AN APPRAISAL OF THE LOAN EVALUATION CRITERIA AND CONTROL TECHNIQUE IN ZENITH BANK
ABSTRACT
The role of banks as financial intermediary is crucial to the growth of any society. Primarily, bank supply, such financial services as provision of savings and time deposits, call deposits, working capital and terms loans, tender and performance bonds documentary collections, fund transfer, foreign exchange transaction, equipment leasing and business advisory services.
To the individual and corporate business community, bank loans are a prime source of funds for investment and consumption needs. To the government such loans are important because they serves to accelerate development in priority areas. Indeed the provision of loans to viable projects in the society is one important way that the banking industry can be regarded as the economic engine of society because of the multiplier effect of this in creating employment and improving the standard of living of the populace.
It is the deposits from customers that banks principally use in lending and therefore it is only national to expect that they be cautions when lending so as to ensure that the risks they take minimum, for instance, there has ben reasonable profits as well. Banks also want document assurances that the loans are interest will be fully repaid.
Other conditions for bank loans sometime include the provision that the intending borrowers take on equity in the total cost of the project. This equity ranges often time between 25-45%. A bank may also demand collateral in the form of land or ended property debentures on the assets of a borrowing company, share certificates and such immovable properties as plants and equipment, there is also the personal standing, integrity, status and tract records of the borrowers, a factor which the banks consider equally important.
If the aforementioned criteria are strictly applied in loan request, there is little doubt that the incidences of bad debts would be minimal. In practices the criteria are supplemented by “subjective” variable bank loans are at times granted to persons of dubious character and for projects that are clearly not viable or profitable due teither to improper credit appraisal or collusion between loan applicants and lending officers.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Commercial banking plays a major role in the commercial life of a national regardless of the level of development it has attained; lending is an essential function of commercial banking. Through lending, bank management strives to satisfy the credit needs of the community or credit market that he bank serves or intends to serve. Further more, the bank loans contributed maternity to bank profitability by providing a higher return than most other bank assets and by being a key element in the creation and maintenance of the depositor’s relationships.
If the element in the creation in the economy’s life blood is true, then credit that cease to flow, through the economy and becomes stagnant can be said to represent a hardening of ht economy and arteries it is in the content.
If forestalling such as situation that the ideas of criteria for evaluation loads and control of such loans become of importance, if a bank is to survive to serve the community, she (the bank) most provide loans for sound purposes and repayments but the bank should set in motion a control machinery which will constantly monitor project for which loans been approved and granted. This not only ensures that funds are channels into the ventures for which they are meant but enables the bank to device customers whenever anything goes with the project which if not arrested at all early stage may lead to the division from the payment schedule and possibly end up a bad debt.
This study aims at appraisal the law evaluation criteria and the control techniques currently in operation in zenith international bank limited and hance, on the basis of the findings, make recommendations which may help the bank to reduce cases of bad and doubtful debt in future.
1.2 STATEMENT OF THE PROBLEM
There is a chronic bad debts syndrome currently sweeping across the nations banks, Bad debt constitute one of the most critical factors affecting a bank profitability and survival. A high bad debt profile could cripple the operations of bank and impair its development. In recent times, a number of Nigerian Bank indeed come near insolvency, as a result of bad debt. A loan can turn bad after it is granted for example where security was not perfected prior to draw down.
A loan can also turn bad as a result of combination of other factors many from incomplete knowledge of a custom and his activities corporate illiquidity problems due to over borrowing or over expansion instance, abrupt changes in government or in government policies to shear incompetence and bad judgment on the part of loan office. Experts, in fact attribute the phenomenon of bad debt to unforeseeable contingencies and part of bank loan officers.
The conduction from the foregoing is the bad debt arise from factor beyond the control of both the bankers and his customer or both of then acting in concert. A problem loan graduates into bad debt if not properly managed, and is then charged off thus representing a drawn on the banks resources. In the present financial squeeze where bank loans represent the major source of capital funds for several forms, this will means reduce access to such funds and this reduced productivity, reduced employment opportunities, increased inflation. Similar economic complication for the nation.
BRIEF HISTORY ON ZENITH BANK PLC
Zenith Bank plc is presently the most capitalized company on the Nigerian stock Exchange (NSE), with a market capitalization of N612.82 billion as at end June 2007 and the biggest bank in Nigeria in terms of total assets plus contingents which stood at N1,178.39 billion as at June 2007.
The bank was established in May 1990 and started operations in July same year as a commercial bank. It become a public limited company on June 17, 2004 and was listed on the Nigerian stock exchange on October 21, 2004 following a highly successful initial public offering (IPO), which recorded a subscription level of 554%. The bank present has a shareholder base of above one million, an indication of the acceptability of the zenith brand.
Its head office is located at 87, Ajose Adeogun street Nigeria Island, Lagos, Nigeria. with over two hundred and fifty (250) branches and business offices nation wide connected online, real time zenith bank has presence in all the state capitals, the federal Territory (FCT) and numerous towns and cities.
Over the years, zenith bank clearly set out to differentiate itself in the banking industry through its service quality, drive for a unique customer experience and the caliber of its client base. Today, it is easily associated with the following attributes in the Nigerian banking industry;
The overall vision of the bank is to make the zenith brand a reputable international financial services network recognized for innovation, superior customer service and performance while creating premium value for all stakeholders.
1.3 AIMS AND OBJECTIVE OF THE STUDY
The main aim of the study is to critically analyze the criteria used in granting loan and the effectiveness of control measure adopted in zenith bank international.
The specific objective for the study include the following:
1. To review the credit guidelines of the monitories to all banks.
2. To examine the credit policy and practices of zenith international bank.
3. To review the management of loan, bad debts and recovery processes in zenith international bank.
4. To appraise the control measures in averting bad debts.
5. To identify problems associated with credit management.
6. To make recommendations on the finding of the study.
1.4 HYPOTHESIS OF THE STUDY
To achieve the objectives of the study the following hypothesis was formulated.
H0: Banks do not follow laid down criteria and control in their evaluation of application for credit facilities.
H1: Banks follow laid down criteria and control in their evaluation of application for credit facilities.
RESEACH QUESTIONS
The study answers the following research questions:
1. To what extent does an effective loan management techniques reduce bad doubtful debts in zenith internal bank of Nigeria, limited.
2. To what extent ha adequate control techniques of Nigeria banks reduced bad and doubtful debts?
3. What extent has CBN regulation and guideline mechanism affected the tending function in the country.
4. To what extent has CBN various conventions and techniques of control influenced the loans creation and management of commercial banks in the country?
5. How effective can loans be evaluated to check the occurrence of bad doubted debt in the Nigerian banks?
