DEFAULT AND RENEGOTIATION, A MANAGEMENT OPTION

1.0 Introduction

1.1 General Overview of the Study

A careful study of the financial statement of most banks over the past years reveals a high bad and doubtful debts. The review shows that the problems of loan default constitute a major percentage of the debts owned banks. This goes to show that most customers do not repay their loans as at when due. Experts in banking and fiancé contend that customers default not because some borrowers could not pay but from the fact that some banks have very ineffective loan recovery measures. The question is why the default? What proportion of the loans disbursed are actually recovered?

Do banks actually recover them in fully? What measures are actually used to see the loans are recovered?.

According to the exports in the banking industry the magnitude of the problem is surprising. The Nigerians deposit insurance corporation (NDIC) report (1997) on distress banks says, a total of 55 banks have gone into liquidation due to bad management.?

According to the exports in the banking industry the magnitude of the problems is surprising. The Nigeria deposit insurance corporation (NDIC) report (1997) on distress banks says, a total of 55 banks have gone into liquidation due to bad management. According to the report customers and bank executives are owning more than billion, while only 1.8 billion naira had been recovered. The merchantile bank of Nigeria PLC report disclosed that customers are owning the bank a total of 1.3 billion Naria while the Nigeria industry development bank said it recovered 1.5 billion naria of the 2.7 billion naria owned by the bank.

On the foreign scene, Nigeria, owes the London and pains clubs, including the world bank of these debts are being reschedules or renegotiated.

What could be the cause? A training forum Journal (1994) on “ problem loan “states that this reasons stems from political considerations in which borrowers feel they are sharing the national cake, poor lending policy articulations, bank insider colluding with customers to circumvent. Laid down produces and changing economic environment other financial commentators attributes it to the use if short term deposit to fiancé medium and long term projects and finally banks leaving non performing loans and advances in excess of 50% of the banks portfolio and reserves. There is also problem of poor negotiation. Some banks do not negotiate their loans.

The due repayment dates are neglected with the result that some do not know that their loans are due. The technical defect to enforce their rights in law when defaults occurs is lacking. The issue of default has not helped the government or the economy in any way. The huge debts owned the banks had led to recapitalization o the banks. Many have collapsed and others distressed.

In spite of these problems, government has taken drastic actions in the recent past to arrest this ugly situation in the banking industry. The setting up of the field banks of Nigeria (CBN) has taken over the management of these banks as an interim measures in order to sanitize them. Government has on its part introduced serious monetary and fiscal policies to arrest the situation while on the part of the banks, they have be gone house to house drive to recovering the debts.

This steady intends to look at some of this problems and ways out of them. It has also chosen the commercial and development banks as its area of concern.

The establishment of Nigeria Agricultural co- operatives and rural development bank Ltd (NACRDS) is 100% owned by the federal government of Nigeria. It merged with Nigeria Agricultural and co- operative bank Ltd (NACB), people Bank of Nigeria (PBN), family economic advancement programme (FEAP)

Bank of industry Ltd (BOI) it came into being in October 2001

The signing into Law of the deposit protection scheme and the subsequent incorporation of the Nigeria deposit insurance corporate (NDIC) in late 80, one with say is a forecast of what is happening in the financial sector. According to Ebhodaghe (1993:17) “ the emergence of distress in the banking system which first came to the lime light in may 1989 after the with standing bad practice inherent in banks such as credit offers or managers giving loans to borrowers without adequate security and the subsequent default on the repayment of borrowed funds on the side of the borrower, fraud etc. all led to an increased interest in the restructure of distressed banks in the financial system.

A problem loan can be define as one where there has been a default in undue delay in collection or in which the appears to be a potential debts (Clarke 1989) therefore agent of government should have solid creative measures.

In this work attention is focused on the default and renegotiation and recovery measures or mechanism at their disposal.

This chapter will dwell on the introduction, objectives and significance of the study, scope, statement of problem, statement of hypothesis, then definition of terms lets start looking into the objectives.

The establishment of Nigeria industrial and development banks (NIOB) and Nigerian Agricultural and co- operative bank (NACB)

NIOB was established in 1959, NIDB hand book (1993) modern development banking did not starting in Nigeria until 1964 when the investment company of Nigeria, which was established in 1959

NACB was established in 1973, mainly to finance agricultureal development project.

Hall mark Plc was incorporated on October 25th, 1990 and has been actively operating since April 1991. it was established as a well focused public liability outfit and offer a wide range of banking service.

