ASSESSMENT OF CREDIT APPROVAL AND COLLECTION

MANAGEMENT (IN CASE OF UNITED BANK S.C ADAMA BRANCH)

A RESEARCH PAPER SUBMIT TO DEPARTMENT OF ACCOUNTING

FOR PARTIAL FULFILMENT OF THE REQUIRMENT OF BA DEGREE
IN ACCOUNTING

Prepared by:- 1. Kedir Wariyo

2. Lidiya G/Yesus
3. Meseret Abebu
4. Mekdes Getachew
5. Senait Abebe

Advisor: Bekalu

Rift Valley University Adama Compus

Faculty of Business and Social Science
Department Accounting & Finance

June; 2019
Adama, Ethiopia

1
 Acknowledgements
First and for most great thanks are given to almighty God. For he has helped us in every aspect
of our entire life. Next to God our special gratitude goes to advisor Ins. Bekalu _____ for his
unreserved constructive Comment suggestion and guidance to the successful completion of this
research paper.

I
Acronyms (Abbreviation)
UB – United Bank
ATM -Automatic Teller machine
POS – Point of sales
CORE- Connected Online Real Environment
(NPL)- Non-performing loan

II
Abstract
The study is design to assess the assessment of credit Approval and Collection management in
united bank. It also aims at assessing credit management of United bank which would support
ideas for showing assessment of credit management which clearly identify the efficient of the
bank.
To obtain information regarding the assessment of credit management of the bank from primary
and secondary source of data would be used. Primary data would be gathering through interview
and questioner. Data collect from secondary source are process by percentage, table graphical
them.
The population from which judgmental sample has been taken comprise of branch manager and
employees of the bank who have more experience in the area
Based on the finding summary, conclusion was drawing and finally, recommendations were
made that supposed to be important to solve the existing problem of Credit management in
United bank adama branch

III
 Table Content
Content Page
Acknowledgement…………………………………………………………………………….I
Abbreviation…………………………………………………………………………………...II
Abstract…………………………………………………………………………………….….III
Appendix……………………………………………………………………………………….IV
CHAPTER ONE
Introduction…………………………………………………………………………………....
1.1 Back ground of the study…………………………………………………………………....
1.2 Back ground of the organization…………………………………………………………….
1.3 statement of the study………..……………………………………………………………..
1.4 research questioner………………………………………………………………………….
1.5 objective of the study…………………………………………………………………….…
1.5.1 General objective…………………………………………………………………….
1.5.2 Specific objective…………………………………………………………………….
1.6 significance of the study ……………………………………………………………………
1.7 The scope of the study………………………………………………………………………
1.8 Limitation of the study………………………………………………………………………
CHAPTER TWO
2. Literature review………………………………………………………………………………
2.1 introductions ……………………………………………………………………………..
2.2 Meaning of credit ………………………………………………………………………..
2.3 credit analysis……………………………………………………………………………..
2.4 Dimension of credit management ……………………………………………………….
2.5 The credit process …………………………………………………………………………...
2.6 classification of credit /loan…………………………………………………………………
2.6.1 Time classification………………………….……………………………………………..
2.6.1.1 Short term loans………………………...………………………………………
2.6.1.2 Medium term loans…………..…………………………………………………
2.6.1.3 Long term loans…………………….…………………..…………...…………
2.6.2 Purpose classification…………………….…………………………………..….

IV
 2.6.3 Security classification………………………………………………………….…
2.6.4 Lender classification…….………………………………………………………..
2.7 component of credit policy………………………………………………………………….
2.7.1 Credit standard………………………………………………………………….…
2.7.2 Credit term…………………………………………………………………………
2.7.3 Collection policy…………………………………………………………………..
2.8 principles of credit management……………………………………………………………
2.9 repayment schedule…………………………………………………………………………
2.10 collection effort……………………………………………………………………………
CHAPTER THREE
3. Methodology
3.1 Research design……………………………………………………………………………
3.2 Instrument of data collection……………………………………………………………….
3.2.1 The primary data……………………………………………………………………..
3.2.2 The secondary ………………………………………………………………………
3.3 Method of sampling…………………………………………………………………….…..
3.4 sampling size………………………………………………………………………………..
3.5 Method of data analysis and presentation………………………………...…………………
CHAPTER FOUR
4 Data presentation and data analysis……………………………………………………………
4.1 analysis and interpretation of result………………………………………………………….
4.2 background of the bank staff………………………………………………………………..
CHAPTER FIVE
5. Summary of finding, conclusion and recommendation
5.1 finding………………………………………………………………………………………….
5.2 Conclusion……………………………………………………………………………………..
5.3 Recommendation………………………………………………………………………………
Reference………………………………………………………………………………………….

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 LIST OF TABLE
Table of content page
Table 4.1 Background of the bank staff…………………………………………………….
Table 4.2 Educational levels and working experience of respondents……………………...
Table4.3 the sector uses of the bank credit and the most users group of credit of the bank.
Table 4.4 about guarantees for processing loan…………………………………………….
Table 4.5 Communication channel………………………………………………………….
Table 4.6 High rate problem…………………………………………………………………
Table 4.7 The most user group of credit of the bank………………………………………….
Table 4.8 Types of loan extended by the bank and borrowers first contact to apply loan…
Table 4.9 Contact of borrower…………………………………………………………………
Table 4.10 Repayment of loan………………………………………………………………..
Table 4.11 Types of collateral…………………………………………………………………
Table 4.12 Customer guidance and advisor service given by the bank………………………...
Table4.13 Training and credit policy of loan orientation……………………………………....
Table 4.14 Types of collection technique………………………………………………………
Table 4.15 Action technique……………………………………………………………………
Table 4.16 how often an aged debtor analysis data for last five years ago

VI
 Chapter One
1. Introduction
In banking there are various types of services provided by the institution. Among this, loan
operation are one of the most important core business of the bank, the credit drives from, the
Latin “creder” which shows the existence of trust b/n borrower and lender. Without this the
development of modern industrial community would have been impossible. By making
agreement with seller Most of the time the contract made between buyer and seller, borrower and
lender may become inefficient because of many reasons, the existence of problems in loan can be
seen by its being one of most risks bank face. Banks have managed four type of risk. Interest rate
risk, liquidity risk & operation risk, credit risk and all the risk mentioned above are directly or
indirectly related to loan. The effective control of loan approval process of the bank’s believed to
be good indicator of the quality of the bank.
The importance of loan in the banking industry can be seen position in the financial statement of
bank, loans are the most important asset in any commercial bank loans account for half to almost
three quarters the total value of all banks asset in the income statement of banks interested and
faces generated from loans account for, most banks revenue normally two-thirds or more of the
total income.
Additionally, to insure suitable performance of banking industries the issuance of having
effective and efficient loan management should be the top issue for the management of the bank.
So taking to the above fact in account this research paper has aimed to assess the effectiveness
and efficiency of loan approval and collection management of united bank. To complete the
study successfully, adequate and valuable information have great contribution, therefore by
considering this both primary and secondary data has been used. For the purpose of selecting
potential respondent and gathering all necessary information from the responsible personnel and
directly related to loan sections, the researchers used purposive
and judgmental sampling techniques. After the data has been collected the analysis of relevant
data has been made by using table and percentage method. Finally, the researchers believed that
the outcomes of this study will initiate the bank to correct its weakness concerning loan approval
and disbursement and enjoyed benefits obtained by performing the corrective action

7
1.1. Back ground of the study
As a finance student it is one of our objectives to have a deep element of understanding of loan
approval and Collection management. Loans can create higher uncertainty in commercial
banking risk.
In the competitive environment, more and more of business which need a huge investment are
being opened some of this huge investment financed through loan of banks. So banks play major
role in the economic development of a country.
In most business loan is act like a blood of human body. In other word, in day to day many
businesses are dealing with the activities of loan. Therefore the study of loan is a major
importance to the internal and external analysis because of it is close relationship with the day to
day operation of business. In connections with providing loans united bank need to work more
on the awareness corner of task, skill people imagination about loan lack of technical capacity of
the staff not to change. Therefore this implies proper and goal oriented system have to be
designed on loan approval and disbursement to achieve the banks objective. We concluded that
all precondition should be taken for the effective and efficient loan approval and disbursement.
The loan manager should pay particular attention in financing of loan and implication must be
evaluated.
1.2 Background of the organization
United bank Share Company one of the preferable commercial bank in Ethiopia. It is established
in September 1998 to provide quality service for customers to be profitable with authorized
capital of Birr one hundred Million out of Which Birr 20,863,100.00 was fully subscribed and
paid-up in cash by 335 founder- Shareholders and registered as a public shareholding company
No, 84/94 and the commercial code of Ethiopia, 1960

The head office of the bank is located at Debrezeit road kirkos sub-city, Addis Ababa, Ethiopia.
The bank opened its main branch in the name of Beklo Bet and started providing all types of
domestic banking services on October 1, 1998.

