A critical study of credit risk management in the First Bank of Nigeria PLC - Dissertation Example

? A Critical study of credit risk management in the First bank of Nigeria Plc Chapter 4 4 Credit policy in first bank of Nigeria Credit risk management in First Bank of Nigeria verifies and manages all credit process beginning with origination to the collection of payments and other obligations (Risk management disclosure, 2010). In designing the credit policies, due considerations are given to the commitment of the bank which involves: Creating, monitoring and managing credit risk in a way that complies with all the applicable laws and bank regulations (Basel III: A global regulatory framework for more resilient banks and banking systems, 2010) Identifying the credit risk in every investment, loan or in other activities of the Bank (Risk management disclosure, 2011). Utilizing appropriate, accurate as well as timely tools to measure the credit risk in every department (Risk management disclosure, 2011). Adopting a risk-based approach in determining the appropriate pricing strategy while lending products and service offerings (Risk management disclosure, 2010). Setting an acceptable risk parameter. Maintaining an acceptable level of credit risk for the existing individual credit exposures. Maintaining acceptable levels in the overall credit risks for the portfolio of the bank. Coordinating the credit risk management and other risks that are inherent within the Bank’s business activities. Setting remedial and recovery measures and actions (Risk management disclosure, 2012). To effectively handle its credit policies and practices in the first bank of Nigeria, five departments have been formed that control and manage credit processing functions. This are- 1. Credit Analysis & Processing (CAP) which is responsible in developing the appraisal of non-specialized credit requests and processing in order to obtain requisite approvals that are in line with the Bank’s policies (Credit Risk Management, 2009). 2. Specialized Lending Department (SLD) is responsible for the appraisals of credit requests and processing till its final decision to sanction specialized types of credit which are peculiar because of the size and complexity involved in such transactions (Transformation, 2010). It handles departments like power, oil and gas both upstream and downstream, utilities such as water projects, etc, transportation like mass transit, aviation, commercial real estate business projects which are the business proposals that are conceived for commercial gain, infrastructure that would also include concessions in public assets. 3. Credit Risk Management (CRM) which is concerned with the planning, monitoring and the reporting of the credit portfolios (Principles for the Management of Credit Risk, 2012) 4. Remedial Management Unit (RMU) that would have a bias for the proactive work-out of accounts that would show early signs of weaknesses and 5. Classified Assets Management (CAM) that would be concerned with for the recovery of the classified retail loans which are 90 days past their due date, wholesale accounts that are classified as lost with days past their due period (DPD) by over 540 days and accounts that are written off from the on-balance sheet into their CAM SOL (Risk management disclosure, 2012). 4.2 Internal ratings scale In measuring the credit risk of loans and advances to their customers and to the banks at a counterparty level, the Group considers the following features. The first feature concentrates on the character and the capacity to make payments by the client or the counterparty on their contractual obligations. The second feature surrounds the current exposure of the bank to the counterparty and its likely development in future. The third and the last feature center around the credit history analysis of the counterparty and its likely recovery ratio in the cases of default obligations (Risk management disclosure, 2012). The Group also has internal credit limits for approval for various levels in the credit process. The levels are shown in the following table. Approval levels Investment grade obligors limits N’000 Non-investment grade and unrated obligors limits N’000 Board of Directors >45,000,000 >30,000,000 Board Credit Committee 45,000,000 30,000,000 Management Credit Committee 30,000,000 5,000,000 GMD + CRO + Business_SCO1 or Business_SCO2 10,000,000 3,000,000 Risk_SCO1 + Business_SCO1 or Business_SCO2 8,000,000 2,500,000 Business_SCO1 + Risk_SCO2 5,000,000 1,000,000 Risk_SCO3 + Business_SCO2 500,000 250,000 Risk_SCO4 + Group Head +BDM +BDM 100,000 100,000 Fig 1. (Risk management disclosure, 2012). Exposure in the credit risk is also managed by regular analysis of the borrowers and the potential borrowers to meet the interest and capital repayment obligations as well as by changing the lending limits when required to do so (Madura, 2012, p.509). 