RISK ASSESSMENT AND CONTROL IN CREDIT ADMINISTRATION IN BANKS
ABSTRACT OF RISK MANAGEMENT AND CONTROL IN BANK CREDIT ADMINISTRATION
This research project aims to investigate risk assessment and control in bank credit administration. A case study of the Effurun Branch of First Bank Nigeria Plc.
The study's goal is to identify and critically evaluate First Bank Nigeria Plc's risk assessment and control methodologies in order to determine their impact on the bank's profitability and performance as well as in reducing the occurrence of bad debt. Data were gathered from both primary and secondary sources.
A questionnaire interview was used as the primary source. For data analysis, the chi – square(x2) approach was applied. The percentage approach was used to assess the questionnaire responses. According to the findings of the study,
most lending officers underestimate the relevance of credit risk assessment and control in their credit administration due to the challenges that are normally connected with it.
Lending bankers are expected to apply adequate skills and a variety of qualitative and quantitative methodologies in analysing credit proposals and assessing the risk associated in order to mitigate the risk involved in lending.
Banks should ensure that their credit policies are firmly tightened, amended, and correctly applied; this will result in a reduction in the bank's risk assets portfolio and increased profitability.
The bank's credit risk management policy handbook should be created to serve as a comprehensive reference and framework for managing risk assets.
1.1 BACKGROUND OFÂ THE STUDY
A bank is defined in the Banks and Other Financial Institutions Act of 1991 as “a person, institution licenced to receive money as deposit which could be undertaken either through advertisement or solicitation and limited to a fixed amount which may provide for interest payment or re-payment of deposit amount.” Banks, as financial intermediaries, play an important role in any country's economy.
Banks' importance to the economy stems primarily from their ability to mobilise credit and extend credit to diverse economic actors for the creation of goods and services while earning a comfortable share of the excess. The aforementioned goals,
however, will not be met if credit is not effectively channelled, regulated, and administered. Rather, it may have serious economic implications. Poor credit administration has the most destructive impact of all the causes causing bank hardship and failure in Nigeria.
According to Anyanwaokoro (1996), the most significant function of the banking business is credit administration. It is the most dangerous, complex, and profitable function undertaken by banks. The ability of a bank to manage credit risk has always been the fundamental strategic value it adds.
This cannot be done properly unless effective risk assessment, control, and follow-up procedures are used. A solid and effective credit management procedure reinforces and supplements the company's aims and ambitions.
The fundamental issue that banks have in credit administration is that some of the credit facilities given are not repaid, resulting in the loss of depositor funds and the formation of bad debts.
According to Harle (1993), “risk increases when credit principles are violated.” To ensure that loans given are repaid, sound banking practises require bank management to establish standards for analysing and approving individual credit applications.
However, bad and dubious loans continue to claim a bulk charge on bank performance due to inadequate credit administration caused by loopholes and violations in risk assessment and control systems, causing many banks to experience institutionalised distress and, in some cases, entire unexpected failure.
As a result, it is imperative that banks reassess their risk assessment and control processes in order to provide for a close examination and monitoring of granted credits in order to evaluate their impact on the banks' credit choices.
To emphasise the significance of complete risk assessment and good control methods in order to achieve both low risk and high returns.
1.2 STATEMENT OF THE problem
Credit risk management is a major issue that all banks face. Through its credit analysis department, banks ensure that the individual appraisal and rating of credit applications is not in doubt. However, their procedures and tactics for carrying out this critical duty are being called into question.
Bad and questionable debts endanger performance, profitability, and, ultimately, survival as a result of ineffective risk assessment and control practises. Poor credit administration has accompanied an ineffective risk assessment and control strategy.
As a result of this, the following issue has been detected. Ineffective risk assessment and control strategies in banks, resulting in poor credit administration and an increase in the incidence of questionable and bad credits.
Failure of bank operators to comply with credit administration safety norms and regulations.
