CHAPTER ONE PROJECT

CHAPTER ONE INTRODUCTION In the study of credit management in Nigeria, Union bank of Nigeria Plc. was used for my analysis, so as to find out the administrative procedures of lending, the problems and prospects associated with the management of their loans portfolio and the extent to which the management and control is being practice by the institutions. BACKGROUND TO THE STUDY. In a modern economy, there is distinction between the surplus economic units and the deficits units and in consequence, a separation of the savings investment mechanism. This has necessitated the existence of financial institutions whose jobs include the transfer of funds from savers to investors. One of such institutions is the money deposits banks, the intermediary roles of the money-deposits banks places them in a position of ‘’trustees’’ of the saving of the widely dispersed surplus economic units as well as the determinant of the rate and shape of the economic development. The techniques employed by bankers in this intermediary function should provide them with perfect knowledge of the outcomes of lending such that funds will be allocated to investments in which the probability of full payments is certain. However, in practice no such tool can be found in the decision of the lending banker. Virtually all lending decisions are made under creditors on uncertainty. The risk and uncertainty associated with lending decisions situation are so great that the concepts of risk and risk analysis need to be employed by lending bankers in order to facilitate sound decision-making and judgment. This statement implies that if risks are to be objectively assessed, lending decision by the money-deposits banks should be based less on quantitative data and more on principles too subjective to provide sound and unbiased judgment. Furthermore, the banks depend heavily on historical information on a basis for decision making. STATEMENT OF THE PROBLEM. A major problem facing all banks is credit and debt management. That banks ensure the individual appraisal and rating of credit application through their credit analysis department is not in doubt. However, what are being questioned is their procedures and strategies for carrying out this important function. It is believed that most loans and advances go bad because of the inadequacy in credit management and recovery procedures of banks. Many credits are given on the basis of the name of the company especially blue-chip companies, while some are given to friends, well-wishers and relations and some of the borrowers are still having under the illusions that the loans are part of their national cake without making efforts to repay the loan as they fall due. Some banks customers are unable to adequately determine the amount of loan facility required to finance a project. This results in customers sometimes mismanaging the funds disbursed to them. Some banks officials failed in their duty of supervision and controls of loans disbursed to their customers and sometimes no reference was obtained upon the guarantors who guarantee the applicants and borrowers. Poor credit administration has been a complement of an unviable risk assessment and control strategy. In light of this, the following problem has been identified. Poor evaluation of borrower’s credit worthiness by the credit managers. Inadequacy of collateral securities provided by borrowers for loan or deliberate acceptance of poor collaterals by Banks. Poor loan administration. PURPOSE/OBJECTIVES OF THE STUDY To evaluate the capacity of Union bank Plc. in assessing the credit worthiness of its customers. To examine the effect of loan administration on the performance of commercial banks. To examine the adequacy of collaterals provided by customers for their credit. To determine the effect of credit and debt management on the performance of the bank 1.4 RESEARCH QUESTIONS The following are the research questions: Does the bank assess the creditworthiness of its customers before extending loans and advances to them? What effect does loan administration have on the performance of Banks’ credit? Is the collaterals provided by the Banks’s borrowers sufficient to cover the risk of the credit? What impact does credit management have on the profit of the bank? 1.5 STATEMENT OF HYPHOTHESIS Hypothesis is a tentative statement of conclusion. It is a proposition or condition, which states what we are looking for in other works. It is a conjecture statement of relationship between variables. Hypothesis raised for this study is at 0.05 level of significance: These hypothesis are as follows: Ho1 There is no significant relationship between Bank’s profitability and credit creation. Ho2 Credit and debt management has no significant impact on the financial performance of commercial banks. 1.6 SIGNIFICANCE OF THE STUDY This research work will be of great benefit both to the lending institutions, customers and students in the sense that it will enable bankers to appreciate an appraisal of their lending and control mechanisms now that they are expected to lend under tight monetary conditions. The lending institutions will also be able to know the information required for this research work and ascertain the credit need of the borrowers and the period of loans. Borrowers on the other hand will be in a position to know the adequacy of loans and the problems to encounter in sourcing funds in all our commercial banks. It will also help to tackle the various credit problems facing them. This study will be of great help to the growth and development of the country. 1.7 JUSTIFICATION OF TE STUDY It is expected that the findings from this study will be beneficial to: The banking industry will obtain information about credit and debt management and its effect on financial performance and this information will particularly be important and useful to future investors in the industry and the top management. This study also will be important to banks’ credit departments and senior managers as it will provide an insight into the image of banks’ financial performance towards its credit management efficiency and how to reduce exposure to the risk. The government will obtain information on the importance of implementation of various legal frameworks in relation to credit risk management, developing policy papers, policy making regarding credits and other regulatory requirements of commercial banks in Nigeria. The academicians will be furnished with relevant information regarding credit management and its effect on the financial performance of commercial banks. The study will contribute to the general knowledge and form a basis for further research. 1.8 SCOPE OF THE STUDY In the study of credit management and incidence of bad debts in Nigeria, Union bank Plc. was used for my analysis, so as to find out the administrative procedures of lending, the problem and prospects associated with the management of their loans portfolio and the extent to which the credit management and control is being practiced by the institutions. 1.9 DEFINITION OF TERMS The definition in this glossary are meant to give a general understanding of terms used in this study. They are not legal definitions but they generally assume compliance with applicable legal requirements. CBN: Central Bank of Nigeria: It is known as the apex financial institutions in the country. CREDIT ADMINISTRATION: The implementing of credit decisions as authorized by the financial regulatory authorities. CREDIT CONTROL: It is the post approval area and monitoring of the credit facility to ensure that the credit remains qualifiedly satisfactory during its tenure. CREDIT POLICY: Credit manuals that specify the course of actions, procedures and guides to sound lending. BAD DEBT: Bad debt are irrecoverable debts. They are debt that cannot be recovered. DOUBTFUL DEBT: It is an amount receivable that might become a bad debt at some point in the future. CREDIT: It is the amount of fund a bank is willing to lend to a borrower and has risk exposure. RISK: The chance of failure or loss that the actual return from holding an asset will deviate from the expected returns.