Banking & Finance

Credit Management and Bank Lending

Credit Management and Bank Lending

CHAPTER ONE

1.0 INTRODUCTION

Financial is the procedure for preparing according to and reporting reliable information concerning transactions.

Financial resources in any economy should be adequately be mobilized, taking into consideration the crucial role of finance in economic development.

Nwankwo (1993:p.2) stated that financial resources have been considered a very important factor in economic development.

Consequently, the mobilization of resources has been defining criterion in the achievement of rapid econ0mic growth in any economy. The first step for resources mobilization for the development purpose is the mobilization of financial resources, which will lead to capital formation. Capital formation required the release of domestic goods and services for real investment or the import of resources from outside or both.

Ojo and Adewumi (1989:P.10). They emphasized the role of financial resources and pointed out that the finical institution offers an efficient institutional mechanism through which resources can be mobilized and directed to less essential use for more productive alternatives. The writer’s contention here is that the efficiency of any financial system particularly in a developing economy like Nigeria depends on the extent to which the financial information role is effectively and efficiently discharged concerning the economic good of the country and the objective of the institution itself.

According to Racheal 91984:p.478), the primary function of the commercial bank is the extension of credit to worthy borrowers. it has been noted that commercial bank is the most important institution n the mobilization of funds.

That furthermore Khat Khate and Racheal (1984:p.516), while enacting the importance of resource mobilization stated that commercial banks are the most relevant institution in the developing countries to encourage and mobilize savings and also to charnel such saving into productive investment. First because of their network of offices, second because commercial banks through normal credit operation often activate savings that are lying idle elsewhere, and third because the bank is highly liquid and thus attracts savers.

Oji (1984: P9), projected at Nigerian case opined that the commercial banking system is used as a representative since it constitutes the largest single component of about 85% of all the institutional savings in the system. Mayor (1982:P 13) further stressed that there are two main reasons why the commercial banking system is the most important financial intermediary.

Firstly the total amount of deposit in the commercial banking system can create deposit demand resulting from lending activities.

Since demand deposit constitutes a large sum of the money supplied, the banking system can expand the nation’s supply of money. The consent that commercial bank need liquid asset especially the short term asset that can be converted into cash loan accordant to him constitute the largest amount of asset

Good bank lending ensures a high-profit level, ensure the greater return, and have underscored meeting the social responsibility to the benefit of the society while in the other way bank lending can affect the bank negatively in a various way, for instance, it might take a great chance of their annual profit which the bank needs to stay in business with. This and the indiscriminate extension of loans although within the credit guideline without proper supervision of such loans and accounts have led to an increasing trend in the existence of bad debt.

The bank has failed in the implementation of various checks against bad debt and has tended to forget every loan committed the moment the contract has been concluded. The author’s contention here is that the cause of bad debt is due to improper supervision and management of loans granted. Thus the study is been carried out with the Hallmark bank limited as the case of study

1.2 THE BRIEF REVIEW OF THE BANK

Hallmark limited was incorporated on the 29th of October 1990 and was granted a license to operate as a commercial bank on the second of January 1991. The bank opened for business on the 2nd of April 1991 with an authorized and fully paid-up capital of # 50 million (fifty million). The equity-based was latter increased to # 100 million and by March 1995 it has reached 200 Million Naira. It has its headquarter and registered office at Plot BC, Okigwe Road, Ugwu Orji Owerri, Imo state Nigerian. Currently, the bank has branched in the country and correspondent bank in London, Norway, and the United States of America

1.3 STATEMENT OF PROBLEM

The commercial banking system shares very important characteristics with other members of the financial sector and the rest of the business community. It desired to maximize profit. Clem (1994: P.4), commercial banks are profit-seeking enterprises as such it shares with other businesses the same set of expectations concerning the health of the economy. It is in this light that it made loans available to borrowers on interest which is a source of profit to the bank. Alongside, the growth of the credit sector is the increasingly high incidence of bad debt due amongst others, to poor management. Hallmark bank limited like most commercial banks have recorded a high incidence of bad debt and have one the year declared losses. For instance, in 1994, the bank sustained a net loss of 112, 153 Million, resulting from the fact that the bank net portfolio is [predominantly not performing ( chairman annual report 1996: P.28)

