FACT OF AN RATIO ANALYSIS AS A BANK LENDING TOOL

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 “FACT OF AN 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.

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.

CHAPTER ONE

INTRODUCTION

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. 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?

2. THE METHODS AND STRATEGIES OF RESEARCH

 Scope of thesis: The study is restricted in the following scopes: – Theoretically, it focuses on financial analysis as a tool in the credit evaluation to lend to business only. Project financing, which requires the assessment of project specific risks by adopting a different set of measures, is not subject to this study. – Practically, it only analyzes the current practices at a particular commercial bank, namely VCB, based on which recommendations for improvement are made. In view of the specific purposes and limited scopes above, the methodology used in this thesis will includes three steps:

Step 1: Quantitative analysis different financial analysis techniques approach in lending activities at theoretical level and their applicability;

Step 2: Point out in details on the Vietcombank’s credit evaluation process practice in its financial analysis;

Step 3: Based on analyses at step 1 and 2, the study will recommended for financial analysis in lending to business at Vietcombank.

3. STRUCTURE OF THE THESIS

 The thesis includes five chapters. After the thesis is briefly introduced in Chapter 1, Chapter 2 will present theoretical framework of bank lending activities and focus on financial ratio analysis. Chapter 3 mention to current practice in financial analysis in lending to business of Vietnam’s banking system. Chapter 4 will give some recommendations for improvement of efficiency of financial analysis at Vietcombank including micro and macro level.