AN ASSESSMENT OF BANK DEPOSITS AND THEIR IMPACT ON LENDING POLICY
(A Case Study of Intercontinental Bank Plc, Kaduna)
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ABSTRACT
This research work was undertaken to assess the bank deposits and their impact on lending policies. This work was intended to achieve the following objectives: to apprise and determine the lending procedure of banks, to highlight the extent to which improper project evaluation influence bad debts of money. Deposit banks. Relevant data were collected from both primary and secondary sources. Questionnaire was the main primary data collected instrument employed while data from various relevant publications constituted the source secondary data. Upon the analysis of data, the following conclusion were drawn; that sound lending requires a clear-well articulated and easy accessible policy documents which spells out the philosophy of lending. On the basis of the above findings, it was recommended that banks should ensure that loans given out to customers should be backed-up with adequate collateral security. Finally, it is the opinion of the researcher that the management of bank deposit should prevent the incidence of bad debts in Nigerian banks.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
In a modern economic, there is distinction between the surplus economic units and consequently a separation of the savings investment mechanism. This has necessitated the existence of financial institution whose jobs include the transfer of funds from savers to investors. One of institution is the money deposits banks, the intermediating roles of the money deposit banks places them in a position of “trustees” of the saving of the widely dispersed surplus economic units as well as the determinant of the rate and sharp of the economic development. The techniques employed by bankers in this intermediary function should provide them with perfect knowledge of the outcome of lending such that funds will be allocated to investment in which probability of full payment is certain. However, in practice no such tool can be found in the decision of lending bankers. Virtually all lending decisions are made under creditors uncertain the risk and uncertainty associated with lending decision situation are so great that the concepts of risk and risk analysis need to be employed by lending bankers in order to facilitate sound decision making and judgment.
This statement implies that if risks are to be objective assessed, lending decisions by the money deposit banks should be based less on quantitative data and more on principles tool subjective to provide sound and unbiased judgment. Furthermore, the banks depend heavily on historical information as a basis for decision making.
Apparently aware of the inadequacies of his decisions base, the lending banker has often sought solace in tangible and marketable assets as security giving the impression that lending against such securities is an insurance against bad debts. This makes the banker complacent with his loan port folio. The increasing trend of provision for bad and doubtful debts in most money deposit banks is a major source of concern not only to management but also to the shareholders who are be coming more ware of the dangers posed by these debts. Bad debts destroy part of the earning assets of banks such as loans and advances which have been described as the main source of earning and also determines the liquidity and solvency which generates two major problems, that is liquidity and profitability, has to earn sufficient income to meet its operating costs and to have adequate return on it’s investment.
Lending has becoming a vital function in banking operation in view of its direct effect on the economic growth and development in the business sectors. Thus as far as banks are concerned, their activities are lending are as important as their deposit taking, considering the inter-relationship between lending and deposit taking.
Although lending is risky, commercial banks profit oriented organization having a primary objective or profit maximization cannot do without lending out money. In most cases, they generate the highest proportion of their interest on lending. More so, the principal objective of lending of a bank is the provision of growth profitability and liquidity within the economy.
Commercial banks play an important role in the pass-through of monetary interest rates. Nevertheless, the efficiency of transmission of decisions of central bank is a complicated process and may depend on many factors such as: level of competition in financial industry, perception of credit risk (risk prenina) risk aversion, availability of close substitute for loans etc. moreover, banks may influence the external fiancé premium not only via the interest rate but also modifying the available maturity of loans or changing collateral requirement. Finally as evidence by broad literature on bank lending channel, credit rationing and uncertainty about credit worthiness of borrowers may markedly influence banks risk taking thereby influencing their willingness to tend.
The existence of bank lending channel is condition on two important assumptions. First monetary policy decision impact bank liquidity position. Second, changes in the supply of loans affect borrowers because of constrained access to other sources of financing than bank loans. Tightening of monetary policy usually leads to decrease in the demand of deposit because bank adjust their deposit rates only partially to the change sector to equity investment funds. Shrinking bank’s liabilities forces banks to decrease the supply of loans accordingly.
1.2 STATEMENT OF THE PROBLEM
Years after years, banks suffer much from the part of full loan extended which has for one reason or the other proved uncoverable. Banks lose millions of Naira in various bad debts yearly and deposit efforts by bank management committee of chief inspectors and the bankers committee on the other hand, the ware of bad debts in banks is still on alarming proportion. This is gathered from a combination of literature reviews on the topic.
On the other hand, many banks experienced a lot of bad debts when the new government abandoned the project awarded to the contractors by civilian government.
These contractors borrowed to execute the project awarded to them but could not repay the loan, due to government action on revamping the economy. Thereby abandoning the project other experience were during the time of draught or poor rainfall and pest. These however led to low harvest which did not give the farmers enough time to repay their debt.
Again, experience may arise in respect of lapses on the part of the bank credit officers. For instance, there may be excesses over approved facility, unformatted facilities and expired facilities not renewed on time in each of these cases, the customer may easily deny even owing the bank all or part of the amount. Deposit banks have always borne the burden alone, but this may not continue in future as the banks may be unable to take the risk of lending more but when eventually they do, they would seek the best way to come out of the risk with realistic reward which they are dearly failing to achieve at present.