ABSTRACT
This project studied the management of bad and doubtful debts by Nigeria commercial banks. It noted problems associated with the wide spread development of bad account by banks as being occasioned by so many changes that are unfolding as a result of the deregulation of the Nigerian Financial System. It viewed the incidences of bad debts as one of the greatest problems facing both old and new generations of banks today with adverse consequences on their profitability level.
This project traced the origin of bad accounts to a number of factors some which may be internal, external or by act of God. e.g. the death of the owner of business. It was help that an account becomes bad the very day the facility is granted. Carelessness on the part of lending officers and his inability to interpret and respond promptly to warning signals may cause an untold loss in addition collusion by lending officers with the borrowers and absence a clearly defined lending guideless by banks may be responsible for high loan default. It is even difficult to identify control once a facility has been agreed by management.
The most effective way of limiting one’s losses however is to stop paying out but trading margins are particularly important. Â
TABLE OF CONTENT
TITLE PAGE i
CERTIFICATION ii
DECLARATION iii
DEDICATION iv
ACKNOWLEDGEMENT v
ABSTRACT vii
TABLE OF CONTENTS
CHAPTER ONE
1.0 Introduction 1
1.1 Background of the Study 1
1.2 problems of the Study 4
1.3 Objective of the Study 4
1.4 Significance of the Study 6
1.5 Research of the Study 8
1.6 Plan of the Study 9
CHAPTER TWO
2.0 Literature Review 10
2.1 Meaning of Bad Debt 10
2.2 Management Of Bad Debt 11
2.3 Effects of Bad and Doubtfully Debts 18
2.4 Risk Analysis 22
CHAPTER THREE
3.0 Research Methodology 25
3.1 Historical Background of First Bank 25
3.2 Sample and Population of the Study 26
3.3 Population 28
3.4 Method of Data Analysis 29
3.5 Validity of Instrument 31
3.6 Administration of Instrument 32
3.7 Observed Problem 33
3.8 Limitation of the Study 36
CHAPTER FOUR
4.0 Data Presentation and Analysis 38
4.1 Data Presentation 38
4.2 Data Analysis 41
4.3 Test of Hypothesis 47
4.4 Findings 49
CHAPTER FIVE
5.0 Summary, Conclusion and Recommendations 51
5.1 Summary 51
5.2 Conclusion 55
5.3 Recommendation for Improved Management
of Bad Loan 57
REFERENCES 59
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Among the industrial sectors in Nigeria today
banking sector arouses the public interest most it is the most visible and of
the fastest growing section in the economy a past from the fact that the
monetary of every policy guideline document issued by the central bank of
Nigeria in January of every year regulates the activities of the entire economy
the banking sectors is responsible for carrying out most of the policy issue
contained there in the sectors is also subjected to frequent controls and
reputations. In popular jargon, the banking sectors has become one of the most
critical sectors and commanding heights of the economy with wide implications
on the level and direction of economic growth and transformation and such
sensitive issues as the rates of unemployment and inflation which directly
affect the lives of people the banking sector is without doubt of the fastest
growing industries in the country today from total of 26 in 1980 the number of
commercial and merchant banks in the country growing steadily to 40 in 1985
where it stabilized until it increased to about 49 in 1987 beginning from 1987
and following the introduction of structural Adjustment programme (SAP) in 1986
there had bean a rapid growth in the number of bank increased by 15 i.e. 30% to
reach 66 and additional 15 joined it in 1989 which 1998 witnessed 21 new enchants
to bring the total number of commercial and merchant bank to 102. Before the
government placed temporary ban on the opening of banks in 1991 there was not
less than 125 banks operating in the country. From N12million and N20million
for merchant and commercial bank respectively paid up capital increased to N40million and N50million one notable implication from the development is the sudden
rise in the volume of bad doubtful account which bank are compelled to carry in
their books the increasing number of this problem loans had been on grated
challenges facing in particular the old generation of bank usually referred to
as the “Big three. The First Bank of Nigeria Plc. The Union Bank of Africa Plc
The problem posed by carrying large volume of bad loans or non-performing accounts was not fully recognized until in November 1990 when the central bank introduced the prudential guidelines in line with the general standard all over the world to make the s in the country assess themselves fully thereby determine how healthy or prudent they are in their loan credit management.
