WEEK 3
LABRADOR REPORT 6. Reputation Risk – Poor credit
management can damage a lender’s
Credit Management is essential for a reputation, affecting investor confidence and
company's financial stability, ensuring that customer trust. Issues like inefficient loan
risks in the credit process are effectively processing or non-compliance can
controlled. contribute to this risk.
Risks Associated with Lending
Functions of the Credit Department
1. Credit Risk – The possibility that a
borrower will fail to repay a loan. Effective Gathering credit information - Through the
risk management requires sound credit investigators, the credit department
underwriting, structured loan agreements, gathers information about the applicant from
and continuous monitoring. direct and indirect sources. Sometimes
information for policy formulation is also
gathered.
2. Interest Rate Risk – Exposure to changes
in interest rates that can impact revenue. Analyzing credit information - All the
Lenders should identify high-risk borrowers information gathered is sent to the credit
and develop strategies to mitigate this risk. analyst who is in charge of applying the
standard tests and measurements for
performance.
3. Liquidity Risk – The ability to convert SANDOT REPORT
loans into cash. This depends on loan
quality, pricing, maturity schedules, and The non-financial data are critically
market standards. Monitoring commitments subjected to analytical tools to determine
and borrower usage is essential for liquidity the
planning. creditworthiness of the debtor.
Credit checking and authorization - Once
4. Transaction Risk – Arises from loan the analysis is undertaken, verification is
disbursements and credit administration. made of the applicant's papers and the
Poor information systems, weak controls, proper authorization for credit is given by
and inadequate procedures increase this the authorized officer or committees as the
risk. case may be.
Filing and recording - A record of the
5. Compliance Risk – Relates to regulatory transaction is made and the credit folder of
obligations, such as limits on lending to the applicant is prepared and filed. From
single borrowers or affiliates. Lenders may time to time, the file or records, or both,
also face legal action due to lending or whichever is the case, are updated.
collection practices.
Credits adjustments - Adjustments are -He must keep pace with changing times
made in accordance with discount or net and changing conditions.
credit period, or both. In the case of banks,
this may pertain to increasing or decreasing Conscientiousness
the credit lines, or perhaps extensions. -He must be devoted and dedicated to his
job.
Collection correspondence - Credit granting
does not end with the approval of the Consistency
application but with its collection. When the -He must be consistent in making credit
credit has been granted, collection follow- decsions.
up, reminders, and other correspondence
are sent to the debtor. Certitude and Celerity
- He must not only act with certainty and
Other functions - Other functions, which accuracy but also with swiftness and speed.
may fall within the jurisdiction of the credit
department, are the exchange of credit Contact
information with other organizations and the -He must have good contact, good public
dissemination of credit information to valued relations both within and outside the
customers in case of banks. Credit organization.
information may also be used by other
departments of the organization. Cost-consciousness
- He knows how to minimize cost in credit
evaluation, remedial account management
and others
SANTILLAN REPORT
Character
Qualities of a Credit Man (The Cardinal CS - He must have character integrity, reliability
of a Credit Man) and sometimes need to be a "character to
cope with clients who turn out to be
Competence and Capability "characters".
-He should know his areas of
responsibilities. Confidence
- He must be trusted by the debtor to have
Communication reciprocity of confidence between the credit
-He must have the ability to effectively man and the customer
convey his ideas.
Considerateness
Constructivenes - He must have regard for other's feelings. It
- He must be positive and constructive in his is incumbent upon the credit man to extend
approach is both credit and collection assistance to the customer.
management.
Computer literate
Creativity
- He must have at least some basic •intended as guide in the implementation
knowledge of computers and the ins and of created transaction
outs of information technology. •minimum requirements under normal
conditions, additional controls may be
Congeniality, charming personality, courage established when appropriate
- He should be cool and calm and •Dynamic- must be flexible and
deliberate. responsive to changing condition
•helpful in putting order and and
Common Sense facilitating transaction necessary to
ensure efficient customer service.
"formulation of credit policies"
external factors:
business cycle - The station the
business cycle is important as it and tax
directly consumer an industrial demand,
sales, supply, prices, profitability etc
which in turn affect profit margin and
cash flows.
monetary policy - affects the level of
interest rates and availability of funds
WEEK 4 which impacts on both creditors and
their borrowers for funds.
MALANA REPORT Fiscal policy - influences the channeling
of funds and spending patterns.
FORMULATION, COMMUNICATION AND political - The environment climates
IMPLEMENTATION OF CREDIT AND needs to be kept in minds as swings and
COLLECTION PROCESS priorities may affect the borrowers
Policy - is a general guideline on how to regulatory - what needs to be aware of
act in ordinary or exact-ordinary hair is spending or probable regulations
situation that recur from time to times, affecting the business community.
bearing in mind the accomplishment of industry - must be aware of industry
established company objectives. practices.
