Credit management and bank lending pdf

It desired to maximize profit. Clem P. Alongside, the growth the credit sector is the increasing high incidence of bad debt due amongst others, to poor management.

Hallmark bank limited like most commercial bank ahs recorded high incidence of bad debt and have one on the year declared losses. For instance in , he bank sustained a net loss of , Million , resulting from the fact that the bank net portfolio is [predominantly not performing chairman annual report P.

In , the bank made a profit of 87, ,, after the amount of 1, , has been deducted as the provision for the bad debt. Added to Giving the phenomenon of bad debt and the consequent loss been declared by the bank, there is therefore a need to study the credit management of the bank with a view to attained an insight into how best to reduce the incidence of bad debt.

There has been a conferrable concern showed by the management of the bank on this because the affect on the profitability of the bank and also affect and limits its expansion. As the bank sector expands with the growing complexity of the Nigerian Economy, it has been observed that the amount of bad and doubtful debt of the bank, which has contributed, to distress nature of some of the bank has been risen. The question that borders the mind is giving the management expertise of the bank the various guideline as regard to lending, why did such lending be regarded as bad debt..

In order to find answers to the various question rose above, the author formulated four hypotheses which would be put to test. Ho: there is a significant relationship between the profit of the bank and total loan and advance granted by it. Hi: there is no a significant relationship between the profit of the bank and total loan and advance granted by it. Hi: this is no a significant relationship between the level of bank deposit and the manner of loan.

Ho: this is a significant relationship between the level of risk in loan proposal and the loan that is granted buys the bank. Hi: this is no a significant relationship between the level of risk in loan proposal and the loan that is granted buy the bank. Ho: there is a significant relationship between the banks perception of different type of security and the amount loan granted. Hi: there is no a significant relationship between the banks perception of different type of security and the amount loan granted.

This is studying the entirely the credit management and causes of bad debt in the bank and how it affect the performance of the bank as it a only restricted to Hallmark bank of Nigerian as the case of study. Some difficult and constrain were encountered by the researcher in the cause for obtaining necessary information.

For instance in some occasion, it was impossible to get in touch with the bank officers, who should supply the information needed. For a proper understanding of the study been carried out, the author gave the operational definition of the following terms in the study;. Debt: it can simply be said that debt is what is owned to another. It can be also describe as an obligation to make future payment. It can be define as money goods or service owning to another by nature of an agreement expressed or implied which gave rise to a capital duty to pay.

Capitally put; debt is credit recovered by a borrower from a lender. Bad debt: this is the case where the debtor or the borrower fails to meet up with his matured obligation and all effort by the borrower to rescue the debt proves abortive. This give rise to bad debt. Credit: this could be said to be what is owned to another by virtue of an agreement expressed on implied, which gave rise to a legal duty to pay.

Techniquecal credit is debt relieved by a borrower from a pure lender. The type of facility a bank grant to its customers depends on the purpose for which the facility is going to be utilized even though they could belong to one sectoral entity or the other.

Apart from the purpose of the loan. The length of time before repayment is due. The type of lending done by hallmark bank limited and indeed most commercial bank include.

Overdraft, loan advance, discounting, documentary letter of credit facility, trusts receipt, bands and guarantee. Adekanye P 10 opined that overdraft is the most widely use type of credit grant short term finance usually use to tied over the population cycle and finance occasional seasonal peaks.

Its maturity is usually within one year but in practice, most overdrafts are reversible. This finance is most suitable for financing transaction which ahs self-liquidity over short period.

Fund advance on overdraft are in teory repayable on demand while interest is payable on the outstanding balance on daily basis. Loans are usually lent by borrowing, which are secured against he asset of the borrowing company. It is duly use as part of a package of a financial facility. The policies on granting of loans, their supervision, and recovery drive are normally established taking into consideration the relevant strategies used in the past and those ones being utilized by other banks.

Bank policies on loan supervision are used to address responsibilities such as: a Teams to be constituted for checks and balances; b Superior officer s to be in charge of reports and evaluation, e. There are other areas of responsibilities for the management of credit risks by various bank officials, which are not covered by above list.

Therefore, the list is by no means exhaustive for the purpose of credit management of credit risks by the banks. Such policy should be used to specify the necessary actions to be initiated and taken by the bank officials to recover the amount of loan involved in the transaction.

