Abstract
This study focuses on the impact of managerial risk on credit facilities of commercial banks (a case study of GTBank). A proper research was carried out to identify the credit risk management strategies used in GTBank in Ikeja Local government area, to ascertain the influence of managerial risk on the bank credit policy for credit facilities in GTBank, to investigate whether increment in interest rate increases the chances of loan default in GTBank, to find out if the managerial risk on credit facilities of GTBank can be managed, to examine if poor management of credit risk can affect the profitability of GTBank. In carrying out the research, research questions are been set in order to direct the researcher in administration of questionnaires. There is also review of relevant literature on related topics to the study. Questionnaires which was the instrument used was given to 30 managerial staffs at entry, junior and senior managerial levels in GTBank by the researcher. The result obtained from the questionnaire was analyzed and conclusion was derived from the analyzed result.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Banks are established for the purpose of provided various financial services to the general public. Their intermediation role (through credit creation) is a catalyst for business activities in an economy. Consequently, banks credit for productive endeavours provides the public and real sector with necessary financial resources needed to accelerate the nation’s growth and economic sustainability. Their credit function enhances the ability of investors to exploit desired profitable ventures (Kargi, 2011). Unfortunately, the performance of this intermediation functions; sometimes exposes banks to credit risk.
The Basel Committee on Banking Supervision (2001), defined credit risk as the possibility of losing the outstanding loan partially or totally, due to credit events (default risk). Chen and Pan (2012) defined it as the degree of value fluctuations in debt instruments and derivatives due to changes in the underlying credit quality of borrowers and counterparties. It is the exposure faced by banks when a borrower (customer) defaults in honouring debt obligations at maturity or on due date. Just like any other risk – health, medical, physical, spiritual, meta-physical risks among other, credit risk has the capacity of eroding bank’s profit and/or causing a bank distress; when appropriate management strategies are not in place. Hence, the role of credit risk management in the banking sub-sector cannot be overemphasized.
Credit risk management is the identification, measurement, monitoring and control of risk arising from the possibility of default in loan repayments (Coyle, 2000). Usually, banks extend credit on the understanding that the borrower(s) will repay their loans. However, such extended credit, may be at the risk of default; resulting in unprecedented decrease in banks income due to the need for provisions for such loans. Where commercial banks do not have an indication of what proportion of their borrowers will default, earnings will vary thus exposing the banks to an additional risk of variability of their profits (Onyiriuba, 2009).
The health of the financial system has important role in the country (Das & Ghosh, 2007) as its failure can disrupt economic development of the country. Financial performance is company’s ability to generate new resources, from day-to-day operation over a given period of time and it is gauged by net income and cash from operation. The financial performance measure can be divided into traditional measures and market based measures (Aktan & Bulut, 2008). During the 1980’s and 1990’s when the financial and banking crises became worldwide, new risk management banking techniques emerged. To be able to manage the different types of risk one has to define them before on can manage them. The risks that are most applicable to banks risk are: credit risk, interest rate risk, liquidity risk, market risk, foreign exchange risk and solvency risk.
Risk management is the human activity which integrates recognition of risk, risk assessment, developing strategies to manage it, and mitigation of risk using managerial resources (Appa, 1996) whereas credit risk is the risk of loss due to debtor’s non-payment of a loan or other line of credit (either the principal or interest or both) (Campbell, 2007). Default rate is the possibility that a borrower will default, by failing to repay principal and interest in a timely manner. A bank is a commercial or state institution that provides financial services, including issuing money in various forms, receiving deposits of money, lending money and processing transactions and the creating of credit (Campbell, 2007).
Credit risk management is very important to banks as it is an integral part of the loan process. It maximizes bank risk, adjusted risk rate of return by maintaining credit risk exposure with view to shielding the bank from the adverse effects of credit risk. Bank is investing a lot of funds in credit risk management modeling.
In commercial lending, commercial banking plays a dominant role (Allen & Gale, 2004). In many countries, commercial banks routinely perform investment banking activities by providing new debt to their customers
(Gande, 2008). The credit creation process works smoothly when funds are transferred from ultimate savers to borrower (Bernanke, 1993). There are many potential sources of risk, including liquidity risk, credit risk, interest rate risk, market risk, foreign exchange risk and political risks (Campbell, 2007). However, credit risk is the biggest risk faced by banks and financial intermediaries (Gray, Cassidy, & RBA., 1997). The indicators of credit risk include the level of bad loans (Non- performing loans), problem loans or provision for loan losses (Jimenez & Saurina, 2006). Credit risk is the risk that a loan which has been granted by a bank, will not be either partially repaid on time or fully (Campbell, 2007), and where there is a risk of customer or counterparty default (Gray, et al., 1997).
Prior to financial sector deregulation, banks were highly motivated to grant credit facility to clients who could easily express their creditworthiness (Bryant, 1999). Deregulation offered the opportunity to meet the demands for credit across a wide range of borrowers. Large amount of bad credit, as a result of boom-time advances in the 1980’s, caused the banks to be too cautions in extending credit (Boyd, 1993; Bryant, 1999).
Credit risk management processes enforce the banks to establish a clear process in for approving new credit as well as for the extension to existing credit. These processes also follow monitoring with particular care, and other appropriate steps are taken to control or mitigate the risk of connected lending (Basel, 1999).
