Appraisal of Loan Recovery in the Banking Industry – Problems and Prospects (A Case Study of Union Bank of Nigeria, Enugu Branch)
1.1 Overview of the Study
The banking industry is not left out. One of the means by which banks make its money is through money creation (i.e. to collect from one person at a low rate and then give out that money as a loan to another person at a higher rate. The difference between the rates then becomes an income on the part of the bank) but this also poses a problem to the banks. Most times the banks give out loans to individuals and companies which they usually face difficulties regarding the collection of such money.
This work looks into the measures taken by banks to ensure adequate collection and retrieval of the loans advanced to customers.
Moreover, it looks into the problems associated and encountered in collecting of such loan and the way forward in the industry as regards the problems in question.
1.2 Statement of the Problem
Banks lend the money gotten from customers’ savings and deposits to business customers in form of loans and advances. It is profit out of lending that is the ornament upon which the banks survive, provided it has the ability to recover such credit facilities granted.
Banks loss most of their money as a result of the inability of their customers to meet up at the time of payment of their loans. Banks face difficulties in retrieving such loans from their customers. This is what we want to find out in banks.
Also inability to retrieve their loans lead to inefficiency on the part of the bank and its inability at times to meet up with depositors’ demand, thereby forcing the banks into liquidation, since their customers deposit (principal) as well as their own interest have been lost and there exist not source of recovering such lost funds.
Finally, by what means can the bank contest this problem of liquidation and default in payment from creditors.
Based on this, one can see that there exist some problems. The goal of this research is to figure out solutions to the problems.
1.3 Objectives of the Study
The purpose of this study is to:
- Ascertain the problems encountered by the banks in loan recovery from their customers.
- Determine the causes of such problems.
- Ascertain the best procedures to be followed in the case of a difficult payment by the customer.
- Determine why banks are faced with the difficulties of recovering their loans irrespective of the stringent measures and supervision, which are being employed by them.
- Recommend measures one can rely on in order to reduce the problem and stress associated with loan recovery.
- Determine the threat or default in loan payment.
1.4 Significance of the Study
The attainment or failure of any bank can put a stop to its credit creating ability. Its ability to give out loans in repayment of the principal and interest as may be agreed upon by both parties. The inability to recovery such loan might hinder the flatten functioning of the banks’ activities. Definitely, no one would like to be known as the manager of a distressed bank.
Based on the above, this would be a guide to both present and potential managers as to how to ensure that the loans advanced to customers are being collected in order to ensure the bank’s corporate existence.
It would also assist them in grappling with difficulties, which may arise (default in payment in respect of the loans which were advanced to customers).
The outcome of the study would ensure that adequate provisions, securities as well as measures are being considered and are in place before granting a loan to a customer.
The work would be of boundless importance to our present undergraduates, who are interested in knowing more about the nature of loan recovery and would act as a guide for them and a source of information in writing their term papers and seminar papers.
In the light of the above, the researcher hopes therefore that the study would be of immense help to the banking industry in particular and to the lending institutions in general, in making certain decisions.
1.5 Research Questions
To solve the research problems, the following questions are being stated:
- What are the ways or procedures for recovering a loan?
- Are banks actually faced with the threat of liquidation as a result of not recovering their loans?
- Do banks encounter any difficulties in collecting their loans?
- Has non-compliance with bank policies for granting loans any impact on the recovery of loans?
- Do banks have any means of reducing the problems associated with loan recovery?
- Does default in payment of loans have any thing to do with the presence or absence of collateral?
- Why are banks faced with difficulties in retrieving their loans even when all necessary procedures have been followed before granting them?
1.6 Formulation of the Hypotheses
For the resolution of this study, the researcher will make use of the following hypotheses to guide him.
H0: There are no difficulties encountered in loan recovery.
H1: There are difficulties encountered in loan recovery.
H0: Absence of collateral is not the cause of the problem of loan recovery.
H1: Absence of collateral is the cause of the problem of loan recovery.
H0: Liquidation of banks is not as a result of loan recovery.
H1: Liquidation of banks is as a result of loan recovery.
H0: Absence of loan supervision is not the reason for the difficulties in loan recovery.
H1: Absence of loan supervision is the reason for the difficulties in loan recovery.
