CREDIT MANAGEMENT AND THE INCIDENCE OF BAD DEBT IN NIGERIA MONEY-DEPOSIT BANKS

CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND OF THE STUDY

In June 2012, the former Finance Minister, Anthony Ani, predicted that “the merged banks will eventually die” (Daily Sun, June 18, 2012). There have been debates about the banking industry and its rising and falling status, mergers and acquisitions, recapitalization and nationalization of banks, failed banks tribunal and so on since early 1980s. The underpinning was a lasting solution to the crisis that seems to engulf the banking industry. Moreover, the banking industry has been known for its intermediation role in providing financial assistance (credit) needed in the economy. This role is normally carried out in many ways, for example, granting of loans and advances to customers, which constitute the major part of bank lending. Apart from loans and advances, there are other forms of banking or bank credits or bonds issued by banks for and on behalf of customers. Banks are merely custodians of the money they lend; hence interest must be paid to depositors and dividends to the investors. Credit management can be seen as an integral part of lending and as such in its absence, good loans can turn bad. It is expedient to note that the importance of credit management cannot be over-emphasized and good credit management requires the establishment of adherence to and of sound and efficient credit policies of government. For banks to be successful, their corporate credit appraisal, disbursement, adequate monitoring and repayment must be assured. But experiences over the years have shown that inadequate credit analysis and sound judgment of loans application have resulted in unperforming loans. Provision of credits, which are in the form of loans and advances, are the total amount of money a given bank lends out to its customers at any given period of time. The bank usually charges the borrower interest for using its money. These loans and advances usually have maturity period. In providing credits for business ventures, banks should as a matter of importance take all necessary steps to ensure that advances are granted to those customers who can and will make judicious use of loans so that repayment will not become a problem. Therefore credits must be made to people who are capable of utilizing it well and repaying the loan at its maturity. The place of loans and advances in the affairs of banks can be explained by referring to the fact that “loans and advances are the largest single item in the assets structures of Nigeria commercial Banks (Ani 2012).” It also constitutes the main source of the operating income of banks and also the most profitable assets for the employment of banks funds (Nwankwo 1980). According to Onwudiegwu (2001), the concept of default is less obvious than it first seems, for it could result from non - or delayed payment of interest and or principal for a given period. One or a combination of the following factors could contribute immensely to default especially in a depressed economy. The more one borrows; the more one would want to borrow consequently. The volume of the loan would increase which decreases the ability to repay as opposed to the willingness to repay. The ability to repay increases with increased net income although that does not say anything about the willingness to repay. One would expect borrowers with high net income to have low debt/equity ratio, the lower the debt/equity ratio, the higher the ability to repay. The effect of high net income and low debt/equity ratio is a precaution for borrowers to build up valuable assets. Onwudiegwu (2001) equally posited that, as the value of the collateral increases, the default rate is expected to decline. Where there is income variance as a result of economic or natural circumstance, credit service ability per individual borrower decreases and hence default could increase. Such income variances are common in agricultural and manufacturing sectors. The higher the interest rate, the more the outstanding balance the borrowers have to pay considering the principal. Rate of inflation has link with the real interest to be paid by the borrowers. If inflation is higher than the interest rate, it will mean that the lending bank would be paying borrowers to take its loans. The close monitoring of borrowers to ensure a loan is not diverted to unproductive use, though costly, has a lot of bearing on ability of the borrower to repay. The effort is put in ensuring utilization of a facility, the less chance of default.

TOPIC: CREDIT MANAGEMENT AND THE INCIDENCE OF BAD DEBT IN NIGERIA MONEY-DEPOSIT BANKS
Format: MS Word

Chapters: 1 - 5, Abstract, References
Delivery: Email

Number of Pages: 58

Price: 3000 NGN

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