FIMA 30063 - CREDIT AND COLLECTION

By: Bernadette M. Panibio

Week 5 - CREDIT AND COLLECTION PROCEDURE

Credit and Collection Procedure Flowchart

Target Market Identification
Pre-screening of Loan Applicants

At the end of the lesson, the student is expected to:

▪ Explain the entire credit and collection procedure

▪ Identify client base and credit program facilities that must be pursued

▪ Discuss prospecting/account sourcing

▪ Identify the factors to consider in pre-screening applicants to distinguish eligible

borrowers and projects

PROCESS FLOW CHART

TARGET MARKETS ORIGIN EVALUATION

NEGOTIATION
FIMA 30063 - CREDIT AND COLLECTION

By: Bernadette M. Panibio

CREDIT AND COLLECTION PROCEDURE

 FIMA 30063 - CREDIT AND COLLECTION

By: Bernadette M. Panibio

TARGET MARKET IDENTIFICATION

Target market identification is a process where the lending unit identifies the client
base and credit program facilities it will pursue. It is done cognizant of the general
policy, program thrusts, strategies and targets of the company, the business
environment, market information, present portfolio mix, risk asset acceptance criteria
and resources of the lending unit.

Account origination or prospecting refers to the introductory and exploratory

discussions the account officers do in relation to credit initiation. It is when the account
officer introduces the products and services that may be relevant to the prospective
client. Before any origination exercise is done, it is advisable that the account officer
secures relevant information on his prospects including financial and related interests.
Thus, it requires good staff work and preparation.

PRE-SCREENNG PROCESS

Receipt of Credit Application

The first activity in the Credit Department as it starts actual operation of its functions is
the credit application. It must have a credit application form for use by its prospective
customer/client. As a matter of policy, no credit extension should be approved and
released, unless the customer/client had at least filled up a credit application form. The
duly filled credit application provides the credit department.

1. With initial credit information on which to base its credit decision, if credit
decision has to be made without further credit investigation
2. Information on which to further interview the applicant
3. With some “leads” on which to start the credit investigation process

In order to guide the credit applicant, it would be good practice to give a listing of the
company requirement upon his signifying his intention to apply for such a credit
accommodation or loan. This way he will be able to find out whether he could comply
with the company’s requirements. The following documents normally should be
submitted together with the duly accomplished loan application.
 FIMA 30063 - CREDIT AND COLLECTION

By: Bernadette M. Panibio

Individual

1. Latest Income Tax Return

2. Marriage Contract (if married)
3. Photograph

Single Proprietorship

1. Business Information Sheet

2. Certificate of Business Name Registration with the DTI
3. Income Tax Return
4. Audited Financial Statements
5. Statement of Assets and Liabilities
6. Photograph of principal/owner

Partnership/Corporation

1. Business Information Sheet

2. Copy of Registration with the SEC
3. Articles of Incorporation and By-Laws (for corporation)/Articles of
CoPartnership and Partner’s Resolution (for partnership)
4. List of Officers and Directors certified by the Corporate Secretary
5. Bio-data/Personal Information of Officers and Directors
6. Alien Registration Certificate of foreign officers
7. Audited financial statements
8. Board Resolutions to borrow or enter into the requested facility in the
amount of, and designate authorized representative to negotiate and sign
in behalf of the company

• The requirements are by no means complete. The account officer, however,

should ask for other requirements for them to better evaluate the proposed
credit transactions. Therefore, the list may be expanded/shortened
depending on the industry/project.
 FIMA 30063 - CREDIT AND COLLECTION

By: Bernadette M. Panibio

PRE-SCREENING

Pre-screening is done by taking a cursory review of the application whether this is

accurately and completely filled up and determined thru preliminary interview whether or
nor the applicant is qualified. The interview is conducted to obtain, confirm and verify
information about the applicant which is sufficiently reliable, acceptable, and complete
to facilitate sound credit decisions. In many cases, the credit interview may not be
enough
 FIMA 30063 - CREDIT AND COLLECTION
By: Bernadette M. Panibio

to accumulate adequate and complete information. In which case, a full blown credit
investigation will have to be conducted. If the applicant is not qualified, discuss to the
applicant the reasons for his disqualification.

