3 Tips on Ways to Recover Bad and Doubtful Debts
The present challenges in the Nigerian Banking System may be due to the global economic crisis which began in 2007. This crisis led to a credit contraction as households, private and public establishment faced difficulties in making payment on adjustable portfolios. The basic function of any bank is that of acting as an intermediary between the large number of depositors and those who wish to borrow. In doing this however, banks encourage savings by providing the means of attracting and collecting funds through the various types of account they offer and their extensive branch network, while at the same time, they put such funds to effective use. In performing the above functions, banks are usually faced with some fundamental risks. Such risks arise when trying to ensure that funds pushed to the deficit area (funds lent to borrowers) are recovered and paid back to the owners. Consequently if a rumour begins that a bank is having difficulty in making repayment to its customers, no matter how un-founded it might be, there would soon be a queue of people waiting to withdraw their deposits. This could if not check escalate into a run on the bank and would most probably result in the bank having to close its doors and go out of business. After SAP in 1986, the hard realities of a distorted banking sector emerged in wider dimensions with the result that the resilience of some banks to absorb economic shock became threatened, evidence of bank liquidity crisis started to appear in their operations, key health indicators like liquidity ratio, capital adequacy ratio etc, were flagrantly abused. The shout that the banks were making “paper profit” grew by the day. In 1990, prudential guidelines were adopted to aid revitalize and sanitize the banking system. This guideline will be further discussed in detail in chapter two (2). 2 For the financial sector (particularly the banking sector) to be efficient, it has to be regulated to prevent market failure, ensure social equity and stability and also protect the market operators. Consequently, of all the sectors of the economy (worldwide), the banking sector is the most regulated because of its critical role which is considered as very crucial to the survival of the economy. Basically, four parties are interested in a Bank’s performance namely: shareholders, employees, government and customers. Shareholders are interested in ensuring that returns on their investment are maximized at all times. Employees on their own aspire for maximum motivation for their contribution. The government on the other hand makes policies, laws and generally regulates the activities of all business enterprises. It ensures that its laws and other control measures are strictly complied with. Customers of the Bank expect fair treatment and conducive banking environment at all times. Loans are generally viewed as credit facilities granted to credit worthy customers at a cost which is referred to as interest. Loans are time bound i.e. they are meant to be repaid after a specified period of time. Credit facilities which include loans, advances, overdrafts, commercial papers, bankers acceptances, bills discounted, leases, guarantees and other loss contingencies connected with a bank’s credit risks are classified by the Prudential Guidelines as either “performing” or non-performing” as defined below. A credit facility is deemed to be performing if payment of both principal and interest are up to date and in accordance with the agreed repayment terms. A credit facility should be seen as non-performing when any of the following conditions exist: (i) Interest or principal is due and unpaid for 90days or more. 3 (ii) Interest payments equal to 90days interest or more have been capitalized, reschedule or rolled over into a new loan
