INTRODUCTION

1.0 Introduction

Banks may either decide to eat well or sleep well. Eating well implies that they grant out more loans to their customers to generate more profits through interest rates. Giving out loans is the most profitable as well as the riskiest activity a bank carries out and so certain measures are been put in place to minimize or eliminate these risks but nevertheless, these loans still go delinquent which makes lending difficult. Sleeping well on the other hand means keeping money in the bank to meet up with customer’s withdrawal demands at call and honoring their cheques at maturity.

This has always been a bone of contest between management and shareholders as management will always want to maximize profits by granting loans while management will decide to sleep well and remain with the little dividend she receives and not entering into the risk of lending.

1.1 Background of Study

Credit/lending is the most profitable and income-generating activity/sector in every commercial bank in particular and banking system in general. Most of the commercial banks that saw the light in the early nineteen centuries are no more today and had closed their doors due to poor credit evaluation before giving out loans which made the loans go delinquent and eventually defaulted.

It should be borne in mind that proper credit assessment is key to every successful loan repayment and this assessment can only be carried out with the help of the 5C’s which some other schools of thought have as 7, 9, and 12 respectively. These principal 5C’s are collateral, character, capital, capacity, and condition.

Cameroon’s financial sector is made up of a central bank, commercial banks, Insurance companies, Pension funds, microfinance institutions as well as self-help groups (njangi) who have roots in the colonial period and were historically oriented towards meeting the financial needs of external trade and large scale commerce.

These financial institutions do not, therefore, have a track record of lending to households and start-up Small Enterprises. Bank lending is guided by credit policies which are guidelines and procedures put in place to ensure smooth lending operations. Bank lending if not properly assessed, involves the risk that the borrower will not be able or willing to honor their obligations.

In order to lend, banks accept deposits from the public against which they grant loans and other forms of advances. Since they bear a cost for carrying these deposits, banks undertake lending activities in order to generate revenue. The major source of revenue comprises margins, interest, fees, and commissions. Beyond the urge to extend credit and generate revenue, banks have to recover the principal amount in order to ensure the safety of depositor’s funds and liquidity adequacy.

Bank lending has to consider interest incomes, cost of fund, statutory requirements, depositor’s needs, and risk associated with loan proposals or applications. For these reasons, banks have over time developed credit policies and procedures which stipulate the lending process. These processes include among others; Credit appraisals, documentation and proper information collection, disbursement, monitoring and recovery processes, long-term customer relations, collateral and compensating balancing, and credit rationing.

Bank lending is also based on international standards. However, banks have continued to face an average of 10 – 20% bad debt written off yearly. However, there have been some improvements with Non-Performing Loans (NPL) improving from 14.1% in 2011 to 13.2% in December 2012and 12% by December 2013.

1.2 Problem Statement

Income from lending constitutes an average of 70 – 80% of all bank’s incomes (BEAC Report 2012, p.15). Credit policies and procedures are designed to guide lending and ensure prudent lending operations. Despite rigorous credit assessment process, Atlantic bank uses which include among others proof that customer does not have other credit obligations, analysis of their bank account performance, sustainability of their income levels, security and ability to pay, Atlantic bank is faced with problems of its loan portfolio. The financial records show that Atlantic bank’s provisions and bad debts written off increased over the years.

1.3 Research question

1. What are the procedures followed by banks in credit assessment?
2. What is the level of loan default on banks’ performance?
3. What strategies could be designed to improve credit assessment and repayment of bank loans?
4. Why do loans still go delinquent despite the numerous rigorous strategies put in place for their repayment?

1.4 Objectives of The Study

1.4.1 General objective;

To examine the effects of credit evaluation on loan repayment in Atlantic bank

1.4.2 Specific objectives;

1. To examine the appropriateness of the credit assessment process used by Atlantic bank Cameroon and how it can reduce loan default.
2. To analyze the effect of credit assessment on loan repayment in Atlantic bank
3. To establish the level of loan default on Atlantic Bank’s performance.
4. To design and recommend strategies on how credit assessment and repayment of bank loans can be improved.
5. To establish the degree of security in relation to the risk associated with loans.
6. To recommend ways to curb loan defaults and strategies to reduce non-performing loans of Atlantic Bank.

1.5 Hypothesis

H₀: Credit evaluation has no significant effect on loan repayment.

H₁: Credit evaluation has a significant effect on loan repayment.

1.5 Significance of Study

The significance of this basic research is solely to add to already existing knowledge. The study is also to serve as;

Policymakers: provide empirical data for policymakers that assist in formulating appropriate policies for the operations of Atlantic bank

Banks: Provide recommendations on how to assess and recover the loans given to bank customers.

Researchers: To academicians and researchers, they will be furnished with relevant information regarding credit management practices in savings and credit cooperative societies.

Management: To management and directors the study will provide an insight into the various approaches towards credit management techniques and portfolio management in the sector.

Academia: Finally, this will also contribute to the general body of knowledge and form a basis for further research.