Professional Documents
Culture Documents
Lending is one of the main activities of commercial banks and other financial
institutions in India. This is evident by the size of loans that form banks’ assets
and the annual substantial increase in the amount of credit granted to borrowers
in the country. Loan portfolio is naturally the largest asset and the largest source
of income for banks (Babalola, 2012 and Jahn, 2012). The Commercial Banks
mostly grant credit on short-term basis except in few occasions where they lend
on medium and long-term basis provided it will not hamper the liquidity of
the bank. Commercial banks loans must be given with collaterals or securities
to back up the loans in case of a default. Often, there are policies that guide
commercial bank lending which must be adhered to before loans are granted.
The level of interest rate has a very great role to play in commercial bank lend-
ing practices (Adekanyi, 1983; Aburine, 2008). According to Ugoani (2013),
banking activities have continued to be of immense support to the growth of
the economy, especially through the credit facilities they offer to various sectors.
These credits are expected to improve investments and in turn impact positively
on economic growth. The various sectors of bank lending to the India economy
as pointed out by the Central Bank of India (2013), include, Production sector,
General commerce sector, Services sector, and Others. Generally, banks render
a number of services to the economy, foremost of which is the provision of fi-
nance which has been described as a lubricant for economic growth (Greuning
and Brajovic. 2004). A critical factor in this growth process is adequate sup-
ply of credit to the various sectors of the economy to carry on their activities.
The role of the banking system in this regard is that of financial intermediation
which entails moving funds from the surplus unit to deficit unit of the economy,
to facilitate trade and capital formation. Lending which may be on short term,
medium or long term basis is one of the services that commercial banks usually
render to their customers. In other words, banks do grant loans; overdrafts and
advances to individuals, business organizations as well as government in order
to enable them embark on developmental activities as a means of aiding their
growth in particular or contributing towards the economic development of a
country in general. The customer may be in need of the fund for the various
purposes which may spread through new capital venture bridging loan, farming,
contract jobs, and business expansion among others (Nwanyanwu, 2010).Credit
Management can be viewed as written guidelines that set the terms and con-
ditions for supplying goods on credit, customer qualification criteria, procedure
for making collections, and steps to be taken in case of customer delinquency.
Ugoani (2013) submitted that credit is a marketing tool for expanding sales.
Credit sales to customers however, must be well monitored because regardless
of an organizations share of the market and demand for its products, if there are
no measures put in place to regulate sales made to customers on credit, there
could be problems especially those related to profitability. A company rich in
fixed assets may still be short of cash and therefore have difficulty in meeting
current obligations. The profitability of a business firm is usually of particular
interest to its short-term creditors since the liquidity of the firm measures its
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ability to pay those creditors (Felix and Claudine, 2008).
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overall success and growth of their organizations. As the largest component of a
bank’s total assets, there is the need for its effective and efficient management.
Besides, loans and advances are also the most profitable and risky assets, hence
the need for proper management for maximum profitability while minimizing
the risk element. The study is also significant to the shareholders, both existing
and potential ones. This springs from the fact that the proper management
of this resource will enhance reasonable returns on shareholders’ investment.
As pointed out earlier, banks performance of intermediation activity involves
accepting deposits from surplus unit of the economy and channeling it to the
deficit units. This role ensures proper allocation of scarce financial resources to
the various sectors of the economy thereby enhancing the overall growth and
development of the national economy. A study of this nature will draw the
attention of bank’s management to the need for proper management of loans
and advance to obviate failure and its negative consequence on profitability and
economy growth. Bank’s failure erodes depositor confidence in the financial
system, thus resulting in dearth of loanable funds to the economy. To enhance
depositor confidence in the system, there must be proper management of the
loans and advances portfolio to enhance growth of the bank. Students as well
as other researchers would find this study worthwhile. The study, therefore, is
timely, current and relevant not only for the continued visibility of the financial
system but the overall growth and development of the economy. The findings
of this study if duly and adequately incorporated by all the operators of the
banking industry and the financial system in general will enhance profitability
and efficiency in the provision of banking services in the country.
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Lending Practice: These are laid down principles which guide the lending prac-
tice of banks. These principles could be due to external or internal factors.
These principles act as a blue print to measure the effectiveness of commercial
banks lending activities.
Profitability: This is the ability of a business to earn a profit. A profit is what
is left of the revenue a business generates after it pays all expenses directly
related to the generation of the revenue, such as producing a product, and
other expenses related to the conduct of the business activities.