8
Over the years, United Bank Share Company built itself in to a progressive and modern banking
institution endowed with a strong financial structure and strong management, as well as a large
and even increasing customers and correspondent base.
Today, united bank is a full service bank that offers its customers all full range of commercial
banking service with a network that includes 320 (City and outlaying) Branches.
United Bank‘s priority in the coming years is to strengthen its capital base. Maximizing return on
equity and benefit from the latest Technology in order to kept a breast with the latest
development in the local and international financial services industry.
1.3 Statement of the Problem
Loan is one of banking service currently the socio-economic situation of the country is providing
and business activities are increasing. As lending is the
essence of Commercial Banking. Consequently the formation and implementation of sound
policies and procedures are among the most important responsibilities of board of directors and
management well-conceived lending policies and care for lending practices are essential if the
bank is to perform its credit-crediting function effectively and minimize the risk inherent in any
extension of credit.
However most managers and directors of those private banks located in Ethiopia often lacked the
necessary expertise and experience recruiting good staff was often difficult for the privet banks
because the established banks could usually offer the most talented bank officials better career
prospects. Moreover, the rapid growth in the number of banks in the country could lack the
supply of experienced and qualified bank officials. Even though United Bank established the best
policies and procedure in loan area, the bank faces some problems.
 Long and time taking procedures in loan approval.
 Poor assessment on the customer background and capacity to receive loan.
 In effective system of customers follow-up to check collection of loan.
1.4 Major research questions
This research assessed some matters related to loan approval and disbursement that need to be
situated and answered. These are:-
1. Are the existing loan approval and collection policies and procedures of the bank
effective?
2. Does the banks consider the fulfilment of all required proceed before approving loan
to the customer?

9
 3. Does the loan approval and Collection procedure of the Bank safe guard the bank
from losing its customer?
4. What is the cause for failure of borrowers to pay the loan at within the specified
period?
5. Does the bank study properly the back ground of the customer to offer the loan?

1.4 . Objective of the study

1.3.1. General objective
The general objective of this research is to assess the effectiveness of the loan approval and
Collection management of United Bank Specifically Adama branch.
1.3.2. Specific objective
1. To examine the effectiveness of existing loan policies and procedures of the
bank.
2. To assess whether the bank consider the fulfilment of all required procedure
before approving loan to the customer.
3. To identify if the bank polices and procedure safe guard the bank from losing
its customer.
4. To examine the cause for failure of borrowers to pay at exact time.
5. To assess whether the bank properly check the bank ground of the customer.
1.5 Significance of the study
The importance of this study is to initiates the bank to correct its weakness concerning loan
approval and disbursement and enjoyed the benefit obtained by reforming the corrective action
in addition the study also give under mentioned importance.
 Motivate the bank to set a proper loan approval and disbursement policies and to carry
out that policy in day to day operation in order to have a good loan management system.
 Provide better understanding about loan management and its roll in obtaining better result
in the bank.
 To indicate the way for potential investors to expand their business through loan.
 To show requirement needed for any bank before getting in to the loan management.
 The findings and recommendation of the study was used as starting points for others
researchers who might be interested to carry out further study in wider and depth scope.

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 It gave good opportunity to acquire experience and good understanding to the future
researchers.
1.6 Scope and delimitations of the study
Even if this topic relies on loan approval and disbursement which is so wide in its scope. This
research paper only focused on to evaluate the effectiveness of loan approval and
disbursement procedure, because to study all aspects of the subject matter is un-affordable in
our capacity in terms of time and finance.On the other hand among many banks which are
found in Ethiopia. This study has been delaminated to at United bank Adama branch
1.7 Limitation of the study
It is difficult to say that one research study full of accurate and complete without any difficult.
The major limitation faced by the researchers in conducting relevant data the researchers has
faced the following problem.
 Lack of availability of data.
 Lack of financial resource
 Shortage of time

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 CHAPTER TWO
2. REVIEW OF LITERATURE
2.1 History of Loans
No one can say where the history of loans began? It’s likely that people have been practicing
lending and borrowing for as long as there has been a concept of ownership. The history of loans
can be documented at least several thousand years back; forms of lending were evident in ancient
Greek and Roman times.
The modern history of loans started much later than these ancient times, it is, however, important
to realize that lending started much earlier than many people would imagine and has its origin in
much older times.
2.2 Indentured loans
One of the early forms of lending that should be explored in the history of loans is the indentured
loan (also known as indentured servitude.) Initially practiced in the Middle Ages and through the
19th century by land owners and the wealthy, indentured servitude allowed poor individuals to
borrow the money needed for major expenses such as travel and real estate.
Once the land owner or wealthy individual had secured a ship passage or piece of real estate for
an individual, that individual would then have to work off their debt over the course of several
years? Unfortunately, many times the land owner was very dishonest and would greatly inflate
the debt or would continue to add provisions to the debt long after it had been repaid.
Indentured servants often had very few rights, and were seen by some wealthy individuals as a
way to maintain slave labor long after slavery had been abolished in both Europe and the United
States.(www.directonlineloans.co.uk).

2.3 Banking loans

Legitimate banks were developing even as indentured servitude was rampant. Individuals known
as moneylenders played an important part in the history of loans? In fact, it's from the Italian
moneylenders of the middle Ages that we get both the English words "bank" and "bankrupt" that
we use today.
Italian moneylenders would set up benches in the local marketplace (with the word for bench
being "banca", from which we eventually derived the word "bank"). The moneylenders would

12
charge interest on their loans at a rate that they set, and would sometimes be quite successful and
become very wealthy.
As an interesting side note to the history of loans, if the moneylenders were not successful,
though, they would break up their benches and pursue other venues. The Latin expression for
breaking up a bench in this way was "bancarupta", which eventually became the English word
"bankrupt" (which carries a much steeper connotation than simply a broken bench.
2.4 Modern banking loans
The history of loans has progressed quite a bit since the days of the middle Ages moneylender.
Interest rates are much more controlled, loan terms have a much higher degree of fairness to
them, and the banks of our era aren't out to simply get as much money out of borrowers as they
can. The modern banks, finance companies, and online lenders that provide loans to the public
and private sectors provide a great service to the world economy, and are regulated by both local
and governmental policy so as to make sure that nothing interferes with that service. However, if
not for some of the oppression and misdealing that was present throughout the history of lending
then the fairness and opportunity that exists in banking today might not be possible? even the
oppression that resulted from indentured servitude in the past helped to establish modern banking
by showing what factors needed to be eliminated so as best to benefit both lender and borrower.
(www.directonlineloans.co.uk).
3. DEFINATION OF LOAN
In finance, a loan is a debt evidenced by a note which specifies, among other things, the principal
amount, interest rate, and date of repayment. A loan entails the reallocation of the subject
asset (s) for a period of time, between the lender and the borrower.
In a loan, the borrower initially receives or borrows an amount of money, called the principal,
from the lender, and is obligated to pay back or repay an equal amount of money to the lender at
a later time. Typically, the money is paid back in regular installments, or partial repayments; in
an annuity, each installment is the same amount.
The loan is generally provided at a cost, referred to as interest on the debt, which provides an
incentive for the lender to engage in the loan. In a legal loan, each of these obligations and
restrictions is enforced by contract, which can also place the borrower under additional
restrictions known as loan covenants. Although this article focuses on monetary loans, in
practice any material object might be lent.Acting as a provider of loans is one of the principal

13
tasks for financial institutions. For other institutions, issuing of debt contracts such as bonds is a
typical source of funding.(F.BRIGHAM, F.HUSTON 2005, page 901).
According to Investopedia LOAN is the act of giving money, property or other material goods to
another party in exchange for future repayment of the principal amount along with interest or
other finance charges. A loan may be for a specific, one-time amount or can be available as
open-ended credit up to a specified ceiling amount.The terms of a standardized loan are formally
presented (usually in writing) to each party in the transaction before any money or property
changes hands. If a lender requires any collateral, this will be stipulated in the loan documents as
well. Most loans also have legal stipulations regarding the maximum amount of interest that can
be charged, as well as other covenants such as the length of time before repayment is required.
Loans can come from individuals, corporations, financial institutions and governments. They are
a way to grow the overall money supply in an economy as well as open up competition,
introduce new products and expand business operations. Loans are a primary source of revenue
for many financial institutions such as banks, as well as some retailers through the use of credit
facilities (www.investopedia.com).
4. Understanding loan terms
The term of the loan refers to the length of time you have to repay the debt. Debt financing can
be either long-term or short-term. Long-term debt financing is commonly used to purchase,
improve or expand fixed assets such as your plant, facilities, major equipment and real estate. If
we are acquiring an asset with the loan proceeds, we (and our lender) will ordinarily want to
match the length of the loan with the useful life of the asset. For example, the shelf life of a
building to house your operations is much longer than that of a fleet of computers, and the loan
terms should reflect that difference. Short-term debt is often used to raise cash for cyclical
inventory needs, accounts payable and working capital. In the current lending climate, interest
rates on long-term financing tend to be higher than on short-term borrowing, and long-term
financing usually requires more substantial collateral as security against the extended duration of
the lender's risk. (www.businessfinancemag.com).
3.1.Short term commercial loans
Although short-term commercial loans are sometimes used to finance the same type of operating
costs as a working capital line of credit, they're not interchangeable. A commercial loan is
usually taken out for a specific expenditure (for example, to purchase a specific piece of

