CHAPTER ONE

INTRODUCTION

Banking operation is very important in the affairs of any economy the fundamental function of commercial bank in economy system in the transfer of funds from the savings surplus unit to the borrowing deficit units. The surplus units provide the fund needed to the deficit units for investment purposes. This is essential fro economic growth of any country. The commercial banks are the intermediaries between the demand side and supply side. 

Banks is the process of performing their code of financial intermediaries between surplus units and deficits create deposit. When a bank gives out loan to a customer, it debits the loan account and credit the customer account with the amount involved. The credit to the customer account which has become a new deposit is available the bank for further lending to other borrowers.

The ability of a commercial banks to grant loan depends on the level of deposit it has generated and the legal reserve requirement imposed by the central bank.

A bank earns a return for performance of the role of mobilization loans and advances are described as the must important as well as the bad debt. Effect of bad debts on the profitability of banking institution. Most profitable asset of commercial banks. One of the main objectives of commercial banks to maximized profit but this objective can be affected by increasing the trend of provision for bad and doubtful debts.

If there is doubt concerning the recovering of the account, it is classified doubtful and when several efforts general forward are in vain, it is declared a bad account, due to the numerous reasons which may include the likely death of a borrower, possible illegal diversion of funds, poor state of the economy not all the loan granted by banks to customer are repaid when due, such problems on loans and advances are classified as bad and doubtful.

This has been two major concerns to both management and shareholders. Bad debt are losses to banks and therefore are capable of reducing the returns that the shareholders and contributions of the banks to economic and social development of the country.

1.0    BACKGROUND OF THE STUDY

Through the resolution to create a debt recovery department out of the ‘Head’ Office Advance Department was finally taken on 31st December 1984 but it practically implemented on 31st January, 1985.