Loan granting and it's recovery problems on commercial banks

(A case study of first Bank plc, Ojo-Alaba branch)

This research work was undertaken to assess the Loan granting and its recovery problems on Commercial Banks. The research was intended to achieve the following objectives: To find out the several problems facing loan recovery, the effects of loan default on commercial banks and the measures that will be used in reducing the incidence of loan default. Relevant data were collected from both primary and secondary sources. Questionnaires were the main primary data collection instrument employed while data from various relevant publication constituted the sources of secondary data. Upon the analysis of data, the following conclusions were drawn: That problem of loan default stemmed from the fact that there is unavailability of security to be disposed by banks to realize funds. And also customer’s attitude towards loan payment. On the basis of the above findings, it was recommended that commercial banks should use some risk control measures to guide against loan default. Also, before granting loan, they should examine critically the project statement submitted by the customer or borrower which will help them to find out the realistic repayment pattern and also help them in knowing if the projects are realistic based on the customer’s past performance. Also, the Central Bank of Nigeria should create a conducive environment for the successfully operation of commercial banks in Nigeria.ABSTRACT

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TABLE OF CONTENTS

Title page--------------------------------------------------------------------------------ii Approval page--------------------------------------------------------------------------iii Certification----------------------------------------------------------------------------iv Dedication-------------------------------------------------------------------------------v Acknowledgment-----------------------------------------------------------------------vi Table of contents-------------------------------------------------------------------vii-ix Abstract----------------------------------------------------------------------------------x CHAPTER ONE
1.1 Background of the study---------------------------------------------------------------1
1.2 Statement of problems-----------------------------------------------------------------3
1.3 Objectives of the study-----------------------------------------------------------------4
1.4 Research question----------------------------------------------------------------------4
1.5 Research hypothesis--------------------------------------------------------------------5
1.6 Scope of the study---------------------------------------------------------------------- 5
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1.7 Significance of the Study -------------------------------------------------------------6
1.8 Definition of terms----------------------------------------------------------------------6
1.9 Limitations of the study----------------------------------------------------------------7
CHAPTER TWO LITERATURE REVIEW 2.1 Brief introduction--------------------------------------------------------------------- 8 2.2 The nature of loan and advances granted by banks-----------------------------9 2.3 Problems of loan default-------------------------------------------------------------13 2.4 Causes of loan default---------------------------------------------------------------14 2.5 Effects of loan default----------------------------------------------------------------19 CHAPTER THREE RESEARCH METHODOLOGY
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3.1 Research design--------------------------------------------------------------------- 21
3.2 Definition Population --------------------------------------------------------------21 3.3 Sample size--------------------------------------------------------------------------21 3.4 Sources and method of data collection------------------------------------------22 3.5 Method of data presentation and analysis--------------------------------------26 CHAPTER FOUR
4.0 Data presentation and analysis---------------------------------------------------23
4.1 Presentation and interpretation of data------------------------------------------23
4.2 Data analysis and findings--------------------------------------------------------31
4.3 Discussion of the findings---------------------------------------------------------32
4.4 Recovery measures------------------------------------------------------------------33
CHAPTER FIVE SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSION 5.1 Summary of findings---------------------------------------------------------------- 39 5.2 Recommendation---------------------------------------------------------------------40 5.3 Conclusion-----------------------------------------------------------------------------41 5.4 Suggestion for further research----------------------------------------------------42 Bibliography --------------------------------------------------------------------------43 Appendix A----------------------------------------------------------------------------45
Appendix B-----------------------------------------------------------------------46-48
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CHAPTER ONE

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,
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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
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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. Subsequently, lending is a risky venture which banks only engage on after a rigorous and satisfactory analysis of the project for which lending is being made. The main preoccupation of banks is extending loans to their customers. Thus, the formulation and implementation of such lending policies are some of the important responsibilities of the management of the bank. The lending policy of a bank must be specific on how much loan will be made available to whom, what period and for what reason. For this reason, lending policies should be well documented so that lending officers will be able to know the areas of prohibition and the area of where they can operate. Also, such policies should be subjected to periodic review to make the banks keep abreast with the dynamic and innovation nature of the economy as well as competing with other changing economic sector.
Therefore, the basic objectives of credit analysis t=is to assess the risks involved in extending loans to bank customers. In financial circle, risk typically refers to the volatility in earnings. Lenders are particularly concerned with adverse fluctuation in net income or cash flows, which hinder the borrower‟s ability to service a loan. Some risks can be measured with historical and projected financial data, while others such as those
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associated with borrower‟s character and willingness to repay a loan are not directly measurable.

1.2 STATEMENT OF PROBLEMS:

Banks in recent times has failed as a result of loan recovery problems. Loan is the major source of bank profitability. However, in going about their lending activities, banks have their own objectives among which are profitability, growth, safety, suitability and liquidity. Loan, when not recovered could adversely affect banks. It is easily granted than recovered. It usually needs proficiency i.e. competency and expertise in the recovery process. It sometimes become an uphill task to recover. When they are not recovered, the impact is often disastrous to the bank. It can lead to illiquidity, insolvency and even distress as the case may be. There is therefore a need for arriving at strategies for efficient loan recovery. That is the peak of the problem. 1.3 OBJECTIVES OF THE STUDY Having known that lending objectives of a commercial bank is to provide growth, profitability and liquidity, and its representing chunk of deposit as a source of income to the bank, the cumulative effect of loan default will be a loss of confidence in the banking system.
The researcher therefore aimed at:
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1. Finding out the several problems facing loan recovery 2. The effects of loan default on commercial banks 3. The measures that will help to reduce the incidence of loan default.