCIAL BANKS
ABSTRACT This research work was undertaken to assess the Loan granting and its recovery problems on Commercial Banks. The research was intended to achieve the following objectives: To find out the several problems facing loan recovery, the effects of loan default on commercial banks and the measures that will be used in reducing the incidence of loan default. Relevant data were collected from both primary and secondary sources. Questionnaires were the main primary data collection instrument employed while data from various relevant publication constituted the sources of secondary data. Upon the analysis of data, the following conclusions were drawn: That problem of loan default stemmed from the fact that there is unavailability of security to be disposed by banks to realize funds. And also customer’s attitude towards loan payment. On the basis of the above findings, it was recommended that commercial banks should use some risk control measures to guide against loan default. Also, before granting loan, they should examine critically the project statement submitted by the customer or borrower which will help them to find out the realistic repayment pattern and also help them in knowing if the projects are realistic based on the customer’s past performance. Also, the Central Bank of Nigeria should create a conducive environment for the successfully operation of commercial banks in Nigeria.
CHAPTER ONE 1.1 BACKGROUND OF THE STUDY: Virtually, every business has a credit relationship with a financial institution, especially banks. Some rely on periodic short term loans to finance temporary working capital needs. Others primarily use long-term loans to finance capital expenditure, new acquisitions or permanent increases in capital. Regardless of the type of loan, all credit request mandate a systematic analysis of the borrower‟s ability to repay as at when due.
Commercial banks carry on ordinary banking business with the general public, changing cash for bank deposits and bank deposits for cash,
transferring bank deposit from one corporation to another, giving bank deposit in exchange of bills of exchange, providing of trustees and executor‟s services, providing safe custody of funds and valuables as well as foreign exchange remittance. Though commercial banks differs from country to country, their profit and banking motives are the same. Their activities are of interest to their customers, workers (staff), and above all, shareholders. The commercial objective of the bank is to maximize profit, though other social and economic functions tends to deflect banks from profit maximization. The aims and objectives of commercial banks have therefore paved way for their customers to make and obtain credits, in form of loan of which the researcher is interested in. Lending has become a vital function on operation because of its direct effect and impact on economic growth and business development.
In a market oriented economy, there are two main participants that move the economic growth; these are the suppliers of invisible funds and the users of the funds for productive purposes. These two participants are spread widely in the economy and may not have direct relationship with each other. For this, there is the need to have an intermediary to link them up. The banking sector mobilize surplus funds from small and big savers who have no immediate need for such funds. The users of these funds are
the business entrepreneurs and investors who have brilliant ideas on how to create additional wealth in the economy but lack the necessary capital to execute their ideas. These groups of people approach banks to obtain loan. Subsequently, lending is a risky venture which banks only engage on after a rigorous and satisfactory analysis of the project for which lending is being made. The main preoccupation of banks is extending loans to their customers. Thus, the formulation and implementation of such lending policies are some of the important responsibilities of the management of the bank. The lending policy of a bank must be specific on how much loan will be made available to whom, what period and for what reason. For this reason, lending policies should be well documented so that lending officers will be able to know the areas of prohibition and the area of where they can operate. Also, such policies should be subjected to periodic review to make the banks keep abreast with the dynamic and innovation nature of the economy as well as competing with other changing economic sector.
Therefore, the basic objectives of credit analysis t=is to assess the risks involved in extending loans to bank customers. In financial circle, risk typically refers to the volatility in earnings. Lenders are particularly concerned with adverse fluctuation in net income or cash flows, which hinder the borrower‟s ability to service a loan. Some risks can be measured with historical and projected financial data, while others such as those
associated with borrower‟s character and willingness to repay a loan are not directly measurable. 1.2 STATEMENT OF PROBLEMS: Banks in recent times has failed as a result of loan recovery problems. Loan is the major source of bank profitability. However, in going about their lending activities, banks have their own objectives among which are profitability, growth, safety, suitability and liquidity. Loan, when not recovered could adversely affect banks. It is easily granted than recovered. It usually needs proficiency i.e. competency and expertise in the recovery process. It sometimes become an uphill task to recover. When they are not recovered, the impact is often disastrous to the bank. It can lead to illiquidity, insolvency and even distress as the case may be. There is therefore a need for arriving at strategies for efficient loan recovery. That is the peak of the problem. 1.3 OBJECTIVES OF THE STUDY Having known that lending objectives of a commercial bank is to provide growth, profitability and liquidity, and its representing chunk of deposit as a source of income to the bank, the cumulative effect of loan default will be a loss of confidence in the banking system.
The researcher therefore aimed at:
1. Finding out the several problems facing loan recovery 2. The effects of loan default on commercial banks 3. The measures that will help to reduce the incidence of loan default. 1.4 RESEARCH QUESTION 1. What are the several problems faced during loan recovery? 2. What type of loan do commercial banks grant? 3. Who are the loan beneficiaries of commercial banks? 4. Are there measures to reduce the limit of loan default? 5. What are the effects of loan defaults on commercial banks? 6. What are the sectorial allocation of commercial bank‟s loan? 7. What are measures that will help to reduce the incidence of loan default? 1.5 RESEARCH HYPOTHESIS Ho – the measures taken by banks do not reduce the incidence of loan default. H1 The measures taken by banks to reduce the incidence of loan default
1.6 SCOPE OF THE STUDY
The research work is to analyze the problems of loan recovery on commercial banks (First Bank Plc) in Ojo-Alaba, Ojo Local Government Area of Lagos State.
Due to limited time and the level of this project work, the researcher decided to systematically and meticulously narrow it down to a study that will cover two distinct areas namely: The problem of loan recovery and how to control loan default. The researcher wants to avoid unnecessary details that are not concerned with the problem of loan recovery in commercial banks. The study is limited to first bank branch in Ojo-Alaba, Lagos State. 1.7 SIGNIFICANCE OF THE STUDY This study is intended to analyze the problems of loan recovery in commercial banks in Nigeria and their poor system of management of loan. The result of this study will be immense important to some of us and even the bankers in particular. Banks will become conscious in their loan disbursement. They have to determine the kind o people that will benefit from the loan disbursement, the type of loan to give the criteria to use in granting loan and the procedures to be used for loan recovery. 1.8 DEFINITION OF TERMS In the course of the study, the researcher makes use of some words that needs to be defined so as to carry the reader along.
LOAN: This is the act of allowing a borrower to make a temporal use of
funds at its disposal. It is also a more formal arrangement by which a bank agree to lend an agreed amount to a customer usually for a given period. RISK: It is the measure of uncertainly inherent in any decision making process. PROFITABILITY: It is used as index for measuring managerial performance. It means yielding or bringing profit or gain. LIQUIDITY: This is the word that banks used to describe their ability to satisfy demands for cash in exchange for deposits. BANKING: It is an agency through which debts and credits are converted and exchanged between owners. BAD AND DOUBTFUL DEBT: Bad debts are those which are not recoverable, though they are written off as loss. Doubtful debts are those of which the recovery in full or part is uncertain. CAPITAL: It is the equity value of the bank educated to the present value of its future earnings.
1.9 LIMITATIONS OF THE STUDY:
In the course of the study, the researcher was faced with several constraints. One of the constraints was the short time period within which
the research was to be completed. Another factor was shortage of cash which prevented the researcher from traveling to source the data. Also, most of the credit analysis criteria in commercial banks were not disclosed to offer the necessary data required. Their frequent postponement of appointment coupled with the fact that commercial banks in Nigeria are vast in population i.e. First Bank Branches. The researcher could not get to all of them, therefore a sample was taken to represent all.