14
equipment or pay a particular debt), and a fixed amount of money is borrowed for a set time with
interest paid on the lump sum. (Scot, petty, no year, page 746).
For nearly all startup businesses and most existing businesses a short-term commercial loan from
a bank must be secured by adequate collateral supported by a reasonable cash flow and a regular
sales history. A fixed interest rate may be available because the duration of the loan, and
therefore the risk of rising rates, is limited. While some short-term loans have terms as brief as
90-120 days, the loans may extend one to three years for certain purposes.
As far as what qualifies for adequate collateral, accounts receivable or inventory, as well as fixed
assets, usually qualify. Tip For startups and relatively new small businesses, most bank loans
will be short-term.(W. Kolb, 1987,page 245).
3.2. Long term commercial loans
As the name implies, long-term commercial loans are generally repaid over more than one to
three years. Because more time for you to repay a loan equals more risk for the bank extending
the loan, long-term commercial loans are typically more difficult for smaller businesses to
obtain. With small businesses, a lender may not be willing to assume the risk that the business
will be solvent for, say, 10 years. Consequently, banks will require collateral and limit the term
of these loans to about five to seven years. Occasionally, exceptions for a longer term may be
negotiated, such as loans secured by real estate.(Scot,petty, no year, page 749).
The purposes for longer commercial loans vary greatly, from purchases of major equipment and
plant facilities to business expansion or acquisition costs. These loans are usually secured by the
asset being acquired. Additionally, financial loan covenants are regularly required.
Some small business advisers discourage the use of debt financing for fixed assets, particularly
long-term assets such as equipment, office space or fixtures. They suggest that the cash-flow
problems of small businesses require that borrowed money be directed to generating immediate
revenue through expenditures relating to inventory and marketing.Buying a new expensive piece
of machinery may take many years to pay for it.
Instead, you should aim to obtain a high rate of short-term return on every cash
investment.Tominimize the costs of fixed assets by leasing, buying used equipment, sharing
equipment, etc. Financing through Equipment Leasing from a bank's perspective, the leasing
business can take the form of either:-
 A loan that the borrower uses to lease equipment from an independent source.

15
  A direct lease from a bank subsidiary company that owns the equipment.. (Jordan,
Ross, 2001, page 825).
5. Types of loan
4.1. Secured loan
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property)
as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the
loan. The debt is thus secured against the collateral in the event that the borrower defaults, the
creditor takes possession of the asset used as collateral and may sell it to regain some or the
entire amount originally lent to the borrower, for example, for closeted a portion of the bundle of
rights to specified property. If the sale of the collateral does not raise enough money to pay off
the debt, the creditor can often obtain a deficiency judgment against the borrower for the
remaining amount. The opposite of secured debt/loan is unsecured debt, which is not connected
to any specific piece of property and instead the creditor may only satisfy the debt against the
borrower rather than the borrower's collateral and the borrower.
A mortgage loan is a very common type of debt instrument, used to purchase real estate. Under
this arrangement, the money is used to purchase the property. Commercial banks, however, are
given security - a lien on the title to the house - until the mortgage is paid off in full. If the
borrower defaults on the loan, the bank would have the legal right to repossess the house and sell
it, to recover sums owing to it. (Kuchhall, 1999, page 249).
In the past, commercial banks have not been greatly interested in real estate loans and have
placed only a relatively small percentage of assets in mortgages. As their name implies, such
financial institutions secured their earning primarily from commercial and consumer loans and
left the major task of home financing to others. However, due to changes in banking laws and
policies, commercial banks are increasingly active in home financing
Changes in banking laws now allow commercial banks to make home mortgage loans on a more
liberal basis than ever before. In acquiring mortgages on real estate, these institutions follow two
main practices. First, some of the banks maintain active and well-organized departments whose
primary function is to compete actively for real estate loans. In areas lacking specialized real
estate financial institutions, these banks become the source for residential and farm mortgage
loans. Second, the banks acquire mortgages by simply purchasing them from mortgage bankers
or dealers.

16
In addition, dealer service companies, which were originally used to obtain car loans for
permanent lenders such as commercial banks, wanted to broaden their activity beyond their local
area. In recent years, however, such companies have concentrated on acquiring mobile home
loans in volume for both commercial banks and savings and loan associations. Service
companies obtain these loans from retail dealers, usually on a nonrecourse basis. Almost all
bank/service company agreements contain a credit insurance policy that protects the lender if the
consumer defaults.(F.BRIGHAM, Huston 2011, Page 906).
4.2. Unsecured loan
Unsecured loans are monetary loans that are not secured against the borrower's assets
(no collateral is involved). There are small business unsecured loans such as credit cards and
credit lines to large corporate credit lines. These may be available from financial institutions
under different marketing packages. Some of them are:-
 Bank overdraft.
 Corporate bonds.
 Credit card debt.
 Personal loans.
A corporate bond is a bond issued by a corporation. It is a bond that a corporation issues to raise
money in order to expand its business. The term is usually applied to longer-term debt
instruments, generally with a maturity date falling at least a year after their issue date. (The term
"commercial paper" is sometimes used for instruments with a shorter maturity.)
Sometimes, the term "corporate bonds" is used to include all bonds except those issued by
governments in their own currencies. Strictly speaking, however, it applies only to bonds issued
by corporations, not to bonds of local authorities and supranational organizations.
Corporate bonds are often listed on major exchanges (bonds there are called "listed" bonds)
However, despite being listed on exchanges, the vast majority of trading volume in corporate
bonds in most developed markets takes place in decentralized, dealer-based, over-the-counter
markets.
Some corporate bonds have an embedded call option that allows the issuer to redeem the debt
before its maturity date. Other bonds, known as convertible bonds, allow investors to convert the
bond into equity..

17
Corporate credit spreads may alternatively be earned in exchange for default risk through the
mechanism of credit default swaps, which give an unfunded synthetic exposure to similar risks
on the same 'Reference Entities'. However, quite volatile credit default swaps 'basis' make the
spreads on credit default swaps and the credit spreads on corporate bonds be significantly
different.
(Jordan, Ross 2001 page 829).

6. Understanding Loan Differences

There are many reasons we may need to borrow money such as for building home, buying a new
car, paying off credit card debt, or making a major purchase. Depending on our borrowing need,
here are some options to consider on our loan or line of credit.

5.1. Closed-end loan vs. open loan

Fundamental difference: Open loans don’t have any prepayment penalties while closed-end loans
do. In other words, if we try to make a payment other than the exact monthly payment, we will
be charged a fee if we have a closed-end loan but not if we have an open loan.
Open loans, meaning we can prepay any amount of the loan that we wish without incurring
penalty fees. And can also choose to pay the loan off in one lump sum or even adjust our
payment schedule, allowing our flexibility and freedom in our repayment plan.
6. Essential Feature of loan
6.1. Trust and confidence
Trust is fundamental element of loan. The lender will lend this money or goods on the trust and
confidence that the borrower or buy will pay back the money or price in time.
6.2. Time element
All credit transaction involve time element. Money is borrowed or goods are brought with a
promise to pay the Money or pay the price in some future date.

6.3. Willingness and Ability

Loan Depends in a person’s willingness and ability to pay the borrowed money. In fact lending
of a person depends on his character capacity and capital. A person who is honest and fair in his

18
dealings possesses the capacity of making his business a success. Such persons can get credit
easily.
6.4. Security
Security is the form of property gold. Bonds or shares in an important element for raising credit.
6.5.Purpose of credit
Banks and financial institutions give large amount of loan for productive purpose rather than for
consumption purpose.(M.L.JHINGAN 1997, page 165).
7. Credit Instrument/loans instrument
Loan or Credit’s plays a significant role in modern business and that parties represented by credit
loan instruments. These are written or printed or typed financial documents that serve either as
promises to pay or as order to pay. They provide the means by which funds are transferred from
one party to another some of the important loan instruments are below.(Mago, 1985, page 124).
7.1 Promissory Note
Promissory note is the earliest type of a credit instrument. It is written promise by a debtor to pay
to another person a specified some of money by an agreed given date usually within a year with
three days of grace. Such notes are issued by individuals, corporations and government agencies.
A promissory note is drawn by the debtor and has to be accepted by the bank in which the debtor
has his account for it to be valid. The creditor can get its discount from his bank at a premium by
paying interest until date of recovery. (M.L.jHINGAN.1997 page 166).
1. Amount. The amount borrowed is indicated.
2. Maturity. Although banks do make longer-term loans, the bulk of their lending is on a short
term basis about two-thirds of all bank loans mature in a year or less. Long-term loans always
have a specific maturity date, while a short termloan may or may not have a specified maturity.
For example, a loanmay mature in 30 days, 90 days, 6 months, or 1 year, or it may call for
payment “on demand,” in which case the loan can remain outstanding as long as the borrower
wants to continue using the funds and the bank agrees. Bankloans to businesses are frequently
written as 90-day notes, so the loan mustbe repaid or renewed at the end of 90 days. It is often
expected that the loanwill be renewed, but if the borrower’s financial position deteriorates,
theBank can refuse to renew it. This can lead to bankruptcy. Because banks virtually never
demand payment unless the borrower’s creditworthiness has deteriorated, some “short-term
loans” remain outstanding for years, with the interest rate floating with rates in the economy.