4.3 Measures for default in lending To protect against the problem of default in credit lending, the bank has set a list of probability in defaults against each rating class. Description Rating bucket Rating bucket Rating bucket Score range Probability of default Grade Extremely low risk AAA 1 1.00 – 1.99 90–100% 1% Investment Very low risk AA 2 2.00 – 2.99 80–89% 1% Low risk A 3 3.00 – 3.99 70–79% 1.50% Low risk BBB 4 4.00 – 4.99 60–69% 2% Acceptable moderately high risk BB 5 5.00 – 5.99 50–59% 4% Non-investment High risk B 6 6.00 – 6.99 40–49% 6% Very high risk CCC 7 7.00 – 7.99 30–39% 9% Extremely high risk CC 8 8.00 – 8.99 10–29% 13% High likelihood of default C 9 9.00 – 9.99 0–9% 15% Default risk D 10 Default Sub-standard D 25% Doubtful D 50% Lost D 100% Fig 2. (Risk management disclosure, 2012). The rating tools of the bank are regularly reviewed and are upgraded when necessary. Obligor Risk Rating (ORR) system has been developed by the bank. The above mode features on the guidelines of the Obligor Risk Rating (ORR) system. It is divided into minimum nine risks which would provide a preset objective base for making credit related decisions, with one extra risk bucket included in order to categorize the obligors in default (Risk management disclosure (Credit risk, 2011, p.122). 4.4 Risk limits The credit risk management in first bank of Nigeria has set certain limits to monitor its credit limits and risk exposures (Risk management disclosure, 2010). These are Portfolio limits, Geographic limits and Single obligor limits. Portfolio limits – Here the method of setting the limits is as follows: The Bank engages in forming a detailed portfolio plan annually. While drawing up the portfolio plan, the Bank evaluates the macro-economic factors, it identifies the growth sectors in the economy and performs a risk rating of the sectors in order to define and determine its target market industries that would be acceptable and also its exception. The Bank’s targeted loan portfolio is then distributed across the acceptable target market industries, Strategic Business Units or SBU and its approved product programs. The bank has set an aggregated large exposure limit exceeding not more than 400% in the Bank’s shareholders’ funds. The bank has set a public sector exposure limit exceeding not more than 10% in the Bank’s loan portfolio. limits in the Industry or economic sector are imposed on the lending portfolio of the Bank which is in accordance with the following policies: The target market of the Bank consists of companies that are operating in the industries which are rated ‘BB’ or better unless there is a change on an exception basis. The Bank does not maintain greater than 25% of its total portfolio in any group of industries that are positively associated in terms of risk such as oil exploration together with oil service, tyre manufacturing along with tyre distribution, etc. The Bank focuses to strive at a limit of its exposure in any single industry which is not to be more than 20% of its loan portfolio. This type of industry needs to be rated as ‘BBB’ or better and lastly, The bank focuses at investing not more than 15% of the portfolio in any industry that is rated as ‘BB’. These steps would help the bank to address the issues with nominal exposure, risk of expected loss and economic capital (Gregoriou & Hoppe, 2008, p.7). 4.4.1 Geographic limits At present, the Bank has not developed any exposure to counterparties that are domiciled outside Nigeria. These exposures are taken and handled by the subsidiary of the bank in the United Kingdom, which is bound to operate within the country limits as defined by its Board of Directors. However, the Bank has provisions for a fully developed risk rating system at the country level, which could be employed, in case any such need arise. In such unpredictable eventuality, the limits are to be graduated following the country risk rating (Nigerian Banking report, 2009). 4.4.2 Single obligor limits The bank has limits that are imposed on loans provided to individual borrowers. The Bank does not provide for loans above the regulatory lending limit, which is 20% of the shareholders’ funds that is unimpaired by losses. The internal guidance limit is set at a 15% level of SHF or share holders fund to create a prudent buffer. The bank’s largest exposure, which had been reported as being in excess to the single obligor limit of the bank in prior period, was regularized by the sale of the same to AMCON (Chief Risk Officer’s report, n.d.). Although it was a performing asset, the bank had to sell it down because of the size and the effect it could make on the banking industry in case there was an adverse situation. There are product programmes that contain guidelines on the single obligor limits. Without the approval of the Board of Directors, the Bank will not be authorized to lend more than 20% of the deposit from the Bank’s shareholders’ funds to any other company. Only companies that are rated ‘A’ or are better can be considered to qualify for this kind of exposure and there should not be a single retail loan that would amount to greater than 0.2% of complete retail portfolio (Risk management & Governance, 2010). 