Most bankers cannot unequivocally declare that they have been introduced by problem loan. Certainly, it is a way of life in those tumultuous times of banking that virtually every one of them is faced problem or so-called work out loans.
Another important reason is to decline in the economic fortune which gripped the Nigerian economy.
1.2 PROBLEMS OF THE STUDY
With many banks in large proportion given out loans and overdraft to their customers. The bank is therefore, taking the risk some of the customers may never pay back the loans or overdraft given to them.
This is normal business risk and such bad debts are normal business or running expenses.
The researcher therefore will like to find reasonable solution to the following question.
i. What is the causes of bad debt
ii. Why provision for bad debt are made
iii. How bad debt are written off.
iv. How banks as financial institutions managing bad debts.
v. How banks estimate provision for bad debt.
1.3 OBJECTIVE OF THE STUDY
The broadax objectives of the study is to analysis the effects of rising machine of bad debts on banks operation since 1986 when the federal government adopted SAP. The focus is largely on the credit policy on the credit policy of banks and how to manage SAP. The focus on how to manage loans and reclaim the collateral assets securing them. In specific terms the study will inquire into the rising waves of bad doubtful account in our banks in general and first bank Nigeria plc in particular. The aim is to determine the share of the major actors or factor in granting a loan.
a. Other customer
b. The banks and
c. The government or the economic environment.
Secondly, the study will examine impact of the prudential guidelines on the management of loans by banks since 1990 when the guidelines came into effect. What impact it has produced on the reporting system of banks. The study will vigorously interpret the profit reporting system of bank before and after prudential guideline and finally draw some policy lessons and predictions for the future.
Finally, the study will aspire to provide the essential strategies that may be used for loan recovery once a debtor enters bankruptcy.
1.4 SIGNIFICANCE OF THE STUDY
The motivation for the study arises from the research interest in tracking the effect of economic reforms within the structural adjustment programme since the deregulation of financial system of the economic reforms is expected to alter the volume and pattern of lending by banks and the profitability of banks. It is necessary to investigate the extent to which profit that are being declared by banks actually reflect their true profitability position. Whether adequate precaution have been taken in their granting loans. The structural weakness of these banks is referred in the heavy bad debt portfolio, which is fact eroding their capital base. The introduction of prudential guidelines has therefore exposed the weak foundation and the misfortune arising from bank debt structure. Data generated from the annual reports of banks with regards to the volume of the bad debts have been fraught difficulties until the introduction of the prudential guidelines.
Firstly, it is a policy objectives of the monetary authority to recognize only income that is earned and not paper profits.
Secondly, it is also the objectives of the monetary authority to confirm with4t he international prudential guidelines.
Thirdly, it is to make banks more prudent in their lending decision thus reducing incidence of bad and doubtful account.
Finally, it is to encourage bankers to become solid financially able in Ibadan the customers are partially sophisticated.
Of serious limitation of the study is the problem of data collect ion. Through thus is not peculiar to this study. It must be recognized that not until the prudent guidelines came into effect November 1990. Most banks nor do they realize the need to make adequate provision of data for bad and doubtful debts. What banks did at best was a make petty provisions for those classes of debts.
1.5 RESEARCH OF THE STUDY
The course of action employed in this research in order to achieve its objective were both a case study and survey methods.
According to Aliazu (1981) a case study involves the study of one group at a point in time and arriving at a conclusion in relation to the situation of that one group. While the survey method is one in which the representation sample of the population is studied and the entire result generalized.
Most financial institutions and industrialist sampled preferred to remain anonymous. One of the logs in the wheel of progress is carrying out survey studies is the difficulty encountered in data collection.
Institution and individuals are usually not ready to release information. The strategy of anonymous was adopted in this work to enable easy access to information needed for the study.
1.6 PLAN OF THE STUDY
The remaining part of work is organized into four chapters. In chapter two, the study reviews some existing literature on bad debt management with view and conclusion as generated among the various authors. Chapter three of the study contains the methodology. In the chapter, I tried to present the methods by which the result which terms basis of my samples and how the questionnaires were administered. The forth chapter derives from the third and contains my analysis of the questionnaire and my basic deductions.
Finally, chapter five contains a summary of my findings, recommendation and conclusion.