The necessary directives in managing difficult account involve the following considerations: a The use of committee for the recovery of the funds; b Discussion with the difficult customer by the bank officials; c Visit to the business premises of the customer for assessment; d The use of subtle pressure on the customer, e.

In addition to the above, there are other areas for policy actions on difficult customers, which various banks can formulate to manage them. More so, necessary responsibilities for the management of the difficult customers are formulated and assigned to various bank officials, which are not covered by above list. Therefore, the list is by no means exhaustive for the purpose of managing difficult customers by the banks. The control of customer account is necessary because of the fact that a customer can be playing pranks on the repayment of loan and payment of interest on such funds.

The above list is by no means is exhaustive, and therefore, it is left for individual banks to decide on the necessary considerations in this respect. In addition, there is every likelihood that such customers will use their accounts to demand for overdraft or loans in the course of their operations.

There are areas on which policies can be established for such purpose. Credit Extension By Banks Commercial banks operate business that is woven around financial intermediation activities. In fundamental terms, banks are institutions which evolve for the business of keeping, lending and exchanging of money. Therefore, banks are organizations whose principal operations are entrenched in accumulation of idle funds from the general public with the purpose of lending such funds to business entities and individuals as well as the government institutions.

The position of the commercial banks is that of retail banking institutions that accept deposits from the public and in turn lend such funds to some members of the public. Historically, the goldsmiths that pioneered the realm of banking business evolved the operations by accepting valuables such as bullions, money and ornaments for safekeeping. For the care of the valuables, the goldsmiths started charging some fees for the safekeeping of the money and the bullions.

In the process of the safekeeping of money, bullion and other valuables, the goldsmiths started lending the money to other people for fees. This serves as the precursor of the modern banking business operations. In conceptual terms, banks are institutions which evolve for the business of keeping, lending and exchanging of money. Hence, commercial banks as retail banks are institutions that accept deposits from the public and in turn advance loans by creating credit.

The commercial banks, are the banks that perform all kinds of banking functions such as: a accepting deposits; b advancing loans; c credit creation; d financing foreign trade; e discounting bills of exchange; f agency functions; g keeping of valuables; h issue credit instruments; and i serve as underwriters for shares and debentures.

The commercial banks are known for granting short-term loans, in most cases, to customers. Nevertheless, in recent years, they have included medium—term and long term loans in their loan portfolios. In terms of ownership, commercial banks are joint stock banks in the sense that they are just like the joint stock companies whose ownership cuts across many strata of the society; and therefore the shareholders of each of such corporate banking entities run into millions.

The situation may be different in advanced climes where there are some other forms of loans or credits which can be advanced to customers. Advancing loans or credits out of the deposits constitutes one of the fundamental functions of the commercial banks.

In the process of banking operations, the commercial banks lend out certain percentage of the cash in deposits on a higher rate of interest than they pay on such deposits.

The various forms of loans and credits being granted to customers by the commercial banks are identified and discussed below. The amount of loan is normally credited to the current account of the borrower. In the case of a new customer, a loan account for amount of loan is normally opened for the facility. The customer who is the beneficiary of the loan facility is then free to withdraw money with cheques, from the loan account in the case of the new customer and the current by the existing customer of the bank.

The beneficiary of the loan has to pay the specified or agreed interest rate on the full amount of the loan and necessarily the loan principal would also be repaid back to the bank. Such loan facilities are normally advanced against first class bill or securities. Such loans can be recalled at a very short notice and can also be renewed. These are similar to money at calls and short notices normally advanced by banks to other banks in the money market operations in the economy.

The facility is effected by providing the overdraft up to a specific amount to the customers against their future deposits, which would be used to offset the amount involved by the bank. The commercial banks normally charge interest only on the amount by which the current account is overdrawn and not by the amount of the full amount of the overdraft approved for the customer by the bank. It is meant for immediate access to the funds in the bill but at a discounted amount which is lower than the face value of the instrument.

The commercial banks through this facility provide the customer who is a holder of a bill of exchange immediate cash by discounting the bill. The banks would deposit the amount of the bill in the current account of the bill holder after deducting their rate of interest for the period of the loan, which is not more than 90 days. It is instructive to note that the bill of exchange is normally drawn by the creditor and sent to the debtor for acceptance, and then given back to the creditor making it payable after 90 days.

