Overview of Credit Policy and

Loan Characteristics
Koch, T. W. (2010). Bank Management. Australia; Mason,
Ohio: South-Western CENGAGE Learning.

pages 485-522
 Measuring Aggregate Asset Quality
It is extremely difficult to assess individual asset
quality using aggregate quality data
Different types of assets and off-balance sheet
activities have different default probabilities
– Loans typically exhibit the greatest credit risk
Historical charge-offs and past-due loans might
understate (or overstate) future losses depending
on the future economic and operational
 Measuring Aggregate Asset Quality
Concentration Risk
– Exists when banks lend in a narrow geographic
area or concentrate their loans in a certain
industry

Country Risk
– Refers to the potential loss of interest and
principal on international loans due to
borrowers in a country refusing to make timely
payments
 Trends in Competition for Loan Business
Banks still have the required expertise and
experience to make them the preferred
lender for many types of loans

Technology advances have meant that more

loans are becoming “standardized,” making it
easier for market participants to offer loans
 Trends in Competition for Loan Business
Structured Note
– Loan that is specifically designed to meet
the needs of one or a few companies but
has been packaged for resale
 The Credit Process
Loan Policy
– Formalizes lending guidelines that employees follow
to conduct bank business

Credit Philosophy
– Management’s philosophy that determines how
much risk the bank will take and in what form

Credit Culture
– The fundamental principles that drive lending
 The Credit Process
Credit Culture
– The fundamental principles that drive lending activity
and how management analyzes risk

• Values Driven
– Focus is on credit quality
• Current-Profit Driven
– Focus is on short-term earnings
• Market-Share Driven
 The Credit Process
Loan Policy
– Formalizes lending guidelines that employees follow
to conduct bank business

Credit Philosophy
– Management’s philosophy that determines how
much risk the bank will take and in what form

Credit Culture
– The fundamental principles that drive lending
 The Credit Process
• Business Development and Credit Analysis
– Business Development
– Market research
– Train employees:
• What products are available
• What products customers are likely to need
• How they should communicate with
customers about those needs
– Advertising and Public Relations
 The Credit Process
Business Development and Credit Analysis
– Credit Analysis
• Evaluate a borrower’s ability and willingness to
repay
• Questions to address
– What risks are inherent in the operations of
the business?
– What have managers done or failed to do in
mitigating those risks?
– How can a lender structure and control its
 The Credit Process
Business Development and Credit Analysis
– Credit Analysis
•Five C’s of Good Credit
–Character
–Capital
–Capacity
–Conditions
 The Credit Process
– Business Development and Credit Analysis
– Credit Analysis
•Five C’s of Bad Credit
–Complacency
–Carelessness
–Communication
–Contingencies
 The Credit Process
Business Development and Credit Analysis
– Credit Analysis
• Procedure
1. Collect information for the credit file
2. Evaluate management, the company, and the industry
in which it operates
3. Conduct a financial statement analysis
4. Project the borrower’s cash flow and its ability to
service the debt
5. Evaluate collateral or the secondary source of
repayment
6. Write a summary analysis and making a
recommendation
 The Credit Process
Credit Execution and Administration
– Loan Decision
•Individual officer decision
•Committee
•Centralized underwriting
 The Credit Process
Credit Execution and Administration
– Loan Agreement formalizes :
• the purpose of the loan
• Terms of the loan
• Repayment schedule
• Collateral required
• Any loan covenants
 The Credit Process
Credit Execution and Administration
– Documentation: Perfecting the Security Interest
• Perfected
– When the bank's claim is superior to that
of other creditors and the borrower
» Require the borrower to sign a security
agreement that assigns the qualifying
collateral to the bank
» Bank obtains title to equipment or
 The Credit Process
Credit Execution and Administration
– Position Limits
• Maximum allowable credit exposures to any
single borrower, industry, or geographic local
– Risk Rating Loans
• Evaluating characteristics of the borrower
and loan to assess the likelihood of default
and the amount of loss in the event of
default
 The Credit Process
Credit Execution and Administration
– Loan Covenants
•Positive (Affirmative)
–Indicate specific provisions to which
the borrower must adhere
•Negative
–Indicate financial limitations and
The Credit Process
 The Credit Process
– Credit Execution and Administration
– Loan Review
• Monitoring the performance of existing loans
• Handling problem loans
– Loan review should be kept separate from credit
analysis, execution, and administration
• The loan review committee should act
independent of loan officers and report
 The Credit Process
– Credit Execution and Administration
– Problem Loans
• Often require special treatment
– Modify terms of the loan agreement to
increases the probability of full repayment
» Modifications might include:
• Deferring interest and principal
payments
• Lengthening maturities
Overview of Credit Policy and
Loan Characteristics
Koch, T. W. (2010). Bank Management. Australia; Mason,
Ohio: South-Western CENGAGE Learning.