4.5 The new BASEL capital accord norms There are three notable pillars in the new BASEL capital accord (Utz, 2008, p.36). These are minimum capital requirements, supervisory review process, and market discipline. Of the different objectives in the new accord two are to promote safety, soundness in the financial system and that the accord should contain approaches for capital adequacy that would be appropriately sensitive to the various degree of risks involved in the bank’s positions as well as activities (Overview of The New Basel Capital Accord, 2001, p.6). Nigerian banks are on the forefront of applying the BASEL norms (Omoragbon, 2009). The initiative of First Bank of Nigeria is in tandem with the regulatory actions that have accepted the frame work and have accordingly set up a panel that is known as the CBN (Central Bank of Nigeria)/NDIC (Capital Management, 2012). First Bank had made substantial improvement in its Basel II compliance scheme. The successful conclusion of the scheme would allow the capital measurement of the bank to reflect credit risk, market risk and operational risk exposures that can be felt on the assets of the First Bank of Nigeria (Capital Management, 2012). The consolidation for the banking industry in Nigeria began in 2004 when Central Bank of Nigeria had mandated all commercial banks to meet the minimum paid-up capital of 25 billion by 31st December, 2005 (Pat & James, 2012, p.60). The consolidation of the Nigerian banks was made to make them compliant with the Basel Accord II by 2007 (Pat & James, 2011, p.57). Basel II emphasized the requirement for the banks to maintain a higher level of capital base which must be proportional to their risk exposure. Since the consolidation in the Nigerian banking industry, many banks have approached the capital market to raise additional capital for funding various purposes which can include expansion, the enhancement of its operational efficiency through investment in ICT etc (Pat & James, 2012, p.61). Under the minimum capital requirement, there are two types of risks that are credit risk and operational risk (Overview of The New Basel Capital Accord, 2001, pp.12-13). First Bank is highly committed to the management about its operational risks. The operational risk management model of the bank aims at: Reducing losses that arises from the operational risk – a vital role of operational risk management in first bank of Nigeria is to lessen the losses from operational failure and in particular to avoid potentially large risk losses. Improving performance measurement – the Bank’s improved understanding in its operational risk portfolio shall enable it for appropriate allocation of the risk and economic capital to individual business lines, which would then allow improved measurement in performance and in the evaluation of activities. Ensuring better control of operations – the Bank expects that an increased understanding of its risk activities within the different business units, the Board and the senior management would lead to improvements over the control of operations and in the emergence of more proactive risk management culture in the operations domain. Providing timely signals for deterioration in the internal control system of the bank and Raising awareness about operational risk in the Bank from the top levels to the bottom levels by the implementation of an enterprise-wide method in operational risk (Risk management disclosure, 2012). First Bank’s capital is divided into two levels: Tier 1 capital that includes the core equity such as ordinary shares, the statutory reserves, premiums known as share premium and the general reserves (Liquidity Risk, 2011). The book values of goodwill, insubstantial assets, unregistered losses and under provisions are deducted for arriving at the tier 1 core equity capital. Tier 2 capital comprises of qualifying subordinated loan capital, the preference shares, general provisions, debenture stock, minority and other interests in the tier 2 capital and unrealized gains arising from the fair valuation of equity instruments held as available for-sale. Tier 2 capital also consists of reserves that are evaluated by the revaluation of the properties and of foreign reserves (Risk management DISCLOSURE Liquidity risk, 2010, p.111). Under the 2nd pillar of the new Basel II First Bank of Nigeria (UK), the bank had undertaken a process of self-assessment of its internal capital requirements - an Internal Capital Adequacy Assessment Process, or ICAAP (FBN BANK (UK) LTD, 2011, p.3). The ICAAP takes into consideration all material risks in order to establish an additional requirement for capital resource. These projections are simulated under various market scenarios, the results of which inform management actions to be taken (FBN BANK (UK) LTD, 2011, p.5). Regular stress tests are performed by the on its capital adequacy as well as liquidity positioning different scenarios. The scenarios are agreed upon by asset liability management committee (ALCO) and reviewed by EMC, and are regularly updated to reflect the Bank’s risk profile and external risks (FBN BANK (UK) LTD, 2011, p.10). In the banks, the stress tests cover all relevant risks to which the Bank is exposed that are based on macro-economic situations analyze the effect on both the credit and the market risk exposures. Liquidity stress tests are performed monthly and stress tests in capital adequacy are performed twice yearly (FBN BANK (UK) LTD, 2011, p.11). The third pillar in the Basel accord that is followed by the first bank of Nigeria is market discipline. In 2010, the Central Bank of Nigeria (CBN) had initiated some vital reforms in the banking system in order to provide a more structured resilient financial system. These reforms among other factors were aimed at instilling the concept of market discipline, in addressing liquidity issues, in shoring up faith in the banking sector and re-invigorating its financial system. Some of the reforms include aspects like creating Asset Management Company of Nigeria (AMCON), the reversal of its universal banking model and the introduction of more strict regulations that would be aimed at strengthening the corporate governance and enhancing its risk management (Risk management DISCLOSURE Liquidity risk, 2010, p.110). 