THE LENDING PROCEDURES AND LOAN RECOVERY IN BANKS

CHAPTER ONE

INTRODUCTION

1.1  STATEMENT OF THE PROBLEM AND PURPOSE OF THE STUDY

The problem of this study is to appraise the lending procedure and loan recovery in banks and their policies with a view of finding the roles of banking in general economic development and characteristic of a good policy and procedure for taking securities for bank lending. It is believed that most loan defaulted goes bad because of the inadequacy of lending procedures and polices in bank. Since it affect their cash flow and impairs their profit ability.

PURPOSE OF THE STUDY

The main objective of this study is to known the procedures in lending loans in bank and the securities for bank lending.

Bad debt recovery: When every effort to recover a debt has proved unsuccessful, recovery processes could be done using any of these approached:

(A)   Realize the securities

Where the bank is in possible of duly perfected securities which could fetch some money, the bankers night could be enforced. The type of security held will determine the approach to adopt in realizing them. This point under scores the importance attached to realizable securities under the cannons of lending as stated earlier in chapter four. If it is discovered at this critical point that the securities cannot be realized due to defect in perfections, the bank would sadly have lost on purely technical grounds

(B)   Appoint a Debt Collector

Where the amount involved is smaller or tangible securities held, banks will normally pass the recovery of such dept to licensed debt collectors. A fixed percentage of the recovered amount is usually paid to the debt collector and expenses in cuffed in the course of undertaking such a recovery exercise will be reimbursed upon substantiated claims. Ti is advisable to draw up deed of appointment incorporating the terms and conditions of the contract prior to it’s commencement, so as to avoid misunderstanding.

(C)   Take Legal Action

In the extreme cases, the bank may be forced to take legal action in order to recover debts owed to it by the debtors. This is done as a last resort because it is cumbersome, time consuming and expensive and because it represent s a sad way to terminate what probably was an interesting banker-customer relationship. However, at this stage, the entire relationship will get to the much without sentiments attached. Court proceedings may not always be in the banks favour due to a number of reasons of which are:

(i)   Inadequate knowledge of banking procedures

(ii) Poor banking knowledge and habits

However, where the decision is in the bank’s favour, the court decision may in the case of individual or sole proprietorship, result in bankrupting proceedings which are detailed in the Bankrupting Decree 1979 or winding-up process as stipulated in the companies Decree of 1968.

IMPACT OF BAD AND DOUBTFUL DEBTS: The incidence of bad and doubtful debt imposes cost on the bank, the customer and the economy in general. Though bad debts could be completely eliminated, but it could be reduced to manageable level in order to induce a healthy banking environment and to retain public confidence.

It has been observed that if lending decisions are not handled with care, it can turn out to be the most loss making activity of a bank. A lot of risk are involved in lending. To guard against this, the bankers need to apply a lot of caution. However, to be too cautions can mean a lot of missed opportunities for profitable lending, while failure to apply enough can mean huge losses for the bank in form if bad debts. In view of the above mentioned points, three important questions often come to the mind of a lending banker, and he must be satisfied that the answer to them are positive before deciding on which step to take. These questions in relations are in relation to the loan profitability, safety and soundness.

1.2     RATIONALE OF THE STUDY

The rationale of this study is as follows:

1) It helps to know how much that is required.

2) It helps to know how long the funds is required.

3) It also helps to know the sources of repayment

4) It also helps to know the policies of lending loans.

1.3   SIGNIFICANCE OF THE STUDY

The different between success and failure in the banking industry is in the effective lending procedures of the banks loan and advance. Efficient lending procedures is vital to investments on the technique of lending and the methods of security such lending and the pi falls that await the unaware banker. A study on its subject will therefore be a welcome addition to the existing volume of banking literature.

Effective loan procedures recognizes that beyond the application of sound bank principles whenever a loan is made, there is need for urgency in appreciating the point when loan begins to look doubtful arriving at a decision as to the appropriate action, and in taking that action. This will enable the banks to at best obtain full repayment of loan.

Beside the bankers more than ever before will appreciate an appraisal of their lending and control mechanism now  that they are expected toi lend under tight monetary conditions with it negative effect on investment outcomes. The economy as a whole will benefit from the study because if the level of bad debt is reduced, bank will be left with movement to enable them make the expected contribution to the development of the economy.

 1.4   DEFINITION OF TERMS

Bad debt- There is loans that the borrowers are unwilling or unable to reply due to one reason or the other.

Doubtful debt- There are debt which cannot be recovered back again

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