CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY:
Virtually, every business has a credit relationship with a financial institution, especially banks. Some rely on periodic short term loans to finance temporary working capital needs. Others primarily use long-term loans to finance capital expenditure, new acquisitions or permanent increases in capital. Regardless of the type of loan, all credit request mandate a systematic analysis of the borrower’s ability to repay as at when due.
Commercial banks carry on ordinary banking business with the general public, changing cash for bank deposits and bank deposits for cash, transferring bank deposit from one corporation to another, giving bank deposit in exchange of bills of exchange, providing of trustees and executor’s services, providing safe custody of funds and valuables as well as foreign exchange remittance.
Though commercial banks differs from country to country, their profit and banking motives are the same. Their activities are of interest to their customers, workers (staff), and above all, shareholders. The commercial objective of the bank is to maximize profit, though other social and economic functions tends to deflect banks from profit maximization. The aims and objectives of commercial banks have therefore paved way for their customers to make and obtain credits, in form of loan of which the researcher is interested in.
Lending has become a vital function on operation because of its direct effect and impact on economic growth and business development.
In a market oriented economy, there are two main participants that move the economic growth; these are the suppliers of invisible funds and the users of the funds for productive purposes. These two participants are spread widely in the economy and may not have direct relationship with each other. For this, there is the need to have an intermediary to link them up. The banking sector mobilize surplus funds from small and big savers who have no immediate need for such funds. The users of these funds are the business entrepreneurs and investors who have brilliant ideas on how to create additional wealth in the economy but lack the necessary capital to execute their ideas. These groups of people approach banks to obtain loan.(C) Take Legal Action
In the extreme cases, the bank may be forced to take legal action in order to recover debts owed to it by the debtors. This is done as a last resort because it is cumbersome, time consuming and expensive and because it represent s a sad way to terminate what probably was an interesting banker-customer relationship. However, at this stage, the entire relationship will get to the much without sentiments attached. Court proceedings may not always be in the banks favour due to a number of reasons of which are:
(i) Inadequate knowledge of banking procedures
(ii) Poor banking knowledge and habits
However, where the decision is in the bank’s favour, the court decision may in the case of individual or sole proprietorship, result in bankrupting proceedings which are detailed in the Bankrupting Decree 1979 or winding-up process as stipulated in the companies Decree of 1968.
IMPACT OF BAD AND DOUBTFUL DEBTS: The incidence of bad and doubtful debt imposes cost on the bank, the customer and the economy in general. Though bad debts could be completely eliminated, but it could be reduced to manageable level in order to induce a healthy banking environment and to retain public confidence.
It has been observed that if lending decisions are not handled with care, it can turn out to be the most loss making activity of a bank. A lot of risk are involved in lending. To guard against this, the bankers need to apply a lot of caution. However, to be too cautions can mean a lot of missed opportunities for profitable lending, while failure to apply enough can mean huge losses for the bank in form if bad debts. In view of the above mentioned points, three important questions often come to the mind of a lending banker, and he must be satisfied that the answer to them are positive before deciding on which step to take. These questions in relations are in relation to the loan profitability, safety and soundness.
1.2 RATIONALE OF THE STUDY
The rationale of this study is as follows:
1) It helps to know how much that is required.
2) It helps to know how long the funds is required.
3) It also helps to know the sources of repayment
4) It also helps to know the policies of lending loans.
1.3 SIGNIFICANCE OF THE STUDY
The different between success and failure in the banking industry is in the effective lending procedures of the banks loan and advance. Efficient lending procedures is vital to investments on the technique of lending and the methods of security such lending and the pi falls that await the unaware banker. A study on its subject will therefore be a welcome addition to the existing volume of banking literature.
Effective loan procedures recognizes that beyond the application of sound bank principles whenever a loan is made, there is need for urgency in appreciating the point when loan begins to look doubtful arriving at a decision as to the appropriate action, and in taking that action. This will enable the banks to at best obtain full repayment of loan.
Beside the bankers more than ever before will appreciate an appraisal of their lending and control mechanism now that they are expected toi lend under tight monetary conditions with it negative effect on investment outcomes. The economy as a whole will benefit from the study because if the level of bad debt is reduced, bank will be left with movement to enable them make the expected contribution to the development of the economy.
1.4 DEFINITION OF TERMS
Bad debt- There is loans that the borrowers are unwilling or unable to reply due to one reason or the other.
Doubtful debt- There are debt which cannot be recovered back again