INVESTIGATING LOAN DEFAULTS AND THEIR EFFECTS ON THE PROFITABILITY OF BANKS
Dr. Ruchi Atri , Jatin Sharma
MASTER OF BUSINESS ADMINISTRATION
School of Business Galgotias University
INTRODUCTION
Over the last 10 years, the quality of the loan and its portfolios across many economies worldwide stayed comparatively stable until the emergence of 2007-08 financial crises. Since then, the quality of the bank assets declined quickly because of the world economic downturn. The reality is that loan performance is closely associated with the economy of any country and decline in the loan performance was not yet standardized across the world economies (Gerstel and Baesens, 2008).
The crucial problem faced by financial institutions in Cameroon is credit risk because of defaulters not repaying credits. The failure to manage bad debts leads to insolvency and losses among financial institutions (Abiola & Olausi, 2014). The growing trend of loan defaults is becoming a concerning issue notonly for the banking sector but also for the national economy of Cameroon; It hinders the financing capacityof the banks and, therefore, harms the overall socio-economic development of the country. Among the various services provided by the bank, lending has been the primary activity for a decade.
Default loans can be described in an actual sense as bad loans, which banks are not proficient to earn from, it is uncertain in determining whether the debtors would be able to make their instalments in regardsto the amount owed or borrowed. Customers of banks in Cameroon consist of businesspersons and women, civil servants, contractors and even the state itself and all are accountable for the poor performanceof loans in the banking system.
Kofi and Dadzie (2012) found that some reasons for default include poor sales, sickness, lack of planning by clients, spending on unnecessary things by clients, poor record-keeping and inadequate monitoring by loan officers. Moreover, it was observed that implication of loan default to banks includes the inability to disburse more loan in future, reducing operating profits, loan-able funds and undermining the liquidity.
