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CREDIT RISK MANAGEMENT AND BANK LENDING

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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
It is difficult to imagine another sector of the economy where as many risks are managed jointly as in Banking. Banks and banking activities have evolved significantly through time. With the introduction of money, financial services like acceptance of deposits, lending money, currency exchange and money transfers became important because of the central role of money, Banks had had and still have an important role in the economy. Like any other firm banks are exposed to classical operational risks like infrastructure breakdown, problems, environmental risks e.t.c. More typical and important for a bank re the financial risk it takes by the transformation and brokage function.
By its very nature, banking is an attempt to manage multiple and seemingly oozing needs. Bank stands ready to provide liquidity on demand to depositors through the checking account and to extend credit as well as liquidity to their borrowers through lines of credit (Kashyap, Rajan, and Stein 1999). Because of these fundamental roles, banks have always been concerned with both solvency and liquidity. Traditionally, Banks held capital as a buffer against insolvency and they held liquid assets like cash and securities to guard against unexpected withdrawals by depositors or draw downs by borrowers. Banks are germane to economic development through the financial services they provide. Their intermediation role can be said to be a catalyst for economic growth.
In recent years, risk management at banks has come under increasing scrutiny. Banks have attempted to sell sophisticated credit risk management systems that account for borrowers risk and perhaps the risk reducing benefits of diversification across borrowers in a large portfolio. Banks that manage their credit risk (buy and sell loans) hold more risky loan than banks that merely sell loans or banks that merely buy loans. For banks, credit risk typically resides in the assets in its banking books (loans and bonds held to maturity). Credit risk refers to the risk that a borrower will default on any type of debt by failing to make required payments. The risk is primarily that of the lender and includes lost principal and interest, disruption to cash flows and increased collection costs. The loss may be complete partial and can rise in a number of circumstances for example consumer may fail to make a payment due on mortgage loan, credit card, or other loan. Traditionally, the five c‟s representing the borrowers characters, capacity, collateral and conditions have been recommended.
Credit management is the process of collecting payments from customers. This is the function within a bank or company to control credit policies that will improve revenues and reduce financial risks. Credit management is also the process for controlling and collecting payments from customers. A good credit management system will help you reduce the amount of capital tied up with debtors and minimise your exposure to bad debts. Credit management generally is usually regarded as assuring that buyers pay on time, credit costs are kept low and poor debts are managed in such a manner that payment is received without damaging the relationship with a customer. .A credit manager is a person employed by an organisation to manage the credit department and make decision concerning credit limits, acceptable level of risks and terms of payment to their customers. Credit risk is the potential loss due to failure of a borrower to meet its contractual obligation to repay a debt in accordance with the agreed terms. Credit risk management is undoubtedly among the most crucial issues in the field of financial,……..

1.2 STATEMENT OF PROBLEM
Without risk management functions, it is unlikely that the bank succeeds in achieving It‟s long term strategy. Hence the need for good credit risk management cannot be overemphasized.
Here are some problems identified with this research work:
1. The major cause of serious banking problems continues to be directly related to low credit standards for borrowers and counterparties, poor portfolio management.
2. There is no deep or thorough examination on the factors that affect the performance and competition of a bank.
3. lack of attention to changes in economic or other circumstances that can lead to deterioration in the credit standing of bank‟s counter parties

1.3 OBJECTIVES OF THE STUDY
This Study, therefore, was undertaken to:
1. Examine the credit standard for borrowers and counter parties and why portfolio management is poor in some banks.
2. Empirically examine the factors which affect performance of banks and competition in the industry.
3. Find out why credit administrators does not pay attention to the changes in the economy of the country.
1.4. RESEARCH QUESTIONS
This study seeks answer to the following questions
1. Does appropriate management of credit risk affects bank performance in Nigeria?
2. Does mitigation of risk improve bank capital adequacy?
3. What is the impact of non-performing loan on the profitability of banks in Nigeria?
1.5. HYPOTHESES.
Hypothesis 1
HO: Appropriate management of credit risk does not affect bank performance
H1: Appropriate management of credit risk greatly affects bank performance affect bank performance
Hypothesis 2
H0: Mitigation of risk does not improve

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