In 1995, the bank made a profit of # 87, 879,000, after the amount of # 1, 836,645 has been deducted as the provision for the bad debt. Added to 130.481, 720 revised provision in 1994 at the instance for the central bank of Nigerian and those for the proceeding years the bank provided for the bad debt rose to a staggering amount of # 134, 318, 380 (chairman report 1996, P 20 – 21)

Given the phenomenon of bad debt and the consequent loss been declared by the bank, there is, therefore, a need to study the credit management of the bank to attain an insight into how best to reduce the incidence of bad debt. There has been a conferrable once owned by the management of the bank on this because the effect on the profitability of the bank also affects and limits its expansion.

1.4 THE PURPOSE OF THE STUDY

As the bank sector expands with the growing complexity of the Nigerian Economy, it has been observed that the amount of bad and doubtful debt of the bank, which has contributed, to the distressed nature of some of the banks has risen. The question that borders the mind is giving the management expertise of the bank the various guideline as regard to lending, why did such lending be regarded as bad debt.

In the light of the foregoing, the purpose specifically which are to find out include

(i) I the bank has definite loan policies

(ii) Who are held responsible for making loan policies for the bank

(iii) If there is a significant relationship between the bank loan and profitability

(iv) To suggest a likely solution to the bank poor performance

(v) What are the cause of bad debt in the bank

1.5 RESEARCH QUESTIONS

To carry out this study, the following question is raised.

1. Dose the bank have definite loan policies?

2. Who is held responsible for making loan policies for the bank?

3. If there is a significant relationship between the bank loan and profitability.

4. To suggest a likely solution to the bank’s poor performance.

5. What is the cause of bad debt in the bank?

1.6 HYPOTHESIS

To find answers to the various question rose above, the author formulated four hypotheses that would be put to the test.

They include amongst others:

Ho: there is a significant relationship between the profit of the bank and the total loan and advance granted by it.

Hi: there is no significant relationship between the profit of the bank and the total loan and advance granted by it.

Ho; this is a significant relationship between the level of bank deposit and the manner of loan.

Hi: this is not a significant relationship between the level of bank deposit and the manner of loan.

Ho: this is a significant relationship between the level of risk in loan proposal and the loan that is granted buys the bank.

Hi: this is not a significant relationship between the level of risk in the loan proposal and the loan that is granted by the bank.

Ho: there is a significant relationship between the bank’s perception of different types of security and the amount of loan granted.

Hi: there is no significant relationship between the bank’s perception of different types of security and the amount of loan granted.

1.7 LIMITATION OF THE STUDY

This is studying the entire the credit management and causes of bad debt in the bank and how it affects the performance of the bank as it an only restricted to Hallmark bank of Nigerian as the case of study. Some difficulties and constrain were encountered by the researcher in the cause for obtaining the necessary information. For instance, on some occasions, it was impossible to get in touch with the bank officers, who should supply the information needed.

1.8 DEFINITION OF TERMS

For a proper understanding of the study been carried out, the author gave the operational definition of the following terms in the study;

Debt: it can simply be said that debt is what is owned by another. It can be also described as an obligation to make future payments. It can be defined as money goods or services owned to another by nature of an agreement expressed or implied which gave rise to a capital duty to pay. Capitally put; debt is credit recovered by a borrower from a lender.

Bad debt: this is the case where the debtor or the borrower fails to meet up with his matured obligation and all effort by the borrower to rescue the debt proves abortive. This gives rise to bad debt

Credit: this could be said to be what is owned to another by an agreement expressed on implied, which gave rise to a legal duty to pay. The technique can credit is debt relieved by a borrower from a pure lender.

