CREDIT POLICY AND DEBT RECOVERY EFFORT IN NIGERIAN COMMERCIAL BANKS

(A CASE STUDY OF GUARANTY BANK PLC, KADUNA)

CHAPTER ONE

INTRODUCTION

1.1     Background of the Study

To every nation, the existence of banking industry is inevitable. This necessitates the need for deposit and credit mobilization. Osayeme (1936) reported that lending has become a vital function in banking operation because of its direct effect on economy, growth and business development.

A bank is an organization that accepts money in different account and honours cheque drawn upon it, return of the same amount on demand by depositor or at a specified maturity date.

According to Haisbury Laws of English, a bank or banker in an individual, partnership or corporation whose sole or predominant business in banking, that is the receipt of money on current or deposit account and the payment of cheque drawn by the collection of cheques paid in by a customer.

The above definition is suitable for the description of a commercial bank, commercial as a bank of common people are organized on a joint stock company system with primary aim of making a profit as any other business venture carried out, if the profit is not forthcoming, then the rate of patronage and intimacy must be improved between the buyer and the seller.

This is done by granting of credit to customer of financing in modern  business. In order to protect the creditor (that is, he person who gives out loans), certain policies must be complied with. These protective weapons are credit standard credit terms and collection efforts. By credit stand we mea the criterion which a form followed in selecting a customer for credit extension. Credit terms could be the stipulation under which credit is extended to customer, for instance, it expected that a customer will pay his credit obligation of later than 35 days. A collection policy is needed because not all debtors pay their debt in time, some customers are slow payers, while some are not payers.

The aim of collection effort is to speed up the payment. However, the motive of granting credit facilities with the aim of increasing the volume of profit have become somehow difficult to realize by commercial bank a business today operate in harsh erratic economic climate. As a result, granting of credit to assessment have both positive and negative impact on the commercial banking sector (especially in Nigeria).

To survive in Nigeria (banking business), it is wise for commercial banks to increase their liquidity (cash). This can be brought about by effective credit assessment and a design of comprehensive policy in granting credit. Banks must follow clear, and sequential procedures to recover their debt, it is not done, there is great tendency for them to lose the whole amount.

1.2     Statement of Problem

It is important to recognize the two fundamental functions which a banker must perform. It must attract deposit on one hand and attract borrowers and users of services on the other hand. Those average positioned were at a staggering level of performance. This menace is as a result of high level of bad debts with associated problems brought about distress in many banks. Hence tribunal came to place to recover these bad debts.

Despite the strict conditions that prevail lending of procedure commercial bank still find their administration difficult because of the fluctuating effect of some factors such as economic policy and more so that the attitudinal tendencies credit, in that all banks are exposed to available fund at all times of boom, hence their lending ability is high. But in period of depression, lending money will mean exposing the bank into a greater risk.

Then the problem of human beings their attitude is evident in question like what is the intent of borrowers before and after credit facility has been granted him? business was frustrated by promulgation of decree?

1.3     Objectives of the Study

i)                   To know the concept of credit policy and debt recovery in an organization.

ii)                To identify the relationship between customers and bankers.

iii)              To understand how to recover debt in an organization

iv)              To know how to interact with customers when it comes to attending to their needs.

The complexity of modern business environment and the increased volume of transactions have conferred credit as a vital tool in the development of banking industry. Lack of sound lending policy initiate operation lapses in commercial bank which affect levels of efficiency and effectiveness in the performance. This study attempts to appraise the credit policy and debt collection efforts of commercial with a sample bank of Guaranty Trust Bank (GTB) evaluating whether it is in conformity with efficient financial management.

1.4     Research Hypothesis/Questions

H1:     Credit policy and debt recovery has a significant impact in Nigerian commercial bank.

H0:     Credit policy and debt recovery has no significant impact on Nigerian commercial bank.

          Research Questions

1)                What is the concept of credit policy and debt recovery in an organization?

2)                What is the relationship between the customers and bankers?

3)                How can debt be recovered in an organization?

4)                How can an organization go about credit policy?

5)                What are the tactics needed to collect debts from creditors?

1.5     Significance of the Study

Credit policies are certain guideline which any well established organization adopts before granting credits. The policy could be tight or loose. Tight credit policy leads to loss of sales and at the same time loss of handling account receivable or debtors accounts.

Therefore, the credit policy of any organization could be determined by the trade-off between opportunity cost and credit administration and bad-debt losses. In the case of debt settlement by customer, not all customers are willing to pay-in-time or pay at all.

