CREDIT RISK MANAGEMENT IN COMMERCIAL BANKS (A CASE STUDY OF UBA PLC)

The recent upsurge of concern by retail and wholesale bankers for the enthronement of credit risk management into their operational process had been adjudged by credit analysis as timely and relevant. Financial institutions are exposed to risk taking of which credit risk is probably the most important. The risk problem usually emanates from undue delays in. collection or from a signal of a potential loss which cause a lot of complications in management. Banks in developing economies like Nigeria face intense challenges in the management of credit risk management. Government controls frequent instability in the business environment and most importantly the legal environment undermine the financial condition of the borrower.
It thus becomes clear that risk management as a disciple should pursue the goal of protecting the assets and profit of an organization. This can only be achieved by arresting the potential for loss before it occurs. In a financial world where there is dearth of information which interestingly is fragile in nature, both the allocation of and the use of credit are more vulnerable to disturbances. The Nigerian financial industry has suffered from the adverse effects of these disturbances resulting in distress of some institutions. Despite the fact that borrowers themselves absorb a disproportionate share of risk, the failure of the financial sector to manage their risk reduces not only the financial systems ability to allocate capital effectively but also erodes public confidence in the financial sector.
In other to bridge the risk profit gap, a macroeconomic framework for meditation is therefore required for depositors and lenders. Although lending is an integral and fascinating aspect of banking business, its complexity underlines its importance as the highest most profitable aspect of a bank’s operation. Lending is therefore something that must be done with minimum loss. The quality of bank loan portfolio will ultimately improve profitability and corporate survival.
Banks today continually face the problem of how to maintain asset quality in an asset generating environment. It has therefore become imperative for financial institution to sustain the discipline attain these past few years and stay focused on the fundamentals of credit as standard measure to improve the quality of loan portfolio. Lenders need to assess lending risk and device an effective way to hedge against risk related to the borrowers’ industry management and operation.
The changes that have taken place in the Nigerian financial system over the past two decades have been traumatic and revolutionary with disturbing news of shrinking spread on loans, erosion of demand deposits, disintermediation of banks or in most cases by the capital market and the concentration of oligopolistic practices in few core banks with series of threats to the Nigerian money market.
Credit risk management system incorporates the processing of credit transactions from the receipt of credit facility request from customers, through credit risk analysis and approval, monitoring of credit exposures to credit payoff or delinquency management in event of decline in credit quality. The management of loans and advances does not require any special skill, although, technical knowledge is essential. Previous experiences can also assist but the ability to think objectively to deal and communicate with a broad range of accounts and customers of different back experience, approach and ability is more important. As the challenges posed by the difficult economic environment increases, financial institutions are subsequently exposed to increasing risk.
The most important of these is credit risk, that is the possibility that a borrower will not repay the loan when if falls due or that he may even fail outright to repay. This credit risk has the effect of exposing banks to problem loans when they crystallize. Advance problems arise immediately customer makes his request for the manager to take a decision. This is further compounded when repayment by customer is not met and debt irrecoverable, except through realization of security (where possible). Where a large chunk of banking system credit is unpaid, the process of intermediation is impeded, fresh funds are unavailable to deserving new projects and the consequences of this for national productivity and employment can be serious. Because of these problems, loans which are increasingly becoming a threat to the financial stability of the banking industry, the Regulatory/Supervisory Authority (CBN and NDIC) introduced the prudential guidelines in November 1990 and always release credit policy guidelines annually for financial institutions comply with so as to minimize this credit risk. But the question is, are these banks really complying with the guidelines so as to safeguard customers’ deposit and owners’ funds? This question is what the research seeks to answer using UBA Plc as a case study.
The objectives of the study are:
- To show the extent of compliance of UBA Plc with the prudential and credit guidelines so as to minimize credit risk
- To establish the pattern of relationship between loans and advances in UBA Plc and bad loans (i.e. non performing loans)
- To make appropriate recommendations for control of advances and minimizing bad debt arising from bad lending.
1.4    Research Questions
- To what extend has UBA Plc been managing its credit?
- Has UBA Plc been complying with the CBN prescribed guidelines?
- What are some of the problems and challenges militating against the enthronement of efficient credit risk management in UBA Plc?
-  What are your recommendations for the removal?
For this study, one research hypothesis is considered. This is:
H0: There is no significant relationship between loans and advances (credit) and bad loans (non-performing loans)
H1: There is significant relationship between loans and advances (credit) and bad loans (non-performing loans).
The scope of the study shall be limited to credit risk management in commercial banks. it shall be within the frame of population size which comprises of all commercial banks in Nigeria. However, the sample size of the study is restricted to. UBA Plc. Focus will be on the risk management department of UBA Plc coupled with information from CBN and NDIC.
A research work of this nature is fraught with many limitations. An obvious limitation of this study is non-availability of textbooks on credit. Most of the materials available are in form of seminar papers, workshop papers and credit review extracts etc. Time constraint is  another limitation since the researcher is a part time student who has to combine this project with regular office work. In spite of all these limitations, justice is done with the available information and materials collected.
This study becomes important because of the volume of bad debts, which has mounted in banks over the years. The magnitude of non performing credits in the banking system is a cause for concern to different stakeholders including bank management which granted the credit, bank director some of whom took the credit, depositors whose funds have been misappropriated, bank supervisors, government responsible for protecting the banking system and the society at large. These concerns arise not only because of the potential losses to depositors but because of the likely loss of confidence in the banking system arising from a systematic distress. When credit is not paid, the banking system would be unable to play its intermediating role. It thus becomes obvious that this is a problem that everyone has a role to pay in finding solution.
For purpose of this study certain words and concepts are used which may appear obscure to a reader not well versed in the field of finance. It is therefore pertinent to define such words or terms as used in this study to make them easily understandable to any interested party .Such terminologies and words are there defined below as used in the study.
Bank: A commercial institution that takes deposits and extends loans. Banks are concerned mainly with making and receiving payments on behalf of their customers, accepting deposits, and making short term loans to private individuals, companies and other organizations. However, they also provide money transmission services and in recent years have diversified into many areas of financial services.
Bankers References: A report on the credit worthiness of an individual supplied by a bank to a third party. Reference and status enquiry are often supplied by credit reference agencies who keeps list of defaulters.
Bank Loan:   A specified sum of money lent by a bank to a customer, usually for a specified period, at a specified rate of interest. In most cases banks require some form of security for loans.
Bankruptcy: The state of an individual who is unable to pay his or her debts.
Bad debt: An amount owed by a debtor that is unlikely to be paid.
Bad debt recovered: Debts originally classed as bad debts and written off but subsequently recovered either in full or part.
Credit:      The reputation and financial standing of a person or organization. The sum of money that a bank allows a customer before requiring payment.
Credit control:  Any system used by a bank to ensure that its outstanding debts are paid within a reasonable period. It involves establishing a credit policy.
Credit Rating:  An assessment of the credit worthiness of an individual,  i.e the extent to which they can safety be granted credit.
Credit Risk:  This risk taken when a loan is made that the borrower will the default or delay repayment of the principal or payment of interest.
Debtors: Those who owe money to an organization.
Debtors Collection Period:  The period on average that a business entity takes to collect the money owned to it by debtors.
Debt Restructuring:  The adjustment of a debt, either as a result of legal action or by agreement between the interested parties to give the debtor a more feasible arrangement with the creditors for meeting the financial obligation.
Management: This is that managerial activity which is concerned with the planning and controlling of the organizations finances, to make profit for its owners.
Performance: The process of developing standards geared towards attaining certain predetermined goals