DEVELOPING AN AUTOMATED LOAN PROCESSING SYSTEM FOR COMMERCIAL BANK

1.1 Introduction

A loan processing system is designed to handle back office operations of financial institutions offering different types of Loans (Mbam & Kingsley, 2014). The system converts the traditional method into a more digitized, less stressful form and ensures the security of records and information. It also tracks loan disbursed and enhances compliance to loan terms and conditions (Adebayo et al., 2014). Loan disbursement is the principal business activity for most commercial banks. The loan portfolio is typically the largest asset and the predominate source of revenue. As such, it is one of the greatest sources of risk to a bank’s safety and soundness. Whether due to lax credit standards, poor portfolio risk management, or weakness in the economy, loan portfolio problems have historically been the major cause of bank losses and failures. Effective management of the loan portfolio and the credit function is fundamental to a bank’s safety and soundness. Loan portfolio management (LPM) is the process by which risks that are inherent in the credit process are managed and controlled. Because review of the LPM process is so important, it is a primary supervisory activity.

As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the Study, Scope of work, Limitations of the Study and Definition of technical terms.

1.2 Background of Study

Financial institutions offer loan services to small organizations individuals and this was initiated after a number of considerations on the banking system. This project attempts to design and implement an automated loan processing System for Commercial Bank and know about loan sanctioning and lending procedure among banks across the globe. It also attempts to use the credit risk and evaluation models to develop a strict approach to these areas, to think through policies, principles, and practices to accomplish the new tasks.

A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. In a loan, the borrower initially receives or borrows an amount of money, called the principal, from the lender, and is obligated to pay back or repay an equal amount of money to the lender at a later time. Typically, the money is paid back in regular installments, or partial repayments; in an annuity, each installment is the same amount. The loan is generally provided at a cost, referred to as interest on the debt, which provides an incentive for the lender to engage in the loan.

The online Loan processing system will boost commercial bank’s productivity, accessibility and security. The system will focus majorly on increasing the work output of the organization thereby decreasing customer wait time, which improves the customer-client based relationship of the organization. Accuracy, consistency and compliance will also be achieved. Keeping records of transactions done in a financial organization is a bit of a hassle especially when these records are paper based and there is no digitized process of storing data, processing loan application, tracking repayment dates and disbursing loan to the public. Major operations and decisions are exposed to challenges such as decrease in efficiency and effectiveness towards retrieval and storage of records, security of paper-based records, decrease in productivity and efficient delivery of service.

In a legal loan, each of these obligations and restrictions is enforced by contract, which can also place the borrower under additional restrictions known as loan covenants. Although this article focuses on monetary loans, in practice any material object might be lent. Acting as a provider of loans is one of the principal tasks for financial institutions. For other institutions, issuing of debt contracts such as bonds is a typical source of funding.

The proposed system is an interface which facilitates a customer to apply for a loan using a digital channel through the internet, the system check for possible bankruptcy prediction, credit risk estimation to track the status from time-to-time. This system provides detail about the customers’ financial status over a period of time, their loan details, risk estimation and possible bankruptcy prediction. Getting a loan is a very tiring and complicated process in Nigeria. It may take weeks or even months for loans application to get reviewed, before getting approvals and people have to visit the financial office for documentation and customer verification.

1.3 Statement of Problem

Investigation revealed that many banks do not have an automated system specifically to manage loan lending information. This situation makes it difficult to instantly confirm loan information or get reports when needed. To solve this problem, a loan lending management system is needed to aid the easy capturing and updating of loan information of customers and verification of loan lending records.

Currently, most financial institutions do not have any an automated system to help manage the data of customers applying for Loans, Grants and Investments with credit risk evaluation. They have to rely on manual procedures which are time consuming and does not calculate the credit risk evaluation in case of bankruptcy.

This manual procedure doesn’t maintain customer records with proper security and can’t track details easily. It doesn’t allow the customer to check their loan request, submit bank account statement if need be. The Existing manual procedure isn’t equipped with basic functionalities of fast access to information such as customer details and maintenance of all the loan details so it involves lots of paperwork. Apart from administrative task being cumbersome, manual system of registration is also long and error-prone.

1.4 Aim and Objectives of the Study

The aim of the study is to design and implement an Automated Loan processing System for Commercial Bank. In achieving this aim, the following specific objectives were laid out as follows to develop an application software that will:

1. Allow bank customers to easily access loans without stress or visiting the banks;
2. Analyze the loan sanctioning procedures of the applicants using credit risk and evaluation models;
3. Assist the end-user in identifying the credit worthiness of the borrowers;
4. Increase accountability in the financial sector; and
5. Help the efficiency of loan disbursement and Loan recovery among banks.

1.5 Significance of the Study

The loan processing system will provide flexibility to generate different records when it is needed for loan processing. The system will also reduce the time spent in manually approving or declining loan applications, it will also alert customers of repayment dates a month before due date, a week before due date and a day before due date respectively. The following are the specific relevance of the research work:

1. It will provide an automated system that will aid the easy recording of loan lending information.
2. It will serve as a management information system.
3. The study will also serve as a useful reference material to other researchers seeking for information pertaining the study.

1.6 Scope of the Study

This scope of this research is focused on the Design and Implementation of an Automated Loan processing System for Commercial Bank.

1.7 Limitations of the Study

During the course of this study, many things militated against its completion, some of which are:

1. Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
2. Establishment Policies: Establishment policies posed a serious limitation as most staffs are not ready to release information needed for this project work. There were lots of information needed from the staffs of this institution to enhance the study which took them time to release or they did not release at all for security purposes, hence the scope was reduced.
3. Research material: availability of research material is a major setback to the scope of the study.
4. Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.

1.8 Definition of Terms

Debt: An amount of money, a service, or an item of property that is owed to somebody

Loan: An amount of money given to somebody on the condition that it will be paid back later.

Lending: To allow a person or business to use a sum of money for a particular period of time, usually on condition that a charge interest is paid in return

Guarantor: Somebody who gives a guarantee, especially a formal promise to be responsible for somebody else’s debts or obligations.

1.9 Organization of the Research

This research work is organized into five chapters.

Chapter one is concerned with the introduction of the research study and it presents the preliminaries, theoretical background, statement of the problem, aim and objectives of the study, Significance of the Study, scope of the study, organization of the research and definition of terms.

Chapter two focuses on the literature review, the contributions of other scholars on the subject matter is discussed.

Chapter three is concerned with the system analysis and design. It analyzes the present system to identify the problems and provides information on the advantages and disadvantages of the proposed system. The system design is also presented in this chapter.

Chapter four presents the system implementation and documentation. The choice of programming language, analysis of modules, choice of programming language and system requirements for implementation.

Chapter five focuses on the summary, conclusion and recommendations are provided in this chapter based on the study carried out.