Nen perfoming loan in banks

Banks exist to ex ten dollar billd m anetary Intermediation services opus at the same conviction endeavor to maximize profit & sh atomic number 18 holders value. Availing ac reference to borrowers is one elbow room by which banks maximize their profit. Loans are the dominant plus & read 50-75 percent of total amount of about banks, gene roll the largest share of operating Income & represent the banks greater put on the line exposure (Mac Donald & Koch, 2006). Managing give in a tight-laced way is not yet has a positive effect on the banks performance but on borrowers firms and the country as a whole.Failure to sleep with moans, which make up the largest share of banks assets, would believably lead to the episode of last level of NP. According to MIFF (MIFF, 2009), a non perform make for is whatever contribute which please and header payments are to a greater extent than than 90 eld over payable or much than 90 eld price of interest has been refinanced. U nder the Ethiopians banking bank line directives (N.B., 2008), non acting adds are defined as Loans and Advances whose acknowledgment quality has deteriorated such that large appeal of principal and/or interest in consent with the contractual pay backment of term lends or advances in query.Theoretically, there are so umpteen reasons wherefore imparts leave out to perform. Some of this includes, depressed economic conditions, high real matter to rate, Inflation, lenient terms of belief, high credit growth & luck appetency and poor credit monitoring are among the others. Forestall (2002) categorize non playacting brings to bank precise and macro economic conditions. Accordingly, this study is focused on assessing factors that contributed for non perform contributes of Awash International Bank mainly targeting on bank specific determinants of non playacting contributes. 1. 2 Statement of the problemAn efficient and well functioning of financial sector is essen tial for the development of every economy. Loan qualities are one of the indicators of financial sectors soundness. A sound financial system among other things requires tending of low non performing contributes. In Ethiopians context. The banks In the country are involve to maintain proportionality of their non performing loans below five percent (N.B., 2008). The entropy obtained from the 2011/12 & 2012/13 annual progress report of BIB shows that the proportion of non performing loan of the bank was below the threshold for twain years.Despite the fact, the non performing loan of the bank was Increased from Birr 98 million in 201 1/12 to Birr 1 77 million in 2012/13, showing an increments of Birr 108. 9 million (104%). Similarly, the banks non performing loan ratio was increased from 1. 9% to 2. 8% during the same level. Even, this ratio was in a higher place ten percent in some branches of BIB. This fact raises the issue of what causes this non performing loan Increment. Ac cordingly, two inquiry questions were drawn to investi entrance this Issue. What does the tends of loans and NP looks like in BIB? Defaulted? What are the main causes for these thought slightnessed loans? 3 Objectives of the Study The general documental of the study is to suss out the non performing loan of BIB and to spot its causes. status by side, the study was assessed the comp some(prenominal)ing issues. Reviewed Loans & NP trends of BIB? 0 recompense which loan category, loan use & economic sectors to a greater extent defaulted. Searched the main causes of NP in BIB in general & identify those branches that were highly contributed for this NP. Assessed the credit assessment & follow up practice of other commercial banks. 0 Recommended some remedial actions to be taken to reduce these non performing loans. 1. 4. MethodologyResearch traffic pattern A sample survey was carried out to seek the characteristics of defaulted loan files and to identify belike causes for th eir loan default. Survey Population 25- Branches were pose down NP as of June 30, 2013, comprising about 74 defaulted loan files. Sampling Design Using haphazard sampling method, seventeen branches and 43 defaulted loan files were taken for this study purpose. remand 1. 1 NP Recorded Branches Profile Branches Total NP recorded branches Sampled NP Branches % GE Responded branches Total NP files Sampled NP files % city 119 829 31 21 68 outlying 148 578 432251 Total 25 176017744358Data Sources To achieve the say bearing, both special and secondary entropy were utilized. The primary data was gathered by interviewing Selected Albas Credit Directorate staffs, Compliance & Risk Management part staffs that are on supervisory position. Questionnaires were withal distributed to selected branches incurred loan default. Secondary data was utilized from various documents of BIB, mainly from Annual progress report of BIB, credit policies & procedures of the bank, NP action plan report and other colligate documents.Various make and unpublished literatures were to a fault utilized from different sources grading the musical theme. Data analytic thinking & Presentation After collection, the data was organized, analyzed & interpreted using both quantitative & qualitative descriptive analysis methods mainly tables, percentages, charts & etc. 1. 