LOAN LOSSES IN COMMERCIAL BANK LENDING A COMPARATIVE STUDY OF GOVERNMENT CONTROLLED AND PRIVATE BANKS

With the unprecedented display of interest in the banking business in the wake of structural adjustment programme, the fear of imminent bank failures as a result of anticipated down turn in the fortunes of banks has remained lightened. This down turn in fortunes of mainly attribute able to one factor that has always assured greatest currency in discussions of problems of banking in Nigeria, that is loan losses. While the loan loss issue remains unassailable, the argument in most circles is that the loss profile is higher in the government owned or controlled commercial banks than in the privately owned banks. It is against the background of these lightened developments that this study attempts in examination of the post SAP loss phenomenon and particularly make a comparative study of the private and government controlled commercial banks. The study which used representative banks is therefore an appropriate attempt to draw some important conclusions backed up with empirical analysis.  The study mainly helped on historical approach and was partially descriptive in pinpointing the present problems or issues in lending and loan management.  Data was generated from the historical records as well as the questionnaire and analyzed using the statistical tool of t-distribution, chi-square and correlation analysis. Interesting findings were made from the analysis.  On a general note, the problems of diversion, excessive emphasis on security.  Greater influence of internal organizational considerations (e.g Loan policy), Lack of continuity of terms, undue pressures, lack of automated loan information system are inherent.  Comparatively, it was found out that the role of loan recovery is not higher in the private banks, the rate of provision for loan losses is higher in the government. Controlled banks; the private banks do not emphasis more on security than their government-controlled counterparts, the loan to total assets ratio of government-controlled banks is not significantly different from the average of the commercial banking sector.
 
CHAPTER ONE
1.0     INTRODUCTION
“Neither a borrower nor a lender be” goes the popular saying. Deriving from the above saying is a simplicity that in the lender – borrower relationship, the lender who gives has had to face problems, basic among which is that the borrower might not honour his or her debt obligations. By virtue of their highly recognizable and incontestable role in the process of engineering economic growth through the lending function, commercial banks are most vulnerable to this non-repayment phenomenon.
In the process of accelerating economic growth in Nigeria, as in other countries, commercial banks have served as most important institutions of resources allocation and financial intermediation between surplus and deficit economic units.  However for obvious reasons of low level of capital formation in the country, emphasis of this purveying function is on lending, with its multiplier effect.
A second and consequent issue arises with due considerations to the primary motive of the investors in the banking business.  The commercial bank owners desire profit and it is largely through the interest on their loans and advances that is primary profit is satisfied.
Thirdly, besides all the important lending role and profitability consideration commercial banks lending activities demand concrete understanding of the depositors’ position since a good part of their abilities goes into the loan portfolio ie. the liquidity considerations.
The foregoing vividly underscorses the causative role of commercial banks in the process of engineering growth as well as indicating the nature of their relationships with depositors.  On the role of commercial banks as growth engineers. ORJI (1989) aptly stated.
“they are much more involved in the development of the economy than any other financial institution.  Indeed, they have been and are likely to remain the dominant financial intermediates in Nigeria for they presently account for over 80% of the resources of the financial system, they therefore occupy strategic position in the economy and are more than most other units, able in all events to influence the course of development”. Roles of resources allocation and profitability the commercial banks commit sizeable audits of their asset portfolio in the form of loans and advances.
1.2     STATEMENT OF PROBLEM
Deriving from the above introductory background is that loan losses among commercial banks have assumed some canker wormic dimension and demands serious “financial diagnosis”.  Accordingly, it has therefore attracted the chagrin of keen observers of and commentators on, the financial systems who believe that it is a major problem which present day banks in Nigeria are facing.  In fact, of recent “The bad debts in the banking system was estimated at N73 billion (this day of April 24,2005).
However, while there is a general wider standing of high rates of loan losses among the banks, augments in many circles highlight a higher magnitude of the losses among banks wholly owned or substantially controlled by government.
1.3 Objectives of the Study
The primary objective of this study was to examine the loan losses in commercial bank lending a comparative study of government controlled & private banks. Specifically, the study sought to