Download complete project materials on The Role Of Loan Portfolio Management In Enhancing Profitability In Commercial Banks from chapter one to five
TABLE OF CONTENT
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Title Page
Declaration
Approval Page/Certification
Dedication
Acknowledgement
Table of Contents
Abstract
CHAPTER ONE: INTRODUCTION.
1.1 Background to the Study
1.2 Statement of the Problem
1.3 Objectives of the Study.
1.4 Research Questions.
1.5 Research Hypothesis
1.6 Significance of the study
1.7 Scope of the study
1.8 Limitation of the Study
1.9 Definition of Key Terms
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction
2.2 Historical Development of Banking in Nigeria
2.2.1 Brief Profile of first Bank Plc
2.3 Development of Commercial Bank in Nigeria
2.3.1 The Role of Commercial Banks in Nigeria
2.4 Services Rendered By Commercial Bank In Nigeria..
2.5 Bank Portfolio
2.6 Loan Portfolio and its Management in Commercial Banks.
2.7 Canons of lending
2.8 Procedures for Granting Loans and Advance
2.8.1 Approvals of Loans
2.8.2 Related Considerations in Granting Loans
2.8.3 Loan Disbursement
2.8.5 Loan Monitory and Supervision
2.9 Summary
CHAPTER THREE:
RESEARCH METHODOLOGY
3.1 Introduction
3.2 Population and Sample Size
3.3 Sources and method of data collection
3.4 Techniques of data analysis
3.5 Justification for Method and Techniques Used
3.6 Summary
CHAPTER FOUR:
DATA PRESENTATION, ANALYSIS AND INTERPRETATION
4.1 Introduction
4.2 Data Presentation and Analysis
4.3 Test of Hypothesis
4.4 Summary of Findings
CHAPTER FIVE:
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary
5.2 Conclusion
5.3 Suggestion for further studies
5.4 Recommendations
Bibliography
Appendix
Abstract
This study focuses on the role of loan Portfolio Management in enhancing profitability in commercial banks. Relevant data were collected from financial report. The data was obtained from a survey of First Bank Plc in Nigeria. The data collected were analyzed by the use of regression. Some performance indicators such as profit after tax, earnings per share and dividend were used to measure the performance of the First Bank Plc in Nigeria.
The analyses reveal that loan is a predominate source of revenue, and effective management of loan portfolio and credit function is fundamental to banks safety and soundness. Although these activities continue to be mainstays of loan portfolio management, analysis of past credit problems, such as those associated with the banking sector, has made it clear that portfolio managers should do more.
There is also the failure of bank management to establish sound lending policies and adequate credit administration procedure. Banks, as custodians of depositors’ fund therefore, are obliged to exercise due care and prudence on their lending operations.
While the test reveals that there is no significant relationship between effective loan management and the performance of banks. The work concludes that loan management has not affected the performance of Nigerian banks. Finally the research recommend that effective management of loan portfolio and credit risk be strictly adhered to, and critical evaluation must be made and they should be continuously checked for proper management.
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CHAPTER ONE
INTRODUCTION
Background to the Study
Lending is the principal business activity for most commercial banks. The loan portfolio is typically the largest asset and the predominate source of revenue. As such, it is one of the greatest sources of risk to a bank’s safety and soundness. Whether due to lax credit standards, poor portfolio risk management, or weakness in the economy, loan portfolio problems have historically been the major cause of bank losses and failures.
Effective management of the loan portfolio and the credit function is fundamental to a bank’s safety and soundness. Loan portfolio management (LPM) is the process by which risks that are inherent in the credit process are managed and controlled. Because review of the LPM process is so important, it is a primary supervisory activity.
Assessing LPM involves evaluating the steps bank management takes to identify and control risk throughout the credit process. The assessment focuses on what management does to identify issues before they become problems. This project, written for the benefit of both examiners and bankers, discusses the elements of an effective LPM process. It emphasizes that the identification and management of risk among groups of loans may be at least as important as the risk inherent in individual loans.
For decades, good loan portfolio managers have concentrated most of their effort on prudently approving loans and carefully monitoring loan performance. Although these activities continue to be mainstays of loan portfolio management, analysis of past credit problems, such as those associated with oil and gas lending, agricultural lending, and commercial real estate lending in the 1980s, has made it clear that portfolio managers should do more.
Traditional practices rely too much on trailing indicators of credit quality such as delinquency, nonaccrual, and risk rating trends. Banks have found that these indicators do not provide sufficient lead time for corrective action when there is a systemic increase in risk.
Effective loan portfolio management begins with oversight of the risk in individual loans. Prudent risk selection is vital to maintaining favorable loan quality. Therefore, the historical emphasis on controlling the quality of individual loan approvals and managing the performance of loans continues to be essential. But better technology and information systems have opened the door to better management methods. A portfolio manager can now obtain early indications of increasing risk by taking a more comprehensive view of the loan portfolio.