At the maturity of the bill of exchange, the bank that discounts it recovers its payment from the banker named by the debtor who accepted the bill. By implication, the commercial banks cannot create credits without engaging in granting loans to their customers. The credit creation by the commercial banks, unlike other financial institutions that cannot create credits, arises out of their quest to generate profits in their operations.

For this rationale, the commercial banks accept deposits and advance loans out of such funds by keeping small cash in reserve for day-to-day transactions. In this operation, whenever the bank advances a loan, it opens an account in the name of the customer as the beneficiary but does not pay cash to the customer. The bank would allow the customer to draw the funds through the use of cheques according to his needs. Hence, by granting loan to a customer, the commercial bank creates credit or deposit.

Credit Protection Methods The following are the methods being adopted by banks to ensure the protection of the funds they usually commit into loans and advances. This is an important way of eliminating credit risk. The retention of the articles by the bank does not involve any cost. This is relevant in the case of leasing of items of equipment that involves acquiring these productive assets and make them available to manufacturers for use on rental basis.

The title to the ownership of the assets is normally retained by the banks until they are paid for by the users called lessee at the end of lease period. It implies that such arrangement gives the bank the right to recover the items of equipment which are not paid for by the users. The requirement is that the customer as the loan beneficiary should establish a separate bank account into which the proceeds from the sale of the finished goods, arising from the conversion of the raw materials, be lodged on periodic basis.

Such lodgments will be used to repay the funds that have been advanced as loan to the manufacturer by the bank. Therefore, the usual practice by banks in the process of lending funds, is to request for some form of collateral security. The commercial banks normally consider certain categories of property or assets as well as valuable for the purpose of securing collateral from a loan beneficiary.

The bank advancing loan to the exporter of goods will have to demand for the irrevocable letter of credit to hold it as mortgage for the loan. Lending Procedure The lending of loans and advances to the customers of banks goes through a rigorous events.

Such events or procedures are normally initiated by both the bank and the customers who are seeking for credits with which to run their business operations. The process involves contact between the bank and the applicant for loan, during which the bank would initiate necessary actions to conduct a thorough investigation on the loan applicant and his business or the project for which the funds would be utilized.

Nevertheless, some customers of the bank may be approached by the bank managers or credit officials of the bank to convince them to apply for credit facilities. The bank officials normally take into consideration certain factors before initiating the move in drawing the attention of some customers that they are entitled and qualified for credit facilities.

In general terms, therefore, the request for loan facility of a customer can be initiated by both the customer and the bank. This is often based contacts and good banking relationships between the bank and their customers. The interview is very critical in view of the fact that there is need to confirm the necessary claims by the customer who is seeking for the credit facility. The interview is normally conducted on the strength of the loan form filled and the analysis of same by the loan officer or loan committee as the case may be.

The loan interview is desirable because it can be used to extract some additional information from the loan applicant, which can go a long way to help in giving favourable consideration, or otherwise, to the loan request.

In order to evaluate the loan request, the following considerations are assessed. In the case of a new business, the necessary financial projections on income generation and statement of affairs for some years, which are incorporated in the feasibility study report, will have to be used for evaluation.

The documents are both signed by the loan officer of the bank and the customer who benefits the loan facility. There is also the need for the guarantors to sign the documents before the final seal. In carrying out this business the banks would source for funds from various members of the public. The funds of the customers are held in safekeeping of the banks and therefore, such funds must be made available to the depositors whenever they demand for them.

The implication is that banks strive to ensure that the funds are available for payments to the depositors on periodic basis for their needs and commitments. In the process of performing the other aspect of financial intermediation, the commercial banks usually keep the interest in uppermost consideration so as to discharge their delicate function efficiently.

In performing such function of lending funds to customers the banks usually take necessary steps to protect the interest of the depositors. In the process of trying to maintain a delicate balance between recovery of loans and advances and periodic payments to the depositors, the banks usually institute appropriate measures to safeguard their position with regards profitability and survival. Based on this discussion, it is possible to identify the basic reasons for the management of lending and credits by the banks, which are critical to their operations.

And since such depositors are entitled to their funds as often as they so desire, banks lend money for a short time in most cases. The administration of lending and credits by the banks is managed in such a manner that the funds are repaid at agreed regular intervals without defaults.

