LENDING PRACTICES IN COMMERCIAL BANKS AND THE PROBLEMS OF BAD DEBT IN NIGERIA

1.0 Introduction

1.1 Background of the Study

Lending which is one of the services rendered by banks needs to be effectively carried out by the commercial banks since it is the basis for the establishment of sound economic development. The lending operations of commercial banking in any Economy constitute a critical sector in the growth and development of any economy. The need for lending arises in view of the apparent financial disequilibrium in the economic system which is the gap arising between the deficit unit and the surplus unit. Thus, lending must be designed in such a way that it could be a total benefit to all different interest group of the bank, which include the shareholders, depositors and the borrowers.

According to Roy and Lewis (1971), giving credit to worthy borrowers is one of the most significant functions of commercial banks that are directly related to the development of the economy. If those loans or credit where not grow, the expansion of our production facilities and operations would almost be impossible and take a longer time for expansion.

The lending function has been seen as the outflow of finance intermediation process. According to Egonu (1992), it represents the channeling of funds by institution to those economic must unit that have more investment and consumption “Need than their resources can meet. It is as a result of the way in which all interest group can benefit form bank lending that researcher seeks to examine the lending practices and the problem of bad debt in Nigeria commercial banks.

The issue of bad debt has become pervasive so much that not in single day possess by without attention being drawn to the effort it has and continues to have on the banking industry. Of recent, we have seen one lending disaster after another. The case of progress bank of Nigeria plc, African continental bank plc, the republic bank etc are goods example. Also the total collapse of capital merchant bank limited, Alfa merchant Bank and also Savannah bank plc are consequences of misfortunes, facing the banking industry, majority through inefficient lending operations.

Bad and doubtful debts generally are component of account receivables or trade credit granted to the customers of a business organizations but which cannot be recovered within the specific period for one reason or another. According to Asakamye (1983) what then should the bank do in this situation should they stop the extension of credit to their customers so as to avoid bad debt? Yet lending is the sources of bank profit.

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1.2 Statement of the Problem

Commercial bank have been incurring huge amount of bad and doubtful debts due to the failure of recovering measures adopted in such situations. Many commercial banks are inefficient in credit granting functions and recovery measures and these results to a huge amount of bad and doubtful debt being reported in their annual profit and loss account.

Through there have been significant improvement of banks since various banking acts have been promulgated and credit guidelines have been communicated to the banks annually to regulate bank lending, they still face various problems could be enumerated as follows: Loans defaults fueled by wrong appraisal techniques, michannelling of loans finds, dubious character of the borrowers etc the share holders, the banks and other are identified to have a part in the championing of this problem and their roles could be disassed as follows.

Shareholders:

Many shareholders who are the main owners of these banks have created problems for some banks. Sometimes a prospective borrower, whether he has collateral or not can be sure of getting a loan once he knows any of the owners of the bank. In this case, loans and granted based on who you knows any of the owners of the bank. In this case, loans are granted based on who you knows and not on any appraisal techniques and such loans are defaultable.

Banks:

The administration of the loans and advances portfolio of many banks leaves much to be sold. The department changed with the responsibility of granting and monitoring the loans and advances of he portfolio do not usually coordinate their efforts. It was apparent that the department lacked adequate and experienced manpower in credit administration. According to Doyle (1968), the lending practices in banks is characterized by the following irregularities.

1. Facilities were not subject to prosper credit appraisal before lending to the customer. In most cases, neither the ability to repay nor adequate securities were available
2. The viability of the projects to be financed and the integrity of customers were usually given the pride of place in the processing of application for credit.
3. Failure of management to have a defined landing policy.
4. Delay in the approval and disbursement of loans helps to fuel loan default. Sometime, it takes banks a couple of months to perfect some security items.

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1.3 Purpose of the Study

The main purpose of this study is to investigate lending practices and problems of bad debt in Nigeria commercial banks and how to minimize the rate of bad debt. The purpose of this study is as follows.