Week 6 – 8 CREDIT AND COLLECTION PROCEDURE

Credit Investigation
- Purpose
- In-house File Verification
- Field Verification
- Elements

Appraisal of Collateral

Credit Evaluation and Analysis

- Ownership and Management
- Financial Capability
- Industry Analysis
- Quality of Collaterals
- Condition

At the end of the lesson, the student is expected to:

▪ Describe the financial and non-financial factors to check on credit applicants

▪ Identify sources of credit information and the data that can be derived
▪ Recognize risk areas and control in appraisal of collateral
▪ Differentiate types of collateral
▪ Discuss the typical requirements in accepting collateral
▪ Appraise the creditworthiness of a loan applicant based on gathered internal and
external credit information
 CREDIT INVESTIGATION CONCEPTS

The concepts and procedure defined in this CMS and the succeeding ones are mere guidelines
and are not intended to be all-inclusive. The credit investigation and the credit analyst must
rely on their experience, initiative and judgment in determining the credit information
necessary in each case.

Purpose of Credit Investigation

• To validate data about a loan applicant/borrower.

− Credit investigation may also be done on third parties intending to establish a business
relationship with the bank such as new depositors, other financial institutions and job
applicants.

• To gather, develop and analyze enough relevant information about the borrower to aid
in formulating a sound credit decision.

Credit Investigation is conducted on all credit applications to immediately ascertain applicant’s

credit worthiness. It is intended to detect and eventually prevent extension of credit to
applicants with already unfavorable credit records. It covers in-house credit file verification
and field verification.

In-House File Verification

All credit applications except those rejected outright are checked against existing credit and
court case records.

In house file verification consists of the following:

▪ Credit File Verification – involves inquiry from existing credit records to determine if an
applicant has past or present credit transactions with the company
▪ Court Case Verification – involves inquiry against compilation of names of persons
against whom collection cases have been filed by creditors
In-house verification is always conducted on borrower’s personal name, known aliases, trade
or business name and also covers the following:

▪ Spouses. In case of married individuals, check on both the spouses whether or not one
has entered into any credit transactions.
▪ Co-maker, co-buyers or guarantor whether individual or business entity
▪ Self-employed borrower, proprietorship or partnership check under both personal and
trade/business name
▪ Individual applicant employed in family-owned firm, verification also covers the
company
▪ Corporate accounts, verification is done on both corporate entity and
owners/stockholders

The name gathered as a result of in-house file verification must be ascertained to be of the
same identity as the borrower or name of persons indicated in the credit application as co-
maker, guarantor, surety, etc.

If the credit investigator has information that the name of the applicant is the same person as
the name of a defendant in a court case, he should pursue his investigation to determine
whether the applicant is the same defendant in the case

Field Verification

Field verification consists of the following:

▪ Residence/Neighborhood Verification – refers to the inspection of applicant’s residence

address or locality and verification with the nearest neighbors and store owners in the vicinity
to gather information regarding the applicant’s background and reputation. It is conducted to:

− Verify the applicant’s and spouse’s correct name including their middle names, aliases,
ages and citizenship and likewise of their children
− Verify the respective provincial addresses if there’s any
− Determine house description with approximate lot and floor areas
− Verify and confirm the exact residence of client
− Determine the applicant’s length of stay in the said address
− Determine if client owns a vehicle and other household appliances
− Determine the character of the client based on his reputation in the neighborhood and
whether or not he is known thereat
− Determine the client’s general living condition and type of neighborhood
 − Determine the personal data/background of the client
− Determine if the house is rented or owned by the client
− Determine the number of children, their age and the school they are attending
− Determine the income bracket of the applicant and the spouse
▪ Business Verification – refers to the verification of information related to the applicant
and related interest business. It is conducted to:

