The word bank simply means a financial institution that deals with finance (monetary) by receiving from the members of the public who have surplus and giving or granting to those who have project in mind to finance. The bank surplus deposits are then lend out to the needy persons, corporate bodies and business customer in form of loans, advances and overdraft. This prove the statement that bank service as a major intermediary between the demand sector which need credit to finance their project and the supply sector(those who provide such fund which the bank lend to such investors).
According to Ogboghro (2006) one of the basic functions of a bank is the lending of surplus funds to those who want to borrow, for most customers, both personal and business, the bank represent one of the cheapest and most flexible sources of finance for small business in particular.
Credit facilities (lending) are usually in form of loans, advances, bills discounting, bonds and overdrafts. Lending is one of the most intricate services rendered by bank services.
The banking policies have to operate in accordance with the central bank of Nigeria (CBN) directories and other monetary controls, while at the same time, adequate reserves and cash must be maintained.
It is indisputable fact that important assets items in the balance sheet of the commercial and merchant banks now know as universal banks are loans and advances. These items are reported for some good reasons.
Onyia and Olute (2000) from the bank perspective, they are the largest source of income/loans and overdraft, the focus of prudential credit or lending guidelines used in Nigeria are directives released annually by the central bank of Nigeria on their lending activities in a given year.
There are some condition which must be fulfill by customers before such facilities are granted, these are popularly known as the CANONS OF GOOD LENDING, which include the safety of the loan, amount of loan, purpose of the loan, period of the loan, profitability of the loan repayment plan and security of the loan. Among the canons of good lending, the safety is mainly taken care of. In thinking of the safety of lending, is assessed by considering what is commonly known as 5c’s of lending which includes; the character of the borrower, the connection of the borrower, collateral security to cover the loan and capacity, condition of the sector of the company, the borrower belongs, who the customers (borrowers) is? (character, what is her/his previous relationship with bank?). These goes into the integrity of whomever the borrower may be. Some borrowers could pay with ease but fail to oblige due to lack of morality. Therefore, the lender should as a matter of fact make sure that the integrity of the borrower is not in doubt. Most bad debts arise as a result of insufficient information about the prospective borrower. In order to avoid this, banks are expected to carry out enough inquiries about the borrower so that adequate information would be obtained to enable them make better judgment.