The Effects of Lending Policies and Recovery Strategies on the Financial Performance of Microfinance Institutions in Abuja
Chapter One
General objective
The general objective of this study is to assess the effects of lending policies and recovery strategies on the financial performance of Micro Finance Banks in Abuja
Specific Objective
The study has the following specific objectives in order to achieve the general objective stated above.
- To examine the lending policies of the bank in relation to loan
- To assess the follow up system of the bank in relation to loan
- To assess the collateral related problems of the bank in relation to loan
- To examine the loan work-out performance of the bank
CHAPTER TWO
LITERATURE REVIEW
This part of the thesis has a review of related literature both in the theoretical review and the empirical review which has been conducted abroad and in our country.
Theoretical Literature Review
Loan Recovery
Debt recovery techniques is a very essential component of the performance of banking institutions as it plays a key role in ensuring that the major goal of the bank is to issue loans that results into the preferred outcome of making a profit margin beyond the loans advanced. It is evident that the presence of debt recovery techniques ensures the loans to pay up their debts. Debt recovery unit is involved in the day today role of ensuring that the loans issued to the bank’s customers are repaid as per the schedule of contract signed by the customer and bank. The task of debt recovery involves compiling and accumulating a list of unpaid loans and practically managing and organizing the loans by following up on defaulters. The debt recovery unit interacts with lawyers to summarize demand letters to the loan debtors and sending the same letter to the customers who are defaulting (Hellen, 2016).
An effective credit monitoring system will include measures to; ensure that the bank understands the current financial condition of the borrower or counterparty; ensure that all credit are in compliance with the existing covenant; follow the use customer make of approved credit lines; ensure that projected cash flows on major credits meet debt servicing requirements; ensure that where applicable, collateral provides adequate coverage relative. Its obligors’ current condition and identity and classify potential problem credits on timely basis. The problem of credit risk often begins at the loan origination/application stage and increased further at the loan approval, monitoring and controlling stages, especially when credit risk management guidelines in terms of policy and strategic procedures for credit processing do not exist, are weak or incomplete (Greuning & Bratanovic 2003).
Debt recovery is the process of pursuing loans which have not been repaid and managing to recover them by convincing the loonies to make attempts to repay their outstanding loans. Normally, this role of recovering loans is not an easy task as clients will go out of their way to prove inaccessible to the lender (bank). The banking industry in most cases has a debt recovery unit which is in charge of following loans before they become delinquent and make attempts to recover the loans (Garber, 1997).
Credit default
Loan default is the failure to pay back a loan which may occur if the debtor is either unwilling or unable to pay its debt. A defaulted loan is a cost to financial institution in terms of forgone or delayed interest, high recovery cost and finance cost associated with external borrowing.
The clearest definition of credit default is given by Moody’s where a credit default involves both delinquency and the notion of expected loss to the lender. This definition of default comes closest to why one is interested in credit defaults in the first place it is to estimate expected losses from lending. Even the delinquency definition of default with a specified time lag such as currently adopted by Basel II can be interpreted as a convenient indicator of potential loss for secured loans. A credit default represents the financial failure of an entity (a person or a company). A theory of credit default should therefore represent a systematic understanding of the causes which directly lead to the effects which are associated with credit defaults. Such a theory is required to provide direct causal connections between macroeconomic causes of changing financial environment and their microeconomic effects on changing personal or corporate financial conditions, leading to possible credit defaults. Most existing theories of credit default do not meet this causal requirement (Wilson, 2007).
Banks failures have involved with the combined effects of severe liquidity and credit deterioration. Credit Risk is a failure to fulfill the terms of any contract with the bank or to perform as agreed. Credit sensitive funds providers may work that the bank’s increased credit exposure leads to insufficient profits and credit problems. A bank may increase its liquidity risk that assumes more credit risk through adoption of new underwriting or asset Concentration in relation with risky business line (James, 2003).
Lending policy
Typically, every bank has its own lending policy, which determines bank visions and strategies linked to credit activities. For a commercial bank, this policy acts as a guideline for employees and loan personnel in their daily jobs by setting a common mindset, a common goal among workers whenever they make decisions, handle transactions, negotiate and interact with customers. Though, components in a lending policy may vary from bank to bank, a lending policy needs to contain at least five elements: introduction, objectives, strategies, credit standards, lending authorities and approvals (Hempel & Simonson, 1999).
In a rational profit-maximizing world, banks should maintain a credit policy of lending if and only if borrowers have positive net present value projects. Why then are changes in credit policy seemingly correlated with changes in the condition of those demanding credit? This paper argues that rational bank managers with short horizons will set credit policies that influence and are influenced by other banks and demand side conditions. This leads to a theory of low frequency business cycles driven by bank credit policies (Raghuram ,1994).
