The purpose of this research is to examine the impact of credit
management on commercial banks. The introduction of the prudential
guideline in banking industry, the volume and value of loans and advances
classified into non-performing account ahs continued to increase in bank
lending. Obviously this has adverse effect on banks since it affects
their cash flow and impair profitability.
Most loans and advances go bad because of the inadequacy in credit management
and recovery procedure of banks. Appraisal of lending vis a vis the
credit management of banks and the impact of the application of prudential
guidelines on credit, form the major objective of this study. Union bank
of Nigeria Plc Okpara Avenue Enugu was used as a case study with a view to
highlight the effectiveness, the adequacy or otherwise of the credit management
policy of Nigerian commercial banks with a view to finding the causes and
consequences of non-performing loans and advances. The causes are
excessive lending on security values and bad management of borrowers.
Having analysed the data, the following findings were made, the principal
objective of bank lending is to generate revenue, the loan deposit ratio
affects the liquidity position of commercial banks, non- performing account
kept on increasing the frequent occurrence of non- performing accounts was
discovered to be as result of the banks inability to put in place an effective
process of loan recovery, implementation of prudential guidelines by Nigerian
commercial banks reflect the real income of banks. In conclusion, the
prudential guidelines reduced the profitability of commercial banks and made banks
classify their loans clearly. In the recommendation, the researcher
suggested that the provisions of the prudential guidelines should
be adhered to and an effective loan monitoring unit should be set-up in al
LIST OF TABLES
4.1Administration of Questionnaire
4.2Sex Distribution of Respondents
4.3Educational qualification of respondents
4.4Whether respondents are staff of union Bank of
4.5Category of Respondents.
4.6Transactions of union Bank of Nigeria Plc with
4.7Whether the principal objective of Bank lending
is to generate revenue.
4.8Whether inefficient management portfolio is a
fundamental problem of distressed banks
4.9Whether the prudential guidelines has improved
the asset quality of banks.
lending increases profitability of the bank.
loan-deposit ratio affects the liquidity position of commercial banks.
total lending and total classified non-performing advances has any relationship.
effects of classified advances on the profitability of the bank.
classified debts have any relationship with the security obtained for the loan
non-performing credits depend on loan recovery process.
of loans and advances in union bank of Nigeria Plc.
credits and its relationship with secured lending.
TABLE OF CONTENTS
2.0Review of Related
2.1The role of commercial Banks in Nigeria
2.2Causes of Non-performing accounts/
2.3Techniques though which banks can minimize
2.4The purpose and importance
of commercial banks in
2.5The positive impacts of the prudential guideline
on Nigeria banking industry and the economy.
Historical background of
3.1The Design of the
3.2Population of the
3.3Sample and Sampling
3.4Instrument for Data
3.5Validity Reliability of
3.6Method of Data Collection
3.7Method of Data
4.0 Data Presentation and Analysis
5.4Suggestion/ Area for further
1.1 Background of the
Banking is essentially an international business especially now that domestic
financial markets in many countries are being internationalized. In
modern economy there is a distinction between the surplus and economic units
and the deficit economic units. Consequently, there is a separation of
savings and investment mechanism. This has necessitated the existence of
financial institutions whose job includes the transfer of funds from savers to
investors. One of such institutions is the commercial banks.
roles of commercial banks places them in a position of ‘Trustees’ of the
savings of surplus economic development. The techniques employed by
bankers in this intermediating functions should provide them perfect knowledge
of the out-come of a lending such that funds will be allocated to investors in
which the probability of full repayment is unity.
However, in practice,
the reverse has always been the case. Almost all lending decisions are
made under condition of uncertainty, the risk and uncertainty associated with
lending decision situation are so great that the concepts of risk and risk
analysis need to e employed by lending bankers in order to facilitate sound
decision making and judgement.
This implies that all
risks should be objectively assessed. Unfortunately, many commercial
banks have based their lending decision on subjective principles.
In most cased emphasis is placed more on security offered for the loan
rather than paying attention to the proper monitoring of the loans and the
insisten that recovery potential of credit should be from the projected cash
This has led to the
increasing cases of non-performing advances.
adjustment programme (SAP) introduced in 1980 had led the adoption of a wide
range of economic liberalization and de-regulation measures which in turn had
resulted in the emergence of more banks and other financial intermediaries.
Consequently, it became
imparable to strengthen and extend the powers of the central Bank of Nigeria to
cover these new institutions in order to enhance effectiveness of monetary
policy and the regulation and supervision of banks and non-banks financial
Perhaps, it is
necessary to point out the deregulation, which does not mean the absence of
regulations. Banking industry is generally considered to be more regulated
than any other sector of the economy. This is largely due to the crucial
intermediation played by the operations in the industry. The various
deregulation measures brought about benefits, opportunities and problems.
The industry is now more competitive and this has to a large extent increased
concern about abuses and violation within the industry.
