Banks are very important in the economic development of any nation. They constitute the central part on which other sectors of the economy revolve. They mobilize resources from the surplus sector of the economy and lend to the deficit sectors for investment purpose. Hence they are obliged to comply with certain regulatory requirement, which are generally not applicable to other –sectors of the economy. One of the stationery guidelines is the subject of my study.
Loans and advances make up a major part of the lending. A careful look at the balance sheet of any commercial banks in Nigeria will reveal that loan and advances are by for the longest single items in the assets structure. Apparently, loan and advances make up the major sources of the operating income in banks. Because they are the most profitable assets for the employment of banks funds. Regardless of this fact, they could turnout to be bad ad doubtful debts.
In November 7, 1990 the central bank of Nigeria issued a circular entitled “Prudential Guideline” for licensed banks. It stipulated minimum requirements for assets classification and disclosure, provision of interest accrual and off balance sheet engagement (CBN) circular No. BSD/20/23 Vol.1 /11. in particular, the guideline imposed new and somewhat far-reaching requirements in the classification of risk assets and provision for bad and doubtful debts. (Nwankwo G.O 1990)
The guidelines also emphasized the time recognition of determination in the quality of assets and the classification of credit facilities into “performing s” and “ non-performing” accounts.
A credit facility is deemed to be performing the payment of both principal and interest, which are up-to-date in accordance with the agreed terms, while credit facilities should be deemed as “non-performing” when any of the following conditions existence
Non- performing facilities are to be further classified into three categories as follows:
(a) Substandard: Where the interest or principal payments are in arrears for 90days-180 days
(b) Doubtful: Where interest or principals payments are in arrears for 180 days to 360 days, and no perfected tangible security is in course of realization.
(c) Cost: Where interest or principal payments are in arrears for more that 360 days and no perfected tangible security is in the course of realization. The guidelines required all licensed banks to make adequate provisions for perceived losses based on portfolio classification in order to reflect their true financial positions.
Furthermore, in order to ensure the reliability of their published operating results, banks have been directed to cease charging accruing interest on non-performing credit facilities and interest and interest accrued