4.6 Risk Based Supervision Risk based supervision helps to Focus on regulatory attention in those areas in an organization that poses the greatest risk. It involves aligning supervisory practices with the prudential legislative framework, enhancing the capacity in assessing the safety and soundness of the credit unions, assessing the consolidated risks, proactively responding to the credit unions with elevated risk measures and managing the risks with the depositors as well as the guarantee fund. It is an analytical assessment of the risk profile of a credit union (Principles & Practices of Risk-Based Supervision, 2012). It helps to focus on the inherent risks in the organizations. The inherent risks in first bank of Nigeria are in the form of credit risks, market risks, liquidity risks and operational risks. 4.7 Challenges before the First Bank of Nigeria Banks in Nigeria are facing many problems that are related with both its operational risks and financial risks. A few of them are weak asset quality, high lending concentrations that raise credit risks, market risk which includes large losses in the capital market-linked funds. It was reported that the nonperforming assets in the first bank of Nigeria had accounted at almost 10% as on June 30, 2010, and these were only moderately covered by the provisions. Further weaknesses were detected in the management of risk that happened from the loss incurred in the capital guaranteed investment product, which on being marked-to-market had created the need for NGN25 billion of compensation on March 31, 2009 (Global Credit Portal, 2010, p.5). In terms of the poor asset quality, the asset quality indicators of First Bank of Nigeria had deteriorated at a very rapid rate in 2009 that occurred largely due to their exposures in the capital market and in domestic real estate. The situation had however stabilized during the first half of 2010. NPLs or non performing loans that are defined as loans which are over 90-days overdue and the restructured loans to the total gross loans that excluded the money market lines was at 11.12% as on Dec. 31, 2009, and had further dropped to around 10% on June 31, 2010. The slight improvement that was observed in the asset quality indicators had reflected a reduction in the overdue loan stock of 90-days. This happened due to the 5% write-off of the bad loans (NGN28 billion) against the loan loss reserves during the second quarter in 2010. This problem got mitigated by restructuring the 35% of the share-backed loan portfolio (NGN10 billion) in the same period. The positive effect of this move was that in June 30, 2010, the exposure in the share-backed collateralized lending was reduced to 2.9% of the total loans and pure margin lending accounted at a meager percentage of 0.5%. In addition to the weak points of the bank, collateral coverage for the share-backed exposures was almost at 124% on June 30, 2010, and the prices of the domestic share were at very low levels (Global Credit Portal, 2010, p.5). High operating costs is another feature that limits the functioning of the bank. The high level of cost-to-income ratio of the bank which stood at 59% on Dec.31, 2009, in comparison to the other top tier Nigerian banks reflected the large branched network and its traditional form of banking system (Global Credit Portal, 2010, p. 7). Also, the capitalization level in First Bank is presumed to be not adequate for the continued credit risk and the growth strategy that is faced by the bank. On Dec. 31, 2009, the Standard & Poor's risk-adjusted capital score of the bank was at only 5.3% (Global Credit Portal, 2010, p.8). In the above phase, a brief idea has been generated on the credit risk management policies of the First Bank of Nigeria and the challenges and constraints faced by the bank in the recent times. Now, the branch of study will be concentrating on the analysis and evaluation of the credit risk management dynamics of the First Bank of Nigeria. This requires step wise step analysis of the process with the initiation of a research design, data collection and that of the analysis of data. The subsequent segment will be discussing the research design of the paper for the purpose of execution of the further analysis of the paper. 