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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
A major function of the banking system is the transfer of funds from the surplus units to deficit units of the economy. This is achieved through deposit mobilization and onward lending to customers by ways of loans and advances. Most money deposit banks in Nigeria today cannot equivocally declare that they have been untouched by problem of loans certainty; it is a way of life in these tumultuous times of investing that virtually all investors are faced with problem loans. Whatever form of lending is adopted by commercial banks in any given situation depends on the purpose of the borrower and the circumstances of the transaction. The important thing to understand is that regardless of the form investment lending takes, a debt is inevitably created between the bank and customers.
The bank becomes the creditor and customer, the debtor. Review of loan facilities span served stages from the request stage to the repayment and when the facilities get bad. In this research work, the aim is to outlines the prerequisite for loan, warning signals, management of problem loan as well as debt recovery strategies with the impact of the credit and debt recovery department towards recovering of such debt. It appears that the review of a debt recovery structures should be related to review of analytical tools of credit facility towards its restructuring, preparing a workable game plan or pay out plan. In this project, the subsequent chapters will look at prevention of problem debts and various strategies for recovering credit facilities.
The numbers of volume of good loan and advance seriously determine the degree of profitable commercial banks. Consequently, profitable commercial banks have to limit or eliminate the number of bad account in their lending portfolio. It is necessary to note that all funds tied up in bad and doubtful account are not accountable for further onward lending. Also, with the advent of CBN prudential guidelines, non performing loans and advances who interest have been outstanding on these account are not reflected in the earnings of commercial bank, but charged to interest suspense and charged income when realized. Bad debt regarded as negative contributors to the profitability of commercial banks. So banks should be expected to be the most relevant to provide for bad debts unless it is unavoidable.
Another dimension however is that critics are quick in pointing out that the high bad or doubtful debts figures in final accounts of commercial banks could be realistic. It is also alleged that banks could use such provision to evade tax. It also demonstrate the incompetence of the lending bankers in the management of loan able funds on the other hand, it is held that this provisions shows the level of convenience by the bank officer system. This views was expressed by the president of Association of Shareholders of Wema Bank, Mr. Akintunde Asaw. He alleged that some of the official of Wema Bank acted outside the specified authority and scheduled by irregularly approving loans. He therefore gave the bank up to 1990 to recover all irregular loans while assuring that those involved “regular disbursement” of shareholders would be punished.
The final accounts is of most commercial banks in Nigeria have provisions for bad and doubtful debts of various figures while the funds of the level of such provisions id decreasing in the case of some commercial banks for other, it is increasing. This reflected in the comments made by the Chairman of the Board Directors of such commercial banks. In the case of the Bank of the North provision for bad and doubtful debts were N6.8 million (1993), N6.7 million (1994) and N213.5 million (1995). This shows an increasing trend from 1992 to 1995, which may not be connected with the allegation of the President of shareholders of Wema Bank.
The view of the provisions for bad and doubtful debts by banks in the country has necessitated on in-depth study into the fundamental factors for such losses by the bank. Consequently, the fundamental objective of this study is to identify the causes of bad and doubtful debts and controls been employed by banks to minimize or eliminate such debts. In so doing, we will be able to establish the efficiency of the control otherwise in the banks lending system. Consequently, appropriate recommendations could be made for improvement.
1.2 STATEMENT OF THE RESEARCH PROBLEM
It is paramount to state as clearly as possible some of the prevailing problem of loan and debt recovery, how it has impeded the smooth operations of financial institutions and thereby hindering the banking sector chances of achieving its objectives. The essence is to appreciate the magnitude and the vital roles which the investment company plays as the lubricant to the economy, as a sector, it is the pillar of the economy. It is therefore as a result of these important roles that the researcher have taken pains to carryout an in depth research into the impact of credit and debt recovery department in investment company with the view to identifying not only the problem loan, but the possible causes of this loan becoming bad debt and possibly make recommendation that will perhaps assist in solving these problems.
