The Effect Of Bad And Doubtful Debt On The Liquidity Of An Organization

The Effect Of Bad And Doubtful Debt On The Liquidity Of An Organization

The word “bad and doubtful debt†is used in the banking to refer to the portion of loans, advances and over drafts granted by bank which has proved difficult and seemingly impossible to recover in full from the respective committed customer. Such debt do not emerge instantaneously but rather are a gradual result of “lending errors†by lending officers and subsequent improper administrative handling of the facilities among other factors.

[widget id=”related-posts-by-taxonomy-2″]

The commercial banks are in the services industry. They are aimed at providing financial assistance to individuals and corporate bodies without underplaying the importance of profitability to the shareholders and deposits alike. A bank is therefore expected to ensure that sufficient liquidity of funds meet cash demand by its customer at short notices. This in addition to maintaining sufficient profitability hold through proper and efficient management.
A business has two basic source of capital:

Owner’s Capital: That is equity contributed by shareholders (including retained earnings) which is essentially used for he purchase of the initial assets of the business and its initial working capital.
Borrowed Funds: Which refers to external fund required and injected into the business by management subject to the articles and memoranda of Association. It is here that the commercial bank play an important role by granting long and short term loans and advances. It is in the process of granting those loans facilities that error occurs. Losses resulting from such errors will be the focus of this research.

Through the proper use of interest rate banks are able to attract depositors of various terms. Such depositors include, short term deposits ranging from 7 days to 6 months, long term, deposits current account. This is regarded as special borrowing by the bank since the bank of any purpose(s) could use any deposits without recourse to the depositors, and such depositors are only payable on demand or at any agreed date. It is these depositors, which provide the basis for banks lending to various customers. This is subject of the reserve ratio set by the central bank of Nigeria (CBN). The interest rates charged on loans by banks are usually higher than the rates they pay on deposit and are determined by the federal government. It was the interest rates chargeable and payable on loans facilities and deposits respectively.
The numbers of volume of good loan and advance seriously determine the degree of profitable commercial banks. Consequently, profitable commercial banks have to limit or eliminate the number of bad account in their lending portfolio. It is necessary to note that all funds tied up in bad and doubtful account are not accountable for further onward lending.
Also, with the advent of CBN prudential guidelines, non performing loans and advances who interest have been outstanding on these account are not reflected in the earnings of commercial bank, but charged to interest suspense and charged income when realized. Bad debt regarded as negative contributors to the profitability of commercial banks.
So banks should be expected to be the most relevant to provide for bad debts unless it is unavoidable.
Another dimension however is that critics are quick in pointing out that the high bad or doubtful debts figures in final accounts of commercial banks could be realistic. It is also alleged that banks could use such provision to evade tax. It also demonstrate the incompetence of the lending bankers in the management of loan able funds on the other hand, it is held that this provisions shows the level of convenience by the bank officer system. This views was expressed by the president of Association of Shareholders of Wema Bank, Mr. Akintunde Asaw. He alleged that some of the official of Wema Bank acted outside the specified authority and scheduled by irregularly approving loans. He therefore gave the bank up to 1990 to recover all irregular loans while assuring that those involved “regular disbursement†of shareholders would be punished.
The final accounts is of most commercial banks in Nigeria have provisions for bad and doubtful debts of various figures while the funds of the level of such provisions id decreasing in the case of some commercial banks for other, it is increasing.
This reflected in the comments made by the Chairman of the Board Directors of such commercial banks. In the case of the Bank of the North provision for bad and doubtful debts were N6.8 million (1993), N6.7 million (1994) and N213.5 million (1995). This shows an increasing trend from 1992 to 1995, which may not be connected with the allegation of the President of shareholders of Wema Bank.
The view of the provisions for bad and doubtful debts by banks in the country has necessitated on in-depth study into the fundamental factors for such losses by the bank. Consequently, the fundamental objective of this study is to identify the causes of bad and doubtful debts and controls been employed by banks to minimize or eliminate such debts. In so doing, we will be able to establish the efficiency of the control otherwise in the banks lending system. Consequently, appropriate recommendations could be made for improvement.

Leave a Reply

Your email address will not be published. Required fields are marked *