− Confirm/verify the nature of subject’s business, its legitimacy of operation and the
profitability of the business, the exact address and position of the applicant
− Know the form of organization and type of business of the applicant
− Confirm if business is registered or not with respective government agencies
− Check the business history including the date when it was organized, years of operation,
number of employees, major line of business, its major products and/or services, major
customers or clients, suppliers and bank accounts with specific brand and account numbers
− Check the neighborhood to determine the character of the client
− Inquire from the administrator of the building if the client is holding business therein
and the paying habits of the client
− Compare financial information from the accountant of the business or owner against
documents presented and other records that are related to the business
− Check the business premises, if it is owner or rented. Its present locality and condition
− Check if the business has branches or affiliates, fixed assets and fixtures, financial status
which includes average monthly sales, receivables, inventories, capital, liabilities, average
monthly income and last year’s sales

▪ Employment Verification – refers to gathering of additional or confirmation of

information related to the applicant’s job. It is conducted to:

− Determine client’s employment status

− Determine length of stay with current employer
− Confirm position
− Confirm compensation
− Confirm client’s residence address

▪ Trade and Bank Verification – determines the character of the client and his paying habit
thru creditors. It determines the following:

− Applicant’s accounts maintained with banks whether it is under current or savings, the
dates accounts were opened
− Average daily balance (ADB)
− Present balance
− Status of accounts (if it is active or dormant)
 − Bank’s experience in dealing with applicant

ELEMENTS OF CREDIT INVESTIGATION

Individuals

Identity of the Borrower

▪ The identity of the borrower should be firmly established. The Bank should know who it
is dealing with. Legally, the Bank cannot enforce its claim against a fictitious person or a
person claiming to be somebody else. Further checking should proceed only after the identity
has been accomplished.

▪ Information should be obtained about the borrower’s age, health, character and
reputation, family life and relationships and his residence. These are sources of social pressure
which may affect the ability of the borrower to repay a loan.

▪ Age of an applicant can affect his credit behavior. Young applicants should be fairly
established in employment or business and exhibit ability to handle their financial affairs
before incurring a loan. The remaining productive years of senior applicants must also be
determined.

▪ The health of a borrower must also be investigated because this will affect his ability to
work and generate income to repay his obligations.

▪ The general reputation of the borrower should be established through residence and
employment checking. This should cover habits and morals, his steadiness and dependability,
his ability to manage his affairs, his general attitude toward contractual obligations and
whether he is living within his means or not.

▪ The marital status of the applicant is a good indicator of the applicant’s stability. A
stable family life is a good credit indicator as the borrower will certainly not do anything which
will upset this situation. A creditor lending to a family on the verge of breaking up is almost
certain to have collection difficulties.

▪ The personal circumstances and status of the borrower’s dependents should also be
investigated as this determines the demands on the borrower’s income.

Purpose and Motivation of the loan

 ▪ The intended use of the loan should be established; if used for unproductive purposes,
the sources for repayment of the loan may be diminished.

▪ BSP manual of regulations require that the purpose for a loan should be indicated in all
loan transactions.

▪ Use of the loan other than for the intended purpose is an Event of Default which will
legally allow the bank to demand immediate repayment of the loan.

Source of Income

▪ The amount, regularity and expected continuity of the income as declared by the
borrower should be established. Information should be gathered not only on the borrower but
also on the income provider – the employer and the business firm, in case of self employed
individuals.

▪ Demands on income such as living expenses and obligations with other creditors should
be fairly calculated. It should be determined whether the borrower can still shoulder the
additional debt burden of the proposed loan transaction with the Bank.

▪ The borrower’s financial condition/net worth should be evaluated to show assets

available as reserves in case of liquidity problems. The size of the assets is also a determinant
of the borrower’s thriftiness or the propensity to accumulate savings and credit patterns.

Credit History and Paying Habits

▪ The borrower’s payment record on existing and past debts is an important predictor of credit
behavior. Information to be obtained should include court cases, litigation, bankruptcies and
repossessions involving the borrower.

Corporate Borrowers

Type of Corporate Borrowers and Focus of CI

1. Small/Family Held – CI shall also include on the owners similar to the CI for selfemployed
individuals.
 2. Big Corporations with Diversified Ownership – CI is centered on the amount of debt,
credit history, cash flow and capability of the applicant firm.

