ASSESSMENT OF RISK MANAGEMENT AND CREDIT ADMINISTRATION IN UNION BANK PLC

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ASSESSMENT OF RISK MANAGEMENT AND CREDIT ADMINISTRATION IN UNION BANK PLC

Introduction

The literature covers extract from source documents in line with the objectives of the study. The literature shall

be segmented into the following sub themes. The concept of risk management in commercial banks, concept of

credit administration, techniques of risk management in commercial bank, credit management in commercial

banks, as well as the constraint of risk management and credit administration.

2.2Â Â Â Concept of Risk Management in Commercial Banks

Risk Management is the identification, assessment and prioritization of risk or the effect of uncertainty on

objectives of an organization, by coordinated economical application of resources to minimize, monitor, and

control the probability and the impact of unfortunate events or to maximize the realization of opportunities.

Risk can come from uncertainty in financial market, project failures at any phase in development, production or

sustainment life-cycles, legal liabilities, credit risk, accidents, natural causes and disasters as well as deliberate

attack from an adversary or event of uncertain root-cause (Egbe, 2007).

Risk management in commercial bank basically focus on credit risk. Credit risk management is the process used

to systematically manage the exposure of financial institutions to loan delinquency and default. The process

consists of the following four stages: the identification of potential losses from delinquencies and defaults,

evaluation of the potential frequency and severity of losses form credit risks; development and selection of

methods for managing the risks so as to minimize losses and maximize business value, and implementation and

ongoing monitoring reviewÂ of the selected methods (Okoh, 2009).

Thus maximization of business value by preventing or minimizing losses from delinquency and default and

promoting prompt loan repayment by borrowers is the principal objective of credit risk management in

commercial bank. Bank business value depends on the expected magnitude, timing and variability associated

with future net cash flows that will be available to provide shareholders with a return on their investment.

Delinquency and default results in losses that reduce business value. Credit risk management seek to mitigate

this reduction in business value by designing a system that prevents, reduces or deal with delinquencies and

defaults when they occur. Credit risk management is therefore both an ex-ante and ex-post activity (Lawal,

2007).

The purpose of risk management in commercial bank is to reduce losses arising from default in payment of loan.

As such in order to survive, these institutions must balance risks as well as returns. For a bank to have a large

consumer base, it must offer loan products that are reasonable enough. However, if the interest rate in loan

products are too low, the bank will suffer from losses. In terms of equity, a bank must have substantial amount of

capital on its reserve, but not too much that it misses the investment revenue, and not too little that it lead itself

to financial instability. The complexity and derivatives is a factor that gave rise to risk management in financial

institution and commercial bank in particular (Kent, 2009).

2.3 Credit Administration in Commercial Bank

Credit Administration is the management of loan portfolio. This involves evaluation of loan proposal as well as

appraising the capacity of borrowers and the disbursement and monitoring of loan (Egbe, 2011).

Credit administration in commercial bank help to reduce risks of delinquency and default. An efficient loan

appraisal system is very important in this respect, loan appraisal is the process of determining in advance the

various lending parameters and determining investment opportunities available to farmers that remain unexploited for want of credit, loan appraisal also involves determination of overall loan limit for each borrower

based on his debt capacity; loan duration and phasing of the disbursement to coincide with various

implementation stages of the business project

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