THE IMPACT OF ACCOUNTING INFORMATION ON BANK LENDING DECISION
There are many definition of accounting as far as different authors are concerned. Osisoma (1990:5) defined accounting as a data organized for the special purpose of decision making. Another author Reinkola: feeds that is the process of identifying measuring and communicating economic information to permit informed judgment and decision by users of information.
Isaac Regnalds et (1984:7) see accounting as a set of rules and method by which financial and economic data are collected processed and summarized into report that can be used in making decision.
Macmillian’s dictionary of Accounting, defined information as data relevant for particular decision.
Longman Dictionary contemporary English, defined it as something which gives knowledge in the form of facts.
Many writers are of the opinion that there are three basic types of accounting information.
Osisoma (1990:8) classified financial accounting information to be categorize through routione internal report which are report to management for planning and control functions non routine reports a report to management which help in formulating of major plans and policies and external report which are hemispherical financial statement that are prepared for the benefits of shareholders, creditors, potential investors and others. Bank especially union Bank use this external report in analyzing their customers credit worthiness. There are some specific functions performed by the financial manager such as:
- Making money available at right time and for right length, of time.
- Obtaining funds of the lowest cost.
Weston and Brighan (1980:9) indicates that the main function of financial manager is planning for acquiring for utilizing functions, in ways of maximize the organizations operations.
2.2 FORMS OF FINANCIAL ACCOUNTING INFORMATION
The most important information in every organization is financial accounting report. It is the end product of accounting and also one of the raw materials of effective control of cost and operation. I can also say that accounting report are tool of financial accounting information that forms the basis for decision making.
Financial accounting report was classified into two categories internal report and external report.
Internal reports are used by the managers in planning and controlling routine operation and in formulating major plans and policies.
External Report are used by shareholders government and other outside parties. It also defined company report as condensation and summarization of financial transaction of the company during the reporting period.
Generally, financial statements are inform of balance sheet, profit and loss accounts statement of sources and application of funds.
UNION BANK AS USERS OF FINANCIAL ACCOUNTING INFORMATION
Union Banks are external users of accounting information. A banker who want to loan or who is considering to loan out will be very much interested in the financial statement of the business concerned. These serves as services of financial information necessary for making some vital decision. Bankers are seldom, if very willing to make a loan unless the balance sheet and other information concerning the prospective borrowers offer a reasonable assurance that the loan can and will be rapid promptly at the maturity date. It is obvious to say that if good lending decision are to be made by union bank a true and careful study and analysis of financial accounting information should be made as this goes a long way in helping to attain set goals and objectives like growth, profitability and liquidity in the banking industry and repaid development in the economy.
Ojer (1977:12) feel that bankers should seed to get his customers account as often as possible and extract utmost information from their. It should have aim to discuss the implication of the accounts with his customers not merely from the bankers point of view, but with the objectives of getting to know the customers and his business in detail.
2.4 UNION BANKING LENDING
The most important asset held by union bank are found in loan portfolio lending is the prime earning capacity of the commercial banks. One of the cardinal principle of classical banking is to ensure the effective lending form the banking aspect, lending can be stated as the facilities which a banker offers to his customers or non customers on the ground that such facility will be returned to the banker after a specified time on payment of some charges by the customer.
Lending therefore calls for intelligent use of common sense caution, adequate and searching information about a customer’s state of affairs. It discharge the taking of a customers integrity and financial capacity for granted. This is because we live in changing world of possibilities and eventualities secondly commercial banking is not an exercise of human itarianism. It is a strict contractual business in the world of reality where all managers try to reduce risk to the nearest minimum.
In Union Bank the lending activities is performed by the managers and lending officials or analysis.
2.5 BASIC PRINCIPLES AND CANNONS OF LENDING
The most cannons of bank lending is accepting deposit from the customers who surplus funds. This fund is lent in form of loan and over drafts the costumer who needs it. As lending appears to be one of the activities of commercial banking it is necessary to examine in detail the basic principles of lending.
These include satisfying suitability and profitability. They salves as guide to commercial bank lending. The safety of any loan and advice is of great importance to the bank. This is to ensure that a loan once granted will be properly used and repaid as scheduled. This is a guide to the future. All things may not be equal and things may go wrong such that the basis and optimism established and expected do not materialize that is why a bank should lay great emphasis on this basic lending criteria which consist of characters, capacity, adequate collection and credibility. In this condition it must be emphasized that the banks are lending people money and therefore should have something in return to show suitability.
The bank should ensile and be satisfied about the stability of loan and advance even when the requirements of borrowers satisfy all safety and ask consideration. It is absolutely necessary for the banks to ensure that the purpose of the loan is not in conflict with the economic and monetary policies of the government.
In Nigeria, commercial banks lending is highly regulated and controlled by the central bank of Nigeria (CBN). This is done through the issue of annual monetary circle or credit guidelines. By this, qualitative and quantitative limits are placed on bank lending therefore the purpose of advance and it’s implication when extending credit to customers.
PROFITABILITY.
