Strategies for Credit Supervision and Causes of Bank Distress

Abstract

Credit supervision, evaluation, monitoring and control is a crucial duty of all banks today, as the absence of these can lead to bankruptcy if not checked and given the due attention that it deserves. The banking system is mainly a function of savings and investments. One of the functions of Banks’ (especially commercial banks; be it regional, national or international) is to provide savings and lending services to its numerous customers spread all over the world. What Banks do is that they collect monies from their customers in the form of savings and other deposits and then give it other customers who want to use it to meet pressing needs as at the time they collected it. These individuals are however expected to repay the amount borrowed with interest; where the bulk of the banks’ income is grossly generated. This article reviews the strategies for effective credit supervision and considers it as a very important duty which lies heavily on the credit officer to draw out schemes of plan for effective management of credit facility from the point of approval to the point of liquidation. The paper reviews the significance of credit/lending to the banking business. It also reviews issues relating to credit supervision and its relevance to the business of banking; where it talks about regulatory logistics for credit evaluation, monitoring and control; compliance with legal and statutory frameworks of all regulatory authorities in respect of credit policies; use of working capital and other assets and liabilities figures; supervision through loan disbursement condition precedent and condition subsequent; etc. The article reviews matters concerning the risk of lending and securitization; that is the fear for debtors/lenders to default in the payment of loan facility and the accrued interest; and also absence of adequate collateral or guarantor capable of covering the amount borrowed in the case of bankruptcy or default. The paper has also, among other things, worked on issues relating to the causes of financial distress in banks, which it said to be attributable to ill credit schemes of most banks. Flawed facility control and evaluation strategies, as well as the effects of credit crunch (economic meltdown). The severity of bad debts problems was traced to moral hazards on bank owners and the adverse selection of bank borrowers, with many banks pursuing imprudent lending strategies, in some cases involving insider lending. The paper adopts a descriptive method analysis to reach a conclusion that best proffer solutions to the challenge that has bedeviled the banking sector for decades now. Despite the efforts of the previous CBN governor (Charles Soludo) to revitalize the banking sector, the problem keeps showcasing, as most banks are found to be involved in window dressing rather than presenting the true financial position of the banks as at the time of their reporting.