19
3. Interest rate. The interest rate can be either fixed or floating. For larger loans it is typically
indexed to the bank’s prime rate. The note will also indicate whether the bank uses a 360- or
365-day yearfor purposes of calculating interest. The indicated rate is a nominal rate, and the
effective annual rate is generally higher.
4. Interest only versus amortized. Loans are either interest only, meaning that only interest is
paid during the life of the loan, with the principal being repaid when the loan matures, or
amortized, meaning that some of the principal is repaid on each payment date. Amortized loans
are also called installment loans.
5. Frequency of interest payments. If the note is on an interest-only basis, it will indicate how
frequently interest must be paid. Interest is typically calculated daily but paid monthly.
(F.BRIGHAM, Huston, 2005, page 921-922)
6. Discount interest. Most loans call for interest to be paid after it has been earned, but banks
also lend on a discount basis, where interest is paid in advance. On a discount loan, the borrower
actually receives less than the face amount of the loan, and this increases its effective cost.
7. Add-on loans. Auto loans and other consumer installment loans are generally set up on an
“add-on basis,” which means that interest charges over the life of the loan are calculated and then
added to the face amount of the loan. Thus, the borrower signs a note calling for payment of the
funds received plus all interest that must be paid over the life of the loan. The add-on feature
raises the effective cost of a loan.
8. Collateral. If a loan is secured by equipment, buildings, accounts receivable, or inventories,
this fact is indicated in the note.(Scot, petty, 1997, page 746).
9. Restrictive covenants. The note may also specify that the borrower must maintain its current
ratio, interest coverage ratio, and so on, at prescribed levels, and it spells out what happens if the
borrower defaults on those covenants. Default provisions often allow the lender to demand
immediate payment of the entire loan balance, or to increase the interest rate until the default is
corrected.
10. Loan guarantees. If the borrower is a small corporation, the bank may insist that the larger
stockholders personally guaranteethe loan. Troubled companies’ owners have been known to
divert assets from the company to relatives or other entities they own, so banks protect
themselves by obtaining personal guarantees.(F.BRIGHAM, Huston, 2005, page 924)

20
7.2. Line of credit
A line of creditis an agreement between a bank and a borrower indicating the maximum amount
of credit the bank will extend to the borrower. For example, in December, a bank loan officer
might indicate to a financial manager that the bank regards the firm as being “good for” up to
$80,000 during the coming year, provided the borrower’s financial condition does not
deteriorate. If on January 10 the financial manager signs a promissory note for $15,000 for 90
days, this would be called “taking down” $15,000 of the credit line. The $15,000 would be
credited to the firm’s checking account, and before it was repaid the firm could borrow an
additional $65,000 for a total of $80,000. Such a line of credit would be informal and
nonbinding.
8.1. Procedure of loans
The main objectives of loan procedure are to examine in detail the steps that follow loan
appraisal, including the approval process, setting loan terms and conditions, loan disbursement
and loan monitoring. There are different strategies that a financial institution can follow in each
of these phases but the general principles outlined here are widely applicable.
After loan officer has carried out a loan appraisal, the application has to be prepared for
approval and, finally, disbursement. Decision-making mechanisms vary from institution to
institution and often depend on the loan amount and loan term proposed. However, in all cases at
least one additional person gets involved in order to respect the “four-eyes” principle of internal
control. (MAGO, 1985, page 25).
4. FINANTIAL STATEMENT AND PROPERTY ESTIMATION
The financial statements, like balance sheet income statement and cash flow statement should be
carefully analyzed to determine the financial soundness of the applicant and asses the repayment
capacity. After analyzed the financial statement the credit analysis division then prepares brief
summary and recommendation which goes to the loan committee for approval. On larger loans
members of the credit analysis division give and oral presentation and discussion will issue
between staff analysts and the loan committee over the strong and weak points of loan requests.
If the loan committee approves the customary request, the loan officer of the credit committee
will usually cheek on the property or other assets to be pledged as collateral in order to the
property involved if the loan agreement is defaulted. This is often referred to as perfecting the
banks claim to collateral. Once the loan officer and the banks’ loan committee are satisfied that

21
both the loan and proposed collateral are sound, the note and other documents that make up lone
agreement are prepared and are signed by all parties to the agreement.(Jordan, Rose, 2001 page
987-989).
Ration and presenting to measure the liquidity and profitability of the business need to be
reviewed carefully to assist in the decision making of the amount and the type of loan to be
granted. The banks or council engineers should estimate property issued as security. Otherwise,
if it is complex and yet the banks engineer is not available, the estimation will left to the
municipality engineers.In case of building estimations should be made every three month or after
renovation to detention made, other collaterals such as vehicles will be estimated at leaser
interval due to the rapid deprecation.
5. SITE OR BUSSINESS VISIT:-It helps to assess the customer’s location and the condition of
the property and to ask clarifying question. The lone officer maybe contacts other creditors who
have previously landed money to this customer to what their experience has been. Previous
payment record often revels such about the customers character sincerity of purpose, and since of
responsibility in making use of bank credit.The credit investigator or branch managers will go
and visit the working place of the applicant and the personal granter. Among the other things the
purpose of business visit helps to:-
 Verifies the declared financial position of the applicant and choking physically the
amount of cash on hand, goods in stock, receivable documents vehicles, buildings and
merchandises etc.
 Assess whether the applicant guarantor are actually operating business that they are
licensed to.
 Have an overall view of the business of the applicant or guarantor by observing the
locality as regard to the demand of the area. The number of employee and machineries.
 Determine the addresses of the Brower or his guarantor for subsequent visits and also
identify the security pledged.
6. CREDIT ANALYSIS:-This is the critical point in credit granting process. It is also an area
where the loan officer needs to document that he \she has actually performed proper analysis of
the various risk involved with the particular credit request. The question that must be dealt with
before any other is whether or not the customer can serve the loan. It is to mean that the

22
borrowers can payee out the credit when due, with convertible margin for error. This usually
involves the following is aspects of the loan applications.(Scot, Petty, no year, page 750).
 Character:-purpose of the loan must be specified by the customer.the loan officer must
be convenience that the customer has a well-defined purpose for requesting bank credit
and serious intention to repays.
 Capacity:-the loan officer must be sure that the customer requesting credit has the
authority to request alone and legal standing to sign binding loan agreement.
 Conditions:-the loan officer and credit analysts must be aware of recent trends in the
borrower’s line of work or industry and how changing economic conditions might affect
the loan.
 Control:-the last factor in assessing borrowers credit worthily status is control which
centers on such questions as whether changes in law and regulations could diversely
affect the borrowers and whether the loan request meets banks rules and regulations
could a diversely affect the borrowers and whether the loan request meets the banks and
regulatory authorities standard for loan quality.
 Collateral:-collateral refers to assets plagued to secure repayment for aloan.it can be the
borrowers or third party property and can be a real estate (building).motor vehicle,
machinery, business mortgage or lease land that can be registered with a competent
register or can be merchandise cash deposit,life insurance policy surrender values,share
guarantee or securities ,cash deposit life insurance (T bills or bonds) that may not be
registered. Collateral should be readily marketable, accessible, stable in value easily
transferrable and insuranceble (where applicable) second –degree mortgage may be
accepted to strengthening collateral position (of an already extended).(J.Gitman, 1945,
page 256).
9. The loan file
The loan officer prepares a loan file in accordance with a pre-defined structure. It is useful to
have a standard checklist of the information and documents that are needed for complete loan
file. A second list of people, who should sign off when each step of the loan approval process is
completed, can provide a useful tool to monitor and manage loan processing time. Many
institutions have defined benchmarks for the maximum time a loan should take from the time of
application to approval and disbursement. The loan file should include a summary sheet of the