4.8 Research Design The research design may be of manifold types and according to large number of authors and researchers the creation of an experiment is highly common in the scientific experiments with particular inferences and conclusion. One of the other methods of the research design method is that of the survey method which is associated with that of the quantitative analysis. Within the domain of the analysis methods the quantitative analysis is one of the important tools in the analysis of the further procedure. It is a prefixed ideology that the empirical evidences is based on the research process and are basically depended on the facts and information acquired from the practical evidences and of the observations. The quantitative approaches generally find its roots within the domain of the natural sciences with the study of the natural phenomenon. The quantitative measures are widely applied in the branches of the social sciences with that of statistical methods and that of the survey methods like that of the questionnaire methods and so on. So quantitative analysis will be a prime part in the analysis of the section and it will be divided into two phases. In the first phase, the analysis will be made on the application of econometric method with the application of regression analysis and in the second phase questionnaire method will be considered with the interview of around 250 employees of the First Bank of Nigeria evaluated on the basis of the credit risk management platform which is the theme of the topic. Sample Size and Sampling Procedure The sample size is 250 employees of the First Bank of Nigeria which is basically collected on a non probabilistic procedure and that for the regression analysis the prime focus was imparted on the performance indicators from the annual reports of the bank. Data Collection method The data collection methods also include a very important part in the research of a particular topic (Burt et al, 2009, p. 463). There is wide variety of possible data collection methods. The most appropriate method used in this particular case is that of the utilization of questionnaire, interviews with a variety of formats which also includes that of the structured, unstructured and that of semi structured observation collection and that of the documentation and of several artifacts (Edwards & Skinner, 2009, p.119). They may be also disintegrated into that of historical artifacts which includes that of the corporate materials like that of the annual reports, minutes of meetings and so on. Another process includes the gathering of the data with the concerned persons through the phone and that of the collection of the relevant information through the observation of the participants through the devised means of information exchange. For the process of the relevant data collection generally secondary resources were considered with the concentration on the final accounts of the bank. Within the course of development of the methodology, the interview process was generally selected with that of the primary data collection methods with the help of the zero evaluated survey report and that of the questionnaires. In the research process various types of interviews were used which included that of the structured interview which includes that of the series of fixed responses with the application of closed questions. The semi structured interview process offered the respondents in providing free responses to majority of the questions and the unstructured interview there was the allowance of the participants in expressing themselves without any hindrances or restrictions. Hypothesis of the research The evaluation of the credit management policies of the bank will be focused on the basis of the two prime hypotheses associated with the credit risk management of the First Bank of Nigeria. The hypotheses can be written as follows in the following tabular representation as: Hypothesis Statements 1 A. Null Hypothesis ( H0) Credit risk management (CRM) procedures of First Bank of Nigeria Plc. are not as effective as to enable the bank to properly manage the risks arising out of loans and the overall risk of its entire credit portfolio. 1 B. Alternative Hypothesis (H1) Credit risk management (CRM) procedures of First Bank of Nigeria Plc. are effective enough to enable the bank to properly manage the risks arising out of loans and the overall risk of its entire credit portfolio. 2 A. Null Hypothesis ( H0) The existing credit risk management (CRM) procedures of First Bank Nigeria Plc. are not adequate. 2 B. Alternative Hypothesis (H1) The existing credit risk management (CRM) procedures of First Bank Nigeria Plc. are not adequate. On the basis of the hypotheses chosen the testing will be done on the relevant data collected from various authentic sources associated with First bank of Nigeria. We are directed towards the testing the effectiveness and adequacy of the credit risk management procedures of the First Bank of Nigeria. The data will be focusing on the attainment of the alternative hypothesis. If it fails then the null hypothesis will be accepted in both the cases. Now before entering into the hardcore data analysis a certain amount of the discussion of the Nigerian banking sector can be mentioned. The phenomenon of bank failures has been predominant in the Nigerian economy (Dibua, 2006, p. 17). There have been a formulation of the banking Ordinance in the year 1952 in Nigeria (Ebhodaghe, 1997, p.80). However the economy faced a large number of bank failures and in the period of around 1994- 2003 there has been a highly systematic round of bank failures (Adeyemi, 2011, p.99). The chances of incurring huge amount of losses owing to the nonpayment of the loans or other forms can be attributed to the notion of the credit risk (Chance, 2003). The highest credit risk which the banks and the financial intermediaries face is that of the