3. Corporation with Subsidiaries/Affiliates – Apart from the borrower-firm, CI shall also

include the subsidiaries and affiliates particularly if a big portion of the parent company’s
income/cash flow comes from subsidiaries and/or the parent company has guaranteed a major
portion of the subsidiaries debts.

Identity and Motivation of the Borrower

▪ The CI should first establish whether the corporate applicant is a duly registered entity
with the Securities and Exchange Commission. An unregistered corporation has no legal
identity and no capacity to enter into contracts.

▪ In reviewing the corporate papers, the CI should be familiar with the powers of the
corporation under its Articles of Incorporation and the powers of its officers/directors under
the By-Laws. There could be certain restrictions on the powers of the Corporation and its
officers/directors that may affect their capacity to enter into loan transactions.

▪ The purpose of the loan should also be reviewed against the corporate powers and
generally should redound to the benefit of the corporation.

▪ A profile of the people behind the corporation – incorporators, stockholders and

principal officers – should also be obtained as a gauge of management strength.

Source of Income

▪ Data should be obtained about the present operations of the applicant in terms of major
product lines, suppliers, clients, market area and competitors. Firsthand information should
also be obtained about the corporations’ major facilities and assets.

▪ The present and past financial condition of the firm should be evaluated. The structure
of the assets, liability and capital should be adequately scrutinized.

▪ The stability of ongoing operations and the probability of continuance on a longterm

basis should be established by obtaining data about –

• Financial performance and operating results

• Comparison of performance versus competitors
 • Projection of financial condition and financial performance
• Cash flow projections
• Future prospects of ongoing businesses
• Feasibility study and analysis of project to be financed

Credit History and Paying Habits

The corporation’s dealings with other creditors and suppliers will serve as predictor of future
credit behavior. Court cases particularly those involving sum-of-money cases against the
corporation are indicators of poor paying habits.

SOURCES OF CREDIT INFORMATION

Data sources are commonly classified as internal and external sources of information.

Internal sources of information are those generally provided by the applicant such as data from
the Loan Application and Personal Interview. Data obtained from these sources must be cross-
checked before accepting such to be authentic.

• Borrowers tend to withhold certain information that would result in a rejection of his loan
application. This may also apply to other sources who may have an interest in the loan being
applied for.

Illustration:

In cases where refinancing is involved, the present lender of the applicant may state that the
applicant has good credit, even if this is not true so that the loan is transferred to the Bank
thereby relieving the first lender of his collection problem.

When a person is asked for references, he will carefully select from his potential list those
names likely to give favorable replies.

The predictable bias from these sources should impel the skillful investigator to develop
evidence from informants not supplied by the Borrower. In addition, the questions asked must
be specific so that informants are induced to reply factually, rather than being vague by giving
loosely stated opinion and judgments or by not mentioning unfavorable points.

External sources of information are independent data obtained from parties or

 sources not related to or within the control of the subject-applicant such as Negative Data
Files, Bank Checking. These data are however not readily available and proper contacts must
be developed for this purpose.

Internal Sources

Loan Application Form

This form provides general information about the Borrower. The information supplied by the
Borrower is treated as statements of facts which have not been verified.

Personal Interview

This provides an opportunity to obtain supplementary information of the data provided in the
Application Form and determine “leads” that will be used in the credit investigation.

Financial Statements (3 years)

These will show the applicant’s –

• liquidity position – ability to meet day to day current obligations

• solvency – determines dependence on financial support from creditors
• managerial efficiency – ability of the firm to operate profitably and successfully for a
long time.

The CI should watch out for signs of window-dressing or the misstatement of accounting
information to reflect a better financial condition than what it is actually is e.g. non-existent or
bloated asset accounts, understated or undeclared obligations. This is particularly true for
unaudited or in-house financial statements.

A minimum of three years financial statements should be required to enable the CI to establish
the trend or pattern in the subject’s financial position.

References

These provide supplementary information about the identity and general integrity of the
applicant.

External Sources

Neighborhood and Residence Checking

 This should confirm the address of the applicant, the length of residence and status as owner
or tenant of the property. The relationship of the applicant with neighbors will provide clues
about the identity, character and financial condition of the applicant.

