1.1 Background to the Study
Credit Risk Management (CRM) is the identification, assessment and prioritization of credit risks (CR) associated with loan defaults. It is the effect of uncertainty on objectives, whether positive or negative followed by coordinated and economic of application of resources to monitor and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities (Okeh, 2006).
Risks can come from various sources including uncertainty in financial markets, threats from project failures (at any phase in design, development, production, or sustainment life-cycles), legal liabilities, credit risk, accidents, natural causes and disasters, deliberate attack from anadversary, or events of uncertain or unpredictable root-cause. There are two types of events i.e. negative events can be classified as risks while positive events are classified as opportunities The survival of every Deposit Money Bank (DMB) depends on its ability to manage its risks and loans or advance portfolio fectively. However in therecent past, deposit money banks in Nigeria witnessed rising non-performing credit portfolios and these significantly contributed to the finanial distress in the banking sector.
Financial organization need to manage the credit risk inherent in the entire portfolio as well as the risk in individual credit or transaction. This is so because the survival and ability of financial institution to compete depend on their ability to profitability and manage credit risk. This is the reasons why lending is based on the two fundamental products of banking: money and information. Banks obtain these products from customers themselves by offering customer valuable services. They package money and information about their borrowers together with valuable banking services to create loan agreements and sell the loan agreements back to their customers (Hempel and Simonson, 2007). As such, risk rating system in financial institution contains both objective and subjective elements. Objective aspects are based on financial statements and application of certain financial ratio that reflect liquidity, leverage and earnings. Despite the requirement that risk be quantified, risk rating systems always have a subjective dimension that attempts to capture intangibles such as the quality of management, the borrower’s status within the industry, and the quality of financial reporting. These subjective items may result in inconsistencies. It is in this regard that many financial institutions have faced difficulties over the years arising from their inability to effectively manage credit risk. As such the major cause of serious banking problems continues to be directly related to tax credit standard for borrowers and counterparties, poor portfolio risk management, or lack of attention lead to deterioration in the credit standard of a bank’s counterparties. Hence, the need to assess credit risk management in Nigeria Deposit Money Banks becomes imperative.
1.2 Statement of the Problem
Deposit Money Banks in the recent past witness rising non-performing credit portfolios sequel to the inability of their management to effectively manage credit risk and its administration. That problem resulted to high bad debts in deposit money banks and a number of other money deposit banks were classified as distressed banks by the monetary authorities. Consequently, the need for an Assessment of credit risk management in Nigeria Deposit Money Banks becomes worthy of study. The study answered the questions below:
How is credit risk managed in Nigeria Deposit Money Banks?