The Effect Of Interest Rate On Loan Recovery Of Deposit Money Bank

The Effect Of Interest Rate On Loan Recovery Of Deposit Money Bank

Chapter One

Preface

Background Of Study

Greater elevation have been said to be associated with banking assiduity in Nigeria because of the part it plays in her profitable terrain. The banking assiduity plays a great influence and in the provision of credit installations in Nigeria. still the tendency to dodge fiscal losses due to failure to repay loans or credit installations by borrowers which is regarded as credit pitfalls are most frequently faced by banking institutions in the fiscal sector( Muhammad & Shahid, 2012).

The bank’s credit function enables investor’s exploits gambles that are considered profitable( Kargi, 2011). This function still, exposes the banks to the threat of credit dereliction. Credit threat as defined in 2001 by the Banking Supervision of the Basel Committee as the possibility of an outstanding credit going absolutely or incompletely lost due to dereliction effect( credit threat). dereliction effect or credit threat is assumed an internal dimension factor of the performance of banks. The advanced the position of bank’s exposure to credit threat, the advanced the possibility of the bank to likely experience fiscal extremity and so on. Credit threat is the most redoubtable amongst the multitudinous pitfalls faced by banks and the profitability of the banks is largely affected since a lesser aspect of banks ’ income accrues from granting credit installations from which interest is generated. still, credit threat is set up to be linked with interest rate threat by inferring that interest rate proliferation enhances loan dereliction possibilities.

Interest rate threat and credit threat are related naturally to one another and not independently( Drehman, Sorensen & Stringa, 2008). According to Ahmad and Ariff( 2007), the credit portfolio with lesser non- performing means limits the banks ’ capability in achieving its stated objects. thus, loans that arenon-performing are expressed as the chance of loan values which has not been service for 90 days and over. Consequence upon the huge rate of non- performing loans, credit threat operation practices is largely emphasized by Basel II Accord Working in tune with the recommendations of the Accord is a sure approach to handling the threat of credit and generally the improvement of bank performance. Through the effective operation of the exposure of credit threat by banks, they end up easing the viability and profitability of their businesses and eventually enhancing the systemic stability and smooth allocation of capital in the frugality( Psillaki, Tsolas & Margaritis, 2010). Banks have espoused colorful strategies of recovering their plutocrat, some orthodox, some unorthodox. It has been set up that utmost borrowers are always willing to pay, but certain situation like profitable recession, affectation, political insecurity, poor investment makes them not suitable to pay. According to Ojiegbe( 2002), there are also the subsistence of bad borrowers in the banking assiduity whose primary assignment is to abandon their loan scores in utmost banks and enter into new loan contracts with another bank. This low credit standard of borrowers along with poor operation of portfolio and changes insensitivity in the profitable terrain by the bankers led to the banks witnessing risingnon-performing credit portfolio. This eventually causes numerous banks to fail and come insolvent. It’s relatively unfortunate that in malignancy the degree of carefulness, skillful, experience or tactfulness of a loan officer, utmost of the loan installations granted to borrowers occasionally go bad. The preface of the Prudential Guideline in 1990 for banks certified in Nigeria enable banks to duly classify bad and doubtful debt. These guidelines made it mandatory for certified banks to at least in a quarter, have their credit portfolios reviewed and credit classified( intonon-performing loans and performing loans) meetly( Mora, 2011). The preface of these guidelines has supported the banks to instantly identify the deterioration of loans held by banks. For a credit installation to be considered as non- performing, both the star and accrued interest is overdue for three months and more; or this interest payment must have been interest of 90 days or further may have been tallied, rolled- over or subsidized into a new credit installation( unless these installations have reclassified and the borrower have made cash payment to the effect that interest payment outstanding doesn’t exceed three months). Over the times, bank loans and advances to the Nigerian frugality has been on the increase. According to the CBN periodic report in 2007, marketable banks ’ credit to the core private sector grew by 98 per cent which has been the loftiest ever. still, this incremental trend couldn’t be sustained due to the prevailing harsh profitable situation and its goods on the business sector therefore leading to increased dereliction on loan prepayment. likewise, some bank guests misinterpret the loans and advances entered from banks as public cutlet, hence, they designedly wince down from prepayment.

Statement Of The Problem

Interest rate is a veritably important factor to consider in measuring the performance of banks in Nigeria; still the variation in interest rate tends to affect loan and advances in the bank. Increase in interest rate on loan collected could delay the recovery processes of loans by the bank. utmost borrowers might stop collecting loans from banks due to high interest rate. Secondly there have been series of exploration on loan and interest rate but not indeed a single study has been carried out the effect of interest rate on loan recovery of deposit plutocrat bank; hence a need for the study.

Aim And Objects Of The Study

The main end of the exploration work is to determine the effect of interest rate on loan recovery of deposit plutocrat bank. Other specific objects of the study are

1. to determine the relationship between interest rate and loan prepayment in first bank Nigeria plc

2. to determine the extent to which interest rate affect loan recovery of deposit plutocrat banks in Nigeria

3. to determine the causes of variations in interest rate in deposit plutocrat banks in Nigeria plc

4. to probe on the factors affecting interest rate in deposit plutocrat banks in Nigeria

Exploration Questions

The study came up with exploration questions so as to ascertain the over stated objects of the study. The exploration questions for the study are

1. What’s the relationship between interest rate and loan prepayment in first bank Nigeria plc?

2. To what extent does interest rate affect loan recovery of deposit plutocrat banks in Nigeria?

3. What are the causes of variations in interest rate in deposit plutocrat banks in Nigeria?

4. What are the factors affecting interest rate in deposit plutocrat banks in Nigeria?

Statement Of Research Hypothesis

H0 there’s no significant relationship between interest rate and loan prepayment in first bank Nigeria plc

H1 there’s significant relationship between interest rate and loan prepayment in first bank Nigeria plc

Significance Of Study

The study on the effect of interest rate on loan recovery of deposit plutocrat bank will be of immense benefit to first bank Nigeria plc in the sense that the study will educate the banking sector on colorful styles of recovering loan from debtors; the study will also determine the relationship between interest rate and loan prepayment in first bank Nigeria plc. The study will serve as a depository of information to other experimenters that ask to carry out analogous exploration on the below content. Eventually the study will contribute to the body of the being literature on interest rate and loan recovery of deposit plutocrat bank

Compass Of The Study

The study on the effect of interest rate on loan recovery of deposit plutocrat bank will concentrate on first bank Nigeria plc from the time 2000- 2017.

Limitation Of Study

Fiscal Constraint-inadequate fund tends to stymie the effectiveness of the experimenter in sourcing for the applicable accoutrements , literature or information and in the process of data collection( internet, questionnaire and interview).

Time constraint– The experimenter will contemporaneously engage in this study with other academic work. This accordingly will cut down on the time devoted for the exploration work.