5 Scope & Limitations of the study Scope of the study The study was reviewed factors that contributed for non performing loan of BIB and it was focus on bank specific determinants of non performing loan.The spectrum of the study, therefore, includes Examinations of loans & NP of BIB by loan category & individual economic sectors. An in depth analysis of the loan file characteristics of the defaulted rowers with special reference to their likely causes for their loan default. An in depth analysis Credit analysis & follow up practice of BIB with special reference to identification of their limitations that contributed for th e banks non performing loans. Suggestions of relevant non performing loan reduction strategies based on The respondents were grumpy and usually uncooperative.Particularly, some branch managers were un entrusting to fill the questionnaire by themselves and outrank other officers to fill the questionnaire. As a result, the researcher had called phone many times to branches before getting a fulfilled questionnaire. In appendix it was difficult to obtain some of the required datas from credit directorates since some of the datas were not compiled properly and regularly. Similarly, it was difficult to get the defaulted borrowers to conduct interview with them to know their likely causes of loan default.Accordingly, the researcher was forced to see the likely causes of their loan default from the analysis of their loan files and interview conducted with staff members. Despite this limitation, the result of the research provided a meaningful basis for filling the gap and made recommend ations that privy be used by the management to improve performance of loan portfolio in BIB. 2. Literature Review 2. 1 Theoretical Review of Non- playing Loans Loans and advances are the most profitable of all the assets of a bank. These assets constitute the primary source of income by banks.As a business institution, a bank aims at making a huge profit. Since loans and advances are more profitable than any other assets, it is willing to lend as much of its funds as possible. But banks go through to be careful about the safety of such advances. In the words of Dry. Leaf, the banker has to tamper liberty with caution. If he is too liberal, he may easily impair his profits by bad debts, and if he is too timed, he may fail to obtain an adequate fork over on the funds which are confided to him for use. It is by his capacity in lending that a bank manager is Judged. A bank invites to be careful in giving loans as there is a greater risk which follows it in a position where the loa n defaults. Loan injustice or defaulted loans puts a bank in a difficult situation especially when they are in sterling(prenominal) amount. Banks gives loans with uncertainty whether they are returned or not though they may hold some security. In assessing any proposal for n advance or a loan, the banker has to satisfy himself/herself regarding the period for which the advance is required and the prospects of its repayment at the end of the period.He/she should not be carried away by the soundness of the security offered to him/her or the rate of interest. gainfulness should be given only a sound consideration. He/she should as well satisfy himself herself about the purpose for which the advance is required. He/she is expected to branch against and discourage speculative advances. As a matter of fact most bank failures may be traced to faulty policies in respect of loans and advances. From the blockage of safety and liquidity, loan and advances are poor assets. The risk mostly ensues when loans pass away non- performing.Allocating loans has always been one of the central pillars of the banking business. Traditionally this marked the start of a long term relationship with the client, which would continue at least until the maturity date of the loan. With the growth of deposits, banks are supposed to increase the lending. However, when Non-performing Loans (Naps) are high, the willingness to expand loan reduces. This relationship will be distorted under high NP condition. In any lending recess, there is inherent risk of loans existence defaulted which leads to the concept of non- performing loans.The concept of non-performing loans has been defined in performing loans are defined as defaulted loans which banks are unable to profit from. They are loans which cannot be go backed within stipulated time that is governed by the laws of a country. The criterion for identifying non performing loans also varies in Africa. Some countries use quantitative crite ria to distinguish amongst good and bad loans (e. G. , number of days of overdue schedule payments), while others rely on qualitative arms (such as the availability of information about the clients financial status, and perspectives about future(a) payments).However, the Basel II Commission emphasizes the affect to evolve toward a standardized and internal rating-based approach. Accordingly, the Basel committee puts non performing loans as loans left unpaid for a period of 90 days. Under the Ethiopians banking business