The repayment of loans by the beneficiaries depends on their capacity to generate enough funds from their projects, besides the fact that their character which are normally evaluated before loan approval. In essence, the banks lend funds to the customers based on the financial standing of their business in terms of regularity of cash inflows with which to repay the loans.

The banks also take into consideration a less risky business for loans to ensure the safety of the funds and their prompt recovery from the borrowers. In the case of new business ventures, the banks would also grant loans for those enterprises whose owners command good character and have adequate capacity to repay the loans.

The new business venture should have sound financial projections in relation to the technical feasibility and economic viability of the project for which the loan is granted. This means that in the process of granting loans and credits to customers, the banks consider the composition of the loan portfolio so as to maintain balanced diversity of the assets. This is view of the fact that the spread goes a long way to guarantee the safety of the banks funds.

It implies that the loans and credits being granted to customers are not concentrated in a particular sector but in diverse sectors of the economy. This is in conformity with the policy of the apex bank in terms of extending loans to various productive industries and businesses for balanced growth and development of the economy.

The spread of the loan portfolio to various productive sectors of the economy is also imperative towards minimizing risks that are always associated with lending of funds. In this regards, commercial banks take appropriate measures to spread the risks of investment in loan and advances portfolio by considering various trades and industries.

In order to ensure constant inflows of funds from loans and advances, the banks normally put in place some administrative measures towards assessing that such credits are the types that would generate stable incomes with which to repay the funds.

It is the responsibility of the credit officers and the committee to also evaluate new projects using their technical feasibility and economic viability reports to determine the nature of cash inflows in terms of their nature of earnings. Such assessment will be used for the selection of the projects that can generate enough funds for repaying loans and credit facilities.

In the case of existing business, the usual practice is for the bank to request for financial reports of the business which incorporate relevant data for five years. This will be used in evaluating the regularity of generation of earnings.

And the assessment is used to determine the stability of income from the business for the repayment of loan facility. Loans and advances are usually granted to customers with the intention of earning some income for the banks. The income from lending facilities comes mainly from the interest charges being made from loans advances being granted to customers by the banks. The rate of interest being charged on loans and advances by the banks is normally determined in consideration to the prevailing interest rate and the ruling bank rate sanctioned by the apex bank in the economy.

Such bank rate is called the monetary policy rate in the country, as determined by Central Bank of Nigeria. The interest rate being charged on loans by the commercial banks is normally determined in relation to the bank rate being charged by the apex bank, the former being higher than the later.

In addition, the banks incorporate some other charges as may be determined by the lending officers or the credit committee. In order to ensure that lending operations are proper supervised, the banks normally set administrative policies on loan supervision.

In this regards, administrative policies are established on supervision of credit facilities, their recovery drives, and personal visits by bank officials to the loan beneficiaries.

Most of the banks that are now neck deep in bad debts found themselves in that situation through mismanagement of their loan management portfolio. Considering the ratio of defaulters in Banks with Government equity and those that are one hundred percent private one may tend to agree that partisan politics in its rotten form has some influence in granting and administering loans.

He stated that Bankers relax, more than they should the lending standard because of Mr. A and B who helds from our village or State etc. Other analyst believed that loans go bad due to human errors or unforeseen circumstances. Some others argue that the inconsistent economic policies are largely responsible for why certain loans turn out to be bad.

These inconsistent economic policies of the government make feasibility study to become obsolete. This often creates a situation of the borrower making all the assumption initially considered in the proposal to become unrealistic. A good percentage of bad loan is also believed to fall within loans granted to government and government contractors who had failed to pay or collect that money from Government due to political changes resulting from political and economic instability.

Another reason advanced by Mr. Bayo in the Banking and Finance Digest was the present economic down turn in the country. Most businesses and individuals could no longer cope with the repayment program. However, in spite of these factors, some banks grant credit without requesting for guarantee of an owner.

This inclination the felt was a way to compass for seemingly desirable credits. Credits began to go bad in increasing numbers, with no guarantees to back them up. Borrowers perceptions forms one of the causes why loans goes bad. The events of the s spawned dangerous perceptions in borrowers. One is that the deep pocketed, high — speeding banks can easily absorb the loss caused by a business loss have no particular financial effect on the economy.

