Doubtful Debts And Their Causes | Credit Factors
There are many factors that causes bad and doubtful debts which includes the factors that we are going to be discussing on this post. These factors can be regarded as a major determinant of credit performance, below are the factors;
Lack Of Credit Information As A Cause Of Doubtful Debts
Lending decision that are based on money or falsified credit information would eventually create bad debts in the future. Good credit information includes balance sheet and management accounts of customers, cash flow projection, sales turnover, previous loan repayment records, and references on opening of account, personality involved.
These sources of information are only a guide for your decision but actually player is the character and integrity of the borrower.
Poor Credit Analysis Of Doubtful Debts
The poor evaluation and assessment of all the factors that could assist the advances officers are a crucial factor in the analysis of the causes of bad debts. Most bad debts are as a result of poor credit analysis decision by the credit officer who may have a personal interest in a particular business.
Poor Credit Monitoring And Supervision
Credit monitoring and supervision should be the watchword of a prudent credit officer. Personal visits to the customer’s business to see that the amount advanced is used for the purpose in which it was advanced. In Nigeria context, particularly before the advent of distresses in banks, credit officers may not even know his customers business premises.
It is common knowledge that most bankers are only interested to lend, it may be with a view to enriching themselves, while at the end of the day, they leave out the monitoring and supervision of the business. Sometimes, loans granted may not be enough, and it is only through monitoring that this could be found out, and the officer in charge might be able to recommend or otherwise the need for an additional credit facility.
Bad Economic Condition (Recession)
This is also a major cause of doubtful debts, many corporate organisations have folded because of economic conditions. The high inflation rate and unstable exchange rate have helped to pull down economic activities particularly the unstable exchange rate. The unstable supply of power by national electric power authority (NEPA) has made it difficult doe manufacturers to operate at optimal level. The liberalization and deregulation of banks in the nineties have brought sharp practices ending in distresses of banks which in order words tied in people’s money.
The attendant implications of this is that many companies are finding it difficult to operate profitably as they continue to struggle with reduced sales at higher costs. The productive environment not finding it easy because of government policies and regulations.
Excessive Lending On Security Values
Banks lends money to customers who have collateral security. In most cases, the amount lent is usually greater than the value of the landed property. In most cases, estate valuers inflate the value of the property thereby putting the banks at a tight corner when giving out credits. Failure to maintain a reasonable margin on stock and shares, reliance on poor guarantees on which status reports are not constantly rechecked and lack of appreciation of the drop in security values. All these deficiencies could be avoided to some extent by regular checking and inspection.
Bad Doubtful Debts Management (Nigerian Factor)
One of the greatest problems facing Nigerian banks is bad management. With the deregulation of banking industry, many banks came on board. People with or without accounting o banking education were managing directors and the results were bank failures here and there. Interferences was another great problem facing the banks in Nigeria.
As far as you know the chairman board of directors, he could approve an unprofitable business venture for credit facility, and from day one, the facility is already bad. There are many cases where approvals are given for non-existence companies and location of business, yet approvals are given in paper by the bad management.
Over Reliance On Trade Customers
This can as well be considered as a cause of doubtful debts. In most cases where approvals are given, banks do not carry out inquiries about the trader who may be knighting, that is borrowing from bank A to swell his Bank B account and at the same time buying goods on credit from his suppliers. If appropriate measures are not taken, lending will be carried out on the premise that the account is well operated.
Other forms or causes of bad debts includes over trading, poor management on the part of the borrower (customer), sharp practices on the part of the bank staff who want to get rich quicker by defrauding his employer.