Certain incentives have to be given by the organization in order to speed up the payment. Such as cash discount and this research work is aimed at selecting the best way of collecting so as not to loose the whole amount by defaults which may in turn be bad debt.

The condition of the debtor must be well observed that is, his financial capability. The research therefore, hopes that by this suggestion given, may assist in minimizing losses and stabilize on maximize earning.

1.6     Scope of the Study

This study will expose itself to the analysis and procedure for granting credit and debt collection effort in commercial banks. It will utilize the opinion of Guaranty Trust Bank Kaduna and the summary or balance sheet which is clearly elucidates the bank annual report and accounts.

1.7     Historical Background of Guaranty Trust Bank (GTB)

Guaranty Trust Bank Plc was incorporated as a limited liability company licensed to provide commercial and other banking services to the Nigerian public in 1990 and commenced operation in February, 1991.

In September 1996, Guaranty Trust Bank Plc became a publicly quoted company and won two Nigerian Stock Exchange President’s merit award. In February 2002, the bank was granted a universal banking license and later appointed a settlement bank by the Central Bank of Nigeria (CBN) in 2003, Guaranty Trust Bank undertook its second share offering in 2004 and raised over N11 billion from Nigerian investors to expand its operations.

On 26th July 2007, Guaranty Trust Bank became a very first sub-saharan bank and First Nigerian Joint Stock Company to be listed on London, stock exchange and Deutsche Borse. The IPO raised its $750,000,000. In the same year, they successfully placed Nigeria’s first private Eurobond issue on the International Capital Market.

The long-term debts of Guaranty Trust Bank Plc are rated BB by Standard and Poors and AA by Fitch Ratings, which are the highest ratings for a Nigerian bank. They introduced online banking and SMS banking in Nigeria and a Naira denominated MasterCard as well as the platinum and world signal cards and with Guaranty Trust Bank on wheels mobile branches. On the 12th March 2008, Guaranty Trust Bank was given a license for the United Kingdom by the Financial Services Authority.

GTB is a partner of Eko Atlantic City a new made Island (820 km) in the Atlantic ocean, adjacent to Victoria Island Lagos. It will be the home of the new financial district. The building of Eko Atlantic city started in 2009 and is expected to be finished in 2016. To commemorate the bank’s 20th anniversary, the Nigerian Postal Service issued a set of GT Bank Anniversary postage stamps. This was the first time in Nigeria that a corporate organization was honoured in such a way. In 2011, the bank became the biggest in Nigeria by market capitalization.

The Bank has over 10,000 employees and furthermore Guaranty Trust Bank has cordial relationship with the customers and bankers and they have a credit policy and the way to recover their debts, when the customers has reached his or her limits for paying the debts. The bank knows how to recover their debts.

Leadership

Mrs Osaretin Demuren is Chairman

Segun Agbaje is Managing Director/CEO

Cathy Echeozo is Deputy Managing Director

Other members of the Board of Directors are as follows: Akindele Akintoye, Adebayo Adeola, Andrew Alli, Olabode Augusto, Ibrahim Hassan, Hezekiah Onyinalola.

1.8     Definition of Terms

Credit Term: The firms credit terms state the credit period the size of the discount it may, the cash discount period and the date of the credit begin. It is concisely stated that such expression as 3/20 net 30 EOM. These term contain all the key information concerning the length of the credit period (30 days) the cash discount (3%), the cash discount period begins at the end of the month.

Credit Period: This refers to the numbers of days until payment in full is required regardless of whether cash discount is offered or not.

The Cash Discount Period: This specifies the medium of number of the days after the beginning of the credit period that the cash discount can be taken. Typically the cash discount period is between five and twenty days (5-20), the cash period varies between different business organization.

Credit Standard: This relates to the decision about who will be granted credit. If the firm extends credit sales to about the stronger customers, it would never have had debt losses on other hand, it would be properly losing sales and the profit that were forgone as a result of cost sales could be for larger than the cost that were involved.

Collection Policy: A collection policy is the procedure the firm follows to collect or obtain payment of past due accounts. A collection policy is necessary because not all customers do pay their debts in time. Collection policy aims at accelerating collecting form slow paying customers and so reduce bad debt losses.

Average Collection Period (ACP): This determines the speed of payment by customers. It measure the number of days for which credit sales remain outstanding, the larger the average collection period. The higher the firm investment in account receivable.

Default Risk: Default risk is the likelihood that a customer will fail to pay the credit obligation.

Loan and Over Drafts: A loan involves the often of a fixed amount to a borrower for a specified term. Interest is payable at a specified rate on the amount of the loan irrespective of whether the borrower actually drawn the whole amount or not the bank.