pages 485-522
Characteristics of Different Types of
Loans
Classifications
– Real Estate Loans
– Commercial Loans
– Individual Loans
– Agricultural Loans
– Other Loans and Leases in Domestic Offices
– Loans and Leases in Foreign Offices
Characteristics of Different Types of
Loans
Real Estate Loans
– Commercial Real Estate Loans
•Typically short-term loans consisting of:
–Construction and Real Estate
Development Loans
–Land Development Loans
–Commercial Building Construction and
Characteristics of Different Types of
Loans
Real Estate Loans
– Commercial Real Estate Loans
• Construction Loans
– Interim financing on commercial, industrial, and
multi-family residential property
• Interim Loans
– Provide financing for a limited time until permanent
financing is arranged
• Land Development Loans
– Finance the construction of road and public utilities in
areas where developers plan to build houses
– Developers typically repay loans as lots or homes are sold
Characteristics of Different Types of
Loans
Real Estate Loans
– Commercial Real Estate Loans
•Takeout Commitment
–An agreement whereby a different
lender agrees to provide long-term
COMPANY
financing after construction is finished
BANK A BANK B
Characteristics of Different Types of
Loans
Real Estate Loans
– Residential Mortgage Loans
•Mortgage
–Legal document through which a
borrower gives a lender a lien on real
property as collateral against a debt
•Most are amortized with monthly
payments, including principal and interest
Characteristics of Different Types of
Loans
Real Estate Loans
– Residential Mortgage Loans
• 1-4 Family Residential Mortgage Loans
– Holding long-term fixed-rate mortgages can create
interest rate risk for banks with loss potential if rates
increase
– To avoid this, many mortgages now provide for:
» Periodic adjustments in the interest rate
» Adjustments in periodic principal payments
» The lender sharing in any price appreciation of the
underlying asset at sale
– All of these can increase cash flows to the lender when
interest rates rise
Characteristics of Different Types of
Loans
Real Estate Loans
– The Secondary Mortgage Market
•Involves the trading of previously
originated residential mortgages
–Can be sold directly to investors or
packaged into mortgage pools
Characteristics of Different Types of
Loans
Real Estate Loans
– Home Equity Loans
•Second Mortgage Loans
–Typically shorter term than first
mortgages
–Subordinated to first mortgage
Characteristics of Different Types of
Loans
Real Estate Loans
– Equity Investments in Real Estate
•Historically, commercial banks have been
prevented from owning real estate except
for their corporate offices or property
involved in foreclosure
•Regulators want banks to engage in
speculative real estate activities only
Characteristics of Different Types of
Loans
Commercial Loans
– Loan Commitment/Line of Credit
•Formal agreement between a bank and
borrower to provide a fixed amount of
credit for a specified period
•The customer determines the timing of
actual borrowing
Characteristics of Different Types of
Loans
Commercial Loans
– Working Capital Requirements
•Net Working Capital
–Current assets – Current liabilities
–For most firms, net working capital is
positive, indicating that some current
assets are not financed with current
Characteristics of Different Types of
Loans
Commercial Loans
– Working Capital Requirements
•Days Cash
–Cash/(Sales/365)
•Days Receivables
–AR/(Sales/365)
•Days Inventory
Characteristics of Different Types of
Loans
Commercial Loans
– Working Capital Requirements
•Days Payable
–AP/(Purchases/365)
•Days Accruals
–Accruals/(Operating Expenses/365)
Characteristics of Different Types of
Loans
Commercial Loans
– Working Capital Requirements
• Cash-to-Cash Asset Cycle
– How long the firm must finance operating
cash, inventory and accounts receivables
from the day of first sale
