The Problem of Debt Management in Financial Institutions
Chapter One
OBJECTIVE OF THE STUDY
This study was meant to investigate the problem inherent on Guaranty Trust Bank Plc. debt management. The main objective of this study was to examine the challenges of debt management in GTB. Specifically, the objectives of the study include:
1· To investigate the impact of inadequate collateral security provision by borrowers on bad debt in Guaranty Trust bank.
2· To determine whether fund diversion has any effect on bad debt in GTB.
3. To proffer solutions to the problems discovered
CHAPTER TWO
REVIEW OF RELATED LITERATURE
INTRODUCTION
This chapter reviews the literature on the problem of debt management in financial institutions. It discusses issues arising from the topic of discuss as viewed from different perspectives, with a view of giving a theoretical and empirical foundation to the study.
CONCEPTUAL CLARIFICATIONS
Here, an attempt is made to prove conceptual clarification on some of key concepts that are relevant to this study in order to aid understanding of the context under which they were employed in this thesis. Debt The act of borrowing creates debts. Debt therefore refers to the resources of money in use in an organization which is not contributed by its owners and does not in any way belong to them. (Oyejide et. tal, 1995). Debt according to Ogbeifin (2007) is generated by the gap between domestic saving and investment, which can increase in absolute terms over time. As the gap widens and the debt accumulates, interest rates also accumulates and the country must borrow increasing amounts just to maintain a constant flow of net imports. It must also borrow to refinance maturing debt obligations. Olaleye (1997:19) puts it, “debt is a sum of money owed by individuals, organizations or countries, a condition whereby owing money when one cannot pay”. Eaton (1993) made simple definition with the various stock and flows associated with debt. Regarding stocks a major distinction is made between disbursed and undisguised debt. Whereas undisbursed debt is composed for mere commitment made by lenders and are, therefore, not accumulating interest, disbursed debt consists of commitment made by the lender that have be drawn on and have accumulated unpaid interest, putting differently, unpaid interest obligation are part of the disbursed debt. Thus, debt essentially refers to disbursed debt. When a government borrows, the debt is a public debt public either internal or external are debt incurred by the government through borrowing in the domestic and internal market so as to finance domestic investment.
Concept of Management
There are as many definitions of management as there are books on the subject. Many of the definitions are relatively concise and simplistic. For example, almost a century ago, Taylor (1903:10) defined management as “knowing exactly what you want people to do, and then seeing that they do it in the best and cheapest way”. We think, however, that management is much more complex than we can discern from the above definition. Management is perhaps best understood from a resource – based perspective (Griffin, 2007). All organization use for basic kinds of inputs or resources from their environment, namely, human, financial, physical and information resources. Management is responsible for combining and coordinating these various resources to achieve the organization’s goals. However, managers combine and coordinate the various kinds of resources by performing four basic managerial functions or activities: planning and decision-making, organizing, leading and controlling. This is why Griffin (1997) defines management as a set of activities (including planning and decision-making, organizing, leading and controlling) directed at an organization’s resources (human, financial, physical and information) with the aim of achieving organizational goals in an efficient and effective manner. Every organization in modern society consists of many different groups of people woven together in a complicated process to achieve the objectives of the organization. As it is in the world of industry, so also is it in the realm of the state. It is this process of organization and management which constitutes administration. At this juncture, this is pertinent to exploits the significance of administrator. The administrators’ position within an establishment (financial institutions) is therefore strategic and pivotal to socioeconomic development of a country. Augustus (2008:2) asserts that “it is true to say that the place of administration has come to be clearly recognized in every sector of human endeavor, as being the keystone to the success and indeed to the very existence of the enterprise”. Being concerned with the planning, co-ordination, supervision and control of the establishment which it is involved, it is no overstatement to declare that “whatever may be the future, the science of administration will be an essential instrument of human welfare (Augustus, 2008). Indeed, so significant is the importance of this instrument of human welfare that one can agree with the writers on administration who asserted that ‘if our civilization breakdown, it will be mainly a breakdown of administration’, and that the future of civilized government, and even of civilization itself, rest upon our ability to develop a silence and a philosophy and practice of administration competent to discharge the public functions of civilized society (ibid, 2008). From the foregoing, it is not difficult to see that administration is the process on which social stability rests. This is because administration ensures the establishment of institutional processes and machinery through which the function of the state is carried out from day to day. In the state, institutional machineries like the rule-making, the rule application, the rule adjudication, regulatory commissions, the technocrats, etc. are set up to ensure the smooth working of the various integrate parts that make up the state. Each component is designed to perform a specialized purpose; laws, rules, and mechanisms are set up and their operation is coordinated, controlled, and supervised. As earlier said, these however, are the processes of organization and management and they constitute administration.