CHAPTER TWO
2.0 LITERATURE REVIEW
2.1 MEANING OF BAD DEBT
Bad debt is an accounts renewable that will likely remain uncollectible and will be written off. Bad debt appear as an expenses on the company’s income statement this reducing net income. In general companies make an estimate of bad debt expenses that might be incurred in the current time period based on past records as part of the process of estimating earing most companies make a bad debt allowance since it is unlikely that all of their debtors will pay them in full
There are a list of possible scenarios that may exist concerning a bad debt these are
- Customer not willing to pay a proportion of the loan sum
- Customer not willing to pay all the sum of the loanable funds
- The customers business had falls and nothing is ever likely to be received
2.2 MANAGEMENT OF BAD DEBT
Since we say bad debt is a normal business expenses with respect to the types of service provided. The management of bad debt has to do with the ways to reduce the amount ways to recover some of these bad debt.
Critical analysis has to be done before loans are given to recover some of these bad debt customers so as to ensure of bad debt and prompt payment of interest and recoupment of the principal amount.
These can take the form of the followings:
- Recruitment of competent, educational qualified personnel to lending and credit department
- Training of personnel from time to time
- Leading controller should be built to reduce incidence of personality man kind of lending which often results to bad debt
- The reasons for the loan
- If the security supply the customer can off set the loan
- How long the customer has been dealing with the bank
- The viability of the project which the loan is to be use for
When the above mentioned are carefully analyzed by the bank then there would be reduction in the amount of bad debt there by increasing the profit and reduce the exposes of the bank
Right now, with cash tight and business slowing down, companies need to go after the bad debts as a way to raise needed cash. They need to go after the receivables even it if means getting just something now!
Like all significant economic change, it creates opportunities for those who have it in them to deal with it. During economic downturns, one of the main reasons why businesses go under is because they run out of cash. However sound your business is in other ways, successful cash flow management should be your main priority.
A recent study on the growing sicknesses in industries and businesses reveal that BAD DEBT is the one major cause for bankruptcy. In a buoyant economy, selling on credit has a number of advantages, especially when it generates a larger volume of business as well as widens one’s market share. In fact, selling on credit often ‘Makes’ or ‘Breaks’ a sale and at most times gives one that edge over competition. Yet, one cannot afford to take this area of credit control lightly, as too many companies everyday are mounting with debts that are increasingly doubtful of recovery.
The volatile business conditions of recent years have created problems of cash flow and interest charges never before encountered.
Companies large and small have, in many cases for the first time, come to realize that the trade debtors or receivables, on the balance sheet represent a very substantial and expensive consumer of capital employed. They are also now beginning to accept that, in total, trade debtors represent an investment in the market -place on which the expected return is the profit to be earned only when payment has completed the sale. At the same time, like all investments, those trade debtors are subject to the risks arising from the effect of the economic climate on that market-place generally.
Has it ever occurred to you that before the customer buys your goods, both are interested (he in your goods and you in his money), but once he gets the goods he is not interested-it’s only you (for your money!!).
A company can have the finest product, a superb sales record and the most dedicated workforce, but if it does not get paid (…. and on time!) it will die. An unpaid debt is a loan being financed by your company – it means that many companies are prevented from achieving their full potential, because instead of using borrowed money to develop and grow their business, they are having to borrow money just to fund their own sales ledgers.
Research consistently shows that a typical invoice will on an average be settled in not less that 72 to 78 days. A widely quoted survey by Intrum-U.K. fixed the period at 72 to 78 days. As 30 day terms are normal, the extra 48 days have a significant effect on profit and loss. It can even be the critical factor affecting a company’s survival.
Good cash collection procedures therefore can make the difference between a profitable business and one forced into liquidation because of slow payments and default on outstanding debts.
Managing credit and collecting money are the 2 most important and vital factors which decide the fate of any business.
Here are some of the most common reasons:
- Few sales induction programmes offer advice or are held in getting payment, with the result that money is rarely mentioned at the sales call presentation.
- Some salespeople, understandably too, have enough difficulty getting the order without putting it at risk by haggling over payment terms.
- Too many salespeople think only in terms of getting the best deal for the customer and forget that they are obliged to get the best terms for their company as well.