• Cash-to-Cash Liability Cycle
– How long a firm obtains interest-free
financing from suppliers in the form of
accounts payable and accrued expenses to
Characteristics of Different Types of
Loans
 Characteristics of Different Types of
Loans
• Commercial Loans
– Working Capital Requirements
 Characteristics of Different Types of
Loans
• Commercial Loans
– Seasonal versus Permanent Working
Capital Needs
•All firms need some minimum level of
current assets and current liabilities
•The amount of current assets and
current liabilities will vary with seasonal
 Characteristics of Different Types of
Loans
• Commercial Loans
– Seasonal versus Permanent Working Capital
Needs
• Permanent Working Capital
– The minimum level of current assets
minus the minimum level of adjusted
current liabilities
» Adjusted Current Liabilities
• Current liabilities net of short-term
bank credit and current maturities
 Characteristics of Different Types of
Loans
• Commercial Loans
– Seasonal versus Permanent Working
Capital Needs
•Seasonal Working Capital
–Difference in total current assets and
adjusted current liabilities
Characteristics of Different Types of
Loans
Commercial Loans
– Seasonal Working Capital Loans
• Finance a temporary increase in net current
assets above the permanent requirement
• Loan is seasonal if the need arises on a
regular basis and if the cycle completes itself
within one year
• Loan is self-liquidating if repayment derives
from sales of the finished goods that are
Characteristics of Different Types of
Loans
 Characteristics of Different Types of
Loans
• Commercial Loans
– Short-Term Commercial Loans
•Short-term funding needs are financed by
short-term loans, while long-term needs
are financed by term loans with longer
maturities
 Characteristics of Different Types of
Loans
• Commercial Loans
– Open Credit Lines
• Used to meet many types of temporary needs in
addition to seasonal needs
• Informal Credit Line
– Not legally binding but represent a promise that the
lender will advance credit
• Formal Credit Line
– Legally binding even though no written agreement
is signed
– A commitment fee is charged for making credit
available, regardless of whether the customer
 Characteristics of Different Types of
Loans
• Commercial Loans
– Asset-Based Loans
•Loans Secured by Accounts Receivable
–The security consists of paper assets
that presumably represent sales
–The quality of the collateral depends
on the borrower’s integrity in
reporting actual sales and the
 Characteristics of Different Types of
Loans
• Commercial Loans
– Asset-Based Loans
• Loans Secured by Accounts Receivable
– Accounts Receivable Aging Schedule
» List of A/Rs grouped according to the month in
which the invoice is dated
– Lockbox
» Customer’s mail payments go directly to a P.O.
Box controlled by the bank
» The bank processes the payments and reduces
the borrower’s balance but charges the
borrower for handling the items
 Characteristics of Different Types of
Loans
• Commercial Loans
– Highly Levered Transactions
• Leveraged Buyout (LBO)
– Involves a group of investors, often part of
the management team, buying a target
company and taking it private with a
minimum amount of equity and a large
amount of debt
» Target companies are generally those
with undervalued hard assets
 Characteristics of Different Types of
Loans
• Commercial Loans
– Highly Levered Transactions
• Leveraged Buyout (LBO)
– The investors often sell specific assets or
subsidiaries to pay down much of the debt quickly
» If key assets have been undervalued, the
investors may own a downsized company
whose earnings prospects have improved and
whose stock has increased in value
» The investors sell the company or take it public
once the market perceives its greater value
 Characteristics of Different Types of
Loans
• Commercial Loans
– Highly Levered Transactions
• Arise from three types of transactions
