Lending practises of commercial banks and the rise of bad debt in Nigeria
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Lending practises of commercial banks and the rise of bad debt in Nigeria
ABSTRACT
This research will look into the issue of lending problem loans (bad debt) and how to reduce it.
Banks increase bad debt in the normal process of lending, which is assessed against the income gained. Indeed, many banks are on the edge of failure as a result of the impact and consequences of bad debt and inefficient management.
Because the nature of project writing at the ordinary National Diploma level requires that the source of data collection be secondary, the researcher did not employ interviews or surveys, and the study was limited to previously available materials.
The researcher discovered that problem loans are produced by a variety of circumstances, some of which are controllable while others are not.
In general, bad debt has a negative influence on bank operations. It is anathema to a solid banking system, thus financial analysis must work hard to successfully monitor and manage it.
The researcher suggested several feasible solutions and suggestions on commercial bank lending strategies as well as ways to control bad debt.
INTRODUCTION TO CHAPTER ONE
1.1 BACKGROUND OF THE STUDY
This project work on commercial banks lending practises and the incidence of bad debt in Nigeria is a study conducted by the researcher in order to evaluate and analyse the lending principles, issues, and impacts of bad debt in the operation of banks as well as in the broader economy.
The economic aim of a bank is to operate as a financial intermediary. It facilitates the process of converting challenge savings into investment, and one method of achieving this goal is through effective lending.
When loans cannot be repaid, they are regarded as bad debts. However, if management focuses only on minimising these losses, a bank will make almost no loans, profits would decline, and lenders will be unable to completely eliminate risks, so the more loans granted, the more losses are expected.
As a result, one of the objectives of commercial banks is to manage losses well, because losses are unavoidable and thus, charge it against the income generated with the obvious consequence of depleting profit and,
in some severe cases, liquidates the affected banks through all business regrettably in cure bad debts, but bankers whose stock in trade is money view debt incidences with dread.
1.2 STATEMENT OF THE PROBLEM
This study looks at commercial bank lending practises and the prevalence of bad debt in Nigeria. The issues are as follows:
(1) Bad debt stems from ineffective management as well as consumer dishonesty, which may cause hardship.
(2) Because of this regrettable trend in the Nigerian banking system, creditors of the afflicted banks have lost money, as have shareholders who have lost dividends.
(3) Bad debt has a negative impact on banks because it reduces their income and makes less cash available for future lending, which disturbs investment.
1.3 OBJECTIVES OF THE STUDY
The goal of this research is to help banks confirm the various causes of bad debt in their operations and to assist them in reducing its incidences by implementing lending techniques.
If a banker knows his customers, project proposals, account operation, and others, his general position will be detected before granting loans to him. The researcher’s goal is to find answers to the following questions:
(i) What exactly is bad debt?
(ii) What are the concepts and procedures of lending?
(iii) What kinds of collateral are accepted by banks?
(iv) What factors contribute to bad debt?
(v) How does bad debt affect a commercial bank?
(vi) What are some potential solutions for regulating it?
(vii) Is it possible to completely eradicate bad debt?
1.4 THE SIGNIFICANCE OF THE STUDY
Some of the earnings produced by banks have been lost in the chasm of bad and dubious debts. This is a breach of its duty to its shareholders, as well as a general negative impression on the investing public.
As a result, the researcher has conducted an examination into commercial bank lending concerns, and it is hoped that this project effort would significantly minimise bad debt instances.
It will also assist the banker in establishing the best lending portfolios, understanding loan granting and collection strategies, the types of collateral to collect, and understanding how to control or manage bad debts, among other things.
1.5 LIMITATIONS OF THE STUDY
This study’s research was not without difficulty.
There were various difficulties experienced when working on this project. It includes the following:
(1) One of the issues that hampered the effective execution of this investigation was a lack of material, as secondary data was required.
(2) Because the bank workers from whom the reports were to be collected were uncooperative, insufficient information and details could be obtained.
(3) Inadequate finances to conduct more in-depth study, travel to more libraries, or obtain more information from the Internet.
Despite the foregoing flaws, the researcher worked hard and hoped to complete this assignment.
1.6 THE DEFINITION OF TERMS
Some words used in the study will be defined as part of the research. Among them are:
(1) BANK LOAN: A bank loan is a financial facility provided by a bank and designed to be used for a specified purpose or project.
A loan often has a set period and repayment schedule.
The revenues created are distributed to customers and borrowers in the form of loans.
(2) COMMERCIAL BANK: Is a financial institution incorporated and licenced by the Central Bank of Nigeria to engage in the banking business of accepting deposits,
collecting and paying cheques and other instruments, advancing loans, discounting bills, safe custody facilities, buying and selling shares for customers, and so on.
(3) PRACTISE: The processes or actions involved in acquiring loans are referred to as commercial bank lending practises.
(4) INCIDENCE: The impact or impacts of bad debt on the effective operation of banks are referred to as the incidence of bad debt.
(5) BAD DEBT: Are obligations owed to creditors, but complete or partial recovery is deemed unattainable due to some intrinsic weakness. Bad debt is defined as a portion of a bank’s account receivable or credit extended to a customer that cannot be fully or partially repaid for one reason or another.
(vi) LENDING CONCEPTS: Lending concepts are essentially lending principles and ideas.
(vii) GUARANTEE: This is a commitment provided to the bank (the creditor) by one party (the guarantor) to be responsible for the debt of another person (the debtor) in the event of the debtor’s default.
(viii) COLLATERAL: Property or assets deposited with the bank by the money seeker in the event of loan repayment default. It should be simple to dispose of.
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