1.1 BACKGROUND OF THE STUDY
Banking enterprises is established with the assumption that the objectives of every management is to maximize profit. The importance of these organization cannot be over emphasized as they are the bed rock of other sector of the economy. A very good example of the sector is the financial institution known as the banking sector. The phenomenal growth of banks following the introduction of SAP creates a take impression that the banking sectors is an all corners business. The financial industry was thus flocked by incompetent hand and operators with not too clear records and credential which culminated in and aggravated the distress situation.
The banking and financial industry is unique in that it depends mostly on the public confidence and once the confidence is eroded in some banks, it may spread to other banks and institutions and this could be very dangerous to the whole system and the economy at large. Capital adequacy is a parameter of solvency at banks and basis of public confidence in the sector. It should be also be noted as (Orji 1998) stressed that bank lending simply means credit creation and that implies that the profit maximization of the banks is mainly realised through credit creation, the bank authorities should abide by the rules and regulation of eh Apex Bank (CBN) ie lending to the worst unit sector of the economy and on a reliable collaterals. The effort of the monetary authorities in Nigeria is commendable. In this respect as in the financial industry margins and acquisition is a possible solution for some category of banks in which assets are restricted and consolidated as this helps to enhance the quality of banks.
This research work will focus on the possible reasons for bank failures. In this regard of loan lending and loan recovery and effect of such on the rest of the populace plus how the financial industry could be transformed to meet the increasing challenges of the present day and finally assessing the role of the central Bank of Nigeria in ensuring safety of banks loan.
2.1 HISTORICAL BACKGROUND OF COMMERCIAL BANK LENDING
According to Nwankwo (1989), the establishment, development and practice of commercial bank lending system in Nigeria cannot be discussed in isolation of the colonial xxx in the great financial instititution.
The expatriate commercial banks was the first type of banks to be established in order to facilitate trade with foreign tradng companies and the colonial government. Commercial bank facilities started in Nigeria in 1892. With the establishment of African bank corporation, the first bank was set up in 1894, followed by the barclays bank. In 1917, these bnaks all which are expatriate bnaks were set up to provide banking services for the colonial administration and the British commercial interest. These expatriate banks largely ignored the development of local business entreprenuership which led to the enactment of the indeginous banks decree now clearly distinguish the expatriate banks from the indigenous banks.
The Nigerian merchant bank latr followed in 1931 and wnt into liquidity five years later. The national banking of Nigeria limited was the first indifenous bank to survive. It was founded in 1933. The government then was encouraged to finance the indeginous banks in order to promote indigenous trade and to discourage the monopoly of monetary transaction which the expatriate banks enjoyed and to liberalise credit facilities for Nigeria business.
The promutigation of the indigeniation decree of 1972 and 1997 allowed Nigeria to own up to sixty (60%) percent interest in expatriate banks.
These commercial banks which have become indigenous by the decree rendered a lot of services to the public which include lending.
Banks lending policy have revealed that loans were granted to those close in the rang of power without proper securities which led to the set backs in the growth and development of these banks so that more funds were pumped to normalize the situation and restructive management board.
CRITERIA FOR CREDIT EVALUATION
According to Adikwu (1999) commercial banks take the highest risks in loans and overdraft which stand as main source of income.
Bank lend only to formal that deposit balances at the basis and most forms maintain deposit at banks because they believe that these banks will be willing to give them lending facilities. Banks encounters risk in their credit operations name, the credit risks and liquidity pressure risk, in the first case, there is a possibility of default in payment while the second case, there is a risk of liquidity pressure which is typical with the banks loan and overdraft. This problem usually comes about in periods of boom.
There are general basis for evaluating all types of bak loans and overdraft. The borrower will do everything in the power to conserve his business as set and so ensure repayment of his loan. The second is that borrower is a man of his work. When he says that he will repay his borrowing promptly, he mean it, where he does not keep his promise, he at least will have made everything possible effort to do so. The second conditions speaks of capacity for credit evaluatio it means ones ability to pay a specific xxx obligation when due. A borrowers is credit worthy if he can produce evidence of his ability and willingness to repay his loans as agreed. An individuals credit capacity is usually related to income and employment.
The bank should always insist on the financial statements and earnings from all important borrowing regardless of their good character at how close they are to the bank officials. The larger the loan the greater the risk factor and the closer the bank contact with the borrower should be.
The third condition for credit evaluation is capital. This is the financial strength of eh risk. These conditions are known as the five is of credit.
(1) Character, (2) capacity (3) capital (4) condition and (5) collateral. Character which is the first is associated with reputation. Cole defined character as an intangible sum of personal attributes which and revealed indirectly rather than directly. He further said of the borrower as regard his credit worthiness and this reputation is really the opinion held by others about the borrower.
A prospective borrower character may be revealed by his business or profession conduct such as prompt payment obligation, attitude towards obligation speculative tendencies and respect for the right of others.
Character is very important in the evaluation of the credit worthiness of commercial enterprises or individuals so that a bank official should be provided with adequate tools to appraise credit effectively.
The last condition that should be satisfied before credit evaluation is collateral. Where individual borrower has a high credit standing he can do his borrowing on an unsecured basis. Others are obliged to back up their credit standing with collateral. If he have a properly life assurance policy with a cash surrender value of marketable securities he can use such assets as collateral for loan.
Where the loan is made for source/purpose and the repayment are realistically scheduled to flow from the liquidation of the transaction being financial, little more will be required to make a good loan. Long term plans granted to small or new enterprise that are rapidly expanding could not be justified on the basis of the five factors itself, which involves greater risk additional requirement will be required.
Collateral protection for business loans may be arranged in many different ways, depending on the nature of the business and the particular circumstances in each case. Collateral helps the bank to control its risks in two ways. Where a borrower defaults then he forfeits claim to the pledged assets except to the extent that the realized or realizable amount of the pledge assets exceed the debts to the lender. If the lender sells the pledge assets and does not receive enough money to pay off the defaulted loan then the borrower continues to owe the lender for the remainder of this rapid loan.
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