– LBOs in which debt is substituted for privately
held equity
– Leveraged recapitalizations in which
borrowers use loan proceeds to pay large
dividends to shareholders
– Leveraged acquisitions in which a cash
purchase of another related company
 Characteristics of Different Types of
Loans
• Commercial Loans
– Highly Levered Transactions
• An HLT must involve the buyout, recapitalization,
or acquisition of a firm in which either:
1. The firm’s subsequent leverage ratio
exceeds 75 percent
2. The transaction more than doubles the
borrower’s liabilities and produces a
leverage ratio over 50 percent
3. The regulators or firm that syndicates the
 Characteristics of Different Types of
Loans
• Commercial Loans
– Term Commercial Loans
•Original maturity greater than 1 year
–Typically finance:
»Depreciable assets
»Start-up costs for a new venture
»Permanent increase in the level of
Characteristics of Different Types of
Loans
Commercial Loans
– Term Commercial Loans
•Lenders focus more on the borrower’s
periodic income and cash flow rather
than the balance sheet
–Term loans often require collateral, but
this represents a secondary source of
repayment in case the borrower
Characteristics of Different Types of
Loans
Commercial Loans
– Term Commercial Loans
•Balloon Payments
–Most of the principal is due at maturity
•Bullet Payments
–All of the principal is due at maturity
Characteristics of Different Types of
Loans
Commercial Loans
– Revolving Credits
• A hybrid of short-term working capital loans and term
loans
• Typically involves the commitment of funds for 1 – 5
years
• At the end of some interim period, the outstanding
principal converts to a term loan
• During the interim period, the borrower determines
how much credit to use
• Mandatory principal payments begin once the
Characteristics of Different Types of
Loans
Agricultural Loans
– Proceeds are used to purchase seed, fertilizer
and pesticides and to pay other production costs
• Farmers expect to repay the debt with the
crops are harvested and sold
– Long-term loans finance livestock, equipment,
and land purchases
• The primary source of repayment is cash flow
from the sale of livestock and harvested crops
Characteristics of Different Types of
Loans
Consumer Loans
– Installment
• Require periodic payments of principal and
interest
– Credit Card
– Non-Installment
• For special purposes
– Example: Bridge loan for the down
payment on a house that is repaid from the
sale of the previous house
Characteristics of Different Types of
Loans
Venture Capital
– A broad term use to describe funding acquired in
the earlier stages of a firm’s economic life
• Due to the high leverage and risk involved
banks generally do not participate directly in
venture capital deals
• Some banks have subsidiaries that finance
certain types of equity participations and
venture capital deals, but their participation is
Characteristics of Different Types of
Loans
Venture Capital
– Venture capital firms attempt to add value
to the firm without taking majority control
•Often, venture capital firms not only
provide financing but experience,
expertise, contacts, and advice when
required
Characteristics of Different Types of
Loans
Venture Capital
– Types of Venture Financing
•Seed or Start-up Capital
–Early stages of financing
–Highly levered transactions in which the
venture capital firm will lend money for
a percentage stake in the firm
»Rarely, if ever, do banks participate
Characteristics of Different Types of
Loans
Venture Capital
– Types of Venture Financing
• Later-Stage Development Financing:
– Expansion and replacement financing
– Recapitalization or turnaround financing
– Buy-out or buy-in financing
– Mezzanine financing
• Banks do participate in these rounds of
financing, but if the company is overleveraged at
the onset, the banks will be effectively excluded
THE CREDIT SYSTEM
The Development of Credit