23
loan appraisal, containing key information on the borrower and the loan in a very concise form.
This can be an important tool for the credit decision committee to quickly grasp the profile of the
proposed loan.
1. Brief description of the economic activities of the firms.
2. Brief risk profileof the farm household and details of risk-mitigating strategies that are used;
3. Characteristics of the loan applied for and the recommendation from the loan officer;
4. Financial indicators:
 An accumulated repayment capacity indicator.
 Free net cash-flow indicator.
 Indebtedness ratio.
5. Rating results as regards personal credit worthiness.
A signature by the loan officer under the loan recommendation will increase the level of
responsibility. With this signature the loan officer confirms that he/she has carried out an in-
depth evaluation of the client’s repayment capacity and willingness and has collected sufficient
information to come to the recommendation.(Mago, 1985, page 155-158)
9.3. DISBURSEMENT PROCEDURES
Once the loan decision has been made, clients should be informed immediately. it is important to
let them know the date on which the application will be presented to the credit committee, and
when a decision can be expected. Reducing useless travel time for loan applicants is good client
service and reduces the transaction costs of the borrower.(Nelson, 1990 page 5).
9.4. Loan disbursement
It is an evaluation of borrower’s capacity UN willingness to repay a loan at limited data In values
financial analysis, such as forecasting sensitively and analysis qualitative assessments of
management character and capacity, due diligence and identification and analyzes of risk.
(kuchhall,199, page 246-247).
Cash disbursement.Many lending institutions disburse loans in cash. They either do this
Themselves through their own cashiers or by handing out cheek that can be cashed at a Partner-
bank.
Money transfer to supplier. Some organizations prefer to transfer the approved loan amount
directly to suppliers. This can increase the level of control over how the loan amount is being
spent. Although this may be interpreted as a signal of mistrust, there are also advantages attached

24
to this system: Firstly, borrowers might not want to travel with large amounts of cash Because of
the risk of money getting stolen. Secondly, it removes the temptation for the borrowers to spend
larger amounts of money, e.g. for investment goods, in a different way. Either the lending
institution can notify the suppliers regularly about the approved credit limits of clients, so that
the borrower can go there directly and make his purchases or clients can be given coupons to use
as cash in specific shops. In many cases, these partnerships allow customers to buy supplies at
preferential rates. Thirdly, interest calculation will only start to be calculated on the day when the
purchase at the supplier is made or the coupons are actually cashed. This is an obvious advantage
compared to the system when cash is directly disbursed to the borrower who might not spend it
immediately. In this case, he must already bear the costs for the loan.(Nelson, 1990, page 8).
10. LOAN MONITORING
The success or failure of any financial institution is closely tied to the quality of its loan portfolio
and its loan monitoring system. The assessment of repayment capacity and the creditworthiness
of an applicant provide the basis for good loan decisions and thus, portfolio quality. Good loans
may turn bad however. A monitoring system provides the information needed to oversee loan
portfolio quality at any given time, identifying potential problems at the earliest moment
possible. There are some key requirements for an appropriate monitoring system for any business
loans.(A.BREALY, C.MAYERS etal, 1998 page 714).
Open communication between the lender and the borrowers essential for effective loan
Monitoring. Some borrowers do not like to tell the lender about problems they may face in
repaying the loan. The establishment of open communication can help ensure that problems are
communicated as soon as they arise. If a clear policy on handling problem loans exists and is
known to the borrower, powerful incentives may be given to borrowers to provide lenders with
early warning signals when they have to go through difficult times.
Loan files must contain all the documents (loan application, loan assessment, collateral
records, memos, loan agreement, etc.) which provide a loan officer and other interested parties
with a complete historical and on-going record of the relationship between the lender and the
borrower. These files are the backbone of a loan monitoring system.
Computerization should be introduced, if it is not already in place. Although in principle loan
tracking can be done manually, this will be difficult beyond a certain number of borrowers with
highly individual repayment schedules and loan terms. An obvious advantage of computerized

25
loan monitoring systems is that reports can be generated automatically. As a speedy response to
loan default is vital for maintaining a sound loan portfolio, automation can help to identify
problem loans at a very early stage, allowing for immediate corrective action.
Periodic direct monitoring of clients:-Generally, lending institution should stay in touch with
their clients through the loan officers. The loan officer can capitalize on the relationship
established during the field visit, the Appraisal process, and possibly through earlier business
contacts..(nelson,1990, page 5).
This is not only prudent loan monitoring practice; it is also good customer relations. However,
monitoring a loan by personal contact is costly and raises the institution's operating expenses.
Client visits:-The most effective way to obtain information about the current performance of a
borrower is tovisit the farm. This gives an opportunity to uncover organizational and operational
problems anddiscuss the current risk management strategies employed by the client Clients
visits, however, require a lot of time and, hence, represent a significant cost burden for
thelending institution.
Attending local markets:-These occasions bring together a large number of the banks
borrowers. They can observe how well a client's business is going from marketing activities and,
by talking to other customers, bank loan officers may pick up a lot of additional information
about the customer.
Meetings with extension officers;-In many countries, business households are assisted by
public extension service programs. Extension workers visit clients to help them improve their
yields and marketing efforts. bank loan officers regularly meet with the staff of the extension
programs to obtain information about particular clients. In addition, they learn about any specific
risks that threaten certain regions.
Meetings with loan management officers:-Another good information source can be loan
management officers who assist in any financing management. This information is helpful to
identify potential problem loans at an early stage.
Other client records in the financial institution:-For those lending institutions that also offer
other financial services, other monitoring devices can be used.
Forexample,can be learned from a borrower’s current account or savings passbook. If such
accounts exist, an occasional check of the account movements can provide indicative

26
information to the loan officer about the level of repayment capacity. (Commercial bank
examination,2004 page 14).
10.2. Monitoring actual loan repayment performance
For those loan borrowers who are in frequent contact with the lending institution because they
pay monthly loan installments, close monitoring of repayment performance may be sufficient.
Accurate and up-to-date information forms the basis for comparing planned versus actual
repayments. Appropriate management information systems (MIS) need to be in place in order to
provide loan officers with the required information on their outstanding loan portfolio. If there is
no fully integrated and computerized MIS in place, spreadsheets and manually prepared reports
have to substitute for automated print-outs. Whether created manually or automatically, some
essential reports are required daily by the loan officers.
 Loan portfolio review.
 Due payment report.
 Past-due payment report.
 Economic feasibility.
 Financial feasibility.
12. Comprehensive loan banking examination procedures
12.1. Portfolio Supervision
1. Review the written policies and procedures for mortgage loan servicing and determine if they
adequately cover all facets or functional areas of the servicing operations.(Credit banking
examination procedures, 2009 page 9).
 Determine whether reports to management adequately monitor compliance with the
established policies and procedures.
 Determine how exceptions to the policies and procedures are identified and addressed.
2. Review a sample of investor-account reconcilements and determine.
 Each investor account is reconciled at least monthly.
 Outstanding items are resolved in a timely manner.
 management regularly charges off stale, un reconciled items, and
 A supervisor reviews and approves the reconcilements.

27
3. Review and determine the accuracy and adequacy of the most recent management reports that
state operating results for the servicing unit. Determine if the details provided are adequate to
supervise the servicing function.
4. Review the most recent analysis of servicing revenues and costs for the primary product types.
Ascertain whether costs are estimated and prepared on an average or incremental basis.
 Determine if management’s analysis of revenue considers all sources of revenue,
including contractual servicing fees, ancillary fees, and the benefits derived from
compensating balances from custodial funds.
 Assess the adequacy of the servicing unit’s current and projected profitability. Determine
if management analyzes profitability on a product-by-product basis and how this analysis
is factored into strategic decisions.
 Determine if management’s cost analysis includes all direct and indirect servicing
expenses.
5. Review the list of outside vendors and sub servicers the bank employs to perform servicing
functions.
 Determine how management assesses (at least annually) the quality of work performed
by outsiders.
 Find out if management regularly reviews and evaluates the financial condition of each
vendor or sub servicer.
 Ascertain whether the bank has a contingency plan to ensure it fulfills servicing
responsibilities if a vendor or sub servicer fails to perform.
6. Evaluate the asset quality of the servicing portfolio.
 Review the reports on the volume of delinquencies, fore closures; bankruptcies, losses,
and other real estate owned that have been prepared since the previous examination.
Assess the extent and impact of those reported results on profitability and financial
performance.
 Determine the extent and impact any geographical credit concentrations have had on
profitability and financial performance.
 Determine if complaints are appropriately resolved. Review significant complaints to
ascertain if there are any possible internal control deficiencies or substantial legal risks.