1.3 OBJECTIVES OF THE STUDY
The main objective of the study was to examine debt recovery procedures of money deposit banks in Nigeria. Specific objectives of the study are:
. To find out debt recovery techniques employeed by money deposit banks in Nigeria.
. To identify debt recovery challenges of money deposit banks in Nigeria.
. To examine the relationship between bank profitability and returns on loans and assets.
. To recommend techniques to minimize bad debts in money deposit banks.
1.4 RESEARCH QUESTIONS
In order to achieve stated objectives for the study, the following research questions will guide the study:
. What debt recovery techniques can be employed by money deposit banks in Nigeria?
. What debt recovery challenges exist in money deposit banks in Nigeria?
. What relationship exist between bank profitability and returns on loans and assets.
. Which techniques can be employed to minimize bad debts in money deposit banks?
1.5 SIGNIFICANCE OF THE STUDY
Like in all research work, the significance of this study are :
a) To provide additional material to carry out future research in this area
b) To increase and widen the scope of the researcher’s knowledge
c) To educate and enlighten the public on the impact of credit and debt recovery department towards accomplishing the organization objectives.
d) To assist the investment company in identifying some of its pressing loan problem with a view to take steps in recovering such loan which will make it achieve its overall objectives.
1.6 STATEMENT OF HYPOTHESES
Hypothesis one
Ho: bank customers do not often divert borrowed funds to other purpose different from that to which loan was sought.
Hi: bank customers often divert borrowed funds to other purpose different from that to which loan was sought
Hypothesis two
Ho: CBN credit guidelines do not have influence on the bank liquidity and profitability.
Hi: CBN credit guidelines have influence on the bank liquidity and profitability.
1.7 SCOPE OF THE STUDY
The researcher have decided to limit the area of coverage to three (3) Money deposit banks in, Warri Delta State, due to the nature of its activities particularly the department of Credit and Debt recovery division considering that they perform similar activities in the head office , other branches in the industries. It will be quite difficult if not impossible to cover the entire investment industry as it would involve traveling in order to have access to materials for information and other logistics which may eventually hamper the effort of the researcher.
1.8 LIMITATION OF THE STUDY
When conducting a research, the researcher is faced with some constraints. The prominent constraints faced as a result of conducting the research are as follows:-
i) Financial constraints, the present economic hardship amplified by the increase in fuel price has limited the researcher’s movement for this purpose.
ii) Time constraints, academic work for the semester occupied most of the time required for the research work allowing limited time for the research work
iii) Facts and vital information’s regarded as secret are been hoarded from the research, thereby limiting the information’s required
iv) Problem of busy schedules, rescheduling of booked appointment s, receiving phone calls and unscheduled meeting.
1.9 DEFINITION OF TERMS
The terminologies used in this study are defined below for the clear and understanding of such terms by the readers.
SECURITY – Can be defined as a cash or fixed assets pledge by customers to secure loan.
DOCUMENTATION – This involves any written and endorsed papers that in one way or the other relates to the lending transaction.
DEMAND NOTICE – This is a reminder to the Client that a certain amount is due for repayment and the Client is advised to come along and meet his obligation.
STATUTORY NOTICE – This is a legal notice sent to the Client that he has certain period (usually three months) within which he must pay his loan.
FULL BACK ON GUARANTEE – This case applies in a situation where the loan is guaranteed by outside body.
LEASES – Is a contract between a lessor (the owner) and the lessee (the user) for hire a specific asset selected from a manufacturer or vendor of such assets by the lessee.
LOAN – Is the facilities extended through loan accounts for investment products of medium and long term nature where amortization is at predetermined intervals or made in full at the end of an agreed period.
SYNDICATE – Is simply the lending to one borrower by a group of banks or lending institutions.
CREDIT – Money given to a customer for later payment
CREDIT MANAGEMENT – Arrangement put in place of repayment of credit facilities
DEBT – Is the credit received by a borrower from a prime lender who may be a formal or informal financial institution.
BAD DEBT – Are debt are doubtful of recovery
FINANCIAL INSTITUTION – Refers to in this study represent mainly the banking sector and other investment houses.
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