Negative Files

The Bank’s Customer Information File (CIF) System provides data on accounts blacklisted by the
Bank due to mishandled deposits and bad loan accounts. In addition, the Bank relies on the
following external sources of negative credit data:

Bankers Association of the Philippines (BAP) – provides the following:

• current accounts closed by member banks due to mishandling

• court cases – venue, sala and reasons for such actions thru the Credit Management of
the Philippines (CMAP)
• cancelled credit cards
• credit dealings with member banks thru the Loandex System

Credit Information Bureau, Inc. (CIBI) – this provides information on credit history of applicant
with banks and other financial institution, negative data and complete CIR works.

Public Records and Filings with Government Institutions

Government agencies such as the Securities and Exchange Commission (SEC) and Department
of Trade and Industry are sources of information about applicants doing businesses. Articles of
Incorporation, By-Laws, Minutes of the Board Meetings and Audited Financial Statements are
required to be filed with the SEC.

Employer

This will provide information about type of work done, amount/trend of wages, status of
employment and chances for advancement, behavior in the office and relationship with co-
employees. Existing obligations with the company should also be inquired on.

Similar information may also be obtained from former employers including the reason for
subject’s departure from the company.

Income Tax Returns (3 years)

These provide data on sources and trend of income once validated as correct by the BIR or the
filing agent. This will also confirm the marital status and the number of dependents of the
applicant. For applicants availing of the itemized deduction scheme, data on interest expense
can provide leads as to the present debts of the applicant.

Banks and Other Financial Institutions

These will provide information on the amount/status of the applicant’s debts and paying
history. The general reputation and financial condition of the applicant may also be obtained
since these entities also have conducted their own credit checkings on the subject.

Trade References

The volume of business done with these firms will give an indication of the reasonableness of
income figures and the status of business operations of the applicant. The credit history with
suppliers will also indicate if the applicant is a good payor or not.

Transfer Certificate of Title

Annotations on the TCT will locate the previous creditors of the Borrower, wherein we could
inquire from them their experience with the Borrower.

Top 1,000 Corporations

This provides information on sales/net income figures, industry and company profiles.

Plant Visit

This gives an insight on how an applicant –firm conducts its business and its production
process. Business prospects and operating problems can also be learned from discussions with
officers and employees on the site. This will also confirm reasonableness of financial figures
presented in the financial statements and loan application.

The Confidential nature of credit information must be safeguarded at all times. All personnel
involved in gathering credit data must exercise due care not to reveal the identity of sources of
information to the subject of inquiry or other outside parties.
SOURCES OF INFORMATION AND DATA THAT CAN BE DERIVED

Sources of Credit
Information
Derived Data
1. Loan Application Form • Su
− bject Property
Location of Property
− Developer/Seller
− Registered Title Owner
− TCT/CCT No.
− Lot Area
− Purchase Price/Outstanding Balance
− Description of Improvement
• Bor
− rower’s Information
Borrower’s personal information and employment record
− Spouse’s personal information and employment record
 − Previous Employment of Borrower and Spouse
− Monthly Income & Expenses of Borrower & Spouse
• Other Properties Owned
− Real Properties
− Vehicles
• Financial Information
− Credit Cards
− Other Credit Dealings
− Bank Accounts
2. Transfer Certificate of Title Annotations on the TCT will locate the previous creditors
of the Borrower, wherein we could inquire from them their experience with the Borrower
3. Personal Interview The interviewer reviews the Loan Application form and request
the Borrower to provide supplemental information, which would assure completion of the
blanks not filled in or which probes more deeply into questionable areas.
4. Residence and
Neighborhood Checking • Borrower’s Address
• Length of Residence
• Number of Household Members
• Status of Owner or Tenant of the Property
• Reputation with Neighbors
• Reputation with the Landlord
5. Income Tax Returns (3 years) •
• Borrower’s source of income Amount of income
• Trend of income for the last 2 years
• Civil status
• No. of children
• Major categories of allowable deductions
6. Employer • Position of the Borrower
• Amount of income
• Length of time employed
• Reputation with Employer and Co-employees

APPRAISAL OF COLLATERAL

Collateral refers to the property/ies which the borrower puts up to repay a loan in cases of
default, or any undertaking from other credit worthy entities to guarantee the borrower’s
obligation.