risk of the customers and or that of counter party default. In the period of the 1990s there has been an increase in the number of players in the banking domain and the banks and the financial institutions have been facing a large amount of the enhanced non performing credit portfolios which led to that of the financial distress in the Nigerian banking sector (Brownbridge, 1998, pp. 7-9). There has been also identified that there has been existence of predatory debtor within the banking system whose method of operations have been attached towards the neglect of their debt obligations in some banks in order to contract new debts in other banks and financial institutions (Making Finance Work for Nigeria, 2009, p.58). The bank failure can be seen to be one of the grave concerns of the Nigerian economy and comes as a challenge to the bankers and the policy makers. Various factors can be attributed for the failure of the banks among which some are that of the ownership structures, ineffective internal control systems as well as that of poor management system and so on. But coming to the notion of the credit risk management these above stated variables are definitely influencing but the major variables which can be said to be more attached or can be said to be more relevant is that of the capital adequacy, transparency and that of nonperforming assets (Awojobi et al, 2012). The failure of the bank owing to credit risk management can be said to be having an influential effect by the variables like that of the capital inadequacy, lack of transparency as well as that of the huge volume of non-performing loans (Adeyemi, 2011). It can be stated that in order to examine the effectiveness of the policies of credit risk management procedures of the First Bank of Nigeria, a suitable variable can be constructed in order to measure the effectiveness of the credit risk management policy .As already discussed the non performing loans can be regarded as a vital variable in analyzing the financial health of a financial institution Chapter 5 5.1. Secondary Research Findings For the purpose of assessing the credit risk management of the First bank it would be beneficial if the analysis is shown with the application of statistical tools like that of regression and . But for that reason, proper variables are required to be defined along with their interpretation and significance. The regression model which will be used in this paper can be depicted as follows: Y= a-X1-X2+e….(1) Where, Y is defined the non performing loan ratio. The ratio is considered as it can be stated that if the value of the ratio rises then it signifies to that of the credit risk of the bank and can be also treated as a performance indicator. If the ratio falls over time it can be also stated that the performance of the bank also increases with time. Now this ratio in the above regression model has been considered as the dependent variables and our purpose is to see that how this ratio is explained over by the independent variables used in the model. Now with respect to that of the independent variables we have considered the variables X1 (CL/TD) and X2 (NI/TA) where X1 can be defined as the ratio of the Net Customer Loans to that of the total deposit and X2 is defined as the ratio of Net income before minority to that of the total assets. In this model considered in equation (1), a is the intercept term, is the slope coefficient of X1 and is the slope coefficient of X2. Now negative sign have been attached in front of each of the slope coefficients of the independent variables and it also bears significance. In case of X1, as the ratio increases the bank is on a profit generating platform which inversely affects the dependent variable and it will fall. In case of X1, as the net customer loan increases proportionately more than that of the total deposits then it will also inversely affect the ratio of the non performing assets to that of the total assets and so a negative sign is attached in front of the coefficient. Now the data set considered in this case is for seven years from 2005 to 2011 and the data have been collected from the final accounts and reports of the bank. The following data set and the regression results are considered as follows: Years Net Customer Loans (CL) Total Deposit (TD) Net Income (NI) [before minority interest] Total Asset (TA) Non-Performing Loan ratio in % terms (NPLR = Y) NI/TA(X2) CL/TD(X1) 2006 221038 685353 18652 538145 9 0.0347 0.44 2007 469670 855306 36540 1527542 2.9 0.0239 0.31 2008 733109 1364866 12569 2009914 1.5 0.0063 0.66 2009 794968 1512422 3189 2172346 4.7 0.0015 0.63 All data are in terms of million Naira SUMMARY OUTPUT Regression Statistics Multiple R 0.770897 R Square 0.594283 Adjusted R Square -0.21715 Standard Error 3.594591 Observations 4 ANOVA   df SS MS F Significance F Regression 2 18.92642 9.463208 0.732385 0.636959 Residual 1 12.92108 12.92108 Total 3 31.8475         Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept -6.66966 13.84025 -0.4819 0.714116 -182.527 169.1874 -182.527 169.1874 NI/TA(X2) 253.1811 222.3045 1.138893 0.458718 -2571.46 3077.827 -2571.46 3077.827 CL/TD(X1) 13.72166 20.79505 0.659852 0.628679 -250.504 277.9478 -250.504 277.9478 (First Bank of Nigeria PLC, 2010; Financial Review, 2010, p. 70) From the above table it