You may be thinking this does not apply to your organization and if that is the case you are fortunate indeed. However several companies do have such problems and the only differing factor is the name of the company. If this problem exists within your own organization, recognize the futility of changing the system; as the root cause of the problem is elsewhere — in the attitudes/improper training of the people in collection procedures / techniques. Until such time as you can bring about a change with a proper training, your cash flow difficulties will continue to escalate. Gerard A. (ID 755)
AVOIDING BAD DEBTS
There are a number of precautionary measures you can take:
- Make sure new clients and customers provide information about their credit worthiness, including credit references, and a commercial credit check on companies;
- Make sure you are clear about the terms of supply of credit;
- Investigate the possibility of obtaining a personal guarantee from the directors of a client company;
- Follow up debts immediately they are overdue, and consider more stringent terms in the future, e.g. the supply of goods C.O.D. or prepayments before work/supply is begun;
- Get supply agreements in writing, so you have proof of agreement to the supply terms;
- Check out whether it is feasible to withhold the passing of title in equipment and materials until payment is made;
- Avoid later claims of unsatisfactory work by getting a customer to sign an agreement that the work was completed satisfactorily;
- Investigate the possibility of progress payments for ongoing contracts or work.
2.3 EFFECTS OF BAD AND DOUBTFULLY DEBTS
The impact of bad debt on sales and profit on any banking industry or organization can be a serious one. Bad debt can put a stranglehold around a business that will eventually lead to bankruptcy and a destroyed professional reputation.
Debt collection is embarrassing, both financially and personally for a business owner. Whether the unpaid debt is indicative of problems that may be of the business’ own making or the result of an economy in recession, but the result is the same. When a commercial collection agency gets involved it’s already too late to save your good name and may be the first step towards bankruptcy court. Debt collection against your business assets should be avoided at any cost.
Sales suffer when word gets out that your business has been turned over to a commercial collection agency. Confidence in your business is the foundation for your sales and reflects either favorably or unfavorably on how your customers view your products or services. If consumers fear that your business is unstable and untrustworthy, this fear will carry over onto your product line. Consumers may question your ability to honor warranties and whether you will be there to accept returns or make exchanges. Consumer confidence is critical to successful sales and the appearance that your business is in financial trouble may cause your sales begin to plummet.
Sales mean profits and the converse is also true. If your marketing strategy is failing due to commercial debt, your profits will dive as well and further complicate an already unfavorable financial situation.
A commercial debt collector can sometimes handle things discreetly and avoid unnecessary publicity concerning the financial stability of your company. Working closely with a commercial debt collector can minimize the effect that bad debt has on your sales and profits.
Bad debt can also hurt your sales and profit margin by causing you to be turned down for additional credit lines during crucial times. Regular debt is incurred when ordering raw materials or supplies, when opportunities are experienced that require capital outlay, or when normal and expected seasonal slow-downs occur. This cycle of debt and repayment is standard operating procedure and a fundamental requirement for doing business. If bad debt prevents you from borrowing and destroys your credit, your business may not survive the ebb and flow of the business world and you may not be able to borrow the funds needed to survive.
Sales and profits may suffer when your debt prevents your retaining important employees. Hiring the right people is one of the wisest things a business owner can do. They literally make or break the business. Bad commercial debt presents the strong possibility of losing those valued employees because of the lack of your business’ ability to provide insurance, give raises, and award bonuses. If word gets out that your business has been turned over to a commercial debt collector, employees may see the writing on the wall and start looking for other employment. If hiring the right people is important, retaining them is just as important.
Bad debt can and does adversely affect your sales and profit margins. Avoiding bad debt is the preferred course of action but it isn’t always possible. If your debt is being handled by a commercial debt collector, cooperate as fully as possible to reduce the damage to your business. Bad debt can be handled in such a way that your business survives and becomes profitable once again.
- Reduces the profit of the business
- Increase the expenses of the business
- Reduces the divided of the shareholders
- Reduces the amount of loan able fund of the bank
- Interest to be derive from loaning out fund is reduced
- Loss of valuable funds when they are written off
2.4 RISK ANALYSIS
Risk analysis involves the identification of risk and its analysis in term of estimating the probability of a loss occurring and considering the potential impact if the loss does not occur it may be possible to quality the initial loss.