To manage their portfolios, bankers must understand not only the risk posed by each credit but also how the risks of individual loans and portfolios are interrelated. These interrelationships can multiply risk many times beyond what it would be if the risks were not related. Until recently, few banks used modern portfolio management concepts to control credit risk. Now, many banks view the loan portfolio in its segments and as a whole and consider the relationships among portfolio segments as well as among loans. These practices provide management with a more complete picture of the bank’s credit risk profile and with more tools to analyze and control the risk.
In 1997, the OCC’s Advisory Letter 97-3 encouraged banks to view risk management in terms of the entire loan portfolio. This letter identified nine elements that should be part of a loan portfolio management process. These elements complement such other fundamental credit risk management principles as sound underwriting, comprehensive financial analysis, adequate appraisal techniques and loan documentation practices, and sound internal controls. The nine elements are:
Assessment of the credit culture,
Portfolio objectives and risk tolerance limits,
Management information systems,
Portfolio segmentation and risk diversification objectives,
Analysis of loans originated by other lenders,
Aggregate policy and underwriting exception systems,
Stress testing portfolios,
Independent and effective control functions,
Analysis of portfolio risk/reward tradeoffs.
Each of these elements is important to effective portfolio management. To a greater or lesser degree, each indicates the importance of the interrelationships among loans within the portfolio. Their focus is not on individual transactions, but on a group of similar transactions and on verifying the integrity of the process. Each practice, by itself, adds a dimension to loan portfolio management, but their value is amplified when they are used together; moreover, the absence of any one of these elements will diminish the effectiveness of the others. These elements are described in greater detail in chapter two and throughout the introductory section of this project.
All Banks need to have basic loan portfolio management principles in place in some form. However, the need to formalize the various elements discussed in this project, and the sophistication of the process, will depend on the size of the bank, the complexity of its portfolio, and the types of credit risks it has assumed. For example, a community bank may be able to implement these principles in a less formal, less structured manner than a large bank and still have an effective loan portfolio management process. But even if the process is less formal, the risks to the loan portfolio discussed in this project should be addressed by all banks.
The researcher assigned LPM is responsible for determining whether the bank has an effective loan portfolio management process. This includes determining whether the risks associated with the bank’s lending activities are accurately identified and appropriately communicated to senior management and the board of directors, and, when necessary, whether appropriate corrective action is taken.
Banking activities consists of functions that vary in performances and risk. This study examined how the loans are being granted by the management and measures involved in collecting or retrieving the said granted loans. The opinion of leading financial experts on the topic under the study were enumerated and analyzed in line with the stated objective of the study.
Loan can be defined as the means by which money or funds are given out to individuals to carryout transactions. The person concerned promise to pay back the loan at a later date. Every economy is made up of two major units that is the surplus unit and deficit units. The surplus units are those that have excess current income over current opening. The deficit units are those with more current spending either for consumption or investment than current income. The surplus units are therefore in a position to surrender their surplus resources to other units for a price or returns. System increases both the standard of living and productive capacity of the people. The efficient flows of these resources are dominated by the commercial banks.
For an intermediation to be successfully carried out, the role of loan portfolio management in enhancing profitability is important it is by providing credit that would otherwise remain idle or unproductive. Such idle funds are mobilize and directed to productive sector of the economy for investment in capital formation. In Nigeria, mobilization of funds is not encouraging due to all ill- organized banking system.
To properly administer the loan portfolio, the bank should clearly define the roles and responsibilities of management. Typically, one person or group is responsible and authorized to take the steps necessary to assure that risk in the portfolio stays within acceptable bounds. Since this goal can be accomplished by a variety of structures, the OCC does not favor any particular one S the best system is the one that meets the bank’s needs.
The development of a robust financial system is crucial for economic growth and development. The banking sector is an important and dominant part of the financial system for many countries especially development countries.
Banks have and will continue to play a key role in the financial systems worldwide. Banks have the special natures of being financial intermeddles channels for monetary policy and also concurrently extend credit and administer payment system.
They are key actors in causing and adverting financial and economic losses. However, their power to fuel economic growth and development will depend on the strength, reliability and stability of the system. One cannot over emphasis the need for a workable, sound and realizable banking system and that why the banking industry is one of the most regulated sectors in any economy.
Loan portfolio objectives establish specific, measurable goals for the portfolio. They are an outgrowth of the credit culture and risk profile. The board of directors must ensure that loans are made with the following three basic objectives in mind:
To grant loans on a sound and collectible basis.
To invest the bank’s funds profitably for the benefit of shareholders and the protection of depositors.
To serve the legitimate credit needs of their communities
In addition, one way of measuring the effectiveness of and efficient performance of any commercial bank is the extent to which customers make prompt repayment of loans granted to them. Though, there are natural and economic calamites that could frustrate any well laid down plan, bankers must avoid all avoidable
1.2 Statement of the Problem
The intermediation role of the deposit money banks places them in a position of trustees, of the banking of the widely dispersed economics units as well determination of the shape of the economy. Ideally, techniques employed in allocating savings should provide lending such that funds will be allocated only to full repayment is very high.
Credit that ease to flow through the economy as measured by its liability to meet the purpose terms and conditions under which it is created represents a clog in the wheel of economic progress. In addition, the leading activities of commercial banks constitute the dominate activity yielding income to enable them earn enough profits and provides adequate claimants.
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