It is in the light of
the foregoing that the need for prudential guidelines and the recent review of
the banking decree should be seen.
guidelines was issued by the banking supervision department (BSD) of the
Central Bank of Nigeria (CBN) on 7th November
1990 through circular letter No BSD/90/28/vol.1/11 to all licensed banks and
their auditors. It is aimed at ensuring a stable, safe and sound banking
system. It is meant to serve as a guide to bank as follows.
a.Ensure a more prudent approach in their credit
portfolio classification, provisioning for non-performing facilities, credit
portfolio disclosure and interest accrued on non-performing assets.
b.Ensure uniformity of their approach in (a) above
c.Ensure the reliability of published accounting
information and operating results.
Until recently, users of financial statement of licensed banks
have had cause to express concern over the quality of such statements in
view of the varied and in most cases inconsistent practices adopted by
banks. Specifically a number of persons felt concerned that banks
earnings were being overstated as interest was being taken on non performing
assets. Also comparisons of banks performances became difficult.
The prudential guidelines were therefore issued to protect the
interest of depositors thereby promoting public confidence in the banking
On the other hand, the increasing trend of provisions for non-
performing credits in most commercial 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 non- performing credits facilities. These
destroy part of the earnings assets of the bank such as loan and advances, which
are classified as the main sources of earnings, and also determines the
liquidity and solvency of banks. In other words, non-performing credits
generate two major problems i.e, non-profitability and liquidity
problems. A commercial bank like any other business enterprise has to
earn sufficient income to meet its operating costs and to have adequate returns
on its investment.
Having regard to these problems a prudent banker should be
cautions to lend and manage loan and advances effectively and efficiently with
a view to minimise the problems caused by classified credits.
In this study we shall survey the possibility of reducing the
occurrence of non-performing credits through improved standard of lending and
effective controls. For the purpose of the commercial banks being mostly
affected, we shall appraise the lending procedure and credit management of
union bank of Nigeria Plc and assess the effectiveness or otherwise of the
existing credit management policy of the bank. We shall suggest on how to
improve any inadequacy highlighted by out findings. C.B.N guideline
1.2STATEMENT OF THE PROBLEM
Since the introduction of the prudential guidelines in banking
industry, the volume and value of loans advances classified into non-performing
account has continued to increase. The increase has remained even at
faster rate than the increase in bank lending.
Obviously, this has adverse affected on banks since it affects
their cash flow and impairs profitability. It is believed that most loans
and advances go bad because of the inadequacy in credit management and recovery
procedure of banks.
1.3 PURPOSE OF THE
The main purpose of
this study is to examine the appraisal of lending vis-a-viz the credit
management of bank.
1.4 SCOPE OF THE STUDY
The scope of this study
covers only the appraisal of the Nigerian commercial banks credit
management. Because, it is difficult for the researcher to cover all the
banks in the study, the study is therefore restricted to Union Bank Okpara
1.5SIGNIFICANCE OF STUDY
This study indicates that whenever a credit is granted that there
is need to urgently appreciate the point when such credits begins to look
doubtful. This will enable the bank to at least obtain full repayment
including accrued interest at worst to reduce the eventual occurrence of
capital loss. Since provisions for non-performing credits are changes
against profit, it is appropriate that we review the methods proportions and
margins of lending to non-performing facilities. Hence the significance
of this study to bankers, besides bankers will be able to appreciate an
effective appraisal of their lending and control mechanism, especially 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 non-performing
advances is reduced banks will be left with more profits to enable them make
the expected contribution to the development of the economy.
principal objective of bank lending is not to generate revenue.
The principal objective of bank lending is to generate revenue.
The loan deposit ratio does not affect the liquidity position of a commercial
The loan-deposit ratio affects the liquidity position of a commercial bank.
Classified debts have an relationship with the security obtained for the loan
Classified debt have relationship with the security obtained for the loan
Non-performing credit do not depend on loan recovery processes.
Non performing credit depends on loan recovery processes.
1.7DEFINITION OF TERMS
tendency for the bank to have excess of revenue over expenditure resulting in
refers to the ability of the bank to meet its financial obligations to the
customer, or it can mean the case with which banks can raise funds to meet with
This refers to the amount
Bank “Run”: A
situation where the banking public withdraws their deposits in large numbers
from a bank feared to be going distress.
NDIC: Nigerian Deposit insurance
Company: An institution established to
provide insurance services for bank deposits.
Performing Credits:- A
credit facility is deemed to be performing if payments of both principal and
interests are up to date in accordance with the agreed term.
A credit facility should be deemed as non-performing when any of the following
i.Interest or principal is due are unpaid for 90
days or more.
ii.Interest payments equal to 90 days interest or
more have been capitalized, rescheduled or rolled over into a new loan.
Non performing credit/
advances are classified into substandard, doubtful and lost credits.
Substandard advances are the ones whose principal and or interest remain
outstanding for more than 90 days but less than 180 days.
Doubtful Advances:- The
principal or interests remain outstanding for at least 180 days but less then
Lost Advances:- Lost
advances are the ones whose principal and or interest remain outstanding for
350 days or more CBN prudential guideline (1990).
TERMS AND CONDITIONS APPLY
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