COMMERCIAL
BANKS LENDING PRACTICES AND THE INCIDENCE OF BAD DEBT IN NIGERIA
ABSTRACT
This research work
will address the issue of lending problem loans (Bad debt) and also the
techniques of minimizing it.
In the ordinary
course of lending, Banks increase bad debt, which are charged against the
income generated. Indeed many banks are at the verge of collapse, because of
the impact and effects of bad debt and its ineffective management.
The nature of project
writing in ordinary National Diploma level demands that the source of collecting
data should be secondary, hence the researcher did not use interviews and
questionnaires, but the research conducted was only limited to already
published materials.
The researcher
discovered that problem loans do not just occur, they are caused by variety of
factors, and some are controllable while others are not.
Generally, bad debt
has a negative impact in the operations of banks. It is anathema to sound
banking system, therefore financial analysis must work hard to control and
manage it effectively.
The researcher
recommended some possible solution and suggestion on the commercial bank
lending techniques and also means of controlling bad debt.
TABLE
OF CONTENTS Page
TITLE PAGE i
APPROVAL PAGE ii
DEDICATION iii
ACKNOWLEDGMENT iv
ABSTRACT v
TABLE OF CONTENT vi-vii
CHAPTER ONE
1.1 BACKGROUND OF THE
STUDY
1
1.2 STATEMENT OF THE
PROBLEM 1-2
1.3 OBJECTIVE OF THE
STUDY
2
1.4 SIGNIFICANCE OF
THE STUDY 3
1.5 LIMITATION OF THE
STUDY 3
1.6 DEFINITION OF
TERMS
4-5
CHAPTER TWO
2.0 REVIEW OF RELATED
LITERATURE 6
2.1 PRINCIPLES OF
GOOD LENDING 6-19
2.2 BANK AND THE
ECONOMY
20-21
CHAPTER THREE
3.0 RESEARCH DESIGN AND METHODOLOGY 22
3.1 SOURCES OF DATA 22
3.2 LOCATION OF
DATA 22-23
3.3 METHOD OF DATA
COLLECTION 23
CHAPTER FOUR
4.0 FINDINGS 24
4.1 BANK RELATED
FACTORS 24-25
4.2 CUSTOMER RELATED
FACTORS 25-26
4.3 UNCONTROLLABLE
FACTORS 26-27
4.4 WARNING SIGNALS 27-28
4.5 EFFECTS OF BAD
DEBT 28-29
4.6 LOAN RECOVERY
MEASURES 29-30
CHAPTER FIVE
5.0 RECOMMENDATIONS 31-33
5.1 CONCLUSION 33-35
BIBLIOGRAPHY
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND
OF THE STUDY
This project work on
commercial banks lending practices and incidence of Bad debt in Nigeria is a
study carried out by the researcher, so as to evaluate and analyze the lending
principles, problems and effects of Bade Debt in the operation of banks and
also to the general Economy.
A
bank economic purpose is to act as a financial intermediary. It facilitates the
process of challenge savings into investment and one of the avenues of
realizing this objective is by lending effectively.
Loans
are classified as bad debts when they cannot be repaid. But if management
concentrates solely on minimizing these losses, a bank will make virtually no
loan, profits will shrink and the lenders cannot completely eliminate risks, so
the more loans are granted, the more losses are expected.
Therefore,
one of the objectives of commercial banks is to manage losses well, since
Bankers unavoidable and hence, charge it against the income generated with the
obvious aftermath of depleting profit and in some severe cases, liquidates the
affected banks through all business regrettably in cure bad debts but bankers
whose stock in trade is money views debt incidences with dread.
1.2 STATEMENT OF PROBLEM
This
research work is concerned with commercial bank lending practices and incidence
of bad debt in Nigeria. The problems include:
(1)
Bad debt results from inefficient management and also from dishonesty of
customer, which might even leads to distress.
