Credit Creation And Management In Commercial Banks

INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Banking is essentially an international business, especially not that financial marketing in many countries are being internalized.
In modern economics is a distinction between the surplus and economic units and the deficit economic units’, consequently; there is a separation of savings’ and investment mechanism. This has made the existence of financial institutions’ whose jobs include the transfer of funds from savers (surplus) unit and investors (deficit) units. One of such institution is the commercial bank.

The intermediating role of the banks places them in a position of ‘Trustees’ of the savings of the surplus economic development. The techniques’ employed by bankers in this intermediating functions provide them perfect knowledge of determining the outcome of lending from such funds as well as ensuring that the funds will be allocated to investments which the probability of full repayment is well ascertained. However, in practice, the reverse has always been the case. Almost all lending decisions are made under condition of uncertainty, the risks and uncertainty associated with lending decisions and the cost of mobilizing fund or deposits used in such lending are so high that the concept of cost benefit and risks analysis need be employed by lending bankers in order to facilitate sound decision making and judgment.
This implies that all risks should be objectively assessed. Unfortunately, many commercial banks have based their lending decision on subjective principles. In most cases emphasis are placed on t he securely offered for loan rather than paying attention to the proper monitoring of the loans and the insistence that recovery potential of credit should be from the projected cash flow. This has led to increase case of non-performing credits.
The various economic reform policies introduced since 1980 to date has made the banking industry one of the affected sector of the economy. The policies led to period emergence of many banks to recently the shrinking of the members of bank through merger as a result of the increased in the capital base of commercial bank to twenty five billion naira (N2513) from member of about eighty-nine to twenty five commercial banks in the country.
Notwithstanding, the increase of room for non-performing credits in most commercial banks’ due to some of the requirement of some of the central bank publicities is a major source of concern not only to the management but also to the shareholders who are becoming more aware of the danger posed by these non-performing credit facilities.
These destroy part of the earning assets of the bank such as loans and advances, which are main sources of earnings and also determines the liquidity and solvency of banks. In other words non-performing credits create two major problems i.e. non-profitability and liquidity problems.
Having regard to these problems, prudent bank should be cautions to land and manage loans’ and advances effectively and efficiently with a view to minimize the problems caused by classified credits.
In this study we shall survey the possibility of reducing the occurrence of non-performing credits through improved standard of lending and effective control for the purpose of the commercial banks being mostly affected, we shall appraise the mobilization and lending procedure and credit management of Union Bank of Nigeria Plc, and assess the effectiveness or otherwise of the existing credit management policy of the bank. We shall suggest on how to improve any inadequacy highlighted by our findings.

1.2 STATEMENT OF THE PROBLEM
Since the introduction of the prudential guideline in the banking industry, the volume and value of loans and advances classified into non-performing account has continued to increase. The increase has remained even of a faster rate than the increase in bank lending and credit mobilization. Obviously this has adverse effect on banks since it affects cash flow and impairs profitability. It is believed that most loans and advances go bad because of inadequacy in credit management and recovery procedure of banks.

1.3 PURPOSE OR OBJECTIVE OF STUDY
Appraisal of lending visa-vis the credit management of banks and impact form the major objective of this study, bearing in mind that the credit created or funds’ mobilized has costs too on them which worsens the profitability and liquidity of the banks.
We use union bank of Nigeria Plc as a test case with a view to highlight the effectiveness, adequacy or otherwise of the credit management policy of Nigeria banks. With a view to finding, the causes and consequences of non-performing loans and advances.

1.4 RESEARCH HYPOTHESIS
1. The principal objective of bank lending is to generate revenue true or false.
2. A fundamental problem of distressed banks is inefficient management of loan portfolio. True or false
3. Loan deposit ratio affects the liquidity position of commercial bank.
4. The prudential guidelines has improved the asset quality of commercial banks.

1.5 SIGNIFICANT OF THE STUDY
This study indicates that whenever a credit is granted. There is need to urgently appreciate the point when such credits begun to look doubtful.
This will enable the bank to at least obtain full repayments including interest or at least reduce the eventual occurrence of capital loss probability. Since provision for non-performing credits are charges against the profit of the bank. It is appropriate then, that we review the methods proportions and margin of lending or advancing non-performing facilities. Hence the significant of this study to bankers. Besides bankers will be able to appreciate an effective appraisal of their lending and control mechanism especially now that they are expected to land under tight monetary conditions. The economy as a whole will benefit from the study because, if the level of non-performing advances is reduced, banks will be left with more profits to enable them make the expected contribution to the development of the economy.

1.6 SCOPE OF THE STUDY
The research work covered the appraisal of the Nigerian commercial banks credit management and the effect on credit created. This study is intended to assess the adequacy or otherwise of the banks management efforts at minimizing losses arising from bad debts.
In the course of conducting this research many problems were encountered. Time coupled with transportation costs and materials cost. There was also problem of lack of co-operation from some of the officers in the loan and advances department of the banks visited.