1. To deuterium why there is incessant demand for bank loans and overdraft.
2. To identify the casual factor of high incident of bad debt in some Nigerian bank
3. To fine out what is to be done to control the burden of bad debt which is now telling on the banks so that shareholders wealth in these banks are better maximized.
4. To ascertain the strength and weakness in the business environment as it can lend to default of the lenders objectives.
5. To find out factors that can influence lending practices.
6. To discuss and make appropriate recommendation for;

   Control of loans and advances.

   Minimizing bad debts arising from bank lending.

7. Finally, the study will also highlight the necessary institutional support provided by the government to enable the banks perform and the implication of the various, laws regulations and guidelines given by the government central bank of Nigeria and other regulatory body.

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1.4 Research Hypothesis

• H1: There is significant relation between lending practices and bad doubtful debts problems in commercial banks.
• H1: Lending rate has a positive influence on bad and doubtful debt.
• H1: Bad and doubtful debt exert significant negative influence on the bad problems.
• H1: Loans and advances are significantly affected by lending rates and the previous years bad and doubtful debt.

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1.5 Significance of the Study

1. One of the significance of the study is the ways of improving the lending practices of the commercial banks with the view of minimizing the incidence of bad and doubtful debt.
2. Secondly, it is also the conviction of the writer that the findings of this study will e immense benefit not only to bank but other allied institutions whose aim and objectives are similar to the banking industry.
3. Thirdly, the import of lending practices to the performance of the bank is worthy giving great attention considering the important role of commercial bank in economic development of the country.
4. Fourthly, the research will find out whether the stated objectives of borrowing are accomplished.
5. Finally, the study will also highlight the necessary institutional support provided by the government to enable the banks perform and the implication fo the various, laws regulations and guidelines given by the government central bank of Nigeria and other regulatory body.

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1.6 Scope Or Delimitation of the Study

In this study, we cannot dismiss the fact that lending pelicious and practices as a management function is a wide field, we cannot therefore afford to be general in our analysis, consequently were shall therefore focus on commercial banks and the lending principles of this banks and low effectively they are practiced.

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1.7 Limitation of the Study

Constraints were met in this research work since much researcher have not gone far into a research of this problem. Related literature to this was a limitation for a comprehension analysis and investigation. The constraints includes.

Financial constraints:

Due to financial constraints, the researcher cannot veer all the relevant detailed facts and information on commercial banks.

Time constraints:

Inadequate time also affected a true research on this topic because there is limited time to carryout the research work.

Lack of data and information:

Inarguable data and information is another problems in Nigeria banking sectors, unlike bank in other advanced countries.

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1.8 Definition of Terms

In other to and our understanding of what this research work is about, some terms are hereby defined to enable better understanding. The terms are as follows:

Lending:

Lending a way of given the temporal use of money, usually at an interest rate.

Bad debt:

This means when the borrower fails to pay the loan in accordance with their terms of agreement.

Collateral:

It is a security pledge of the fulfillment of an undertaken such as payment of a loan to be forfeited in the case of default.

Banks:

This is an institution that receives lends and safeguard money and other important document.

Shareholder:

A shareholder is an owner of share in a business company or bank.

Prerequisite:

This means something required as a condition for something use.

Depositor:

A person who deposits e.g. money in bank.

Advance:

This means a to pay Money before it is due to be paid or to lend money.

Disbursement:

This means to pay out money.

Constraints:

A thing that limits or restricts.

Banker:

A person carrying on the business of receiving money and collecting draft from customers which are subject to withdrawal by cheques.

Doubtful debt:

Doubtful debt are those debts for which its recovering is doubtful.

Criteria:

Principle by which something is measured for value.

Statutory:

Fixed and required by law.

Feasibility:

That which can be managed or that is convenient.

Viability:

Capable of developing and serving without outside help.

Incorporated:

United or formed into a corporations.