FACTORS THAT AFFECT THE SIZE OFNONPERFORMING LOANS ON THE CASE OF DASHEN BANK SHARE COMPANY

Abstract

As it is known, lending is the principal function of banks through extending of loans out of the deposit they collected from depositors. In the course of their operation however, banks may face the risk of getting loss because of uncollectible loans. Due to this, the loan portfolio will be dominated by non-performing loan (NPLs).Therefore, the main purpose of this study is to identify factors that contribute to increase the size of nonperforming loans in banks. The study used both primary and secondary data collection methods to answer its research questions. Among primary ones, 51 self-administered questionnaires were distributed to the staffs who are engaged in loan processing and approving at head office and branch level of Dashen bank. The response rate of the questionnaire is 94 %( 48). In order to make the study complete, 60 questionnaires were also distributed to borrowers of the bank at different branches. The response rate is 42 %( 25), due to the customers not coming regularly. In addition, some selected loan officers and branch managers were interviewed to justify the answers given in the questionnaire. Secondary data also gathered from publications of the bank, loan procedure manuals, journals, websites and books. Then, the data collected from questionnaire was analyzed using descriptive statistical method such as percentages in order to make the paper simple to understand. In addition, tables were used to present the results of the study. The result of the study indicates that diversion of the borrowed fund to other purpose, lack of adequate knowledge and experience on how to use the granted loan by the borrower, un-planned and ambitious business expansion, unwillingness and carelessness of borrowers to pay their debt and providing falsified financial statements to the bank are considered by the staff members of the bank as significant factors to make borrowers in default and increase the balance NPLs in the bank. In addition to these factors, borrowers reveal that lack of adequate market to sell their goods and services, economic and political environment of the country are the major causes of the problem. On the other hand, not taking timely action by the bank when borrowers start to default, competition among banks to attract borrowers and lack of strict follow-up and loan workout procedure, are regarded as significant factors that contribute to increase the size of NPLs from the bank side. To conclude, the study identifies various factors that contribute to increase the size of NPLs in the bank, and hence most of the reasons emanate from the borrowers’ side. By strengthen the existing loan processing procedures together with creating credit awareness to borrowers; the bank can reduce the chance of loan loss to the large extent. Therefore, in order to improve its credit processing quality, the bank should have competent and trained staffs by providing adequate and up to date training as a continuous basis.