credit RISK MANAGEMENT IN commercial BANKS (A CASE STUDY OF UBA PLC)
CREDIT RISK MANAGEMENT IN COMMERCIAL BANKS (A CASE STUDY OF UBA PLC)
CREDIT RISK MANAGEMENT IN COMMERCIAL BANKS ABSTRACT
The purpose of this research is to look into the pattern of credit risk management and the consequences of poor, dubious, and uncollectible debts. Most banks' capacity to balance liquidity in value assets and obligations has been hampered by massive debt burdens.
As a result, a survey of 40 respondents comprised of cbn regulators, NDIC supervisors, and UBA operators was conducted, with simple percentage frequency tallied as the statistical test of analysis.
According to the report, both the CBN and NDIC rated asset risk management and increasing debt profile as low, UBA Plc classified itself as effectively high. To avoid bank distress, the report suggests doing a quarterly evaluation of the credit profile and monitoring the debt portfolio.
1.1 Background of the Research
Credit analysis deemed the recent spike in concern among retail and wholesale bankers on the incorporation of credit risk management into their operational processes to be timely and appropriate. Financial institutions are vulnerable to risk, the most significant of which being credit risk.
The risk issue usually stems from excessive delays in data collection or from a signal of a potential loss, both of which entail a slew of issues in management.
Banks in developing economies, such as Nigeria, confront significant hurdles in credit risk management. The borrower's financial status is jeopardised by recurrent insecurity in the business environment and, more importantly, the legal environment.
As a result, it is evident that risk management, as a discipline, should aim to protect an organization's assets and profit. This can only be accomplished by preventing loss before it occurs. In a financial world where information is scarce and, interestingly, fragile, both the distribution and utilisation of credit are more prone to disruptions.
The Nigerian financial industry has suffered as a result of these disruptions, with several institutions in difficulties. Despite the fact that borrowers bear a disproportionate share of risk,
the financial sector's failure to manage risk affects not just the financial system's ability to distribute capital effectively, but also erodes public trust in the financial sector.
A macroeconomic framework for meditation is thus required for depositors and lenders in order to overcome the risk profit gap. Although lending is an important and exciting component of the banking industry, its intricacy highlights its importance as the most profitable aspect of a bank's operations
. Lending must therefore be done with as little risk as possible. The quality of a bank's loan portfolio will boost profitability and corporate viability in the long run.
Banks nowadays are constantly challenged with the issue of how to maintain asset quality in an asset-generating environment. As a result, it has become critical for financial institutions to maintain the discipline gained over the last several years and remain focused on the fundamentals of credit as a regular measure to improve the quality of their loan portfolio.
Lenders must assess loan risk and provide an effective method of mitigating risk associated with the borrowers' industry management and operation.
1.2 Statement Of The Problem
The changes in the Nigerian financial system over the last two decades have been traumatic and revolutionary, with disturbing news of shrinking loan spreads, erosion of demand deposits, disintermediation of banks or, in most cases, by the capital market, and the concentration of oligopolistic practises in a few core banks, all of which pose a series of threats to the Nigerian money market.
Credit risk management systems include credit transaction processing from the receipt of credit facility requests from customers, through credit risk analysis and approval, monitoring of credit exposures to credit payoff or delinquent management in the case of a fall in credit quality.
Loan and advance management does not require any special skills, but technical understanding is required. Previous experiences can help, but the capacity to think objectively in order to manage and interact with a diverse range of accounts and customers with varying backgrounds, approaches, and abilities is more crucial.
Financial institutions are more exposed to risk as a result of the challenges provided by the challenging economic climate. The most significant of these is credit risk, which is the likelihood that a borrower may not repay the loan when it becomes due, or that he would fail to repay entirely.
This credit risk exposes banks to problematic loans when they crystallise. Advance difficulties develop as soon as the consumer requests that the manager make a decision. This is exacerbated when the consumer fails to repay and the debt becomes irrecoverable except through the realisation of security (where possible).