has been found that the coefficient values are all positive and the intercept term negative which states that the assumptions of the model and guarantees the inverse relation between the explanatory variables and that of the dependent variable. However at 95% confidence interval the absolute values of t stat is less than 2 and the p value greater than 0.05 . Thus the independent variables have no such significant effect on the dependent variable in this case. Hence both the null hypotheses have to be accepted and one can infer that the bank’s credit risk management procedures are not adequate. The credit risk management system is not effective enough to enable the bank handle loans. There may be other variables which can be constructed in order to judge the effectiveness of the credit management procedures and that they may be regarded as that of the loan to deposit ratio (LDR), cash claim on central bank which indicate a relationship between risk management and that of the bank performance and the implementation of the capital availability requirement which ultimately leads to that of the reduction in the adoption of the commercial risk taking, value at risk ratio which can be defined as a ratio measured in percentage term of the bank to that of the benchmark, return of equity (ROE) which can be regarded as the proxy for the bank’s performance dynamics and that of the net profit margin after the deduction of the relevant taxes (Akindele, 2012). This ratio’s movement shows that the credit risk management system is becoming effective overtime but not significant enough to deal with its loans and overall risk of portfolio. 5.2 Primary Research Findings The paper will entail focus on the analysis of the responses made by the respondents (250 employees) of the First Bank of Nigeria on the basis of several questions associated with the evaluation of the effectiveness and the adequacy of the credit management policies of the bank along with the evaluation of its existent procedures. The analysis will be made from the responses made from the questionnaire by the respondents (Refer to Appendix 1). The results and findings of the questionnaire method can be presented in tabular representation as follows: Questions Responses Question 1 Around 57 percent of the respondents have been saying in for the capital adequacy, transparency as well as that of the declining figures of nonperforming assets has been seen giving response towards performance enhancement of the First bank of Nigeria. A percentage of around35 % of the respondents were found to be not agreeing towards the question and around 9% of the respondents seemed to be remain unresponsive towards the question given Question 2 Around 70 percent of the respondents agreed towards the fact that the adequacy of the capital foundation is indeed an important parameter emphasizing on the performance of the bank. The majority of the employees believe that the over capitalization of the bank has been acting as a significant indicator fostering the growth of the bank. Question 3 Around 50 percent of the agreed which signify that the transparency may not be a robust parameter as it was later again found that the percentage of respondents who selected disagreement criteria were around 30 per cent and the remaining selected that of the undecided response criteria Question 4 There was division on the basis of long term, medium term as well as that of short term Question 5 Around 20 or 40% believed that the First Bank forwarded short term loans and financial assistance to the public as well as the private sector and around 30% or 60% of the respondents accepted to the fact that the bank provided medium term financial assistance to the customer of the bank. Cent percent of the respondents were of the belief that the bank kept the provision as well as that of accurate mechanism for the maintenance of the provision of the bad debts Question 6 The majority imparted towards the concept that the misevaluation was indeed an important parameter in explaining the influence on the bad debts in the first bank of Nigeria. Question 7 The non performing loans was a major source associated with that of the failure of the banks in Nigeria Question 8 The imposition of the ceiling by the central bank has been also acted as a hindrance in the generation of the loan to the optimal levels. Question 9 The reengineering process have been fruitful in the process of significant credit management procedure of the first bank which can be interpreted from the fact that the majority of the employees agreed that the reengineering process have been really helpful in the efficient credit management policies of the bank. Question 10 The provision for the collateral security was of high significance and the performance was on a high momentum It can be also seen that from the graphical analysis that within the period of 2008-2009 there has been a bit disappointing results with the crash in the subprime market in the United States some evil effects have also been imparted on the Nigerian First bank also but it has buckled up its growth trajectory and performed quite significantly. Thus it can be said that the credit risk management policy of the bank is efficient as well as adequate and is jet set for performing well in the times to come. 5.2 Conclusion