When they compare themselves with the high profile financiers of the s, some owners look upon their moral retreats as in significant. How elaborate, effective and efficient with which this is done depends on the size of the bank and number of branches a bank has as well as the variation in marketing and delegation of authority.

Sometimes it is useful to operate a form of a rating system, which makes it possible to generate an interesting profile of range of quality in the portfolio. All commercial banks make use of external Auditors and examiners or bank Inspectors as an independent check and other outside reviews. The first method is what he called continuing quality control.

This involves constant quality control within each branch at head office. The continuous review may be made by the general management of the bank either in the form of a credit committee or by continuous review by branch managers. Either as a part of this or in lieu of it, there should exist specialist personnel who surveys and reports on the quality of the lending, the quality of the individual loans, the authorities in each case and effective co-operation within the department.

However, whether as a specialist staff or as an internal auditor, he will be expected to do most of the detailed work, identify and follow problem loans, supervise and assist weaker lending officers to ensure adequate communication between various sections of the bank.

The second method is to establish a loan audit department with a reporting authority directly to the senior manager of the bank via the controller or Accountant. The audit may include full analysis of some borrowers but more often reviews the quality of the analysis done before loans were made. The third method is inspection. This is similar to the loan audit but involves a longer history. A team usually of line bankers inspects all branches and head office divisions on a periodic basis.

Each inspection is usually carried out as a surprise examination with no set interval or warning. They appear more interested in compliance with the conditions on which the loans were made than whether the conditions were right initially or whether subsequent changes have been made up to date. Policies and procedures that are out — dated or weak do not provide prudent and acceptable standards for what constitutes high quality.

Without such guidance therefore, loan officers go their different ways. A credit environment that does not promote and reward high standards is a disincentive for effective loan management. A credible credit culture will autonomously generate lender commitment to loan management. If loan officers are unable to track exposure risks on most accounts, either directly or indirectly, it can be said that accounts allocation is in efficient. A poorly trained or inexperienced loan officer may not be able to handle more than a few simple transactions.

Knowing what to do, how to do it and hang the required skills are necessary for effective loan management. Few banks are known to thoroughly train their loan officers before releasing them into the market. Credit heroes and worthy mentors are scarce commodities in the market because of this spread of expertise over a large number of banks.

The combination of inadequate training and lack of well-experienced monitors can spell portfolio disaster, especially where the credit culture is not very strong. Problem such as population explosion, hunger, swaths, wars, AIDS scourge, juvenile delinquently, investment decisions etc stone you in the face. One may also probably be faced with the problem of maximizing the utility of scarce resources with the little money at your disposal, one may be faced with the issue of prioritizing your needs if one want to go into products, he may be faced with the problem of what to produce, the quantity to produce in order to meet the market demand, what prices to charge in order to generate the required revenue.

All those problems and questions call for solutions and answers. Man by nature is an inquisitive being everywhere he looks, he sees phenomena which arouse his curiosity, makes him to wonder, speculate and ask questions; all human beings do ask questions about everyday occurrences for which answers are needed. Also in our day today interpersonal relationships, we form impressions, opinions and take positions about others.

But have we at anything stopped to ponder the basis on which we have formed these opinions and taken positions. This chapter is centered on the methodology on getting to knowing things, but the main objective of the chapter is to expose the type of date collation method embarked for the purpose of this research work. The sources and types of data used for this research work is all explained in this chapter. The research method used is a Combination of explanatory and descriptive approach. This is because this method sets out to explore a new area of at least one about which little has been achieved in academic cycles.

The method makes it possible to examine a phenomenon from many points of view, looking for new ideas and insights which will explain what is happing. This is particularly so because the researcher did not diversify his data collection techniques to include questionnaires, instead extensive oral interviews and research on the records manuals, and other related documents were embarked upon.

In the light of this shortcoming the questionnaires were augmented with the conduct of extensive oral interviews. While a questionnaire may be subject to misinterpretation depending on the perception of the respondent, this could be minimised if oral discussions are held between the researcher and the respondent. Beyond this generally accepted feature, a wide range of views on the subject matter would be discussed that could be helpful in exposing certain truths that may not be covered by the questionnaire.