directive, non-performing loans are defined as loans or advances whose credit quality has deteriorated such that full collection of principal and/or interest in accordance with the contractual payment terms of the loan or advances in question It further provides that . moans or advances with pre established repayment political platforms are nonperforming when principal and/ or interest is due and uncollected for 90 (ninety) consecutive days or more beyond the sche duled payment date or maturity. In addition to the above mentioned category of non- performing loans, the following are also considered as non- performing.Overdrafts and loans or advances that do not have re-established repayment program shall be non-performing when The debt remains outstanding for 90 (ninety) consecutive days or more beyond the scheduled payment date or maturity The debt exceeds the borrowers approved limit for 90 (ninety) consecutive days or more Interest is due and uncollected for 90 (ninety) consecutive days and more or For the overdrafts, (I) the account has been inactive for 90 (ninety) consecutive days or deposits are insufficient to cover the interest capitalized during 90 (ninety) consecutive days or (it) the account fails to show the following debit balance at least once over 360 days preceding the date of loan review 1 . 20% of approved limit or less 2. 5 % or less This is in accordance with the Basel rules. If a loan is past due 90 consecutive days, it will be regarded as non- performing.The criteria used in Ethiopians banking business to identify non- performing loan is a quantitative criteria based on the number of days passed from loan organism due. 2. 2 Classification of Loans & Advances The National bank of Ethiopia supervision of banking directives classifies loans and advances as follows. surmount loan loans and advances in this category are fully protected by the current financial and paying capacity of borrower and are not subject to criticism. In general loans and advances, which are fully secured both as to teetotal & interest by cash or cash substitutes are categorize under this category regardless of past due status or other adverse credit factor. particular(prenominal) honour Any loan or advance past due 30 days or more, but less than 90 days is classified under this category.Substandard Non performing loans or advances past due 90 days or more but less than 180 days is classified under this category. provis ionary Non classified as doubtful. Loss Non performing loans or advances past due 360 is classified as loss. As per the directive the provision for impairment losings is determined as follows Loan Category Pass loan Mention Extent of provision required 1% of outstanding loan balances Special 3% of outstanding loan balances Substandard 20% of the net loan balance Doubtful balance Loss Non-performing Loans 65% of the net loan 100% of net loan balance 2. 3 Causes of Default mart-gardening is not a new dimension in the arena of investment. earlier in the present economic structure, it is an established culture.The redundancy of unusual happening becomes so frequent that it seems people prefer to be declared as defaulters. Basically, the non- performing loans are a result of the compromise of the objectivity of credit appraisal and assessment. The problem is aggravated by the imperfectness in the accounting, revelation and grant of additional loans. In the assessment of the status o f current loans, the borrowers credit chargeiness and the market value of substantiative are not taken into account thereby rendering it difficult to spot bad loans. The causes for loan default vary in different countries. It extends from borrowers specific act to banks weak regulatory mechanism in advancing loans and monitoring procedures.Generally, in develop and underdeveloped countries, the reasons for default have a multi dimensional aspect. Various researchers have concluded various reasons for loan default. A. Reduced Attention to Borrowers Few of the loan defaults that make trouble for banks can be blamed on trim concern to borrowers. Borrowers give go attention to the loans that they borrowed when they have the perception that better attention is given to them. Lending officers of institutions should try to keep up with their loans, visit the borrowers premises at least once a year or up to a half a dozen times a year on larger loans. Banks rarely lose money wholly b ecause the initial ratiocination to lend was wrong.Even where there are greater risks that the banks recognize, they only cause a loss after giving a pattern sign. More banks lose money because they do not monitor their borrowers property, and fail to recognize warning signs early enough. When banks fail to give due attention to the borrowers and what they are doing with the money, then they will fail to see the risk of loss. The objective of supervising a loan is to verify, first, whether the basis on which the lending decision was taken continues to hold good. And second whether the loan funds are existence properly utilized for the purpose they were granted. . Macroeconomic In perceptual constancy Macroeconomic stableness and banking soundness are inexorably linked.Both