EFFECT OF BAD DEBTS ON PROFITABILITY OF BANKING INSTITUTIONS (A CASE STUDY OF UNION BANK OF NIGERIA PLC.)
ABSTRACT
A bad debt is one of the problems facing by banks and other financial institution. The objectives of this project work breakdown into various stages for easily understanding is contain five chapters. Chapter one deal with introduction of the study, background of the study, aims and objectives of the study, statement of the problem etc. Chapter two contains Literature review, the conflict between profitability and liquidity, implication of bad debt to the organization, staff customers and share holder, principles of lending etc. Chapter three deal with the Re-statement of research hypothesis, research design, population of the study etc. Chapter four includes presentation of data, area of study, history of Union Bank of Nigeria plc while chapter five make necessary recommendation to Union Bank and other financial institution in Nigeria on bad debt.
CHAPTER ONE
INTRODUCTION
Banking operation is very important in the affairs of any economy the fundamental function of commercial banks in the economic system is the transfer of funds from the savings surplus unit to the borrowing deficit units. The surplus units provide the fund needed to the deficit units for investment purposes. This is essential for the economic growth of any country. Commercial banks are the intermediaries between the demand side and supply side.
Banks are the process of performing their code of financial intermediaries between surplus units and deficits create a deposit. When a bank gives out a loan to a customer, it debits the loan account and credits the customer account with the amount involved. The credit to the customer account which has become a new deposit is available to the bank for further lending to other borrowers.
The ability of commercial banks to grant loans depends on the level of deposit it has generated and the legal reserve requirement imposed by the central bank.
A bank earns a return for the performance of the role of mobilization loans and advances are described as the most important as well as the bad debt. Effect of bad debts on the profitability of banking institutions. The most profitable asset of commercial banks. One of the main objectives of commercial banks to maximized profit but this objective can be affected by increasing the trend of provision for bad and doubtful debts.
If there is doubt concerning the recovering of the account, it is classified doubtful and when several efforts general forward is in vain, it is declared a bad account, due to numerous reasons which may include the likely death of a borrower, possible illegal diversion of funds, the poor state of the economy not all the loan granted by banks to the customer are repaid when due, such problems on loans and advances are classified as bad and doubtful.
This has been two major concerns to both management and shareholders. Bad debt is losses to banks and therefore is capable of reducing the returns that the shareholders and contributions of the banks to the economic and social development of the country.
1.0 BACKGROUND OF THE STUDY
Through the resolution to create a debt recovery department out of the ‘Head’ Office Advance Department was finally taken on 31st December 1984 but it practically implemented on 31st January 1985.
This department was born out of serious concern on the stock of bad debt in the banking company’s total portfolio posed to the apex management members, i.e. Board of Directors. The total bad debt on 31st December 1984 was #311,285,424 which represents 19.9997% or 20% of the total loan and advances of #1556,412000 and about 8.656% of the net company asset born source debt recovery department head office of UBN Lagos.
The department was said in still under the responsibility to re-appraise each of its debtors on the basis of the trend of the economic situation and revalue their security with the view to determine the debtors work with the outstanding debt balance in the company’s books.
The department in the apex arbiter to determine the amount to be paid in full and final settlement of debt by any debtors after adequate consideration is respect of interest concession, security revaluation, and realization position of the debtor the percentage of the company profit and interest in terms of the image must be given though after re-appraisal of the company’s credit committee which in terms report to the Board of Director.
1.1 AIMS AND OBJECTIVES OF THE STUDY
The bank is a business enterprise aim at maximization of profit payment of handsome dividends to the shareholder and contributing its quota to the economic growth of the nation. The aim objectives of this research topic are to detail the bad debt activities through the strategies they are using in order to minimize the rapid growth of debt to becomes bad. Efforts would be made to draw out the impact of bad debt on the entire banking industry in eluding the staff. Customers and marketing activities, thereby constituting major constraints on the achievement of their desire objectives.
The project also touches on the effect of prudential guidelines on bad debt and categorization of bad study the process of credit appraisal identify the major causes of bad and doubtful debts analyze their effects and offer suggestions in the minimization and effect management of bad debts in Union Banks.
1.2 STATEMENT OF THE PROBLEM
The study investigated the management of debts in Union Bank. it has been discovered that several factors affect the decision of the bank management in the factors considered are the time factor, the nature of the business of the company involved and its management team, and the type of industry into which the company falls.
A study concerned itself with the examinations of low factors like Non-product financial management, natural disasters, prevailing economic difficulties which has course many countries to operate below capacity, and all others have affected the management of bad debt.
1.3 STATEMENT OF RESEARCH HYPOTHESIS / QUESTION
The hypothesis is defined as a suggestion that put forwards as a starting point for reasoning or explanation based on certain knowledge. Hypothesis testing can be described as a process of determining the validity of a formulated hypothesis. This can be done through the testing of a negative hypothesis i.e. Ho.
There are two types of hypothesis
a. Null Hypothesis (Ho) Negative
b. Alternative Hypothesis (Hi) Positive
Hypothesis Formulation
1. Hi: Loan & facilities granted yield profits to the bank
Ho: Loan faculties granted do not yield profits to the bank.
2. Hi: Banks loans and advances have a significant impact on Nigeria's economy.
Ho: Banks loans and advance has no significant impact on Nigeria's economy.
3. Hi: Credit administration and management will have a significant effect in minimizing
bad and doubtful debt in banks.
Ho: Credit administration and management will no significant effect in minimizing
bad and doubtful debt in banks.
1.4 SIGNIFICANT OF THE STUDY
Union banks take stock activities on the invaluable contributions they have made towards the growth and development of the Nigerian economy. They have nurtured much small business, which has grown to the big business of today in addition, they have partnered various tiers of governments as they seek to foster accelerated economic growth. Bank's frontline position in the industry today is a testimony to its resilience and the appropriateness of its strategic options over the years, as thereby look ahead, they see enormous opportunities for the economy. Accordingly, we have embarked on some strategic initiatives that would enable adequately exploit those windows of opportunities.
In this regard, they have upgraded their flexure banking application from 2007 4.3 to 6.5 (retail) and from 3.2 to 2.2 (corporate). The flexure upgrade project was to allow match competition by providing value-added services to valued customers. As part of the upgrade project, they carried out an extensive review and redesign of their business processes so as to enhances the efficiency and effectiveness of operations. Apart from huge investments in ICT infrastructure, the project also entailed massive expenditures on staff training, cutting across different cadres. These measures were further intended to dive into our e-banking products and services and offer more convenience to customers.
1.5 SCOPE OF THE STUDY
The scope of the research is centered on the business operation and working on the Union Bank of Nigeria Plc, which gives insight explanation on its management of bad doubtful debts in the loans and advances department and the effect of bad debt on the profitability of banks.
1.6 LIMITATION OF THE STUDY
The limiting factors of bad debts on profitability in Union Bank useful advice and recommendation.
Owing to the nature of this study which is restricted by certain factors like time and finance. It should be seen as extraneous functions in Union Bank Plc by using primary and secondary data. In computing this project, there were a few things that seem like constraints to the researcher.
Financial Problem: This is an undeniable constraint faced by the researcher due to the non-availability of money at the right period to sue in carrying out the research and to gather the needed information more effectively and accurately.
Time: This is the main constraint faced by the research in gathering and collecting needed information. As a result of this enough information was not gathered.
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