28
8. Determine if the bank has purchased loans from the servicing portfolio.
 Determine if appropriate policies and procedures governing the purchases are in place.
 Determine the reasons for the purchases.
 Analyze the volume and trend of purchases.
9. Review the procedures for receiving payments from borrowers, depositing funds into
segregated custodial accounts, and remitting funds to investors.
 Assess the bank’s system for ensuring borrowers’ payments are accurately applied and
ensuring investors receive payments on schedule.
 Determine if adequate controls exist over custodial accounts (controls include daily
balancing, monthly reconcilements, authority for disbursements, and segregation of
administrative duties).
10. Review written servicing agreements to determine investor-servicing requirements, funds
remittance schedules, contractual servicing fees, guarantee fees, and servicer representations and
warranties.(Credit banking examination procedures, 2009 page 9).
2.2 DIMENSTON OF CREDIT MANAGEMENT
Credit management involves carefully the following core concepts.
I. Forming credit policy
II. Executing the policy
III. Forming and execution the policy
IV. Analysis of credit policy variables

I. Forming credit policy

Credit policy is a set of decision and general guide lines as to credit terms Credit standard,
collection procedure, discount to be offered, etc. where credit term refers to the duration of credit
and the term of payment customers including discount, if any credit standard specific the
attributes customer should demonstrate to get credit.
II. Execution of credit policy
This involves evaluating the credit applicant’s worthiness. Evaluating credit applicant’s
worthiness involves three steps
A. Collection credit information
B. Analyzing and evaluating information

29
 C. Making credit decision
A. Collection of credit information
The first step in executing credit policy is collecting information.
1. The applicant by requiring the applicant to file various form that require financial
and credit information including reference
2. External sources: are
 Loan applicant
 Financial statement for the past few years
 Personal contact including personal interview
 Credit rating reporting agencies
 Bank reference
 Direct information exchange with other supplier
B. Analyzing and Evaluating credit information
Many author states in their book that the principals factors which may be taken in to
consideration and using credit among these authors (pandey, 1990) states three C’S of credit,
i.e., character, capacity, capital and sometimes also condition is added. The term character means
the credit character which condition is added.
The term character means the credit characters which consist of those qualities of an individual’s
that makes him conscious about his debt. These characters include borrower’s moral qualities
such as honesty, integrity, responsibility and trust.
The capacity signifies the ability to pay his debt whenever it is come due. Capacity is a function
of income rather than savings, since payment depend up on income however income does not
indicate capacity.
The term capital refers to the equity or need worth of an individual or business. It assures that
funds are available to repay the loan, if character and capacity prove inadequate. The term
condition also signifies the financial is the lenders secondary sources of payment or security in
the cost of default. (Koch.1995) identifies the five C’S of bad to help prevent problems. This
included,

30
 I. COMPLACENCY
It refers to the tendency to assume that because things were good in the past, they will be good
in the future.
II. CARELESSNESS
It involves poor under writing, typically evidenced by in adequate loan document, lock of
current financial information and lack of protective covenants in the loan agreement.
III. COMMUNICATION BREAK DOWN
Loan problem often arise when a bank’s credit objective and policies are not clearly
communicated management should articulate and enforces loan policies and loan officers should
make management aware of specific problem with existing loans as they appear
IV. CONTINGENCIES
It refers to lender’s tendency to play down or ignore circumstance in which a loan might
difficult. The focus is on training to make a deal work rather than identifying down side risk.
V. COMPETITION
It involves following competitors behavior rather than maintaining the banks own
standards. The formal credit analysis procedure includes objective evaluation of the
borrowers request and detailed review of all finance statements.
C. MAKING OF CREDIT DECISION
After analyzing credit information, decision should be make as to whether credit should be
extended or not, what amount to extended.
If the custom credit worthiness is above the standard, there is no problem in taking decision. If
creditworthiness is blow don’t refuse out right, rather sell on more selective and restrictive terms.
III. Forming and executing of collection policy
Collection policy refers to the procedure the firm follows to collect past due receivable. Firm
should device procedure to collect past due amount from customer. The following is progressive
and popular collection procedure.
Step1. To send a polite letter followed by the second and more demanding letter.
Step2. To made telephone call to the customer.
If letter prove successful, a telephone call may be made to the customer to personally request
immediate payment.

31
Such a call is typically directed to the customer’s account payable department where the
corresponding employee acts on instruction of his/her boss. If customer has a reasonable excuse
arrangement may be made to extend the payment period.
Step3. Personal visit-this technique is much more common at the customer credit level. Nutty
may be also be effectively employed by industrial suppliers sending a local sales person or
collection person to confront the customer can be very effective collection procedure payment
may be on the spot.
Step4. Collection agency- a firm can turn a collectible account over agency or an attorney for
collection. The free these services typically quit high.
The firm may receive less than 50 cents on the dollar from accounts collected in this way.
Step5. Legal action – legal action is the most stringent step in the collection process. It is an
alternative to the use of a collection agency not only indirect legal to the use of a collection
agency not only indirect legal action expensive, but it may force the debtor in to bankruptcy,
thereby reducing the possibility of fortune business without guarantying the ultimate receipt of
the over(Lawrence J. Gitman,1997).
Lenient Vs, stringent credit policy.
Lenient credit policy involves credit sales to customer on every liberal and related form of
standards. Credit for granted for long period even to customers whose credit worthiness is not
know or whose credit worthiness is not know or whose financial position is doubt full.
Stringent credit policy –involves credit sale on every strict terms and standards credit is granted
on every selected a basis after providing financial position and credit worthiness of customers
.Bed and hardikar [1993] indicate in their book there are some general principles of good lending
which banker should follow when appraising a credit request. They include safety liquidity,
purpose, profitability, security and spread.
Safety
Is the most important principle of good lending when a banker lends, he must feel certain that the
advance is safe, that is the many will definitely come back if for example the borrower invests
the money in an productive or speculative venture should be in jeopardy similar if the borrowers
suffers losses in this business due to his in competence, the recovery of the money become
difficult.

32
Liquidity
It is not enough that the money will come back; it is also necessary that it must come back .on
demand or in accordance with agreed terms of repayment. The borrow must be in position to
repay within a reasonable time after a demand for repayment is made. This can be possible only
if the money is employed by the borrower for short term requirements and locked up in acquiring
fixed asset or in schemes with take a long time to pay their way to the source repayment must
also be definite. The reason why banker attaché as much importance to liquidity as to safety of
their fund is that a bulk of their deposits is repayable on Demand or at short notice.

Purpose
The purpose should be productive so that the money not only remain safe but also provide a
definite source of repayment.
The purpose should also be short termed so that it ensures liquidity; Banks discourage advances
for hoarding stock of for speculative activity. There is obvious risk involved there in apart from
the anti social nature of such transaction.
The backer must closely scrutinize the purpose for which the money is required and ensure, as
for as he can that the money borrowed for a particular purposes is applied by the borrower
accordingly purpose as assumed a special significant in the present day concept of banking.

33
 CHAPTER THREE
1.8 Research methodology
1.8.1. Method of data collection
To complete this study successfully, adequately and available information has great contribution,
therefore by considering this the researchers used both primary and secondary data. Primary data
gathered through interviewing the managers, assistance managers and loan officer of Unite Bank
Adama branch and specially concerned in loan approval and Collection section. and also
observation is taking place for primary data gathering. Secondary data are gathered or extracted
from documentary source particularly from United bank magazine, banks manual and loan
approval procedure manual, And related literature such as books, journals, periodicals, and so on.

1.8.2. Target population

Target population of this research focus on the loan approval and collection section take as a
target population on united bank which is found in Adama branch.
1.8.3. Sampling techniques
For the purpose of selecting potential respondent the researchers used judgemental sampling and
purposive judgemental sampling techniques. To conduct the study the researchers aimed to
gather all the necessary information from staff management, general manager, assistance
manager interviewing and while collecting questionnaires from loan section and directly related
to loan section.
1.8.4. Data analysis and interpretation
The collected data analysed based on the data collected using different data collection method
from primary and secondary source of data observed. The result of relevant data analysed by
using table form the aid of sample percentages.
The result of percentage would enable the researchers to simplify the problem of comparison and
also shows by numerical forms analysis expected to prove better understand of loan approval and
collection of the bank

34
1.9 Organization of the study
This research paper is organized in to five chapters. The first chapter is deals about the
introductory part, backgrounds of the study, statement of the problem, objective of the Study,
significant of the study, and methodology.
The second chapter contain literature reviewed for the preparation of the research, while the third
chapter deals about back ground of the organization. The collected data will be presented and
analysed in the fourth chapter and in the fives chapter conclusion and recommendations are
presented.