(2)
This unfortunate trend in the Nigeria banking industry has caused creditors of
the affected banks to loose their money and also made shareholders to loose
their dividends.
(3)
Bad debt leaves a negative impact on banks, since it depletes their income and
makes lesser funds available for further lending which subsequently disrupts
investment.
1.3 OBJECTIVE OF THE STUDY
The
objective of this study is to assist banks confirm the multifarious causes of
bad debt in their operations and to help them curtail its incidences by
embarking on lending techniques and knows his customers, his project proposals,
his account operation and others, his general position will be detected before
granting loans to him. The researcher has objective of finding answers to the
under listed questions:
(i)
What is bad debt?
(ii)
What are the lending principles and techniques?
(iii)
What type of collaterals are acceptable to banks?
(iv)
What are the causes of bad debt?
(v)
What are the effect of bad debt on a commercial bank?
(vi)
What are the possible solution to controlling it?
(vii)
Can bad debt be totally eliminated?
1.4 SIGNIFICANCE OF THE STUDY
Some
parts of the profits generated by banks has been sink into the yawning gap of bad
and doubtful debts. This derelicting its duty to the shareholders and generally
creating an unfavorable impressions on the investing public.
As
a result, an investigation has been undertaken by the researcher on the lending
issues of commercial banks and it is hoped that this project work will in no
small measure, reduce bad debt incidences by a wide margin.
It
will also help the banker to embark on the best lending portfolios, know the
techniques of granting and collecting loans, the type of collaterals to
collect, know how to control or manage bad debts and many others.
1.5 LIMITATION OF THE STUDY
The
research of this study was not all that easy.
There
were some setbacks encountered in the course of carrying out this project work.
It include:
(1)
One of the problems which militate against the effective execution of this
study was inadequacy of material since it is secondary data that is required.
(2)
The staff of the bank from where reports are to be collected were not
co-operative, so inadequate information and details could not be obtained.
(3)
Insufficient funds to carry out more in depth research, transport to more
libraries or get more information from the Net.
Despite
the odds of the above shortcomings, the researcher worked hard and labored
hopefully to achieve this project.
1.6 DEFINITION OF TERMS
The
research would like to define some terms used in the project. Some of them are:
(1)
BANK LOAN: A bank may be defined as a financial
facility granted by a bank which is intended to be applied for a specific
purpose or project.
A
loan usually has a defined duration and a fixed repayment programmer.
The
funds generated are made available to customer / borrower in form of loans.
(2)
COMMERCIAL BANK: Is a financial institution incorporated
and licensed by the central bank of Nigeria to carry on the business of banking
acceptance of deposits, collection and payment of cheques and other
instruments, advancing loans, discounting bills, safe custody facilities buying
and selling of shares for customers etc.
(3)
PRACTICE: Commercial bank lending practices means the processes or
activities involved in obtaining loans.
(4)
INCIDENCE: Incidence of bad debt means the impact or
effects of bad debt to the effective operation of banks.
(5)
BAD DEBT: Are debts due to creditors but for some inherent weakness, the
full or partial recovery is considered impossible. From the bank’s viewpoint,
bad debt are the part of the bank’s account receivable or credit granted to the
customer of the bank, which cannot be fully or partially recovered for one
reason or the other.
(vi)
CONCEPT: Lending concepts simply means lending
principles and ideas.
(vii)
GUARANTEE: This is an undertaking by one party (the
guarantor) given to the bank (the creditor) to be answerable for the debt of
another person (the debtor) upon the default of the debtor.
(viii)
COLLATERAL: Means property or assets deposited with the bank by the fund
seeker, in case of default in the repayment of loans. It should be easily
disposable.
REFERENCE
1.
E.L Farness (1974) An introduction to financial economics
Heinemann
London page 132-135
2.
J. Orjih (2002) banking and finance, splashmedia
Organization.
Page 65.
3.
Hoye and Geoffrey Wlntehead (1987) Element of banking made
Simple.
Heinemann London Page 149.