Bad Debts Management And Advances recovery Techniques
Bankers stock in trade is money that savings customers deposit with a view to earn interest. The banker on the other hand lends this fund to business customers in forms of loans and advances.
It is the profit out of this lending that is the pillar upon which the banks survive, provided it has the ability to recover such credit facilities granted.
A debt is credited when a customer is granted a loan or advances. The customer remains debtor to the bank until the plus interest and other incidental charges have been repaid in full. Naturally, any lender will be happy if any loan granted by him is repaid back within a stipulated period. In Nigeria financial institutions experience has shown that in the past, customers do not repay their loan recently with the introduction of prudential guidelines by the Central Bank Nigeria in collaboration the Nigerian deposit insurance corporation (NDIC), bankers now view any default with seriousness and go all length to recover the credit granted. In short, the attitude of banks debtors toward honouring their pledge have been the bane of the problems of banks.
Most customers who default see credit facilities granted too them as national cake due to sharp means in which the loans were obtained. Experience has shown that any borrower of bank money is prepared to carryout instructions or even execute whatever, documents that may be required of him before the draw down of the loan facilities, but as soon as the loan is granted without proper execution of documents it becomes a herculean task for them to comply with whatever conditions precedent disbursement of the credit facility but which were not strictly adhere to.
Finally, such customers becomes evasive while their accounts becomes dormant, thereby creating doubtful and bad debts. When a loan cannot be repaid in accordance with the terms and conditions of the original agreement, it becomes problematic and consequently becomes a bad debt. Based on the above conditions we are going to look at what make up bad debt, the causes and dangers signals on bad and doubtful debts and loans advances recovery.
What Makes Up Bad Debts
A bank lends money to his customer with intension of recovering the money as at when due. A debt is classified as being bad debt when the lender has exhausted all the possible means of recovery after debt has become due for repayment and is not repaid. The repayment of the described debt doesn’t have the tag of a delayed debts, it also becomes doubtful and categorised as indeed an uncertain. As mentioned in the introductory paragraph, the Central bank of Nigeria introduced prudential guidelines in November 1990, where it used a better language of performing and lost instead of using bad.
The aim of prudential guideline by Central bank of Nigeria was with a view of making provision for bad and problematic advances when it becomes very outstanding in their books of loss account before making profit declaration. This now helps the bank to declare pure profit and not unrealistic profit which leads to bank distresses in the mid nineties.
According to the central bank of Nigeria, this provision is determined from a specific assessment of each customer’s account and relates to those accounts regarded as non-performing. A general provision of 1% is made in all risk assets, which have not been specifically provided for. Bad debts are finally written off when the extent of the loan has been determined. According to the policy in the prudential guidelines, an account is said to be performing when payments for both principal and interest are up to date in accordance with the terms and agreement of the facility.
On the other hand, a loan and advances facilities is classified as non-performing when the principal and interest is due and remains unpaid for ninety days or more. Also a loan facility is said to be lost if the principal and /or interest is unpaid for 360 days or more and is not secured with any collateral.