35
 CHAPTER FOUR
4. Data presentation and analysis
The primary data used for this study is collected from bank staff working on loan structured
questionnaire were prepared and distributed to branch manager and credit department. Some of
questionnaire allowed respondent to choose more than one option and some of the questionnaire
are required further elaboration question, as a result the analysis is made on the valid of
responses only.
Secondary data analysis was collected from secondary source such as manuals, news letter and
internet access.
4.1. Analysis and interpretation result
In this point of the study the data gathered from primary source are analyzed and interpreted. We
distributed the questions for 4(four) employees of the company which is related the problem area
of the study.
. Back ground of the bank staff
Among the demographic character attributes age, sex and job status of the respondent is the table
below.
Table 4.1 back ground of the bank staff
No Item Respondent
Sex Number Percentage (%)
1 Male 3 75%
Female 1 25%
Total 4 100%
2 AGE
20-30 3 25%
31-45 1 75%
46-60 -
Total 4 100%
3 Job status
Bank manager 1 25%
Loan officer 2 50%
Credit analysis - -
Loan clerk 1 25%
Other - -
Total 4 100%

36
The above table shows the respondent back ground, which include three classes that are sex, age
and job status.
As we can see from a table 4(100%) of the respondent are male. This shows that most of
employees are male.
Respondent employees is found in the age range between 20-30 years and 31-45 this shows that
most of the bank employees are found in by this age.
Finally, the investigator had seen the occupational status of respondents, 1(25%) of the
respondent was bank manager,2 (50%) loan officer and the remaining 1(25%) is respondents by
loan clerk.
Generally, the research concludes that majority of the employee of United Bank in Adama
branch’s educational level and working experience of the respondents in the bank was also
required. The response is summarized as follows

Table 4.2 Educational level and working experience of respondents.

No Item Respondent
Number Percentage (%)
4 Educational level - -
 Certificate holder - -
 Diploma holder
 First degree holder 4 100%
 More than first degree - -
Total 4 100%
5 Job experience
 Less than 1year - -
 1-2 years
 2-5 years 2 50%
 5-10 years 2 50%
 More than 10 years
Total 4 100%

From the above information more of the respondent has first degree holders. Regarding their
working experience 2(50 %) of the respondent have worked 2-5 years, 2(50%) of the respondent
have worked 5-10 years
Table 4.3.the sector use of the bank credit and the most users group of credit of the bank
No Item Respondent
Number Percentage

37
 (%)
6 Which sector is the most user of the bank credit -
 Agriculture - -
 Industry - -
 Domestic Trade and Service (DTS) 4 100%
 Construction - -
 Others - -
Total 4 100%

As we have seen from the above table, the most users of credit of the bank is 4(100%) Domestic
Trade and Service (DTS).Thus this implies the most loan users from the bank are Domestic
Trade and Service.
Table 4.4 About Guarantees for processing loan.
No Item Respondent
Number Percentage (%)
7 Do you obtain any securities for payment? If yes,
in what circumstances and what types of security
do you obtain?
 Yes 4 100%
 No - -
Total 4 100%

As we have seen from the above table we are considering all most all of the respondents
4(100%) are response ‘’yes’’ list their response as follow:-
Building
Share certificate
Motor vehicle
Machinery
Cash
Personal guarantee for permanent clients
Table 4.5 Days of Contact of customer.
No Item Respondent
Number Percentage (%)
8 How many days before and after due date do you
contact your customer?
A-7 1 25 %
B-15 3 75 %

38
 C-20 - -
D- Other - -
Total 4 100%

As we have seen from the above table, the bank has contact its customer after due date 7 days
ago 1 (25%) and 15 days ago 3(75 %) as per respondents

Table 4.5 Communication channel

No Item Respondent
Number Percentage (%)
9 Which communication channel you use to contact
your customer?
A-telephone 1 25 %
B-letter - -
C-physical observation - -
D- all 3 75%
Total 4 100%

As the research shown on the table, most of the respondent are response customer are
communicates through telephone 1 (25%) and all of the above 3 (25%). That means the bank
uses telephone, letter, physical observation communication channel mechanism to collect loan.
Table 4.6 High rate problem
No Item Respondent
Number Percentage (%)
10 Please select from the below listed which have a
high rate problem?
 Undiversified loan - -
 uncollectable loan - -
 the granted loan should be used for
another reason rather than the reason
which the loan was granted
 In case of default 1 25%
 Liquidity problem 1 25%
 All the above 2 50%
Total 4 100%

39
According to the above table show of 1(25%) of the respondent responded in case of
default,1(25%) is responded as liquidity problem is high rate and 2( 50%) are responded as all of
the problem listed above have high rate of problem in loan backing of loan amount among
borrowers. Almost the half of the respondents responded as the entire problem listed above
because the loan process that means the borrower misunderstands of the plan of loan.

Table 4.7 The most users group of credit of the bank

No Item Respondent
Number Percentage
(%)
11 Which of the following are the most user group
of credit of the bank?
 Government - -
 private 4 100 %
 co-operative - -
 other - -
Total 4 100%
As we have understand from the table above the most user group of party of the credit of the
bank was the private with the present type of 4 (100 %).
The most user group of credit of the bank was private because the private organizations are one
of profit seeking entities, so they used loan service for profit generating and investing in different
business sector.

40
Table 4.9 Contact of borrower
No Item Respondent
Number Percentage (%)
13 Whom should borrower first contact before apply
for a loan?
 any bank employees - -
 managers of bank 2 50%
 loan officer 2 50%
 other specify
Total 4 100%
For the above table in the 2(50%) response of respondents say loan office is first contact to apply
for a loan and 2(50%) of the respondents response are managers of bank
Table 4.10 Repayments of the loan
No Item Respondent
Number Percentage (%)
14 Would the borrower repay the loan according to
schedule?
 Yes 4 100%
 No - -
Total 4 100%
According to the above table show 4(100%) of the respondents response are ‘’yes’’. So the
borrowers repay the loan according to schedule because the bank set the repayment schedule due
to the loan is guaranteed or secured by asset and penalty of past due customers are care about
repayment on settled due date.

Table 4.11 Type of collateral

41
 No Item Respondent
Number Percentage
(%)
15 Most of time which type of collateral does the
bank request from borrower?
 Vehicle 2 50%
 Building 2 50%
 Land - -
 Educational document - -
 Other - -

Total 4 100%
According to the above table, most of the time the bank request from the borrower collateral are
2(50%) building and 2 (50%) guaranteed by vehicle because this guarantees are grouped under
fixed asset which is expectable for recovering the loan amount if uncollectability situation
Table 4.12 customer guidance and advisory service given by the bank
No Item Respondent
Number Percentage (%)
16 Does the bank provide adequate consultancy
service to customers before provide loan?
 Yes - -
 No 4 100%
Total 4 100%
The above table shows that 4 (100%) of respondent responded the bank is not provide adequate
customer guidance and advisory service to borrower (said ‘’no’’).This may has negative effect
on borrower because of lack of enough knowledge about loan and customer is not more
profitable on the business run by borrowed amount.

Table 4.13 Training and credit policy of loan orientation

No Item Respondent
Number Percentage (%)
17 Does the bank provide adequate flow up training
and credit policy of loan orientation before
permit loan in order to minimize risk related to

42
 loan?
 Yes 2 50%
 No 2 50%
Total 4 100%
From the above table the researchers generalizes, 2(50%) respondents responded are “no” That
means the bank is not provide adequate flow up training and credit policy of loan orientation
before loan requested is delivered for customer this cause un collectible expense to bank that
customer have less consideration about loan usage and implementation of loan proceed and
2(50%) respondents responded are “ yes” That means the bank provide adequate flow up
training and credit policy of loan orientation before loan requested is delivered for borrower this
minimize un collectible expense of bank that customer has high consideration about loan usage
and implementation of loan proceed.
18. How to determine the credit control process in United bank Adama branch.
For this question almost all of the respondent are list their responds and were as follow:-
 Announcing them when the loan repayment of the customer is aged or matured
communicating them through telephone and personal contact. But when they did not to repay
their loan with the schedule i.e. when the loan repayment exceed from pre settled date 90
days ,we apply 3% penalty charge on their loan from the actual interest rate.
 activities and credit analysis also analysis every activities of credit ,so that credit controlling
in AIB is somewhat we can say it is okay

Table 4.14 Type of collection technique

No Item Respondent
Number Percentage
(%)
19 What type of collection techniques?
 Door to door
 Factor agent

 Physical collection 3 75%

43
  All 1 25%

Total 4 100%

As the research can seen from the above table, most of the respondent responses are physical
collection 3(75%) and 1(25%) is responded as a bank uses door to door, physical collection and
factor agent system.