CHARACTER AND TYPES OF LOANS
Credit is generally granted by commercial banks based on confidence in a customers’ ability to repay the amount granted plus the agreed fixed interest. Such confidences are built on the lender’s satisfaction of the five “Cs” namely character, capability, capacity, capital or collateral. The existence of credit involves a lender and a borrower. Commercial banks are therefore called upon to extend credit to borrowers who may wish to obtain cash to make purchases. The credit or lending policies of a bank are in effect its screeching and appraisal devices by which it tries to determine the type and character of the loan it should grant, from a strict policy view point the character of a loan should take precedence over its form Grosse (1963). In other words, it is a better appraisal method that a loan be sound and healthy than that they just be in form of mortgage or business loans or customer credit. For instance, a bank in a rapidly growing residential area such as the newly created state capital or local government capital like Nasarawa State should have a higher ratio of long-term loan to total loan than a bank in a stable industrial area like Lagos, Kano or Onitsha. The later also ought to have a higher ratio of commercial loans and perhaps a consumer credit. Grosse (1963) opined that as a matter of policy it is desirable for a bank to establish ceilings on the various forms of lending but the should do so solely for the purpose of distributing bank credit in proportion to the community’s need. Commercial bank loans have been classified into various forms based on the purpose of the loan. These classes are. i) Loans to Business (i.e Commercial and Industrial Enterprises) ii) Loans to Agriculture for current purposes iii) Loans on purchasing and carrying securities iv) Loans on real estate mortgage v) Customer loans vi) Other loans not falling into the above categories.
CHAPTER THREE
RESEARCH METHODOLOGY
Research design
The researcher used the descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study sought to a critical analysis of the problem of debt management in financial institutions.
Sources of data collection
Data were collected from two main sources namely:
(i)Primary source and
(ii)Secondary source
Primary source:
These are materials of statistical investigation which were collected by the research for a particular purpose. They can be obtained through a survey, observation questionnaire or as experiment; the researcher has adopted the questionnaire method for this study.
Secondary source:
These are data from textbook Journal handset etc. they arise as byproducts of the same other purposes. Example administration, various other unpublished works and write ups were also used.
Population of the study
The Population of a study is a group of persons or aggregate items, things the researcher is interested in getting information a critical analysis of the problem of debt management in financial institutions. 200 staff of GTB were selected randomly by the researcher as the population of the study.
CHAPTER FOUR
PRESENTATION ANALYSIS INTERPRETATION OF DATA
Introduction
Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey. This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.
DATA ANALYSIS
The data collected from the respondents were analyzed in tabular form with simple percentage for easy understanding.
A total of 133(one hundred and thirty three) questionnaires were distributed and 133 questionnaires were returned.
Question 1
Gender distribution of the respondents.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to have a critical analysis of the problem of debt management in financial institutions.
In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations are made, which in the opinion of the researcher will be of benefit in addressing the challenges of debt management in financial institutions.
Summary
This study aimed at having a critical analysis of the problems of debt management in financial institutions. Three objectives were raised to guide this study. These objectives include: To investigate the impact of inadequate collateral security provision by borrowers on bad debt in Guaranty Trust bank, to determine whether fund diversion has any effect on bad debt in GTB, to proffer solutions to the problems discovered.
Conclusion
Based on the above findings pertaining to the objectives of the study the following conclusions are drawn.
lending constitutes an important function of commercial banks. Therefore, its management or Administration should be given adequate attention. The Management of a loan begins with the appraisal stage and this reveals an initial if the proposal is worth considering, the source of repayment, the adequacy of such a source and the key credit issues.
Recommendation
Having established the fact that some banks share capital is being gradually eroded due to the incidence of Bad debts. Most industry observers will sooner or later begin to loose confidence in the Banking sector. And if commercial Banks fail then the community at large will suffer. Therefore, in this study some recommendations have been made which is believed can be helpful in reducing the increasing level of doubtful debts and also in recovering the Bad debts.
(i) a Charge to Credit Administrators and Bank Management Credit Administrators and Bank Management must ensure that loan policies and credit guidelines are effectively implemented and strictly adhered to in all cases. It is evident from the investigation conducted that most of the loan that became Bad and doubtful debts today were granted in violation of the loan policies and credit guidelines. The personality of the customer and other selfish interest of the approving officer though not expressed has been brought into play in credit decisions. Any officer found to have given or approved loan in violation of the loan policies, credit guidelines and lay down procedure should be dismissed and prosecuted and such loan be recovered immediately. This calls for more monitoring and the establishment of more controls. Proper checking and counter checking should be done by an independent officer before the final disbursement. In line with the above, loan policies and credit guidelines should be in writing to enhance consistency and protection and should be fully communicated to all credit officers and approving officers. Any change in policy or guidelines must be duly communicated to all branches. This would enhance effective and efficient implementation.