POLICIES EXIST TO SEVERAL LEVELS: internal factors:
Company, major divisions or department over-all the company objectives
policies - policies are general guides to recurrent
Credit Policies are guides in the situations being in mind overall
performance of credit functions of the company objectives.
company the granting terms the
customers, Approval authorities, criteria other department policies
for credit granting etc. - decorated policies should be
• design to make credit objectives harmonious weed established policies of
the other department within the controlling risk exposure, and satisfying
company. regulatory requirements.
financial condition of the company *Provides rules, regulations and procedures
-has much to do with the amount of the necessary for consistent credit/sales
credit exposure the company can take management operations
accounting procedure *Avoid unintentional changes caused by
-measurement of the credit department varied opinions on credit Useful tool in
efficiency and collection procedures training programs
needs a thorough knowledge of the
firm's accounting system The most important elements of a well-
written credit policy are:
JUMALON REPORT
*A goal statement for the loan portfolio (i.e.,
Banking Act. While bank loan policies aims statement of the characteristics of a;good
for a fair retum on investments, they should loan portfolio in terms of types, maturities,
have for their primordial objectives the sizes and quality of loans)
protection of the depositors' funds. The
bank's Income is derived substantially from * Specification of the lending authority given
the activities of the credit department. Thus, to each loan officer and loan committee
the credit departments of banks are more (measuring the maximum amount and types
organized and they receive top of loan that each employee and committee
management attention. However, credit can approve and what signatures are
policies of firms other than banks and required)
financial institutions especially trading firms
are geared more to support sales. *Lines of responsibility in making
assignments and reporting information
The extent of the details of credit policies within the loan department
vary from one company to another. They
may be written or unwritten. Although *Operating procedures for soliciting,
unwritten policies may be workable in reviewing, evaluating and making decisions
certain firms, written policies have distinct on customer loan applications
advantages as follows:
*The required documentation that is to
*Communicates to employees working in accompany each loan application and what
the loan department what procedures they must be kept in the lender's credit files
must follow and what their responsibilities (required financial statements, security
are. agreements, etc.)
*Helps the lender move toward a loan *Lines of authority within the lending
portfolio that can successfully blend multiple company, detailing who is responsible for
objectives, such as promoting profitability, maintaining and reviewing the credit files
*Guidelines for taking, evaluating and Policy should be reviewed regularly as
perfecting loan collateral conditions change, and company
requirements warrant. Policies are covered
*A presentation of policies and procedures by certain factors such as:
for setting loan interest rates and fees and
the terms for repayment of loans A a. Terms of Loan or Sale
statement of quality standards applicable to
all loans b. Time Intervals in Collection when should
the initial collection be made and the
• A statement of preferred upper limit for interval of the follow-up
total loans outstanding (ie, the maximum
ratio of total loans to total assets allowed) c. Classification of Debtors-good risk, fair
risk, poor risk
A description of the lender's principal trade
area from which most loans should come. A d. Nature of the Business Collection
discussion of the preferred procedures for methods and practices differ with the line of
detecting, analyzing and working out trade and methods of operation. Example:
problem loan situation creditors with a high income clientele tend
to be more lenient than those with low
Policing the Collection Function income clientele. More established creditors
are stricter than those who are less
In every business entity which is engaged in established who seek patronage to credit
the grant of credit, granting credit is only liberality
one phase of its major activity; collection is
another. The job of collection is to get the e. Profit Margin-The wider the profit margin,
money due to the company. However, all the more liberal is the collection policy. Both
collection efforts should be made in line with the risk and cost involved in diverse
the policy of the business firm, that is, collection system must be related to the
collection costs must be kept within profit margin and care must be taken that
reasonable limits, goodwill of customers amounts collected do not exceed the cost of
must be cultivated and maintained and risks collection
must be reduced to the minimum.
f. Nature of Competition If he encounters a
Setting Collection Goals and Objectives strong competition, a creditor is compelled
to adopt policies that would minimize costs
The conditions of the economy and industry
will also have much to do with the collection Successful collection depends upon a
goals. Obviously, the collection department systematized collection process which
will aim for maximum collection. Ideally, a involves a methodical pre-planned program
maximum and periodic collection is the adapted to differing collection needs and
target of every business institution. providing uniform treatment for similar
cases. The procedure must include
Developing Collection Policies
DECASTRO REPORT e. Profit Margin-The wider the profit margin,
the more liberal is the collection policy.
Setting Collection Goals and Objectives
f. Nature of Competition- If he encounters a
The conditions of the economy and industry strong competition, a creditor is compelled
will also have much to do with the collection to adopt policies that would minimize costs.
goals, Obviously, the collection department
will aim for maximum. Ideally, a maximum Successful collection depends upon a
and periodic collection is the targeto of systematized collection process which
every business institution. involves a methodical pre-planned program
adapted to differing collection needs and
Developing Collection Policies providing uniform treatment for similar
cases.
Policy should be reviewed regularly as
conditions change, and company Communication of Credit and Collection
requirements warrant. Policies are covered Policy
by certain factors such as:
- The credit policy should be stated din clear
a.Terms of Loan or Sale and unmistakable terms so that it will be
well understood by all who will be directly or
b. Time Intervals in Collection-when should indirectly affected.
the initial collection be made and the
interval of the of the follow-up Implementation of Credit and Collection
Policy
c. Classification of Debtors-good risk, fair
risk, poor risk -Once the policies have been formulated
and communicated, they have to be
d. Nature of the Bussiness-Collection implemented, This involves assignment of
methods and practices differ with the line of responsibilities and authorities, establishing
trade and methods of operation. procedures and controls, feedback and
reports.