CHAPTER THREE
RESEARCH METHODOLOGY
This chapter deals with the research approach & design, population, sample size and sampling procedure, data collection instruments and data analysis.
Research design and approach
The researcher used descriptive research approach since descriptive research examines a situation as it exists, presents a picture of the specific details of a situation, social setting, or relationship, describe the situation in terms of its characteristics i.e. provide an accurate profile of a group Presents background information and Creates a set of categories or classify the information (Fawcett and Downs, 1986)
The major purpose of descriptive research is to describe characteristics of a population or phenomenon. It gives a brief description of the statistical units under investigation so it enables us to analyze the effects of lending policies and recovery strategies on the financial performances of Microfinance Institution In Abuja in relation to credit appraisal, credit follow up, collaterals and loan workout strategies by using qualitative data types.
Population, Sample size and sampling procedure
The target population of the study is directed to Micro finance Bank credit department in Abuja which have 84 total population this are monitoring officers, Senior monitoring officers, workout officer, senior workout officer, loan officers, credit analysts, senior credit analysts, principal credit analyst, division managers on credit area, credit directors and relationship mangers. All the above listed credit related staffs are used for this research. Censes is an accurate and reliable because of the fact that no element of chance is left and the total population is not too large to adopt censes method.
CHAPTER FOUR
DATA ANAYSIS AND PRESENTETION
This part of the thesis deals with the data analysis presentation and interpretation using the descriptive statistical analysis of the questionnaire. The questionnaire was designed and distributed to 84 employees of the bank who are currently working in credit area of the bank specifically in Abuja and head office. Accordingly, 74 questionnaires were returned, which is about 88.09% of the total distributed questionnaire.
CHAPTER FIVE
FINDING, CONCLUTION AND RECOMMEDATION
This part of the thesis deals with the finding of the analysis conclusion and recommendation for better effects of lending policies and recovery strategies on the financial performance.
Finding
The study conducted on the effects of lending policies and recovery strategies on the financial performance of Microfinance Institution In Abuja by identifying the credit assessment related issues of the bank in relation to loan recovery follow up system of the bank in relation to loan recovery, Collateral related problems of the bank in relation to loan recovery and Loan work-out performance of the bank.
The analysis reveals the following findings about credit assessment; monitoring, collateral and workout
Credit assessment in relation to loan recovery
- Small number of loans has adequate credit criteria documentation in the bank. It is known that the credit assessment is made based on loan related documents so if they are not fulfilled the outcome of the credit assessment is poor. Which increase the risk of
- The risk of NPL also increases in the bank due to new approval of loans for customers with bad credit relation with the bank which results decrease in effects of lending policies and recovery strategies on the financial performance system of the bank.
- Loan given to Customers with weak financial potion and poor creditworthiness accelerate the risk of NPL and decrease effects of lending policies and recovery strategies on the financial performance of the bank and timely collection of tax clearance increases the effects of lending policies and recovery strategies on the financial performance of the bank by giving priority to the bank at the time of selling property to recover debt.
Credit follow-up in relation to loan recovery
- Lack of financial follow up highly affects loan recovery process of the bank shows that the financial potion of the customer is seen and analyzed at the time of the loan approval as result the financial follow-up is not done for the life time of the loan. This increases the risk of NPL and decreases the effects of lending policies and recovery strategies on the financial performance of the bank
- Absence of scheduled physical follow-up decreases the effects of lending policies and recovery strategies on the financial performance of WB which implies that the existence of the data presented to the bank is not ascertained by the bank which may lead to unrecovered loan at some point of the loan period
- There is a good legal follow-up that can ensure effects of lending policies and recovery strategies on the financial performance of the bank as a result the loan recovery by security increases and loan write off decreases which can help the bank for better effects of lending policies and recovery strategies on the financial performance.
- lower budget for loan monitoring lead to higher non performing loans which shows that not giving attention for loan monitoring can lead to higher NPL and decrease the effects of lending policies and recovery strategies on the financial performance of the a bank.
- Strict follow-ups ensure effects of lending policies and recovery strategies on the financial performance which implies applying all types of loan follow up can reduce NPL and enhance the effects of lending policies and recovery strategies on the financial performance of a bank
Collateral related problems in relation to loan recovery
- Collateral miss estimation is a major problem in the process of loan recovery as a result partial settlement of loans or loan write off may happen because of miss leading estimation at the time of loan approval
- Unavailability of additional collaterals strongly affects loan recovery process of the bank accordingly the risk in loan write off accelerated and effects of lending policies and recovery strategies on the financial performance
- Lack of marketability in collaterals has an impact on effects of lending policies and recovery strategies on the financial performance of the bank that increases the cost of material management and declines effects of lending policies and recovery strategies on the financial performance of the
- Collaterals with high depreciable values are core problem in the process of loan recovery for the bank by increasing loan write off and decrease effects of lending policies and recovery strategies on the financial performance of the
- Fraud made by some dishonest staffs my lied the bank to increases loan writes off and decline effects of lending policies and recovery strategies on the financial performance.