economic theory and empirical essay strongly indicate that unstableness in the macro economy is associated with instability in banking and financial markets and instability in these sectors is associated with instability in the macro economy. Most problems of poor loan quality faced by banks were heighten by macroeconomic rate also makes loan appraisal more difficult for the bank, because the viability of potential borrowers depends upon unpredictable development in the overall rate of inflation, its individual components, exchange rates and interest rates. Moreover, asset prices are also likely to be highly volatile under such conditions. Hence, the future real value of loan security is also very uncertain.Banks do poorly both when product and asset price inflation zip unexpectedly and when inflation decelerates unexpectedly, unemployment increases, and/or aggregate output and income decline unexpectedly. unheralded accelerations in inflation adversely affect banks that, on average, lend prolonged term at fixed-rates than they borrow because nominal interest rates will rise more than expected. This will increase their cost of deposits more than their revenues from loans. Decelerati ons in inflation and, in particular, bursting of asset prices harm banks because the value of their asset collateral is likely to decline below the value of the associated loans and fuel defaults and losses.Indeed, probably the greatest threat to banking stability in almost all countries is increasing asset price. C. Unsound Assessment Mechanism and Weak Risk Consciousness Risk, and the ways, in which it can be identified, quantified and minimized, is key concerns for a banks management and its auditors when they are engendering the need to provide for bad and doubtful loans. No loan is entirely without risk. every(prenominal) loan, no matter how well it is secured, and no matter who is the borrower, has the potential to experience loss for the lender. It is the degree of risk to which a loan is susceptible and the chance of loss that vary these should normally be reflected in the interest brim and other terms set at the inception of the loan.A bank, in considering whether to le nd or not, takes into account the quality of a borrower which is reflected in, inter alai, its past and intercommunicate profit reference, the strength of its balance sheet (for example, capital and liquidity) the nature of and market for its product, economic and political conditions in the country in which it is based, the quality and stability of its management and its general reputation and standing. It is important for the bank to know the purpose of the loan, to assess its validity and to determine how the funds required for the payment of interest and the repayment of capital will be regenerated. D. Lack of Strict penetration policies and no active exit Under the influence of idea of prosecute market share excessively, banks do not establish detailed and uncompromising market admittance policies, which undermine the first risk to prevent gate and weaken the orientation effect of admittance policies to market.During pre-loan investigation, some relationship managers put lit tle emphasis on authenticity and integrally review on related materials. They havent clarified the true intended usage of the loan (especially when extending short-termed credit) and the review is too optimistic, which does not analyze the potential influence of changes in related factors. There is also no deep review on the market, no enough understanding on enterprises operation management situation, no horrors risk revaluation inaccurate assessment, the risk of loans is not fully covered and the risk on group customers and affiliated enterprises are not identified effectively. The factors above damage the loans at the early stage. 2. Debt Recovery Processes interest comprises a banks principal source of revenue, and therefore, of profit. Accordingly, from a banks perspective it is essential that its borrowers keep their contractual commitments and repay interest and capital as scheduled. Defaults are inevitable, but when they occur a bank should take appropriate remedial action, or ailing that, recover the outstanding interest and capital promptly. Ethiopians Banks adopt different ways of regain non- performing loans. These methods are one or the combination of the following shutdown This engages both the lender and the borrower in negotiation to settle through collection of cash.Reschedule/Renewal this method is used whenever a bank believes that the Naps can be regulated in favorable terms and conditions through negotiation (term loans) and renewals (overdrafts). This is not without limitation. National Bank Directive No. SUB/43/2008 states a bank shall not reschedule restructure or negotiate worth or culture medium term loan to a borrower for more than triplet periods. Before rescheduling, restructuring or renegotiating a short or a medium term loan, a bank shall collect in cash full amount of interest thereof and the following principal amounts a. A stripped of 25% of outstanding principal balance in case of rescheduling, restructuring or renegot iating for the second time.