and recommendations The brief study and analyses leads us to the inference that the credit risk management policies formulated and implemented by the First bank of Nigeria is quite successful which can be evaluated from its performance dynamics. Even in the time of global recession, the bank has been able to hold on to its stabilized operation and have worked well. The hypothesis constructed and its validation also leads to the conclusion that the existing credit risk management policies of the bank is efficient in carrying off its operations in a stable path. The non performing loans have been taken as a significant parameter in analyzing the credibility of the credit risk management trajectory of the bank. It has been found that the ration of the total non-performing assets to that of the total loans and advances have been declining with respect to time although during the global recession it has increased to a certain extent but its intensity was less vis-a-vis the other banks and the financial institutions of Nigeria. The method of mail questionnaire has been adapted with the selection of appropriate questions on the basis of which the evaluation mechanism would become more transparent. The sample which has been considered consists of the employees of the bank and the answers corresponding to the questions also direct towards the efficient credit risk management policies of the bank. The First Bank group is dedicated towards the promotion of sound business environment with the implementation of a well managed credit risk management platform. The recommendations which are applicable to the organization is that of the establishment of a solid enterprise risk management framework with the aim at the maintenance of risks at acceptable levels with the avoidance of the transactions that are unfavorable to the system and the industry at a larger dimension. This will lead the bank in a position of allocating an adequate flow of capital to the risks in its portfolio and that of the businesses with the implementation of its Basel project. The bank also needs to accentuate the commitment towards the promotion of a sound governance within the trajectory of the First bank Group with the maintenance of a perfect balance between the provision of useful information and that of the enhancement of transparency for the protection of the responsibility of the customer satisfaction. Summary The country of Nigeria being one of the poorest countries in the global economy, and the study of the financial domain of the country’s economy is a significant area. The banking structure of the Nigerian economy has encountered severe doldrums and many of them have bankrupted or ran out of business. However the path of the failure in philosophy is a pathway to success and in the banking sector of Nigeria in the recent times has some examples of success. The First bank of Nigeria can be attributed to one of them. The tool of credit is an indispensable tool for the banks as well as that of the financial institutions. The banks provide credits, channelize funds and make business out of it leading to growth and expansion. The credit management policy is a primordial tool which is structured by these financial institutions in order to minimize the loss and maximize profit respectively. The following section has reflected the credit management policies of the First Bank of Nigeria as well as its evaluation through various processes. The paper is fragmented into two major phases with the first phase dealing with the evaluation of the credit management policies of the bank and the second phase dedicated towards validating some hypotheses developed keeping in parity with the basic elements of the target of the paper. The results which have been found points out to the fact that the credit risk management policies of the bank are effective and its performance have been well canalized with the path set for the achievement of future sustainability. References 1. Awojobi et al, (2012). 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No c. Undecided 2. The adequacy of the capital foundation of the bank act as a prime indicator in the performance of the bank a. Strongly agree b. Agree c. Disagree d. Undecided 3. Do you think that the transparency of the bank is one of the chief parameter in its performance? a. Strongly agree b. Agree c. Disagree d. Undecided 4.Does your bank possess schemes for financing that to that of the private as well as that of the public sector a. Yes b. No c. Uncertain 5. Does your bank maintain the provision of the accountability of the bad debts? a. Yes b. No 6. Do the misevaluation procedure possess any significant influence on the bad debts in the First bank of Nigeria? a. Yes b. No 7. Are the non performing loans can be attributed towards the failure of the majority of the banks of Nigeria a. Yes b. No c. Uncertain 8. Do you think that the imposition of the ceiling by the Central bank in generating the optimal level of loans? a. Yes b. No 9. Do you think that the reengineering process in the bank has been a massive indicator in augmenting the performance of the bank a. Yes b. No 10. The extent to which the provision of the inadequate collateral security leading to the incidents of bad debts in your bank a. great extent b. moderate extent c. neutral Read More