APPRAISAL ON THE IMPACT OF EFFECTIVE CREDIT MANAGEMENT ON THE PROFITABILITY OF COMMERCIAL BANKS

1.0 INTRODUCTION

1.1 GENERAL OVERVIEW OF THE STUDY.
Granting of loans and advances of credit is one of the banks services of investment policies. Among the crucial growth process is the adequate supply of credit to the different economic units to carry on their activities efficiently and smoothly. There is therefore the need for transferring of funds from the surplus units to the deficit units of the economy. In this wise, commercial bank plays vital role in the allocation of financial resources of capital formation.
There are many opportunities for profit improvement or maximization through effective credit management since lending of money has been widely known and accepted as an important function of the banking industry (i.e. commercial banks) a function which the industry is better placed to perform in view of its position as a finance intermediary.
The basis principles of lending are the same for all types of credit be it personal institutional credit.
The criteria used to determine the data of credit application to grant or not, have however been the genesis of heavy bad debts in the banking industry especially commercial banks. a bank considers a loan or credit to be a bad debt when the possibility of its repayment is the serious doubt and this doubt many be as a result of the following under listed points.
1) Wrong choice and use of lending principle.
2) Failure by the customer to meet credit repayment as agreed and when due.
3) Customer’s occasional request for credit.
4) Frequent attempt by customer to exceed existing limit without prior arrangement.
5) Overdraft balances always at the peak bad debts do have serious negative effect on the banks liquidity and profitability and if they are allowed to persist, undoubted will lead to bank failure.
It is generally accepted that lending is the most risky function performed by the commercial banks and it is therefore important that lending must be done efficiently.
In granting loans to customers, banks are expected to critically consider various factor’s which should enable them to assess the risk associated with the loan and the willingness and ability of the borrower to pay.

1.2 STATEMENT OF PROBLEMS
The following are problems associated with this study
a. BANK AS FINANCIAL INTERMEDIARIES: banks find it difficult to operate efficiently in the face of many borrowers.
b. BANKS AS DEBTORS: banks owe the customer at any point in time, a duty to make funds available to depositors on demand.
c. BANKS AS CREDITORS: banks find it difficult to properly assess and identity credit worthy customers which ensure repayment to guarantee equilibrium of funds flow.
d. COMMERCIAL BANKS AS COMMERCIAL OUTLETS: bank owes it as a duty to the shareholder to maximize profit.

1.3 OBJECTIVE OF THE STUDY 
Commercial banks are general all purpose retail banks. they mobilize deposits of all sizes, both from the depositors and shareholders.
They lend these mobilized funds to willing customers for investment purpose as stated earlier, loans are the most important, most profitable and most risky asset of the banks, not kept liquid due to problems of the loans, banks may be unable to meet their obligations to depositors and public confidence will be lost. These problem loans affect the liquidity of banks, reduce their ability to create deposit, restrict further lending to prospective borrowers, which affect the profitability of the banks.
Therefore, the objectives of the study are:
1. To find out the best ways to manage loans which adversely affects the depositor’s banks and the economy will be a thing of the past.
2. To find out the usefulness of the central bank credit guideline giving to commercial banks
3. To recommend possible ways of making credit policy guideline more effective and beneficial to both commercial bank and their customers.

1.4 SCOPE OF THE STUDY.
The study of the effective credit management on the profitability of commercial banks will review to an extent the level at which the bank is fairing.
This study will also review how positive and unable the bank is in finding project through lending and how lending and borrowing has affected the profitability and liquidity of commercial banks.
The choice of united bank being necessary is that it has passed through all the era of banking policies and regulations in the country.

1.5 STATEMENT OF HYPOTHESIS
Based on the above stated purpose of this study the following hypothesis was made.
1. Banks have adequately financed projects in our economy.
2. Low interests have favoured the borrowing customers.
3. Proper training of credit officers leads to better relationship between commercial banks and their credit customers.

1.6 SIGNIFICANCE OF THE STUDY
1. Loans are important as well as the most lucrative assets of commercial banks credit.
2. It is therefore important that credit proposals be properly articulated and evaluated right form the on set.
3. It is crucial to avoid and minimize bad debts.
4. The collection of vital information for lending and the analysis of the proposal cannot therefore be over looked to be less important.
5. It should be noted that the risk element in credit proposal are usually not easy to quantify.
6. Many banks today are out of business because of poor and bad credit management.
7. This study is therefore aimed at providing an avenue for efficient credit management.

1.7 LIMITATION OF THE STUDY
The study has the following limitations.
It is limited to two commercial banks first bank and intercontinental bank plc. The study is limited to time.
Information used are not all product of primary research but are largely obtained from banks and books.
Lastly one of the major limitations is the respondents to the questions asked to the bankers who were not ready to reveal or disclose certain information concerning their banks to outsiders.

1.8 DEFINITIONS OF TERMS 
BAD DEBT: these means irrevocable debts of an organization CANNON: generally accepted standard on which an idea or subject is based.
CREDIT FACILITIES: this include loans, overdrafts, advances, commercial papers, lease, and guarantee etc. that is those form of credit connected with a banks credit risks.
LOANS: a credit facility extended by one party (lender) to another (borrower) subject to specific terms and conditions agreed upon by both parties.
OVERDRAFT: an account drawn over. It is a short term revolving time agreed with the bank.
POLICY: guideline.
PROBLEM LOANS: all types of credit facilities granted by banks to their customer for whom the customers are unable to repay within the agreed time and conditions.
TERM LOAN: credit facilities granted for a period normally more than one year. 
LIQUIDITY: money or goods that can be sold to repay debts.
Security: goods or property pledged against money borrowed.
GUARANTEE: a promise usually in writing by one person to pay the present or future debts of another, such a promise must be made to the person to whom the debts is or will be due or paid.
CONVEYANCE: the dead by which interest on lend for e.g. mortgage lease, charge or vesting instrument is conveyed to a purchaser. 
PORTFOLIO: collection of shares or investment.