Credit granting procedure and control systems are necessary for the assessment of loan application, which then guarantees a bank’s total loan portfolio as per the bank’s overall integrity (Boyd, 1993). It is necessary to establish a proper credit risk environment, sound credit granting processes, appropriate credit administration, measurement, monitoring and control over credit risk, policy and strategies that clearly summarize the scope and allocation of bank credit facilities as well as the approach in which a credit portfolio is managed i.e. how loans are originated, appraised, supervised and collected, a basic element for effective credit risk management (Basel, 1999). Credit scoring procedures, assessment of negative events probabilities, and the consequent losses given these negative migrations or default events, are all important factors involved in credit risk management systems (Altman, Caouette, & Narayanan, 1998). Most studies have been inclined to focus on the problems of developing an effective method for the disposal of these bad debts, rather than for the provision of a regulatory and legal framework for their prevention and control (Campbell, 2007). Therefore, this study focuses on the impact of managerial risk on credit facilities of commercial banks (a case study of GTBank).
1.2 STATEMENT OF THE PROBLEM
Poor credit management and inadequate credit administration are the main causes of the problems faced by the banking industry in Nigeria (Alalade, Binuyo, & Oguntodu, 2014). In a quest to ensure adequate and sound credit management, lending has been characterized by high interest rate. Also, excess profit imposed by bank officials has scared the prospective investors from borrowing. There has been loan limits violation in order to meet up to target expected from the bank. Inappropriate documentation before draw-down has been one of the major causes of bad loans, moral hazards which are against the principles of credit. These situations occur due to the reckless and lawless behaviour of bank officials. Hence, loans and advances poses a number of risks to the deposit money banks and the banking sector in general, if not properly managed; leading to bank distress thereby affecting customers and stakeholders (Alalade, Binuyo & Oguntodu, 2014).
Marshal and Onyekachi (2014) noted that increasing level of non-performing loan rates in banks books, poor loan processing, inadequate or absence of loan collaterals, undue interference in the loan granting process, among other things are linked with ineffective credit risk management that could affect bank performance. This is quite worrisome in the face of deposit money banks which have lot of economic roles to play in the financial sector because high level of non-performing assets in the bank’s portfolio might erode the capital base of the banks and reduce its profitability if not brought under control. When things get worsened, inability to manage credit risk could result in bankruptcy or liquidation.
Credit remains the primary source of revenue for any bank around the world. However the probability of default borrowers’ loan commitments has been an increasing concern for those banks particularly for unsecured bank loans. This risk could be categorized as credit risk. The risk poses a significant exposure not only to the banks (lenders) but also to the entire economy, which is evident in 2008 financial crises. This is because of the fact that the banking is a vital industry of any economy. This emphasizes the importance of managing the credit risk within the banking sector. Banks grant loans to the customer with an expectation of receiving the capital together with an interest. A loan facility is considered to be performing if payment of both capital and interest are paid accordingly with agreed repayment terms. These problems necessitate the need to carry out a study on the impact of managerial risk on credit facilities of commercial banks (a case study of GTBank).
1.3 OBJECTIVES OF THE STUDY
The general objective of the study is to examine the impact of managerial risk on credit facilities of commercial banks (a case study of GTBank). The specific objectives of this study include the following:
1. To identify the credit risk management strategies used in GTBank in Ikeja Local government area.
2. To ascertain the influence of managerial risk on the bank credit policy for credit facilities in GTBank.
3. To investigate whether increment in interest rate increases the chances of loan default in GTBank.
4. To find out if the managerial risk on credit facilities of GTBank can be managed.
5. To examine if poor management of credit risk can affect the profitability of GTBank.
1.4 RESEARCH QUESTIONS
The relevant research questions related to this study include the following:
1. What are the credit risk management strategies used in GTBank in Ikeja Local government area?
2. What is the influence of managerial risk on the bank credit policy for credit facilities in GTBank?
3. Does increment in interest rate increases the chances of loan default in GTBank?
4. Can the managerial risk on credit facilities of GTBank be managed?
5. Can poor management of credit risk affect the profitability of GTBank?
1.5 SIGNIFICANCE OF THE STUDY
The degree of possible risk in the banking sector is of major concern to the various stakeholders including the top management who operates the banking activities, depositors whose funds are being used and regulatory bodies who are responsible for the protection of banking system. The commercial banks operating in Nigeria have faced difficulties over the past years for multiple reasons. The major reasons identified were relaxed credit standards and poor portfolio risk management (Bhattarai, 2014). Most of the commercial banks in Nigeria are evidenced to have approve loans without proper examinations which may lead to increase in a number of loan defaults and non-performing loans (Bhattarai, 2014).
This study will be relevant to commercial banks in Nigeria by addressing how to manage the managerial risks on credit facilities and its impact on the profitability of commercial banks.
This study will enhance the existing body of literature by contemplating the areas of the literature that have not yet been examined or considered and incorporating these factors into the current study. The study will thus form the basis for further studies in the field.
1.6 SCOPE OF THE STUDY
The scope of this study is restricted to the impact of managerial risk on credit facilities of commercial banks (a case study of GTBank). A questionnaire was used for the purpose of this study and the sample population are managerial staffs at entry, junior and senior managerial levels in GTBank. The researchers restrict this study to 30 managerial staffs at entry, junior and senior managerial levels in GTBank because to the limited resources available and the time constraints.
1.7 LIMITATION OF THE STUDY
Some of the major constraints the researchers encountered in putting up this research include lack of time, lack of willingness to give information by respondent and also limited resources.
1.8 DEFINITION OF TERMS
Management risk is the potential for ineffective, destructive or underperforming management to negatively affect an investor’s holdings.
Credit facility: A variety of different loans that a company brings on to meet its financing needs.
A commercial bank is an institution that provides services such as accepting deposits, providing business loans, and offering basic investment products.