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1.2 Objectives of the Study

The objectives of the study include:

1. To look into the efficiency of bank lending in Nigeria banks, why default and measures taken to recover them.
2. Finding out the default and recovery rate Vis- a- Via total disbursement, the criteria for granting the loans and whether they are actually being adhered to
3. The kind of securities or collaterals required by the banks in order to ensure that they are recovered.
4. Finding out the procedure for renegotion
5. To recommend solution to the problems identified in the course of the study.

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1.3 Statement of Problems

It is clear that there are some problem that customers encountered in obtaining bank loans in Nigeria. There are also some factors which let to these problems and it is these factors that were going to discuss. They include:

1. What are the procedure for obtaining loans and who receives them?
2. What measures were actually used to see that the loans were recovered?
3. What portion of the loan disbursed to the customer are actually recovered?
4. What percentage of the loan are yet to be recovered as at when due?

These question will form part of the project. To compound these problems, inadequate information data from these banks posses another problem in that most banks fear of deluding information that will create a room for fraud.

Finally, the major problem encountered was with the scalar nature of the banks chin of command which made it impossible for those researcher to get the information ever when the information is at the research of the junior worker.

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1.4 Scope of the Study

The project will cover both commercial and development banks in Nigeria using the CBN general loan and default report, the banks published accounts and statement of accounts to assess the performance of the banks.

The scope of this work will also cover the management of loans in hall mark bank Plc, Nigeria Agricultural co-operative and rural development Bank Ltd (N A CROS) and bank of industry ltd (BOI).

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1.5 Statement of Hypothesis

The researcher will test whether or not default affects lending. The effect of default on the national economy.

This research work will test the following hypothesis:

1. Reduction in the overall profit of banks is the major adverse effect of problem loans and debt on the performance of banks.
2. Banks have problem loans and bad debts which erodes their capital base reduces overall profit of the banks, poses a thrat customer relationship and retards the growth and development of the economy.

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1.6 Significance of the Research

As the default and renegotiation consists a major percentage of the debts owned banks therefore this study of the research is significant in the sense that analysis existing lending practice and recovery measures and rate in order answer to this problems. This study is very significance in that:

1. It shall appraise the credit worthiness of the banks.
2. It shall help banks to improve their services
3. It shall bring recover or procedure for renegotiating the loan.
4. It shall proffer solution to lend enough in the aggregation
5. It shall Link this lending to national goals

This research study will only be helpful and relevant to what is happening in the Nigeria banking service. Those that will be benefit them are:

1. Government
2. Individuals
3. Sole proprietorship

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1.7 Limitation of Study

In the process of gathering information and material for this project, I have to face some natural and man- made constraint. For instance, this study is restricted to few Nigeria banks because of the distressed or syndrome. Nevertheless, the researcher trend to articulate all the available information and data within his reach to make sure that the project is completed within the shortest possible time.

More over, the researcher was undertaken within the armpit of limited fiancé. This was brought about by the face that the cost of materials and transportation have gone up due to recession in the economy and high inflationary trend.

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1.8 Definition of Terms

The operational of the co throwing words as they are used in this write up are given below:

Bad Debt:

These are loans that the borrowers have failed to repay for a long time after the become due. The banks are not sure whether these defaulters will repay again or not. They therefore, set a certain amount aside as provision to take care of such loans and debts which are entirely bad, the yare those which are not recoverable.

Doubtful Debt:

Are those of which the recovery in sums full or in part, is uncertain. They are provided for by sum set aside out of profit.

Overdraft:

A credit facility the bank grant to their customers which they are allowed to over draw in excess on their current account up to an agreed amount. Interest being calculated on daily basis.

Loan:

The act of lending a money, banking account were upon approval, a loan account is open in the customers name and the amount credited to the customers current account

Default:

Fault, neglect, defect, failure to account for money or pay back for money held in trust failure to repay a loan or an overdraft ad promised.

Portfolio of Assets:

This refers to the total holdings of loans and securities of bank.

Liquidity:

This means an immediate capacity of the banks to meet. Their financial obligations the degree of liquidity depends on the case with which their assets can be quickly turned to cash.

Bank:

An establishment, which deals in money. Receiving it on deposit from customers honouring customers drawing against such deposits on demand, collecting investing surplus deposits until they are required for payment.

Gestation Period:

This means carry or being carried in a business between conception and birth that is when the idea of starting of is actually being implemented.

Bank Credit:

The amount of new credit or money created by the action of banks in granting loans or overdraft to their customers.

Sanctions:

The approvals of clients applications for specific amount of financial assistance in loan on equity to establish new projects and expand on modernize existing ones.

Solicitor:

A person legally qualified to represent another in a court of law or a lawyer or a law agent.

Industry

This is used to depict the aggregate or collection of the commercial and development banks in Nigeria.