The Problems Associated with Loan Recovery in Nigeria Commercial Banks

THE PROBLEMS ASSOCIATED WITH LOAN RECOVERY IN NIGERIA COMMERCIAL BANKS

The origin of loan can be traced to the bankers of the middle age, who often distributes financial risk among several house to support trade flow loan is of great importance in the Nigerian economy, both to the deficit unit and the surplus unit. Commercial banks play a vital role in loan lending for the economic development and money creation.

J.L Hanson defined loan as the borrowing of a sum of money at an agreed rate of interest usually for a specified period of time, by a government institution, business firms of individuals. According to the loan-able funds theory which states that the rate of interest is a price and like other prices, are determined by the forces of demand and supply in a market the supply of loan while fund is in relation to  the demand to borrow. There are certain problems that do arise among individuals:

1. When on individuals expenditure requirement are more than income earning such individual has a problem of how to increase his income in order to meet up with his expenditures requirement.
2. When an income of an individual exceeds that of exceeds that of expenditure, there is surplus. Such an individual has again faced with the problems of how to use the money efficiently. So one can see that loan lending involves the acceptance of money from the surplus unit and transferring it to the deficit unit. This is a very sensitive performed by commercial banks to the public.

TYPES OF BORROWING

Borrowing from a bank can be either by overdraft or by loan account.

OVERDRAFT: in the case of an over draft, the customer is permitted to draw cheques up to an agreed amount. In excess of the amount at this time standing to his credit. In his current account, interest being paid only on the amount which the account is overdrawn.

LOAN ACCOUNT: In the case of loan account, however the customers current account is credited by the full amount of the loan and at the same times a loan account is opened for him for this amount on the whole of which he has to pay interest for the period of the loan. the interest is of much greater than the interest charged in an overdraft. Loan account can be categorized in long term loan, medium term loan, and short term loam. Let us take them one after the other.

1. long term loan: some government stock are issued for an indefinite period of time or even in perpetuity. This type of loan is mainly given to wealthy organizations. It may be in form of debenture or mere cash. Debenture is an instrument for long term borrowing. It can be split into secured debenture, which are those that form a fixed charge on specified assets of a company or a mortgage debenture, which are debentures that are issued in the security of the company’s asses and thirdly, debenture is a term sometimes used for unsecured debentures to distinguish it from mortgage debenture.
2. MEDIUM TERM LOAN: This is a type of loan that can last for more than one year. It is granted to such customers that deals in whole-sale business

iii.    SHORT TERM LOAN: This is the type of loan that last only for a year or less it sis mainly given to those customers who deal on retail trade basis.

WHY COMMERCIAL BANKS GO INTO LENDING

Commercial banks in Nigeria are profit-oriented institutions.

Some of their objectives are as follows:

1. To maintain liquidity
2. To make profit and
3. To create money

1. LIQUIDITY: liquidity is the case with which an asset can be converted into cash with in a they do not run short of their liquidity because of the following:
2. Deposits of their customers are with drawable on demand. Therefore, the commercial banks will make sure that such funds are their depositors.
3. Commercial bank maintain liquidity in order to meet legitimate loan demands from their customers.

iii.    Commercial bank maintains liquidity in order to meet up with the liquidity reserve. According to monetary authority directives, cash banks must maintain a liquidity ration of 30% and a cash ration of 3% to the central bank.

1. To make sure that they are covered, even when the borrowers fail to repay their loan at the maturity period and to provide their own operational or capital expenditure etc.

some of the liquid assets are:

1. Balances with the central bank
2. Money at call and short notice
3. Treasury bills and other first class discounted bill.
4. Government securities etc.

2. PROFITABILITY: It is well know face that bank (commercial banks) are basically established to make profits, and not as charitable organization. Therefore facilities granted are expected to yield profits is the rate of interest charged.

LIQUIDITY AND PROFITABILITY CRISIS: The conflict crises arise because the more funds are placed on the long terms high yielding assets, the less liquid a bank is, in the other hand, the more liquid the bank is, the less the resources will be on high yielding assess.

Commercial banks can get over to this conflict situation by meeting the reserve requirement of the central bank of Nigeria and for providing the buffer stock. Also, by investing the balances in asset that can easily be convent into cash.

3. money creation: commercial banks have absolute power in money creation. They do this through loan lending. Thus, if a bank grants N1000.00 as a loan, it has in another way created credit money to the tones of N100.00 in the economic what this mean in essence is that if commercial bank stop granting out loan to the general public, it will lead to money destruction in the economy.

CONDITIONS WHICH COMMERCIAL BANKS MUST UNDER GO BEFORE GRANTING OUT LOANS:

Formally, commercial banks deals only on short term lending, but now they have undertakings to finance both short term and medium term loan because.

1. Due to the face that they have excess fund, they now go into investment.
2. There is a vase development in an industries, as a result there is an increase in demand for loan.
3. Finally, organizations like insurance companies are operating in the area of term lending and there is nee to compete with them to avoid loaning customers.

So in any aspect of lending, commercial banks must satisfy with these conditions before granting out loan.

These conditions are thus:

1. SAFETY: The safety of any loan is of paramount importance to the bank, Hence, banks should law great emphasis on the character, integrity, and reliability of borrowers

Great regard should be made to the customers occupation, position, income as well as the previous conduct of his account. There must be a reasonable certainty that the amount granted can be repaid from profits and cash flow generates from the operations of the company.

2. SUITABILITY: The banker should also satisfy him self above the suitability fo an advance. Its absolute necessary for the banker to ensure that the purpose of the loan is not in conflict with the economic and monetary policies of the

government.

3. 3. THE DURATION AND AMOUNT OF THE LOAN: The bank must know from the customer, the exact amount and the duration of the loan. the repayment programme including bank interest. Also securities that will be accepted is of great importance to the bank, securities like, landed properties, stocks and shares certificates, life policy certificates and third party guarantee, conclusively based on this chapter. Upon all the precautions carried on by the commercial banks before granting out loans, still they do ecounter some problems in recovering the loans from the borrowers. This may reflect in a situation wher the business is already making losses and where its value has fallen to less than that of the outstanding loans. The details of the problems associated with loan recovery and its causes will be treated in the nest chapter.

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