ABSTRACT
This research work was undertaken to assess the credit management
and the incidence of Bad debts in Money-Deposit Banks.This work was intended to achieve the following
objectives: to appraise and determine the lending procedure of banks, to
highlight the extent to which improper project evaluation influence bad debt of Money-Deposit Banks. Relevant
data were collected from both primary and secondary sources. Questionnaire was
the main primary data collected instrument employed while data from various
relevant publications constituted the sources of secondary data. Upon the
analysis of data, the following conclusions were drawn; that sound lending
requires a clear-well articulated and easy accessible policy document which
spells out the philosophy of lending. On the basis of the above findings, it
was recommended that banks should ensure that loans given out to customers
should be backed by adequate collateral security. Finally, it is the opinion of
the researcher that the management of the Money-Deposit Banks should prevent
the incidence of bad debts in Nigerian Banks.
TABLE OF CONTENTS
Title Page
i
Approval Page
ii
Certification iii
Dedication
iv
Acknowledgement
v
Abstract vi
Table of Contents
vii
CHAPTER ONE:
INTRODUCTION
1.1 Background of the study 1
1.2 Statement of the problems
2
1.3 Purpose̸ Objective of the study
3
1.4 Research Questions
4
1.5 Research Hypothesis
5
1.6
Significant of the study 6
1.7
Scope of the study
7
1.8 Limitations of the Study 8
1.9
Definition of terms
9
CHAPTER TWO:
LITERATURE REVIEW
2.1 Theoretical Framework
9
2.2 Government control over credits 23
2.3 Credit Administration in Union bank of Nigeria plc 26
2.4
Lending and Credit Analysis 29
CHAPTER THREE: RESEARCH DESIGN AND METHODOLOGY
3.1 Research Methodology
36
3.2 Research Design
36 3.3
Area of Study
36
3.4 Population
for the Study
36
3.5
Sample Size Used 36
3.6 Instrument For Data Collection 38
3.7 Validation of the instrument 39
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Data
presentation and summary of findings 41
4.2 Provision and Analysis of Data Question 46
4.3 Test of Hypothesis 51
CHAPTER FIVE: SUMMARY OF FINDINGS,
RECOMMENDATIONS,CONCLUSION.
5.1 Summary of Findings 59
5.2 Recommendations 60
5.3 Conclusion 62
Appendix 64
Bibliography 66
CHAPTER
ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
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 lending and credit management
policies 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.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 reramping 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
PURPOSE/OBJECTIVE OF THE STUDY
(i)
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 reducing the occurrence and consequences
of bad debts.
(ii)
To
highlight the rate at which inadequate
collateral security provision by borrowers increases the incidences of bad debt
in Nigerian.
(iii)
To
determine whether fund diversion has any effect on bad debt of money deposit
banks in Nigerian.
(iv)
To
ascertain the extent to which government intervention in lending policies of
money deposit banks has influenced bad debts in Nigerian money deposit banks.
(v)
To
highlight the extent to which improper project evaluation influence bad debt of
money deposit banks in Nigerian.
1.4
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.
- Has inadequate collateral security provision by
borrowers caused bad debt in Union bank of Nigeria plc?
- Does fund diversion have any effect on bad debt
of Union bank of Nigeria Plc?
- To what extent has government intervention in
lending policies of money deposit bank influenced bad debt in Union bank of Nigeria Plc?
- 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
in Union bank of Nigeria plc.
Hi:
Inadequate collateral provisions by borrowers increases the incidence of bad debt 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 techique 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 and recovery.
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 credit
management in Nigeria,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:
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.
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.
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.
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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