CREDIT ANALYSIS AND LOAN MANAGEMENT IN COMMERCIAL BANKS IN NIGERIA

Introduction

1.1 General Overview Of The Study

Credit as generally understood would wide refers to the act of one person lending his/her own, money to another in return for a promise of the later to repay at some future date. The credit in banking refers to the transaction between a bank on one hand, and another party in which the bank supplies actual resources goods and services, securities or money. In turn for a promised future repayment by the others, debtors or borrowers (Encyclopedia Britannica, Vol. 6, 1969:713) “credit” has been defined also to be a “term used to denote transactions involving the transfer of money or other property on promise of repayment, usually at a fixed future date” (New Encyclopedia, vol. 7, 1972:128).

The resources banks given out as credit are the income caring assets, which they get from customer. In this study, the word “BANKS” is used in the general sense to encompass commercial and merchant banks. But this study is particular on commercial banks as a result of the formal introduction of universal banking by the Central Bank of Nigeria (CBN) in January 2000, which among others abolishes the dichotomy between Merchant and Commercial banks, enabling every bank to uniform lience to undertake conventional banking functions.

Commercial bank as financial institution, which accepts demand and time deposits from businesses, institution, and individuals, who engages in both business and consumers lending. A commercial bank in the words of Samuelson (1999, Reneuced, P, 292) is the only organizations able to provide “bank money, it checkable demand deposit that are conveniently usable as a medium of exchange. According to (Akpakpan 2003: p.233). That commercial banks are the closet types of banks to the general public, and the main sources of finance for publics.

They accept different forms of deposits from members of the public, example, savings deposits, demands and time deposits. Also, they perform agency and credit services for customers, lend money to consumers and undertake investments. The are guided in all they do by the desire to make profit, by accepting deposits from the general public on which interest is paid normally, commercial banks, encourages the saving habit of the public. And by lending especially to small business operators, these classes of banks contribute substantially to the stimulation of the economy.

Individuals as well as business organization go for credits from commercial banks. (I. M. Pandy, 1998: p 376) in his analysis described trade credit to be the most important force in modern businesses. He say it is an essential marketing tool acting as bridge for the movement of goods through the production and distribution states to customer thus business firms, borrow to buy raw materials or expand factory building in order to increase income most individual demand credits to buy houses, accessories and cars etc.

The banks offers credit to individuals and business which are to be paid back, at since the bank is not a chartable organization but profit oriented as to continue their business activities. Therefore, in order for the banks to get back their resources from borrowers and even to ensure in the first place, that these credit are not being giving to wrong people and investments, the banks has to undertakes certain procedures. Hence the need for credit analysis and loans management.

Credit analysis involves the determination of the ability and willingness of a borrower to repay a requested loan in accordance with the term of the loan contract. Credit analysis therefore seeks to find answers to these two questions: −

1. Can the borrower repay the loan?
2. Will he or she repay the loan?

Therefore, credit analysis states the evaluation of the applicant financial condition. And in order to achieve this, different types of techniques are used by bank, for different types of customers, depending on the type of loan (short, medium or long − term) and the sector demanding it.

Commercial banks provided various types of credit as follows: −
Discounting of bills, overdraft, factoring, hire purchase/ Installment finance, mortgage finance, letter of credit, leasing, export and overseas finance and equity finance etc.

This study seeks to identify the variable responsible for the facilitation of credit to some sector and individuals that needs it and also to identify the problems of bad and doubtful debts amongst commercial banks and its publics. In order to achieve this, the study is focused on the First Bank of Nigeria Plc and United Bank for Africa Plc (UBA))

1.2 Statement Of The Problems

One of the banks greatest problems is of ensuring that bad debts are avoided. This is because, bad debt eats deep in to their profit and so making it impossible for them to meet whatever target they set for themselves. For examples, banks aggregated scattered monetary resources from the surplus economic, units through customer deposit and desegregate the already pooled resources to the deficit economic unit by way of loans to borrowers who undertakes to repay with interest at an agreed data, so as to enable the banks to pay − back to depositors on demand and to remain liquid for further transactions, it will result to insolvency of such bank. This is one of the major causes of bank distress in Nigeria.

Banks have not been finding it easy in this direction, especially as most of them are ignorant of the sources of loan default. This has consequently eroded the profit level and overall management of banks.

This research, therefore, is poised to finding out what problems commercial banks, encounter in analyzing their credits and managing their loan portfolio.

1.3 Objectives Of The Study

The objective of the study is credit in an economy cannot be over − emphasized. As credit contribute to increase in production of goods and services to the ultimate users and the purchase of these goods and services by the said users. In an economy where the use or availability of credit is conspicuously absent, the economic life of the people will be greatly affected. Since money is a scarce resources.

This is why those who do banks among the financial institution provide most of the credits. Therefore, the need for this research is to guide prospective borrowers as to what the banks expect them to satisfy before any credit is given them.