•Degree of Economic

•Social Values
•Institutions pervading in a particular society
 CREDIT

•Tool of development and progress of people and society; however prone to improper
use

•In a self-contained society where people only produce what they consume, credit has
no place

•People realized that it was not possible to produce all the goods that they wanted to
consume - BARTER
PRE-SPANISH TIME
• Trading with China, Japan,
Sumatra, India, Arabia, Siam,
Borneo, Java, Moluccas and other
East Indian Islands

• BARTER System was used

• Filipino Traders were famous for

honesty and excellent record.
Dishonesty was discouraged and
dishonored.

• The reputation of Filipino Traders

contributed to the growth of trade
and commerce in the Asian Region
 Spanish Time

• For the initial years : FREE TRADE

– Goods from Far East were marketed America and Acapulco , Mexico being Manila as the center of
trade and commerce.

• Mercantilism Policy : due to restrictions

– Mercantilism is an economic policy that is designed to maximize the exports and minimize the
imports for an economy
– Galeon Trade : sole means of communication between Spain and its Philippine colony and served as
an economic lifeline for the Spaniards in Manila
– Secures loan from “pias” (forerunners of banking institutions in the Philippines)
 AMERICAN ERA
•Agricultural industry was undeveloped during Spanish Era but given priority in American Era
•First Agricultural Bank in 1908
•1915, Rural Credit Law

•Rice and Corn Fund was established (provides loan to farmers credit cooperative

•Due to the domination of foreign interests in Philippine Banking System, Philippine National
Bank was established (1916)

•Government encourage rural banks and agricultural credit associations (2 rural banks and 7
Credit associations)
TRIVIA
Bank of the Philippine
Islands (Filipino: Bangko ng
Kapuluang Pilipinas, Spanish: Banco
de las Islas Filipinas, commonly
known as BPI; PSE: BPI) is
a universal bank in the Philippines.
It is the first bank in both the
Philippines and Southeast Asia.

Founded : August 1, 1851;

CREDIT PROGRAM FAILED
Farmers was not able to pay their financial
obligation

1. Farmers don’t have steady income due to

destructions from natural calamities

2. They were exploited by the landlords who

give them unfair share in harvest

3. Negative attitudes of the borrowers toward

their debt

4. They consider their loans as another form of

dole outs thus they don’t feel obliged to pay
 UNDER THE REPUBLIC
Rehabilitation Finance
Corporation(RFC) was
1949, Central Bank of
the Philippines was
formed to address the established. –
need for rehabilitation monetary policies to
during World War II improve production,
(Oct 29, 1946) – employment and
provides credit to quality of life of the
agricultural, commerce people especially the
andRFC
1958, industry
become the poor
Development Bank of
the Philippines (DBP).
Today, cooperative
rural banks was
established under
Department of
Agricultures (owned
by farmers
themselves)
 CREDIT
•CREDIT
•1540s, "belief, faith," from Middle French crédit (15c.)
•belief, trust," from Italian credito,

•from Latin creditum "a loan, thing entrusted to another,"

•Latin : neuter past participle of credere "to trust, entrust, believe" (see credo).

Source: https://www.etymonline.com/word/credit
 OBLIGATION

•OBLIGATION IS CREDIT
•- Refers to a person or institution to which the future payment is to be made
•OBLIGATION IS DEBT-
•Refers to the person or institution who is obliged to pay in the future
BASIC ELEMENTS OF CREDIT

•TRUST AND CONFIDENCE

•Confidence on the part of the credit
•FUTURITY
•There is always a future time involved
•RISK
•Uncertainty whether credit will be paid or not
 FOUNDATION OF CREDIT

•CONFIDENCE
•Basis of credit; no man will exchange for a promise unless there is confidence on the
ability and willingness to pay
•Confidence based upon the property of the borrower
•(securing real estate mortgage)
•Based upon business conditions (ability to buy goods and pay them)

Borrower is a man
of INTEGRITY
 THE CREDIT CONTRACT
• The presence of credit contract will bear witness
to the attention being given to credit dealings
• Can be oral or written form

• The agreement arrived between the parties to a

credit contract naturally originates from credit
transaction. These may in turn arise from various
ways namely;
– Purchase of sale of goods and services
– Borrowing money
•CHARACTERISTICS OF CREDIT CONTRACT
•Bi-Partite Contract
•(two parties)
•Personal Factor
•(perfected based on the person’s degree of moral as well as business competence)
•Fiduciary Element
•(contract based on TRUST)
•Creates legal obligation
•(gives the creditor the right to collect from the debtor)
•Pecuniary Contract
•(relates to money)
THE CREDIT SYSTEM
•INSTALLMENT BUYING
•-A series of payments that a buyer makes instead of a lump sum to compensate the
seller. Installment payments often, but do not always, include interest to pay the seller for accepting
the credit risk that the buyer will not make payments in a timely manner.

