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

ABSTRACT

This research work will address the issue of lending problem loans (Bad debt) and also the techniques of minimizing it.

In the ordinary course of lending, Banks increase bad debt, which are charged against the income generated. Indeed many banks are at the verge of collapse, because of the impact and effects of bad debt and its ineffective management.

The nature of project writing in ordinary National Diploma level demands that the source of collecting data should be secondary, hence the researcher did not use interviews and questionnaires, but the research conducted was only limited to already published materials.

The researcher discovered that problem loans do not just occur, they are caused by variety of factors, and some are controllable while others are not.

Generally, bad debt has a negative impact in the operations of banks. It is anathema to sound banking system, therefore financial analysis must work hard to control and manage it effectively.

The researcher recommended some possible solution and suggestion on the commercial bank lending techniques and also means of controlling bad debt.

TABLE OF CONTENTS                                                                Page

TITLE PAGE                                                                                   i

APPROVAL PAGE                                                                         ii

DEDICATION                                                                                  iii

ACKNOWLEDGMENT                                                                            iv

ABSTRACT                                                                                              v

TABLE OF CONTENT                                                                             vi-vii

CHAPTER ONE

1.1 BACKGROUND OF THE STUDY                                          1

1.2 STATEMENT OF THE PROBLEM                                        1-2

1.3 OBJECTIVE OF THE STUDY                                                          2

1.4 SIGNIFICANCE OF THE STUDY                                            3

1.5 LIMITATION OF THE STUDY                                                            3

1.6 DEFINITION OF TERMS                                                                  4-5

CHAPTER TWO

2.0 REVIEW OF RELATED LITERATURE                                     6

2.1 PRINCIPLES OF GOOD LENDING                                           6-19

2.2 BANK AND THE ECONOMY                                                           20-21

CHAPTER THREE

 3.0 RESEARCH DESIGN AND METHODOLOGY                                   22

3.1 SOURCES OF DATA                                                                   22

3.2 LOCATION OF DATA                                                                           22-23

3.3 METHOD OF DATA COLLECTION                                            23

CHAPTER FOUR

4.0 FINDINGS                                                                                      24

4.1 BANK RELATED FACTORS                                                               24-25

4.2 CUSTOMER RELATED FACTORS                                                   25-26

4.3 UNCONTROLLABLE FACTORS                                              26-27

4.4 WARNING SIGNALS                                                                  27-28

4.5 EFFECTS OF BAD DEBT                                                                    28-29

4.6 LOAN RECOVERY MEASURES                                              29-30

CHAPTER FIVE

5.0 RECOMMENDATIONS                                                              31-33

5.1 CONCLUSION                                                                            33-35

BIBLIOGRAPHY

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

This project work on commercial banks lending practices and incidence of Bad debt in Nigeria is a study carried out by the researcher, so as to evaluate and analyze the lending principles, problems and effects of Bade Debt in the operation of banks and also to the general Economy.

A bank economic purpose is to act as a financial intermediary. It facilitates the process of challenge savings into investment and one of the avenues of realizing this objective is by lending effectively.

Loans are classified as bad debts when they cannot be repaid. But if management concentrates solely on minimizing these losses, a bank will make virtually no loan, profits will shrink and the lenders cannot completely eliminate risks, so the more loans are granted, the more losses are expected.

Therefore, one of the objectives of commercial banks is to manage losses well, since Bankers unavoidable and hence, charge it against the income generated with the obvious aftermath of depleting profit and in some severe cases, liquidates the affected banks through all business regrettably in cure bad debts but bankers whose stock in trade is money views debt incidences with dread.

1.2      STATEMENT OF PROBLEM

This research work is concerned with commercial bank lending practices and incidence of bad debt in Nigeria. The problems include:

(1) Bad debt results from inefficient management and also from dishonesty of customer, which might even leads to distress.

(2) This unfortunate trend in the Nigeria banking industry has caused creditors of the affected banks to loose their money and also made shareholders to loose their dividends.

(3) Bad debt leaves a negative impact on banks, since it depletes their income and makes lesser funds available for further lending which subsequently disrupts investment.

1.3    OBJECTIVE OF THE STUDY

The objective of this study is to assist banks confirm the multifarious causes of bad debt in their operations and to help them curtail its incidences by embarking on lending techniques and knows his customers, his project proposals, his account operation and others, his general position will be detected before granting loans to him. The researcher has objective of finding answers to the under listed questions:

(i) What is bad debt?

(ii) What are the lending principles and techniques?

(iii) What type of collaterals are acceptable to banks?

(iv) What are the causes of bad debt?

(v) What are the effect of bad debt on a commercial bank?

(vi) What are the possible solution to controlling it?

(vii) Can bad debt be totally eliminated?

1.4          SIGNIFICANCE OF THE STUDY

Some parts of the profits generated by banks has been sink into the yawning gap of bad and doubtful debts. This derelicting its duty to the shareholders and generally creating an unfavorable impressions on the investing public.

As a result, an investigation has been undertaken by the researcher on the lending issues of commercial banks and it is hoped that this project work will in no small measure, reduce bad debt incidences by a wide margin.

It will also help the banker to embark on the best lending portfolios, know the techniques of granting and collecting loans, the type of collaterals to collect, know how to control or manage bad debts and many others.

1.5           LIMITATION OF THE STUDY

The research of this study was not all that easy.

There were some setbacks encountered in the course of carrying out this project work. It include:

(1) One of the problems which militate against the effective execution of this study was inadequacy of material since it is secondary data that is required.

(2) The staff of the bank from where reports are to be collected were not co-operative, so inadequate information and details could not be obtained.

(3) Insufficient funds to carry out more in depth research, transport to more libraries or get more information from the Net.

Despite the odds of the above shortcomings, the researcher worked hard and labored hopefully to achieve this project.

1.6           DEFINITION OF TERMS

The research would like to define some terms used in the project. Some of them are:

(1) BANK LOAN: A bank may be defined as a financial facility granted by a bank which is intended to be applied for a specific purpose or project.

A loan usually has a defined duration and a fixed repayment programmer.

The funds generated are made available to customer / borrower in form of loans.

(2) COMMERCIAL BANK: Is a financial institution incorporated and licensed by the central bank of Nigeria to carry on the business of banking acceptance of deposits, collection and payment of cheques and other instruments, advancing loans, discounting bills, safe custody facilities buying and selling of shares for customers etc.

(3) PRACTICE: Commercial bank lending practices means the processes or activities involved in obtaining loans.

(4) INCIDENCE: Incidence of bad debt means the impact or effects of bad debt to the effective operation of banks.

(5) BAD DEBT: Are debts due to creditors but for some inherent weakness, the full or partial recovery is considered impossible. From the bank’s viewpoint, bad debt are the part of the bank’s account receivable or credit granted to the customer of the bank, which cannot be fully or partially recovered for one reason or the other.

(vi) CONCEPT: Lending concepts simply means lending principles and ideas.

(vii) GUARANTEE: This is an undertaking by one party (the guarantor) given to the bank (the creditor) to be answerable for the debt of another person (the debtor) upon the default of the debtor.

(viii) COLLATERAL: Means property or assets deposited with the bank by the fund seeker, in case of default in the repayment of loans. It should be easily disposable.

REFERENCE

1. E.L Farness (1974) An introduction to financial economics

Heinemann London page 132-135

2. J. Orjih (2002) banking and finance, splashmedia

Organization. Page 65.

3. Hoye and Geoffrey Wlntehead (1987) Element of banking made

Simple. Heinemann London Page 149.