Ratio Analysis As A Bank Lending Tool

RATIO ANALYSIS AS A BANK LENDING TOOL

(A CASE STUDY OF UNION BANK OF NIGERIA, OGUI ROAD, ENUGU)

ABSTRACT

This study seeks to study the bank lending functions in Nigerian banks, with a view to ironing out the factors militating against the attainment of sound lending which contribute in no small measure to the non-recovery of loans.  Investigating the extent to which ratio analysis assist bank managers in their decision in lending.  Bank lending is merely the assessment and evaluation of bankable proposition with the objective of extending credit facilities on terms and conditions acceptable to both lender and borrower.  The rationale behind bank lending is presumably the desire to attain social and economic objectives for the society and profit for the banks.

Over the years, there has been a transition from an era of paper profits to an era of losses.  In fact, many banks no longer lend delinquent debtors to honour their obligations.  All these and many more are discussed in this project because one of the most important tasks of ratio analysis is assisting the financial managers to achieve efficiency through the provision of suitable financial information.

In carrying out the above mentioned functions, research questions were used in analysis formulated.  Relevant tables were built on the data collected and percentages were used in analysizing the data.  The hypothesis which states that “RATIO ANALYSIS does not help financial managers or does not serve as a lending too” was tested from the responses and found to be wrong.  Based on the findings, some recommendations were put forward which, if adopted will go a long way in enhancing the effectiveness and reliability of using ratio analysis in evaluating the financial performance of a given institution in a given period before lending.

PREFACE

This research, Ratio analysis as a Bank lending tool is written to provide a guide sufficiently instructive in scope to meet the needs of staff in tertiary institutions and practitioners in the field of banks.

A unique feature of this research is that it examined in details those risks associated with different ratio portfolios.  This book would not have been a success but for the positive contributions of many customers especially customers, staff, professionals and practicing bankers who criticized and appraised some of the chapters, to them I remain immensely grateful.

I am particular indebted to Mr. Okorie Onovo, Project Supervisor, also Director of School of Financial Studies.  I thank immensely Mrs. R. K. Osayemeh for the use of her materials.

Theresa I. Iloabachie

Accountancy

PROPOSAL

In chapter one, the target of this project topic is to know how bank lending is concerned with provision of funds for the needy customers as loans from the savings of the fund surplus units paid into the bank.  This is the corner stone of a bank with great care to be exercised in this activity in the ratio analysis as a bank lending took is acceptable to both lender and borrower.

In this chapter two, concept of bank lending is an essential function of commercial banking and it has to do with an extension of loans to the borrowers.  Banks have some of the objectives of lending, having identified the problems and its impact on the analysis of the borrower’s financial position concerning bank policy will not isolate itself completely from it.

Chapter three will be talking about research method and design with the experimental survey method by interviewing the officials.  These will be summarisingly interpreted.

In chapter four, it will be data presentation and analysis of findings and the research will be using the instrument of questionnaires.

Chapter five, is the summaries of some of the key findings of the research which relates to the main objective, recommendation and conclusion.

CHAPTER ONE

1.0            INTRODUCTION:

1.1     BACKGROUND OF THE STUDY:

Bank lending is concerned with provision of funds for needy customers as loans from the savings of the fund surplus units paid into the bank.  Due to the established fact that the saved fund is at the disposal of the bank for specified period, the bank can thus provide these funds to their customers who may have greater use for these funds at the time.

The reason behind bank lending is the need to attain some economic growth through lending to already existing businesses for expansion and to individuals with entrepreneurial prospects to set up businesses and for making profit by far one of the most services provided by banks.  It is the corner stone of a bank.  Great care thus has to be exercised in this activity.

In the lending by banks, some lending policies should be adhered to, some questions should be addressed regarding:

(a)              Who is the bank lending to?

(b)             How honest is this customer?

(c)              What is the reputation of this customer at a time?

(d)             How much can the bank lend to a customer at a time?

Judgment in lending is the real test of a bank’s skill and as such the health of the business and not just the customer should be of a great interest to the bank. Banks suffer great losses following the non-payment of loans.  Banks should develop carefully into an analysis and use of the financial statements before lending.  This analysis involves the assessment of a company’s or borrower’s past; present and anticipated future financial condition that could lead to future problems and to determine any strength that the company/ borrower might capitalize on.

The tools for the financial statement analysis are the financial ratios which can be used to answer some important questions regarding a company’s/ customer’s well-being.

Such very important questions regarding are:

(a)              How liquid is the company?

(b)             Is management generating sufficient profits from the company’s assets?

(c)              How does the company’s management finance its investments?