1.7 Delimitation and Limitation of the Study
This research work will be limited to Union Bank of Nigeria Plc, Garden Avenue, opposite Modotel, Enugu branch. This is as a result of the qualification and the nature of its staff; its location, easy access to its staff and the population of its staff.
The distinctions of the fitting are being affected to a degree by certain constraints which include:
- Lack of finance
- Limited resources
- Educational level and knowledge of the respondents
- Inability to visit other branches as a result of some factors listed above
- Limited academic material on the subject may also affect the final outcome of the research work.
1.8 Background of Union Bank and Loan
The origin of banks in Nigeria can be traced as far back as 1892 when African Banking Corporation (ABC) established its office in Lagos, on the invitation of Elder Dempster and Company. Its operation started in March 1983. Next was the Bank of British West Africa (now known as First Bank Plc), which opened office in Lagos in 1894 (Idem, 2000:154-155). Others include Barclays Bank DGO/Dominion Colonial and Oversea now Union Bank of Nigeria Plc which came in 1917 and British and French Bank for Africa which came in 1949.
Union Bank of Nigeria Plc formally known as Barclays Bank DCO (Dominion Colonial and Oversea) was the second Bank to bring serious operation in Nigeria after First Bank of Nigeria Plc. It opened its first bank in Lagos. Presently it is the second biggest bank in Nigeria, having a total of 322 branches situated in all states and virtually all the towns and cities in the nation, though some of its branches are located overseas. Despite the fact that they are the second biggest bank in the nation, they are also faced with the problem of loan recovery.
The problem of difficulty in the payment of bank loan is not something new but has existed for quite a long time.
According to Whitchead (1985:145) the first bankers in Britain were the lamberts from the plains of Lombardy in northern Italy. They were eventually made bankrupt because they lent money to kings who did not repay the loans. This was before the original coming of the goldsmiths. According to Whitehead (1985:145), the goldsmiths found out that the proportion left in permanent deposit was about 92 percentage of the average depositors fund and it was sensible to lend some of this money to people anxious to borrow from industrial and commercial reasons. This was the root of the bank credit function.
Earlier on default was due to bad planning by the borrower as well as incapable analysis on the part of the bank or deliberate refusal by borrowers. These days as a result of the increase in the level of corruption in the nation and the nature of the economy, default in payment mainly arose as a result of lack of credit information, poor credit analysis, poor credit monitoring and supervision, bad economic condition, excessive lending on security value, bad management and over reliance on trade customers (Nwankwo, 2002:276-279). This led to the liquidation of many banks during the bank distress syndrome.
The introduction of the prudential guideline in November 1990 by the Central Bank of Nigeria was with a view to making provisions for bad and problematic advances. The advances recovery techniques used by the banks can be grouped under orthodox and unorthodox method. The Finance Mal-Practices Decree No. 18 of 1994 and the inauguration of the tribunal have all helped in recovery of already lost accounts.
In actual fact some of the methods have succeeded while some failed.
Nevertheless, efforts are still being made to improve on the techniques and regulation regarding loan recovery.
1.9 Definition of terms
- BANK: An institution which collects surplus funds from the general public, safeguards them and makes them available to their owners when required, but also loans out surplus funds (with interest) to those who are in need of them and provides security.
- BANK POLICIES: This has to do with the criteria used in granting loans to customers and the conditions upon which the loans were granted to the customers.
- COLLATERAL: This entails a property offered by a customer to the bank as a guarantee that he will pay back the loan given to him during which the customer has little or no right over the property until he paid back the loan.
- CUSTOMER: This is an individual or company or organisation who sources for or requests for bank loans and advances.
- DEFAULT: Is the failure of a customer to meet up with the payment of the loan at the appropriate time or to meet up with all the necessary conditions in the payment of the loan.
- DISTRESSED BANKS: These are banks that have problems, which are being caused by lack of money to meet up depositors’ demand for their cash and other obligations.
- LOAN RECOVERY: This entails the possibility of getting back the money, loaned out to customers.
- LOAN/ADVANCES: These are money given out to customers to assist them in their financial need and is expected to be paid back within a defined period of time by the customer.
- LIQUIDATION: To close down a bank and use any money thus made in sales of its assets to pay its debts.