•CASH PURCHASE
•A cash purchase occurs when a business pays for goods or services immediately upon
ordering or delivery. No credit is extended by the supplier. No account payable is created.
 ADVANTAGES OF
•Buyer is able to obtain and therefore the use of the goods he needs even before is he able to
save
INSTALLMENT CREDIT
•Can be considered as a form of savings – the number of individuals

•Not only convenient but it is a necessity

•(limited purchasing power)
•Many goods are purchased through a plan
•“pay for themselves”
•-e.g. buying a house an lot instead of rent

•Spread out expenditures

 DISADVANTAGES OF
INSTALLMENT CREDIT
•Installment purchases cost more than cash purchase
•Some people do not know what to buy or what not to buy, so they accumulate obligations that
they find difficult to meet
•Individuals may be encouraged to buy things which they actually do not need, such as
eventually they have difficulty purchasing their real necessities
 Cash Purchase on Borrowed Amount

Interest = Prt
= P4,500 * 12% * 1.5years (18 month)
= P810
Installment Plan

1. Installment Price = Downpayment + sum of mo.

Payments

=P300 + (280 x 18)

=P300 + P5,400
=P5,340.00

2. Carrying Charge = Installment Price – Cash Price

= P5,340.00 – P4,500.00
What if a vendor needs a P50,000 so he/she can buy goods and sell them for a profit?
BANK

CREDIT CARD

FRIENDLY NEIGHBOR

COMPARATIVE CREDIT
 CREDIT
MANAGEMENT
 ADVANTAGES OF CREDIT
•Credit facilitates exchange

•Credit increases the volume of production

•Credit eliminates the risks involved in making payments to distant places

•Credit economizes the use of coins and paper money

•Credit eliminates the danger of being robbed of large amounts of money

•Credit makes possible of accumulation of small savings and their employment for productive
pueposes
 DISADVANTAGES OF CREDIT

•Credit facilitates the over-expansion of business activity which might lead to

recession.

•A too liberal encourages extravagance

•Credit sometimes increases business risk

•Easy borrowing by the government has often led to the wasteful use of public funds
 CREDIT MANAGEMENT
Credit management is the function of
granting credit terms and making sure
payment is collected when an invoice becomes
due.

Good credit management promotes dialogue

between finance and sales teams to create a
balancing act where risk is minimized and
 IMPORTANCE OF CREDIT MANAGEMENT

Will ensure the close collaboration between granting

credit and collection.

It helps minimize the risk of loss due to default of

payment from the debtor.
CREDIT MANAGEMENT

x
Competent, efficient and effective people are necessary
to have a sound credit management

CREDIT RISK
Risk associated with granting the credit is the
nonpayment of loans of the borrower
 Credit Management Association of the
Philippines (CMAP)

That’s why to have a good credit management ……..

Credit Management Association of the
Philippines (CMAP)

•To inculcate credit consciousness in the public’s demand

•To place the credit man in his proper place as a professional

•To infuse credit discipline to the greater mass of our people

Composed of around 200 member companies from the banking,

trading manufacturing, financing and insurance sectors
•CMAP
•collection of every information for dissemination to members

•Dishonesty, moral turpitude and immorality do not escape

•Cases such as ESTAFA, REPLEVIN, and others
 CREDIT POLICY
Credit policy is a set of guidelines that:
– Are used to determine which customers are
extended credit and billed.
– Set the payment terms for parties to whom credit
is extended.
– Define the limits to be set on outstanding credit
accounts.
– Outline the steps or procedures used to deal with
EXTERNAL FACTORS OF CREDIT POLICY
The Business Cycle