1.8.1 TYPE OF CREDIT

The type of facility a bank grants to its customers depends on the purpose for which the facility is going to be utilized even though they could belong to one sectoral entity or the other. Apart from the purpose of the loan. The length of time before repayment is due. it also leads to the classification of finance as not long, short, and medium-term. The type of lending done by hallmark banks is limited and indeed most commercial banks include. Overdraft, loan advance, discounting, documentary letter of credit facility, trusts receipt, bands, and guarantee.

1.8.2 OVERDRAFT

Adekanye (1983: P 10) opined that overdraft is the most widely used type of credit grant short term finance is usually used to tied over the population cycle and finance occasional seasonal peaks. Its maturity is usually within one year but in practice, most overdrafts are reversible. This finance is most suitable for financing transactions that ahs self-liquidity over a short period. Fund advances on an overdraft are in theory repayable on demand while interest is payable on the outstanding balance on daily basis.

1.8.3 LOANS

Loans are usually lent by borrowing, which is secured against the asset of the borrowing company. It is duly used as part of a package of a financial facility. Repayment may either be made on one lump sum or installed mentally over some time. The pattern of the repayment can e tailored to fit the earning capacity of the asset usually acquired or usually to the estimated cash flow of the business. Interest rates are determined by the general rate prevailing in the market, the time of the loan, and the sector into which the business is classified.

1.8.4 ADVANCE

Nwankwo C.C (1993:P.25) stated that an advance is a type of loan that is given to finance a specific project. The most important distinction is that repayment is to come in block or as agreed from the project financed. This type of finance is particularly suitable for products that are licensed, buying and selling, and credit that is like seed time to harvesting period, though must be comparatively of short duration usually not exceeding six months is made to the exporter by which time the facility becomes explicit.

1.8.5 TRUST RECEIPT

The facility is usually granted in connection with a letter of credit and in most cases as a supplement to document credit facility. Instead of debiting the customer’s accost before the document is collected, the trust receipt account could reverse into account. The letter of credit needs to be of insurance type. Before collecting the chipping document the customer must be reassured to sign a trust receipt or a promissory note or letter of hypothecation as the case may be, holding the goods in trust for the bank and promising to pay the proceed directly into the bank account. It bears the same rate of interest as an overdraft.

1.8.6 BONDS AND GUARANTEE

These are clear and contingent liabilities, which will only be crystallized if the customer on whose behalf the liability was undertaken defaults.

Customers occasionally request for this type of non-cash facility contingent nature to facilitate their business operation. several types of bonds are issued depending on what purpose the bond is requested, this includes performance bond which is an undertaking by the bank that the customer will from to specification, bid, or tender bond assures the party to which they are issued to the bond of custom and exercise assuring.

Discount: by drawing a built-up of exchange on his customers and ensuring that it is accepted on the latter behalf. The supplier has a negotiable instrument which can be discounted however or bill broker with small money deducted from the face value of the bill to cover the incident of risk, administrative expertise, and interest from the date of discount to the due date.

Alternatively where the bill bears good and acceptors. They may be accepted by the bank to support additional bank finance usually of a bridging nature pending the maturity of the bill.

1.8.7 DOCUMENTARY LETTER OF CREDIT

Adenkenye N.C (1983:p15) stated that this is similar to a guarantee in that banks undertake on the behalf of the customer to pay a specific amount if certain conditions stipulated in its term are met. Letter of credit is issued largely in association with a bill of exchange to which they gave added security to the financing of foreign trade. The documentary credit facility is a method of settling debt in international trade. The bank issue a letter of credit undertakes to make payment on the behalf of the imposter. Payment is made for the exporter against the presentation of the document specified in the credit.

If therefore a bank is issuing document specified in the credit on the behalf of the customer and has not collected the local currencies equivalent of the transaction pro to the insurance of such credit, such a bank has pondered a contingent facility to the customer up to the time when actual payment assuring the board that the duty payable on the imported and locally manufactured goods will be paid by the bank if the customers fail to pay.

A guarantee is a promise to ensure the debt of another is made to a person or the financial institution to whom the borrower is already about to become. The guarantee must be in writing signed by the guarantor or his authorized agent.