Table 4.15 Action taken

No Item Respondent
Number Percentage
(%)
20 If payment is not forthcoming what action do you
take?
 Charge penalty
 Give last warning

 Take for closer action 1 25%

 Conversation

 All 3 75%

Total 4 100%
From the above table we derive 3(75%) respondents responded as all action taken and 1(25%)
responded as take for closer action are taken.
21. How the bank analysis the problem and challenge of the credit default?
For this question almost all of the respondent are list their responds and were as follow:-
 It arise liquidity problem
 Accommodation of non-performing loans (NPL)

22. What is factor affecting credit management process in United bank adama branch?
For this question almost all of the respondent are list their responds and were as follow:-
There are so many factors that affect well credit management:-
 Liquidity problem
 Legal issue
 Political issue

44
  Government policy
 Environmental
 bankruptcy
 Deflation in the stock on hand
 Which leads to lower inventory turnover and
His credit facility overdue
Table 4.16 How often an aged debtor analysis data for last five years ago?
NO YEAR MATURED COLLECTED UNCOLLECTED
1 2014 31,450,000 23,000,000 8,450,000
2 2015 52,160,000 42,200,000 9,960,000
3 2016 72,250,000 53,800,000 18,450,000
4 2017 107,765000 76,500,000 31,265,000

5 2018 150,000,000 96,000,000 54,000,000

As we the researcher have conclusion from the above data of table the amount of uncollectible
age is increased from year to year as a sampling of last five years of our research analysis .the 4
(100%) respondents responded that the great and main reasons for un collectible incremental of
number of customer that are not more potential, change in market price (deflation, un matched of
bank interest and profit of business .and so on

CHAPTER FIVE
5. SUMMARY FINDING, CONCULISION AND RECOMMENDATION
SUMMARY OF FINDING

SUMMARY OF FINDING
 More than half of the respondent response is the most user of credit of the bank was
service sector (domestic trade sector).
 As data shows around 100% of the respondents responds the bank has obtain
security for payment.
 As data implies 75% of the respondents are said customers are contact 15 days
before and after due date.
 The bank has uses all communication channel as per all respondents data shows.
Respondents responded

45
  Undiversified loan
 Uncollectable loan
 In the case of default
 Liquidity problem are the high rate problem of loan as all data shows.
 Most of the time private customers are the user group of credit from the bank answer
of respondents.
 More than half of the respondent response the bank short term loan, medium term
loan, long term loan.
 All of the respondent response borrower first contact loan office and bank manager to
apply a loan.
 As the data show all of the respondent responses of the say the loan repay according
to schedule.
 Most of the time the bank require building and vehicles as a collateral guarantees for
providing loan for customers as their total responds shows.
 No adequate consultancy service to customer after providing loan as the whole
respondents answered the questionnaires.
 Training and credit policy of the loan are not provides for customer
 Credit control process is penalizing customer 3 % if loan is overdue as data implies
5.2 Conclusion
 Educational level and experienced are the determined factors in the delivery of quality
loan processing and approval. All numbers of respondents of the bank have degree.
 The bank does not give training opportunities to its customer.
 Most of the time bank is sell tangible collateral guarantees for settlement of un paid
loan.
 According to the majority of the respondents the bank has not give provide adequate
guidance and advisory service to its customer this is term decrease the amount of
collection loan.
 The bank is collecting the amount of money from borrowers according to schedule
rather than uncollectable loan amount.
 Most of the time bank uses credit control process are; penalty 3% from normal interest
if loan exceed 90 days after due date.
The bank was use credit collection strategies telephone, personal contact, door to door and letter.

46
 5.3 RECOMMENDATION
- In order to controlling credit, the credit manager should follow all regulation and manual
the bank.
- The organization use clearly policy and procedure for effectiveness of credit management
for borrower customer.
- The bank provide training such like about loan, how to the borrower become profitable
and all information about loan and its repayment. The bank must provide adequate credit
policy of a bank on the loan and the mode and the methods of the repayment of loan other
related services with their requested loans.
- The bank must modify credit customer selection and borrower evaluation.
- The organization must give adequate training about loan for customer before and after
loan is permitted.
- The data about loan are not more preferable both hard copy and soft copy of previous
years.
- Evaluate acceptability of the propose for which the loan is requested and the proposal
regarding its settlement
- In general the bank maintain and strength credit administration of the following areas:-
 Consultation.
 Efficient loan processing.
 Encourage customer participation .
Advocate credit growth to address need and to focus on the direction of economic growth.

47
 REFERENCE
 Bass,R.M.Credit management state.thornsltd.London3rd edition(1999).
 I.M Pandy.Financial Management.8th edition revised edition publishing Houghton
miffin company. Printed in New Jersey.(1990)
 I.M panday. Financial Management.8th edition vikes publishing house NewDelhi.(1990)
 Lawrence J.Gitman. Principles Of Managerial Finace. 9th edition publishing addition
wisely.(1997)
 Ross wester field Jorden. Corporate Finance.5th edition by Tata me grow – hill
publishing company inc. America(1999)
 Ross wester field Jorgen. Fundamental Of Corporate Finance. 5th edition by me. Grow
hill company America. (2000).

48
 APPENDIX 1
RIFT VALLY UNIVERSITY
ADAMA CAMPUS
DEPARTMENT OF ACCOUNTING & FINANCE

Research questioner
Objective: this questioner is prepared by accounting graduating students of Rift Valley
University to gather relevant information for the study entitled assessment of credit management
practice in the case study of “ United bank adama branch’’
Background of the respondents:
1 .sex Male  Female 
2.Qualification Diploma  BA 
Msc  PHD 
3. Position ……………………………………..

49
4. Department………………………………….
5. Work experience……………………………
Questionnaire
The question is design specifically for United bank S.C manager and credit department of
Adama branch in Adama town.
- The purpose of these questions is to obtain information concerning credit management
practice of the bank we respectful request your kind corporation in answering the
questions that follow as clearly and frankly as possible we assure you that filling this
question has no negative consequence on your personal life.

Thank You!!
Instruction:
- Where ever there is alternative answer you can tick in one or more boxes needed.
- If the question requires further elaboration please write briefly on the space given.

Back ground of the bank staff

Demographic character
1. Sex
Male Female
2. Age
20-30 31-45 46-60
3. Job status
Bank Manager
Loan officer
Credit analysis
Loan clerk (typist) other
4. Education level (the most recent)
Certificate holder

50
 Diploma holder
First degree holder
More than first degree holder
5. Jobs experience around loan
Less than1 year
1-2years
2-5 years
5-10 years
More than 10 years
1. From the different sectors, which one is the frequently take loan from the bank?
A. Agriculture
B. Industry
C. Hotel
D. Construction
E. Domestic Trade Service (DTS)

Other please specify_____________________________________________

2. Do you obtain any security for payment?

Yes □ No □
3. If yes, in what circumstances and what types of security? Do you obtain?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
__________________________________________________
4. How many days before and after due date do you contact you customer?
A. 7
B.15
C. 20
D. Other please specify_____________________________________________
5. Which communication channel you use to contact your customer?

51
 A. telephone
B. letter
C. physical observation
D. If other please specify _____________________________________________

6. Please select from the below listed problems, which have a high rate problem?
1. Undiversified loan
2. Uncollectable loan
3. The granted loan should be used for another reason rather than the reason which
The loan was granted
4. In the case of default
5. Liquidity problem
Other please specify_____________________________________________
7. Which of the following is the most user group of credit of the bank?
A. Government
B. Private
C. Co—operative
Other specify_____________________________________________________
8. What type of loan advanced or granted by the bank?
A. Short –term loan
B. Medium – term loan
C. Long – term
Other please specify_____________________________________________
9. Whom should borrowers first contact before apply for a loan?
A. Any bank employees
B. Manager for bank
C. Loan office
D. other specify______________________________________
10. Would the borrower repay the loan according to schedule?
Yes □ No □
11. If not what is the main reason for the over due

52
 ___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
_________________________________________
12. Most of time which type of collateral does the bank request from borrower?
A. Vehicle D. educational document
B. Building E. other, specify___________________
C. Land

13. Does the bank provide adequate consultancy service to customers after provide loan?
Yes□ No□
14. If yes specify
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

15. Does the bank provide adequate flow up training and credit policy of loan orientation before
permit loan in order to minimize risk related to loan
Yes □ No □
16. If yes please specify
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
____________________________
17. How to determine the credit control process in awash international bank in adama branch?
Describe it
______________________________________________________________________________
______________________________________________________________________________

53
______________________________________________________________________________
______________________________________________________________
18. What type of collection techniques?
A. door to door
B. factor agent
C. legal action
D. other, specify___________________
19 If payment is not forthcoming what action do you take?
A. Charge penalty.
B. Give last warning.
C. Take for closer action.
D. To make conversation with borrower about his repayment habit.
Other please specify_____________________________________________

20. How to the bank analysis the problem and challenge of the credit default?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
__________________________________________________________________
21. What is the factor affecting credit management process in AIB in adama branch?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________

22. How often an aged debtor analysis data for last five years ago?
No Year Matured Collected uncollected
1 2013
2 2014
3 2016
4 2017
5 2018

54
23. If the Flows of uncollectable amount is accelerated/decreased, from year to year what is the
proper mechanism of loan management your company use ?
Please specify
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________
24. If the amount of uncollectable is increased, from year to year what is the main reason for
incremental of un collectability of loan?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
_____________________________________________________

Appendix 2
Interview questions for the purpose of collection of data about background of the organization
1. When the start of this bank?
2. How many workers get by this bank? How many male and female?
3. What is the bank benefit of bank by giving credit service?
4. What is the vision at the future?

55