(ii) Allocation of authority
The allocation of authority to line lending officers is a must in any credit Administration plan. The subject of delegation of authority leads into that of joint responsibilities for the recruitment, training and retention of capable lending officers. With the advent of more complex and specialized kinds of commercial lending and in consideration of the complex and unpredictable nature of the human character, there is the need to use experts who should be given adequate authority to carry out the Administration of lending. They should be given higher naira lending limit, because doing this would eliminate to some extent certain doubts and this may have a definite tendency to increase their self-confidence.
(iii) Establishment of an efficient credit department
The entire review and approval system presume the existence of an efficient and effective credit department where credit files and credit analysis can be prepared effectively to support the loan officer. This is the heart of the entire Credit Administration process. An efficient credit department should be established to develop facts that are both timely and accurate, permitting more correct credit decisions. In addition, interest rates should be responsive to competition, risk, cost of handling the loan, maturity of loan, gross yield, and fees for commitments. A few customers interview expressed sincerely that they run away from paying bank loans because after two or three attempts of payment, all you have done is to reduce the level of accumulated interest. So they got discouraged from continuing.
(iv) Combination of Techniques A combination of the appraisal techniques would be very useful in each case. Therefore, rather than relying on either character or collateral or capability, all these factors should be considered vigorously in each case as it has been proved from the study that each of these has some limitations. Document of charge over assets pledged should be properly filed and legally perfected.
(v) Bank Account In examining the conduct of a customer’s bank account, care must be taken to ensure that certain details are ascertained. The investigation has shown that some customers deceive their bankers that adequate turnover was lviii being generated by them whereas what was been done could be referred to as “kite flying” or “cash recycling”. That is, making a credit lodgment from sources that is unrelated to their operations with simultaneous withdrawals of such funds thereby giving a false impression of a swinging account. Therefore, adequate care must be taken to check: a. the source of payment into account b. director of checks paid out on the account c. frequency of excess request.
(vi) Customer – Bank Dialogue This should be encouraged. Bankers must not and ought not to absolutely rely on the information and data supplied by customer, inviting the customer for a quarterly appraisal discussion to obtain information on performance and prospect of the business are equally necessary.
(vii) Realistic Program of Repayment The purpose of any loan should be based upon repayment. It is therefore desirable that the borrower and the Bank have realistically defined program of repayment agreed upon in writing at the time the loan is made. Bankers have been found to have neglected this important aspect. Primary and secondary source of prepayment must be feasible and evident preferably from the proceeds of the business – being financed. Most importantly bankers must insist on secondary lix source of repayment especially where factors exist that could threaten the primary source. This is better than solely and wholly relying on collateral if the primary source fails. Bankers all agreed that realisation of collateral should be only but a last resort.
(viii) Assuming Owners Perspective Assuming Ownership Perspective particularly in real estate loan rather than a secured lender is another sure way of recovering Bad debts. This means that Bankers have to think like real estate investment firm to make such an adjustment of position necessitates conversion of “credit files” to “property files”. Properties must be identified by metes and bounds. In other words, by their exact location. Rather than looking to the property owner to deal with these items, it becomes necessary for lenders when dealing with distressed loans should mentally step into the role of the owner. In the course of the investigation, it was discovered that some careless bankers relying on Honesty have only known the address of the location of the assets used as collateral but had not really inspected such an asset used as collateral but had not really inspected such an asset to see for themselves. Eventually the honest customer after collecting his money becomes dishonest the following day. Bankers should thus be prepared for a foreclosure should it become necessary
(ix) Centralised Reporting system of Doubtful Debts Doubtful Debts program reporting system should be centralised starting with a consistent risk grading. This is to avoid inconsistent risk assessment and categorising loans. Management of problems assets for example, includes correctly identifying risk of loss and adequacy of reserves. This presupposes the existence of a competent asset review function and realistic subjections of the segmented loan portfolio to an objective economic for cast. Once the magnitude of the problem in the is determined along with the time period in which they might either become improved or result in loss, then a succinct plan can and must be developed to deal with the situation. This plan should result in the development of a precise mission statement supplemented with objectives and goals. In addition, a method of measuring result should be formulated. Finally, adequate resource must be committed to the task, particularly personnel. Most banks recruit unqualified people on the Directors instruction without regard to any background training in Accounting and Finance. Most of these people become accountants and Managers without any deep knowledge of credit. It is important to recruit the right caliber of staff and establish a reward system for those considering a career dealing with problem loans, including advancement potentials. If management recognize that their level of Bad and doubtful debts is increasing and only give lip statement to its management, staffing and motivation, the problem will in my opinion persist in greater dimension.
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