Business activity, which is the composite of the

activity of thousands of independent business
concerns, does not remain at the same level
over a long period of time.
FOUR PHASES OF BUSINESS ACTIVITY
PROSPERITY
REVIVAL

RECESSION

DEPRESSION
EXTERNAL FACTORS OF CREDIT POLICY
BANKING POLICY

Banking policy tends to affect credit policy by its

effect upon the financial condition of the creditor
and the debtor; the creditor borrows from his
bank to replenish working capital that is
temporarily tied up in outstanding receivables,
and the debtor frequently uses his credit with his
bank to take discounts and otherwise strengthen
Factors affecting TRADE CREDIT POLICY
• The size of the credit lines
• The length of bank loan terms
• The level of interest rates
• The character of bank loans in respect to the
use of funds
• Collateral requirements
EXTERNAL FACTORS OF CREDIT POLICY
MONETARY POLICY AND FISCAL POLICY

Monetary policy, the demand side of economic policy,

refers to the actions undertaken by a nation's central
bank to control money supply to achieve
macroeconomic goals that promote sustainable
economic growth

Fiscal policy uses government spending and tax policies

EXTERNAL FACTORS OF CREDIT POLICY
LOCAL ECONOMIC DEVELOPMENTS

Any development that influences the costs and

sales volume of a firm affects the firm’s
financial condition and consequently, its
acceptability as a credit risk.
 EXTERNAL FACTORS OF CREDIT POLICY
CONDITION OF THE CREDITOR FIRM

a. The financial condition of the creditor’s business

determines the extent to which credit can be
accepted.

b. The competitive position of the credit is a second

factor that influences credit policy.
 SOURCES OF CREDIT
•MAJOR SOURCE OF CREDIT INFORMATION
•PERSONAL INTERVIEWS
•PERSONAL REFERENCES

•CREDIT REPORTING AGENCIES

•CREDIT BUREAUS
•BANKS

Other sources : Salesman, Lawyers, and customer’s FS

 FOR A SOUND JUDGEMENT, CREDIT
MANAGERS SHOULD KNOW;

•Whether the owners or managers concerned are honest and intend to repay their
debt
•Whether the history of the concern shows satisfactory progress
•Whether current operations and financial position of the concern are sound
 COLLECTION OF POLICIES AND
PRACTICES

DELIQUENT ACCOUNTS

In the world of finance and investing, delinquency

occurs when an individual or corporation with a
contractual obligation to make payments against a
debt, such as loan payments or the interest on a
bond does not make those payments on time or in
 CAUSE OF DELIQUENT ACCOUNTS
• The debtor who misunderstands the credit terms
• The careless debtor
• The debtor who ignores small bits
• The debtor who is good but temporarily out of
funds
• The chronic slow debtor
• the unethical unfair debtor
• The insolvent debtor
•Requires less working capital tied up in receivables
•Reduces the losses from bad debts
•Decreases the probability of expensive legal action
•IMPORTANCE OF PROMPT COLLECTION POLICY
•Reduces costs of correspondences
•Discourages poor risks from customers
•Reduces loss of sales
•IMPORTANCE OF PROMPT COLLECTION POLICY
 Principles of a
SOUND COLLECTION POLICY
•The creditor should inform the debtor in precise, clear words, the terms of credit

•The credit should enforce the credit terms

•When the account becomes overdue, the collection machinery should be started at once
•It is useless to undertake prompt collection action unless the follow up steps are just as prompt
•The regularity and timing of the successive steps in the collection procedure are as important
as parts of an effective collection policy as promptness in following up the initial action
 COLLECTION METHODS AND
PROCEDURES
1. Statements
2. Collection Letters
3. Personal Call
4. The Use of Telephones
5. The Use of Registered Mail
6. Attorneys and Collection Agencies