When a considerable portion of banking system credit goes unpaid, the intermediation process is hampered, new funds are unavailable to meritorious new initiatives, and the repercussions for national productivity and employment can be severe.
Because of these issues, which are increasingly threatening the financial stability of the banking industry, the Regulatory/Supervisory Authority (CBN and NDIC) introduced prudential guidelines in November 1990 and always release credit policy guidelines annually for financial institutions to comply with in order to minimise credit risk.
But the question is if these banks are truly adhering to the criteria in order to protect their clients' and owners' assets. This is the question that the research aims to answer by utilising UBA Plc as a case study.
1.3 Objectives of The Study
The study's aims are as follows:
– To demonstrate UBA Plc's compliance with prudential and credit criteria in order to reduce credit risk.
– To develop a pattern of relationship between UBA Plc loans and advances and bad loans (i.e. nonperforming loans).
– Make reasonable recommendations for advance control and minimising bad debt resulting from bad lending.
1.4 Research Questions
– How effectively has UBA Plc managed its credit?
– Has UBA Plc followed the guidelines established by the CBN?
– What are some of the issues and constraints impeding the implementation of effective credit risk management in UBA Plc?
– What are your suggestions for getting rid of it?
1.5 Research Hypotheses
One research hypothesis is being considered for this project. This is what it is:
H0: There is no statistically significant link between loans and advances (credit) and non-performing loans.
H1: Loans and advances (credit) have a significant association with poor loans (non-performing loans).
1.6 Scope and Limitations of The Study
The study's scope will be limited to credit risk management in commercial banks. It must fall inside the population size range of all commercial banks in Nigeria.
However, the study's sample size is limited to UBA Plc. The risk management department of UBA Plc, along with information from the CBN and NDIC, would be the focus.
This type of study work has numerous drawbacks. One evident restriction of this study is the lack of textbooks available for credit. The majority of the materials are in the form of seminar papers, workshop papers, credit review extracts, and so on.
Another constraint is time, as the researcher is a part-time student who must balance this project with normal office work. Despite these constraints, justice is served using the facts and materials at hand.
1.7 Significance of the Research
This study is significant because of the growing volume of bad loans in banks throughout the years. The magnitude of nonperforming credits in the banking system concerns various stakeholders,
including bank management who granted the credit, bank directors who took the credit, depositors whose funds were misappropriated, bank supervisors, the government responsible for protecting the banking system, and society at large.
These worries arise not just because of prospective depositor losses, but also because of the likely loss of faith in the banking system as a result of systematic suffering.
When credit is not paid, the financial system is unable to perform its intermediation function. As a result, it is clear that this is a problem for which everyone must contribute to finding a solution.
1.8 Definition of Terms
A risky situation is one in which losses are possible.
Loss: The disappearance or diminution in value of something.
Risk management is a systematic approach to dealing with the pure dangers (and occasionally speculative risks) to which an individual, family, business, or other organisation is exposed.
Employees are those who work for a company.
Loss Prevention: An endeavour to lessen the likelihood of a loss.
Loss Reduction: An endeavour to lessen the magnitude of a loss.
Risk transfer: A mechanism, such as insurance or a hold-harmless agreement, that shifts the financial aspects of a potential loss to another party.
1.9 Research Outlines
This research will be broken into five chapters. The first chapter should include the study background, problem statement, objectives of the investigation, research questions and hypothesis, scope and limitations of the study, significance of the study, definition of terms, and study outlines.
The second chapter will provide a review of the literature. My focus is on reviewing relevant literature on the research, with UBA Plc serving as my case study.
The third chapter describes the numerous data collection strategies and procedures, as well as the analytical treatment of the data acquired in the study.
It covered topics such as study design, population, sample and sampling procedure, research instrument, data gathering method, and data analysis.
The fourth chapter explains how data is collected and organised in tables to promote straightforward and proper analysis.
The fifth chapter provides a summary of this study and the implications that can be derived from it. Some recommendations are given following this conclusion.