Causes and Impact of Non-Performing Loans: The Case of Ut Bank

Abstract

Loans form a chunk of a bank’s assets as a financial institution. This comes about as a result of granting loans to individuals, companies and other institutions in a way of making income. The loans granted by these banks constitute their loan portfolios and assets. However, a loan granted can go bad and this goes a long way to affect the financial health and profitability of the bank in the future through huge provisions for bad and doubtful debts in its books. This research was carried out to establish the causes and impacts of non-performing loans on the financial performance of banks, focusing on UT Bank. This study covered the past five year’s performance of the loans of UT Bank. The data used for this study were primary and secondary data. Questionnaires were the main tools used for the gathering of primary data and I also relied mainly on various forms of published and unpublished information including annual financial reports and other management reports of UT Bank. Some of the causes of these non-performing loans are borrower’s orientation/culture, risk appetite of the bank, high loan interest rate, rapid loan portfolio growth, weak credit monitoring, poor risk assessment, compromised integrity of credit officers, size of the bank, high inflation, poor training of staff, lack of security/collateral, diversion of funds by borrowers, and unfavourable economic changes. It is recommended that effective loan monitoring, staff training, adequate and liquid collaterals, customer orientation and training, use of credit reference bureau and effective monitoring of business cycle of industries are used to improve on the quality of their loans portfolio.