- Complicated collateral estimation procedure of the bank which indicates that the estimation procedure is not equally understandable by the staffs. As result the estimation made by the property valuators staffs is dependent on the own understanding. Due to this the property may be underestimated or overestimated which has a deceases effects of lending policies and recovery strategies on the financial performance.
Loan workout strategies of the bank
- Lack of restructuring the loan repayment period with the consent of the concerned parties highly increases NPLs of the bank. As a result lower interest income, higher provisions to the loan reserve, increased administrative costs for managing and collecting these assets and decrease the effects of lending policies and recovery strategies on the financial performance of the bank.
- Changing the loan type is a good strategy to decrease the effects of lending policies and recovery strategies on the financial performance of the
- difficulty of injecting additional finance to resolve working capital shortage of a customer extremely increases NPLs of the bank which implies that loans that can be managed with injection of additional finance continues default which increases
- Most of the customers categorized as NPL don’t voluntarily liquidate their assets to settle their loan which increase the cost of loan recovery to the bank.
- Absence of genuine information about the deflated loan strongly affects loan workout strategies and increase the risk of NPL which decline effects of lending policies and recovery strategies on the financial performance..
- Inefficiency in implementing detailed workout strategies higher NPLs of the bank. This shows the bank is not efficient in implicating loan workout strategies as a result of this effects of lending policies and recovery strategies on the financial performance of the bank decline.
The study concluded inadequate loan assessment & Lack of follow up are the major contributing factor for NPL to accumulate.
Conclusion
NPL has been increasing for the last three years those are 565,491,453 for the year 2016 G.C, 915,446,535 for the year 2017G.C and 1, 171, 498, 535 for the year 2018 G.C which implies that the unpaid loan has been increasing. this therefore lead the bank to higher recovery cost, liquidity problem, higher amount of provision. This reduces the profitability of the bank. Based on the findings, this paper concludes the following in relation to effects of lending policies and recovery strategies on the financial performance which are contributing for the increasing of NPLs and decline in effects of lending policies and recovery strategies on the financial performance.
The credit assessment of the bank is not satisfactory due to the fact that small no of loans has adequate documentation, new approval of loans for customers with bad credit relation with the bank and loan given to Customers with weak financial potion and poor creditworthiness.
On the other hand the follow up system of the bank is not efficient due to lack of financial follow up, lower budget for loan monitoring, absence of scheduled physical follow up and the follow up is only dependent on repayment follow up.
Collateral related problems of the bank are collateral miss estimation, unavailability of additional collaterals, lack of marketability, collaterals with high depreciable value, fraud made by some dishonest staffs and complicated collateral estimation procedure. This all decreases the effects of lending policies and recovery strategies on the financial performance of the bank.
The bank has deficiency in implementing loan workout strategies which increases loan recovery costs and absence of genuine information about the deflated loan strongly affects loan workout strategies.
Recommendation
Based on the research finding above the under listed recommendation were given
- The management should improve the credit assessment by applying adequate loan documentation; deep financial statement analysis, functioning on the 5cs of credit analysis, checking the credit relation with the bank and other banks, giving higher attention to creditworthiness of a borrower to examine the ability of a borrower to repay debt. This will help the bank to improve the credit assessment to have good effects of lending policies and recovery strategies on the financial performance and reduction of
- The management of the bank should give advisory service to its customer by preparing well experienced staffs about the financial position of the customer in order to improve the creditworthiness of the customer and create awareness about the disadvantages of credit
- The management should provide adequate budget to loan monitoring in order to decrease NPL and improve the effects of lending policies and recovery strategies on the financial performance of the bank.
- The management should insist the staffs to strictly apply its credit procedure manual about the follow-up system which are physical- follow-up and financial follow-up.
- The bank is required to revise complicated collateral estimation manual in order to avoid miss understanding in estimation and create a check and balance system to eliminate miss estimation and fraud made by some dishonest
- The bank should prepare an action plan for the reduction of NPL by using workout strategies which are restructuring/extension of the repayment period with the consent of the concerned parties(borrower and mortgagor/guarantor), Changing the form of the loan fully or partially, Requesting additional collateral or change of collateral, Arranging the sale of the business to a third party with the consent of the borrower and Voluntary liquidation of collateral
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