RISK ASSESSMENT AND CONTROL IN CREDIT ADMINISTRATION IN BANKS

CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND OF THE STUDY

The banks and other financial institutions decree (BOFIA) 1991, defines a bank as “a person, institution licensed to receive money as deposit which could be undertaken either through advertisement or solicitation and limited to a fixed amount which may provide for interest payment or re-payment of deposit amount.” Banks as financial intermediaries are very significant in the economy of every nation. The relevance of banks to the economy lies primarily in their ability to mobilize credit and grant credit to various economic actors for the production of goods rendering of service while earning a comfortable merging of the surplus for itself. However, where credit is not properly channeled, controlled and administered, the aforementioned goals will not be achieved. Rather it may lead to severe consequences to the economy. Of all the factors responsible for banks distress and failure in Nigeria, the one having the most devastating impact is poor credit administration.

According to Anyanwaokoro (1996), credit administration is the most important function of the banking industry. It is the most risky, difficult but most profitable function performed by banks. The key strategic value a bank adds has always depended upon its ability to manage credit risk. This cannot be properly done without an effective risk assessment, control and follow-up strategies. A strong and effective credit management process is one that reinforces and compliments its corporate objectives and goals. The main problem that banks encounter in credit administration is that some of the granted credit facilities are not re-paid leading to loss of depositor’s funds and emergence of bad depts.

Harle (1993) stated that “risk increase when credit principles are violated.” Sound banking practices requires that bank management put in place, standards for appraising and approving individual credit application to ensure that loans granted are re-paid. However, due to poor credit administration caused by loopholes and violations in the risk assessment and control techniques, bad and doubtful debts still claim a bulk charge on bank performance causing many banks to witness institutionalized distress and some, total unexpected collapse.

Therefore, it becomes a matter of compelling urgency to examine banks risk assessment and control process to provide for a close analysis and monitoring of the approved credits with a view to evaluating its impact on the banks credit decisions. Also to emphasize the importance that full risk assessment and effective control procedures should be put in place, to achieve simultaneously, low risk and high returns.

1.2       STATEMENT OF THE PROBLEM

A major problem   facing all banks is credit risk management that banks ensure the individual appraisal and rating of credit application through their credit analysis department, is not in doubt. However what are being questioned is their procedures and strategies for caring out this important function. As a result of non effective risk assessment and control policies in bad and doubtful debts threaten performance, profitably and subsequently its survival. Poor credit administration has been a complement of an unviable risk assessment and control strategy.

In the light of this, the following problem has been identified.

·         Non-effective risk assessment and control policies in banks, leading to poor credit administration, incidence of doubtful and bad credits.

·         Failure of operators of banks to comply with safety rules and regulations in credit administration.

1.3       OBJECTIVES OF THE STUDY

In view of the stated problems, the objectives of this research work would be:-

·         To ascertain and critically appraise the risk assessment and control policies (techniques) of First bank plc and determine its effectiveness in ensuring that incidence of bad debts is reduced.

·         Identify lapses in risk assessment and control procedures and suggest corrective measures to enhance better credit administration.

·         To assess to what extent bank management contributes to bad debts, due to failure to keep to rules of credit administration.

·         To highlight the prospect of a good risk assessment and control policies and identify the facts considered in evaluating credit risk.

·         To highlight the importance of effective risk assessment and control policies to the continuous existence of banking industry.

From findings, make recommendations that would improve the effectiveness and efficiency of risk assessment and control policies of Nigeria banks.

1.4       STATEMENT OF HYPOTHESIS

The following hypotheses were put forward as tested in the course of this study:

Ho:      A good (quality) credit administration is not a function of the effectiveness and efficiency of        its credit risk management system.

H1:      A good (quality) credit administration is a function of the effectiveness and efficiency of its credit risk management system.

Ho:      The relationship between risk assessment and control procedures and effective credit administration, is not a function of the bank’s credit policy.

H1:      The relationship between risk assessment and control procedures and effective credit administration, is a function of the bank’s credit policy.

1.5       SIGNIFICANCE OF THE STUDY

The necessity to adequately address distress in banks which is the main high incidence of non-performing credits cannot be over emphasized. Giving that interest on loans and advances constitute a major source of income to banks, it is very important that loans are properly appraised before approval and that when granted, they are monitored to ensure that they don’t go bad.

Presently the banking industry is again undergoing restructuring due to huge non-performing credits in some of our banks caused by lax credit administration practices, the absence of a viable credit risk management system and non-adherence to corporate governance practices.

In the light of the present challenges facing banks in Nigeria in the management of credit risk, to ensure minimal loan loss through maintenance of a good risk assessment and control, this study will significantly assist bankers in reducing bad debts to the barest minimum by assessing the capacity of bank risk assessment and credit control procedures to provide for close analysis and monitoring of banks credit administration. Bring to the notice of credit managers the importance of effective risk assessment and control in credit administration and make useful contributions to effective and efficient credit management in Nigeria commercial banks vis-à-vis credit administration.

1.6       SCOPE OF THE STUDY

This study is limited to examining the credit risk assessment and control procedures in credit administration of first bank of Nigeria plc, finding out the problems encountered in the process.

The analysis of the credit policies of level of nonperforming loans recorded by the banks, paying special attention to efforts made by the banks to enhance the quality of its risk assessment and control strategies, its effectiveness and contribution to the overall performance of the bank.

The choice of first bank of Nigeria plc is influenced because of its position as a net player in the money market, its size in the banking industry and its relative performance during various distress periods in the Nigeria banking industry.

1.7       LIMITATION OF THE STUDY

·         Uncooperative Attitude of Respondents.

The bank used as case study initially did not volunteer information relating to its credit process to the researcher due to the fact that its weakness can be revealed to its competitors, and can be used against them by way of performance appraisal and expose them to the wrath of their shareholders, cause a decline in price of their shares and subsequently their net worth.

·         Time Factor.

This project was carried out when academic activities were at the high peak, particularly for the final year students. Therefore, there were challenges faced by the researcher in time allotment.

1.8       DEFINITION OF TERMS.

·         RISK: The chance of failure or loss that the actual return from holding an asset will deviate from the expected return.

·         RISK ASSESSMENT: The analysis of the probability of loss occurring and the potential impact if the risk does occur.

·         CREDIT ADMINISTRATION: The implementing of credit decisions as authorized by the financial regulatory authorities.

·         CREDIT POLICY: Credit manuals that specify the course of action, procedures and guides to sound lending.

·         CREDIT: Is the amount of fund a bank is willing to lend to a borrower and has risk exposure.

·         CREDIT RISK: Is the risk that the principal or the interest or both or part thereof the credit extended to a customer might not be repaid by him in accordance with the loan agreement.

·         CREDIT CONTROL: Is the post approval area and monitoring of the credit facility to ensure that the credit remains qualifiedly satisfactory during its tenure.