AN ANALYSIS OF DEBT RECOVERY TECHNIQUES USED BY COMMERCIAL BANKS

ABSTRACT The banking industry has been known to provide lending to support activities of Corporate, businesses as well as individuals. This loan offered by bank is derived from shareholders whose interest is simply to make profits. This makes banks key role to be lending and making a margin from funds lent so that it can provide a return on investment for the shareholders. It has been difficult for banks to play this role with ease as the market is bedeviled with risks, risks which cannot be fully mitigated. The credit risk departments of the bank try as much as possible to offer calculated risks and come up with a proper analysis of anyone who wants to borrow. However, at the end of the day, banks still struggle with bad debt which leads to growth of non-performing loans (NPL) of the bank. If NPL is not tamed, a bank can go under. The importance of debt collection strategies comes into play to mitigate risks related to the lending activities of the back. Various operational strategies are employed by Commercial Banks as highlighted in this research paper. In order to meet the objectives of the study, data was collected through personal interview of those involved in debt recovery and the credit risk department who are involved in the credit approval process. This study seeks to study operational strategies that banks can put in place to ensure the NPL portfolio is kept at check through establishing operation strategies to debt recovery by Commercial banks.  In conclusion it was noted the operational strategies employed by Commercial bank were effective and should be emulated by other banking institutions such as development bank to reduce the growth of the NPL portfolio.

INTRODUCTION Commercial banks use various kinds of debt to finance its operations. The various types of debt can generally be categorized into secured and unsecured debt, private and public debt, syndicated and bilateral debt amongst others.  A debt obligation is considered secured if creditors have recourse to the assets of the bank on a proprietary basis or otherwise ahead of general claims against the bank. Unsecured debt comprises financial obligations, where creditors do not have recourse to the assets of the borrower to satisfy their claims. Private debt comprises bank - loan type obligations. Public debt is a general definition covering all financial instruments that are freely tradeable on a public exchange or over the counter, with few if any restrictions (Swanson, et al., 2008).
A basic loan is the simplest form of debt incurred by commercial banks is usually advanced to finance asset acquisition by both clients and staff. It consists of an agreement to lend a fixed amount of money, called the principal sum, for a fixed period of time, with this amount to be repaid by a certain date. In commercial loans interest, calculated as a percentage of the principal sum per year, will also have to be paid by that date, or may be paid periodically in the interval, such as annually or monthly(Dubois & Anderson, 2010). But the greatest challenge to lending agencies has been the high rate of default in payments compounded by bad economic situation. This forces them to incur more expenditure towards recovery of the loans. Debt recovery is guided by some regulations that somewhat make it difficult to collect the money, resulting to the loan being written off. Thus the strategic success of the company is compromised.