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CREDIT CULTURE

2017-07-04

CREDIT CULTURE

In the recent past in Nigerian Financial System, especially considering the events that led to the current ‘’structure ‘’ in the banking industry, we the risk professionals witnessed the different styles exhibited by the banks as far as lending was concerned. While some banks were perceived to have exhibited undue ‘prodigality’ in the way customers deposits were frittered away unprofessionally in the name of lending, others were out-rightly conservative and embraced ‘’frugality  as their ‘’watch word’’ despite  the dictate of the environment and in spite of all temptations to act to the contrary. The difference in the approaches adopted by these players in the financial industry can be explained in these two words: CREDIT CULTURE . 

 

DEFINITION

A credit culture, according to Edgar Morsman Jnr,  is a system of behaviour, beliefs, philosophy, thought, style, and expressions relating to the management of the entire credit function. It is the combination of policies, practices, experience, and management attitudes, which defines the lending environment and determines the lending behaviour acceptable to the bank.

 

TYPES OF CREDIT CULTURE

Four types have been generally identified over years by several authors. These are;

  • VALUES –DRIVEN CULTURE
  • CURRENT OR IMMEDIATE –PROFIT DRIVEN CULTURE
  • MARKET SHARE (LOAN PRODUCTION)-DRIVEN CULTURE
  • UNFOCUSED CREDIT CULTURE

 

What are the distinguishing factors among the different cultures?

 

FEATURES OF VALUES –DRIVEN CULTURE

This culture focuses on credit quality with strong risk management systems and controls.

There are two ‘schools of thought’ that can be considered by banks when defining their credit philosophy and they are as follows:

Credit quality must always take precedence over exploitation of business opportunities

OR

Business opportunities must always take precedence over credit quality.

Any bank that belongs to the first ‘school of thought’ gives top priority to the quality of credits presented for approval to each approving authority at all levels including the Management Credit Committee (MCC) or Board Credit Committee (BCC) depending on the amount being considered. It is quality first even in the midst of ‘intimidating’ credit proposals that has good earning potentials. A bank with the quality mind-set and orientation will never compromise standards under any circumstances, even in the face of dwindling revenue.

For instance, a bank, as part of its credit administration procedure maintains a register for credits presented but not eventually approved, and records the particulars of such credits in the ‘’Rejected Credits‘’ register. However when there was excess liquidity in the bank running into billions of Naira a decision was taken by the management to ‘’reconsider’’ the rejected credits and eventually a higher percentage of these loan requests were granted approval.

An audit of these reconsidered credits was conducted just a year after this exercise and 78 % of them were no longer performing.

So what went wrong?

It is very glaring that, in a bid to repackage the credits and reconsider the loans that were earlier rejected, the credit quality was highly compromised and obviously did not take precedence over business consideration. In addition there was absence of strong risk management and, control was totally lacking in this typical (life) case study. 

Also in a value – driven credit culture, the primary emphasis is on bank soundness and stability and a consistent market presence. That is, bank soundness, stability and sustainability must be the watch words. Before presenting any customer’s loan request for approval, the RM (Relationship Manager) or RO (Relationship Officer) need to ask him or herself this question- will the bank sustainability be assured or threatened with this approval?   Will the bank still be in existence if these loan(s) become bad?

A typical case study is that of a Unit Micro-Finance bank that financed a N20m transaction. This was at the early stage of Microfinance banking in Nigeria when many of the practitioners were not so exposed to the uniqueness of this banking system.  The promoters, just like many others, are, expectedly, from the Commercial banking background and in their career they have been brought up to believe in, and finance only ‘big ticket transactions’ of hundreds of millions and several billions of Naira. Other facilities of hundreds of thousands were usually jocularly referred to as ‘’barbing salon’’ money, so they were normally dissuaded from pursuing such petty portfolios. It was this ‘mentality’ that the promoters brought to the Micro finance bank, when they approved a big ticket of N20m for a single obligor, oblivious of the fact that the N20m is the minimum regulatory capital required to start a unit MFB and that MFBs are actually licensed to finance the so called ‘barbing salon’ transactions. 

Another real life example is that of a Deposit Money Bank that gave a facility of N44Bn to a single obligor when the minimum regulatory capital required to start a Deposit Money Bank is N25Bn.

What both banks (MFB & DMB) have done in these two cases is that they have literarily ‘handed over’ their banks to the obligor customers. Unfortunately, both banks did not survive these.

 

Furthermore in Values – driven Credit Culture;

Underwriting is conservative and significant loan concentrations are not allowed;

Underwriting, which encompasses loan assessment and analysis, amongst other procedures, is supposed to be conservative, painstaking and devoid of sentiments but many RMs and ROs (Relationship Managers and Officers) do not have patience for this. A particular lady, a senior management staff in a DMB belongs to those regarded as high performers in that bank and because of this, has, over time, developed a knack for disobeying constituted authority, especially the Risk Management Group. Whenever she brings a credit for approval, instead of following due process like others, she normally makes the following statement:

Mr Risk Manager, I know you will never write anything good about my credit, despite the fact that we are the one paying your salaries from the business brought in by us. Please instead of wasting my time, just write whatever you wish to write and I will take it to your bosses who know how to make money for the bank… No regard at all for proper underwriting. Unfortunately she normally gets away with it and by the time the bank went into ‘coma’, majority of her credits were found to be equally in distress. The bank did not survive it.

Finally in Values driven Credit Culture, the typical outcome is LOWER current profit from loans, but with fewer loan losses.

What is the point in a bank declaring a huge income from loans only to lose all to loan loss provisions whenever the regulators visit?

Kindly lets have your views…

Welcome to the 2nd half of 2017








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posted on 2017-12-30


Jide Dina. Bsc, AAT, ACA.
its a good idea in which credit rick must take precedence over business opportuinity. I pray the board and management understand this strategy and give room for risk managers to get more involved. In as much, its a great idea needed.
posted on 2017-07-11


Ikenna Orji. Msc, MCB, ARMA.
This is a welcomed initiative which must be encouraged.
posted on 2017-07-04

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