Besides managers prefer a situation where they could spare about thirty to forty five minutes to chart with a researcher than commit just ten to fifteen minutes to fill a questionnaire. They prefer speaking than writing. General speaking, interviews as a source of data has the following advantages. That is reliability on the respondent for his or her responses. The above limitations not withstanding oral interviews are extremely powerful methods of research when used appropriately.

The prudential guidelines issued by the central Bank in has created a general awareness on the need for effective and efficient credit management policy in the Banking industry. In placing its funds, a commercial Bank in addition to conforming with the central Bank guidelines on credit disbursement must also confine itself to loans and securities of the highest quality.

The credit managers must meticulously evaluate loan applicants to ensure that only those pass the screening test are granted credit facilities. If a bank must cover its cost and make some profit, it must lend its funds at an interest.

Thus seeking to earn this profit, it would naturally have grant loans yielding positive returns. However, in deciding which customer to grant credit and which one to refuse credit facilities, the banker must b e ware of its obligations to the depositors and shareholders.

He must conduct the entire loan policy effectively and efficiently to give the desired result. It was during the course of investigation that, general lending procedure is not dissimilar to other commercial banks and where there is any difference at all it is an innovation in management policy which of course have no much effect on the overall procedure of their lending and administration.

The commercial banks in Nigeria are governed by the same statutory and regulatory requirements, which are issued by CBN. Therefore, because of the similarities as regards lending and credit management and for the purpose of this research work emphasis shall be layed on First Bank Nigeria PLC. The data presented have been critically analysed in other to give clear understanding of the bank and the appraisal techniques.

The need for this credit policy comes to light so as to primarily provide a corporate directional focus and orientation, with a view to educating the operators of credit functions at all levels and management of credit investments. This brings to focus the need for a well defined credit policy which will provide the requisite systematic application of relevant and standardized procedures and practices in lending operations, the purpose of which is achieving an ultimately 4.

While designing the policies, their relevance to both the macro issues and internal considerations of the bank have been taken into account. The loan able funds must be invested judiciously in strict compliance with the stipulated credit policy procedures and laid down operational practices.

The unconditional need to satisfy the institutional constraints and the dynamic economic situation while adhering to the legal framework and statutory requirements must also be considered. Therefore to ensure the achievement of qualitative, broad based and profitable loans portfolio, the need to streamline lending operations.

Via specific authority levels and procedure guidance is recognized by the credit policy. This is with a view to eliminating the incidence of problem facilities arising from faulty credit appraisal and management system. A Cash facility 4. It must be borne in mind the fact that when granting contingent liabilities, the banker must assume primary liability and the worst situation that can arise from the commitment i.

Being called upon to honour its obligation under the agreement. Thus the need to effectively appraise a contingent liability is imperative and calls for the exercise of utmost care and application of all canons of lending.

Moreover, the regulatory authorities consider contingent liabilities as part and parcel of the banks loan portfolio. Cash facilities are as follows: - 4. The repayment of this facility is presumably done on demand or upon expiry it renewal has not been sought or granted. As stated above, these facilities are granted by the bank to finance working capital in adequacies, to tide over the production cycle and financing of seasonal peaks.

Request of-this nature must be accompanied by cash flow projections so as to ascertain level of actual need, for seasonal or revolving financing. Loan facilities are reducible by specifically agreed installments embloc payments taken from the current account for the credit of the loan account plus the interest due. These facilities are extended for specific assets acquisition or projects and personal consumption purposes.

Interest is payable on the whole outstanding balance on a reducing balance method. This must be based upon specific repayment terms and conditions to ensure the borrowers capability to repay on schedule. The bills are acknowledgements of indebtedness with a promise by the debtor pay to upon maturity of the bill.

Where the holder needs money urgently, he can negotiate for a credit of the face value less the discount amount. However these instruments are normally of short-term maturity and must be regular and technically in order. Consequently, request for direct credit are processed and approved like any other credit facility request.

In this case, the customers will apply interest to the amount utilized from such into their account.

However, considerations could be given for genuine drafts and central Bank of Nigeria cheques. A commercial paper is an unconditional promise by an organisation or person to pay to or to the order of another person a certain sum at a future date. To qualify as a commercial paper, the investor must be aware of the identity of the issuer of the instruments. They should only be guaranteed not accepted by the bank since as an intermediary, it is only a secondary obligor.

Since the instrument is negotiable, title to it is transferred by endorsement.