Also, the profit position of the banks will be increased because bad − debts will be a thing of history. Since the bank managers and credit officer who are yet to understand the concept and the need for credit analysis and loan management will now come to know it.

The objectives of these researches include: −

1. To know banks requirement for credit
2. To known the method used by banks in loan management
3. To know what problem banks encounter in analyzing credit and managing loan;
4. To give recommendation that will serve as solution to those problems

1.4 Scope Of The Study

This study focuses attention on First Bank of Nigeria Plc and United Bank for Africa Plc in Owerri. The study covers the period of 7 years on each of the banks. That is 1999 − 2003 for First Bank and 1998 − 2004 for United Bank for Africa (UBA). These periods are necessitated for the fact that bank distresses are limited. It is also observed that the period under study shows improvement on the line banking than earlier years.

1.5 Statement Of Hypothesis

1. The Banks techniques of assessing the borrowers and management of the loans are satisfactory;
2. The borrowers are affected by economy conditions, hence they pay all or at the required time;
3. The borrowers are able to repay the credits give to them because they divert the resources to areas known to the banks

1.6 Significance Of The Research

The Important of the research will enable the commercial banks and the publics (ie the banks customer) to known the importance of credit to the growth of businesses in an economy). The study focuses on how commercial; banks analyze their credits and manage their loan portfolio, because lending decisions are characters with risk.

Therefore, banks must of necessity investigate and evaluate the factors that may give occasion to default in the repayment of a loan. This is also a feasibility study for banks, highlighting how if loan are properly managed and directed to profitable investment, there will be no record of bad debt but the tendency to engage more labour, which will bring forth an increase in aggregate demand, thus culminating in to increase in national income

To the student important of the research to the student is that it will enable them to known the methods used by banks in loans management and to give recommendation that will serve as solution to those problems.

To the borrowers, the importance of the research to the borrowers is to guide prospective borrowers as to what the banks expect them to satisfy before any credit is given to them.

1.7 Limitation Of The Study

(Baridam, 2002; 195), every study has certain limitations, which fall − short of the ideas which the researcher has established or recognized. Thus, this study is not an exemption and it is limited to insufficient data, fiancé and time.

Insufficient Data:

This is one great problem of this research, the raw date was requested for, but it was turned down in place of the banks annual report for the period under study (1999 − 2003). The 1999 Annual report of First Bank of Nigeria is not available; it is therefore replace with that of 1998. Also, the years 2000 /2001 reports of United Bank for Africa UBA is not available at the bank, which is replaced with those of 1998 respectively.

Finance And Time

As a result of finance, this research limited its study to two banks. This is because most of the banks are not helping researchers in providing data. And there was no enough finance to travel to other places to get data, which would have enhanced more figures and tables in the illustrations of credits and advances made by banks over the years under study.

1.8 Definition Of Terms

Assets

Anything owned by a business or an individual, which has commercial or exclusive value.

Bad Debts

Debts, which are not recoverable

Banker Unit Fund

This is a money market instrument in which banks as well as other financial institutions can invest part of their excess liquid resources

Certificates Of Deposits (CD)

Evidence of deposits with a bank repayable on a fixed date. It is a fully negotiable bearer document transferable by delivery

Commercial Bank

A banking cooperation which accepts demand deposit subject to cheques and makes short − term loans, regardless of the scope of its other services

Credit Guideline

The instructions used in the monetary policy of a Central Bank to banks and other financial institutions stating areas to channel funds and interest rate chargeable.

Current Deposit

A deposit in which the customer had the right to withdraw money by cheque any day he wishes to do so without prior notice to the bank and interest as charged on the account

Debentures

An acknowledgement of indebtedness, usually given by an incorporated company often under seal and frequently including a charge on the asset of the company

Discounting Of Bill

Acceptance of promissory notes or bills exchange by the banks for amounts less than the face value of the bills

Domestic Banking

Banking operation carried out within a country

Equity Finance

The acquisition of money for capital or operating purposes in exchange for a share

Euro Dollar Market

Is a market or deposit of reserve currencies (Dollar, Pound sterling, duchtmart etc) in countries other than those of the countries owing them.

Factoring

A means of advancing credit whereby the factor (eg, bank) purchases at a discount and without recourse to the accounts receivable of a firm. The factor assumes complete responsibility for credit investigation and collection.

Hire − Purchase Or Installment Finance

A form of credit where goods are supplied after payment of a deposit with an agreement to pay regular installment over a period of time.

Leasing

Renting houses, land, equipment etc for a specified period of time, hiring of asset for the duration of its economic life

Short − Term Loan

Is a loan repayable within one year or less from the date of insurance

Share

The proportion of interest in the capital of a company which a share holder has

Loan Defaulter

A borrower who goes country to the terms of the loan agreement

Real Bills Of Exchange

These are bills supported by good in transit