INTRODUCTION
Before the introduction of the prudential guidelines, according to CBN circular (1990) some banks were used to declaring huge but unrealized profit, otherwise referred to as “paper profit”.
The following problems will be investigated in this study:
(a)Did profit figures of the selected commercial banks decrease significantly post prudential guidelines?
(b)Did provision for bad and doubtful debts increase significantly under prudential guidelines?
LITERATURE REVIEW
The objective of the prudential guidelines is to protect the depositors and prevent the banks from being exposed to capital inadequacy and possibly becoming insolvent, that is failing in their obligation to their depositors and shareholders. Olisambu (1992) stated that the good thing about prudential guidelines is that, we can now clean up the banking system, exercise better care and conform to the internationally accepted standards.
This view is in line with that of Nwankwo (1991), who opined that not with standing any temporary inconveniences and set bank which prudential guidelines may have caused, particularly to the older banks like Union bank of Nigeria PLC, we wish to state that we categorically welcome the guidelines as part of the current measures to standardize it’s practices.
According to Ebodaghe (1993), the prudential guidelines were intended to ensure due diligence in credit portfolio classification, provisioning for non-performing facilities. This was necessary to ensure reliability in published accounting information and operating results by banks for the first time, the prudential guidelines have compelled banks to classify loan assets accumulated over a long period of 28 years and more in some banks into performing and non-performing. This objective will to a large extent reduce inadence where dividends and tax were paid out of the paper profit from non-performing assets in the past year.
Prior to the issuance of prudential guidelines, the non performing assets in financial institutions were not uniformly classified neither were adequate provision made for such facilities. These practices not only made comparison between institutions difficult, they also tended to hide inefficiencies and distort performance. Ebodaghe (1993) further stated that the introduction of guidelines has brought about uniform classification of non-performing assets and adequate provision for such facilities. Thus comparison between financial institution is now easier than before. Olisambu (1992), states that the primary objective for the introduction of prudential guidelines is to eliminate posting of paper profits by banks. Before the guidelines came out, there had been a lot of playing around with the figures posted by the banks. The truth is gradually coming to light and accounting standards are finally conforming to the international requirement.
According to Olufun (1990), prudential guidelines seeks to infuse sanity into the ehaotic banking environment, whereby different banks adopted different criteria in treating non-performing loans and bad debts.
Ebodaghe (1991) gives the following as the objective of the prudential guidelines.
(i)To accrued on non-performing assets.
(ii)To ensure the reliability of published accounts.
In order ensure a more prudent approach in their credit portfolio classification, providing for non-performing facilities, credit portfolio and interest to ensure that items “other Assets” in the balance sheet of bank contain real assets, the guidelines require banks to write off immaterial items like loan forgotten, untraceable as well as unreconcilliable and where material (ie at least 10% of aggregate balance of other assets should be classified as below
(A)Substandard:-
(i) Cheques Purchased and cleared effect outstanding after the permissible
clearing period.
(ii) Fruad eases of up to 6 months old and under police investigation regardless of the likely outcome of the cases.
(iii) Inter-branch items of between 2 to 3 months
(iii)All other intangible suspense accounts existing in the books for up to 3 months.
For other asset items classified as substandard a minimum provision of 10% should be made.
(B)Doubtful-items for doubtful classification should include, but not limited to the following:-
(i)Cheques purchases of between 3 to 6 months and but when had been withdrawn or cancelled and substituted with new ones. Similar treatment should be accorded unlearned effect for which values had been given.
(ii)Outstanding fraud cases of 6 to 12 months old and with slim chances of full recoveries.
(iii)Inter-branch items outstanding for between 3 to 6 months.
(iv)All other tangible suspense account outstanding for between 6 months and 12 months.
For “ other Assets” classified a doubtful a minimum of 50% provision should be made.
(c) LOST- items for lost classified should include but are not limited to the following.
(i)Cheques purchased and uncleared effects over 6 months for which values had been given.
Should not form part of balance sheet to tals while their disclosure in note form should distinguish between:-
(a)Direct credit substitutes such as guarantees, acceptances and standby letters of credit serving as guarantees;
(b)Transaction related contingencies, such as bid bonds, performance guarantees and standby letters of credit related to particular transactions.
(c)short-term self liquidation trades related contingencies resulting from the movement of goods.
(d)Other contingencies.
However, in order to reduce the difficulties of the implementation of the prudential guidelines, the central bank of Nigeria issued an amendment to the monetary policy circular 25 of may 15, 1991 which modified the treatment of short falls in provisioning over a maximum period of 4 years. This was stipulated by CBN (1990).
Also in compliance with section 10, sub-section 1 (b) of Banks and other financial institutions (BOFIA) decree, banks with outstanding short falls in provision must charge the protracted shortfalls together with the current provision determined for any accounting year to the profit and loss Account of that year before any appropriation to statutory reserve, dividends or share bonus issue is made.
(ii)Outstanding fraud cases over 12 months and involving protracted litigations.
(iii)Inter-branch item over 6 month old whether or not the origin is known
(iv)All other intangible suspense account over 12 months old.
Full provision, that 100% should be accorded to items classified lost.
The guidelines imposes new requirement of off-balance sheet engagements. According to the guidelines, a paper appraisal of off-balance sheet engagement should be undertaken with a view to determining the extend of loss a bank is likely to sustain. Items in off-balance sheet include letter of credits, Bonds, Guarantees, indemnities, Acceptance and pending or protracted litigations (the outcome of which could not be easily determined).
The following factors should betaken into consideration in recognizing loss on off-balance sheet engagements.
(a)Date the liability was incurred.
(b)Expiry date
(c)Security pledge
(d)Performance of other facilities being enjoyed by the customer,
example loans and advances.
(e)Percieved risk.
Full provision must be made for any loss that may arise from off-balance sheet transaction. Furthermore, the guidelines state that off-balance sheet engagements.