1.3 OBJECTIVES OF THE STUDY
In light of the aforementioned issues, the following research objectives would be pursued:
To ascertain and critically appraise First Bank plc's risk assessment and control policies (techniques) and establish their effectiveness in reducing the occurrence of bad loans.
Identify flaws in risk assessment and control procedures and recommend corrective measures to improve credit administration.
To determine the extent to which bank management contributes to bad debts by failing to follow credit administration standards.
To highlight the possibility of appropriate risk assessment and control procedures, as well as to identify the facts considered in evaluating credit risk.
To emphasise the significance of adequate risk assessment and control procedures to the continued existence of the banking industry.
Make recommendations based on the findings to improve the effectiveness and efficiency of Nigerian banks' risk assessment and control policies.
1.4 RESEARCH HYPOTHESIS
The following hypotheses were proposed and tested throughout this study:
Ho: A good (quality) credit administration is not determined by the effectiveness and efficiency of its credit risk management system.
H1: The effectiveness and efficiency of a credit risk management system determines the effectiveness and efficiency of credit administration.
Ho: The relationship between risk assessment and control methods and good credit administration is unrelated to the bank's credit policy.
H1: The credit policy of the bank influences the relationship between risk assessment and control methods and effective credit administration.
1.5 THE SIGNIFICANCE OF THE STUDY
The importance of appropriately addressing bank distress, which is the primary source of non-performing loans, cannot be overstated. Given that interest on loans and advances is a major source of income for banks,
it is critical that loans are properly appraised before approval and that loans are monitored to ensure that they do not go bad.
The banking industry is currently experiencing restructuring as a result of massive non-performing credits in some of our banks as a result of sloppy credit administration practises, the lack of a credible credit risk management system, and non-compliance with corporate governance practises.
In light of the current challenges confronting Nigerian banks in credit risk management, this study will significantly assist bankers in reducing bad debts to the bare minimum by assessing the capacity of bank risk assessment and credit control procedures to provide for close analysis and monitoring of banks credit administration.
Bring to credit managers' attention the necessity of good risk assessment and control in credit administration, and offer useful contributions to successful and efficient credit management in Nigerian commercial banks.
1.6 SCOPE OF THE STUDY
The scope of this study is confined to investigating the credit risk assessment and control techniques used in the credit administration of First Bank of Nigeria Plc, as well as the challenges encountered during the process.
Analysis of credit policies and the level of nonperforming loans recorded by banks, with a focus on efforts made by banks to improve the quality of their risk assessment and control procedures, as well as their effectiveness and contribution to the bank's overall performance.
The choice of First Bank of Nigeria plc is impacted by its position as a net player in the money market, its size in the banking industry, and its relative performance in the Nigeria banking industry during various hardship periods.
1.7 limitations OF THE STUDY
Respondents have an uncooperative attitude.
The bank used as a case study initially did not volunteer information about its credit process to the researcher because its weaknesses could be revealed to competitors and used against them in performance appraisal, exposing them to the wrath of their shareholders, causing a decline in the price of their shares and, as a result, their net worth.
Time is an important consideration.
This study was undertaken during a time when academic activities were at their highest, particularly for final-year students. As a result, the researcher had difficulties with time allocation.
1.8 DEFINITION OF TERMS.
RISK: The possibility that the actual return from keeping an asset will differ from the predicted return.
RISK ASSESSMENT: An examination of the likelihood of loss and the potential consequences if the risk occurs.
CREDIT ADMINISTRATION: The execution of credit decisions authorised by financial regulatory bodies.
CREDIT POLICY: Credit manuals that outline the course of action, procedures, and lending guidelines.
CREDIT: The amount of money that a bank is willing to offer to a borrower in exchange for risk exposure.
CREDIT RISK: The risk that a client will not repay the principle or interest or both or a portion of the credit granted to him in line with the loan agreement.
CREDIT CONTROL: Is the area and monitoring of the credit facility after approval to ensure that the credit stays qualifiedly satisfactory over its tenure.