A book is not a charitable organization. The aim of any commercial bank is to maximize their profit therefore, an y loan granted attracts a specific rate of interest. Any facility that is loan and advance granted is expected to yield some profit to the bank. What determines the amount of profit is the rate charged in Nigeria today interest deregulated and generally higher than interest paid to depositors
- BANKING LENDING DECISIONS.
Lending decisions as defined by Reld E.W (1980:15) is a specific design by the management of Bank by which its lending practices are designed and controlled.
It include loan portfolio specification of amount available for lending to different classes of borrowers, maturity dates, credibility of the borrower types of loan schedule for repayment.
There are two major lending decision operation in Union Bank of Nigeria PLC. These are the explicit and implicit lending decision.
The explicit being formulated by the monetary authorities which is largely derived form circular, issued periodically by the central bank.
The implicit decision are formulated by the commercial bank themselves and mostly designed for relevant internal constraints like sectroal performance deposit bases existing exposure and risk exposure.
Read and company said that commercial banks have the lending decisions to established the direction and use of the funds form stock holders depositors and other to control the composition and size of loan portfolio and to determine the general circumstance under which it is appropriate to make the loan.
To make the loan.
However, these decision serves a number of purposes the most important is that they provide guidance for lending officers and thereby established a degree of uniformity in lending.
2.7 LENDING PROCEDURE
One of the criteria for one to obtain bank facility is for the person for the person to be a customer of the bank. In most bank especially Nigeria the very step towards successful application for bank loan of the opening of an account with them not saving account but a current account.
When a customer does this, he lacks behind a track record which the bank uses to have an idea of his financial responsibility and the ability to manage it. The initial loan application in the bank could come in form of written request oral request or detailed request, that should be in application form attached with relevant documents.
Loan should either be specific loan commitment or a formal loan that is a loan obtained. Against a previous commitment customers are given completed by the customer. The form are then processed. The customer must have been invited for discussion on the loan term of the customer is found worthy from these evaluation the loan is approved.
The customer will state the amount of loan he wants in the application form what the loan is going to be use for had the customer is intended to repay for loan when approval is given it is better to submit the application by hand because the security or guarantors backing the application form.
Loan application can be rejected even though the customer operates his account creditable and is seeking an amount well covered by security. The problem in such a case is bound to be matter of strategy of thing.
Secondly from bank point of view security have different weight because it is form the sale of these security that the bank recover the money but thirdly loan can be rejected because the bank is not convinced that the customer knows what he has in mind. The only way which a customer can convince the bank to believe him. Is by attaching a feasibility study of the intended project to be application forms. The feasibility report should embodies among others, project for cash flow likely returns form the projects a typical cash flow statement which will give estimate of inflows and out flows of cash on monthly basis. After taking into consideration loan serve long requirement at other incidental expenses.
A customer can pledge time deposit, share certificate debenture stock, surrender values of life assurance policies. These are some short term application that may not need security expect to the extent of providing viability and credibility of the purpose for which the loan is needed.
In the process of granting loan the bank met ask the following:
- How much do you want for the loan
- For how long do you want it?
- How is it going to be paid?
Normally all bank overdraft and loans are regable on demand except for the medium term loan.
2.8 ROLE OF FINANCIAL ACCOUNTING INFORMATION IN BANK LENDING DECISION
It is easy to loan out but not often so easy to recover. Bank must prepare to take some risk when lending money. However they do not want to incur bad debts. To ensure safety of funds committed there is need to collect information from financial account that would reveal a lot about the customer credit worthiness. The analysis of financial statement which are sources of financial accounting. Information is a useful tool for evoluting the viability of a business.
The two basic financial statement used in analysis are the Balance Sheet and Income statement. These two statements present two different pictures of the position of a business. The Balance sheet indicates the financial status of a business and the current operation results.
The nature of the analysis differs in relation to the needs of the analyst and it help to monitor the performance of the business. The aboe shows that Union Banks need financial accounting information to reach initial loan decision and to monitor the progress of their advances. These information helps bank to determine whether the customer will be able to meet the interest payment accruing during the period of the loan and to repay the capital sum at the end of the period.
The bank ensure that appropriate date is provided since failure or refusal will result the rejection of the request for finance. The banker will require special purpose reports, which would enable him appraise the future prospect of the customer including the ability to make the necessary interest and loan repayment. These reports will consist of an up0 to date statement of the customer financial position and forecast should coinales with the expected devotion of loan so that the bankers can make a rational assessment of the customers ability to meet the conditions for repayment.
Mosrah et al (1978:18) said that the first step in financial analysis is obtain as much factual information as possible. They contended that the major sources of corporate financial information are published reports like annual general statement and the accompanying note supplementary financial information and comments by management on the year is operation and prospects for futures.
As financial analysis is a process of selection, relation and evaluation, the first step is to select from the total information available about a business the information relevant to the decision under consideration. The second step are to arrange the information in a way that will bring out signification relationship.
The final step is to study these relationships and interest the outcomes. It is essentially note that financial is not primarily a matter of making computation.
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