❖ The borrower’s capacity to pay shall always be the primary consideration in the
extension of credit. However, endeavor to have a fallback or a secondary source of repayment
in the form of value adequate and legally enforceable collateral/security
❖ The strength of the collateral is measured and represented by the quality of the assets
the lender holds and the completeness and enforceability of all supporting legal documents
❖ All collateral/security accepted shall be properly documented and registered/notarized
in favor of the lender

Appraisal is an estimate or opinion of value usually transmitted in writing of adequately

described property as of a specified date supported by presentation of analysis of factual and
relevant data. It is conducted to affix a value on a property or properties offered as collateral
to secure a loan accommodation. The value most commonly sought in an appraisal is market
value.

Market value may be defined as the highest price estimated in terms of money which a
property will bring if exposed for sale in the open market, allowing a reasonable time t find a
purchaser who buys with knowledge of all the uses to which it is adapted and for which it is
capable of being used. Frequently, it is referred to as the price under which a willing seller will
sell and a willing buyer will buy, neither being under abnormal pressure.

General Considerations in the Choice of Collateral

• Stability of value
• General purpose use
• Liquidity/salability
• Ease of documentation
• Control over collateral

Risk Areas and Control in Appraisal

• Proper identification of property appraised

• Authenticity of titles/documents – verification with respective government agencies
concerned
• Approaches to values – determination on whether subject for appraisal/inspection is
income productive or not
• Reliability of information gathered
• Time and resource management
• Confidentiality of report
 Requirements for Collateral

Real Estate Mortgage

• Photocopy of the Transfer Certificate of Title (TCT)/Original Certificate of Title

(OCT)/Condominium Certificate of Title (CCT)
• Declaration of Real Property/Tax Declaration
• Tax Clearance or latest copy of Real Estate Tax Receipt
• Location Plan and Vicinity Map signed by Geodetic Engineer
• Insurance
• If corporation – a copy of the board resolution duly executed and acknowledged
indicating the names and positions of authorized signatories to the mortgage

Chattel Mortgage: Motor Vehicle

• Proof of ownership
• Chattel Mortgage contract duly registered with the Register of Deeds
• LTO Certificate of Registration and Official Receipt (current) of motor vehicle
• Stencil of Motor and Body Number of Motor Vehicle
• Property listing including detailed description, location and purchase cost

Purpose and Importance of Title Verification

• To ascertain that the borrower is the true and legal owner of the property
• To determine any restriction/encumbrance registered and annotated on the tile
• To determine authenticity of the title being offered as collateral

Types of Collateral

Primary Collateral

▪ Real Estate Mortgage (REM) – the conveyance of a real estate as security for the
payment of a loan and conditioned to become void upon such payment. It is essential that the
mortgagor be the absolute owner of the property being mortgaged

Unacceptable

1. Properties in underdeveloped subdivisions

2. Properties in depressed area
 3. Properties occupied by squatters
4. Properties for government appropriations
5. Properties with no right of way
6. Churches, Funeral Homes, Cemeteries, Memorial Parks, Schools, Hospitals and the likes
7. Properties with involuntary restrictions such as subdivisions restrictions, Sec. 4, Rule 74,
Adverse Claims, Lis Pendems
8. Properties with government restrictions such as Free Patent, Sales Patent or Homestead
Patent
9. Properties subject to CARP
10. Properties with unlocated or overlapping boundaries
11. Affected by lahar or foreseen to be affected by lahar
12. Properties located along rivers that erode properties with setbacks

▪ Chattel Mortgage (CM) – similar to the REM, except that the subject is chattel or
personal property

Chattel Mortgage: Merchandise Inventory

 Proof of ownership
 Copy of the Special Power of Attorney executed by the owner
 Chattel Mortgage contract duly registered with the Register of Deeds
 Insurance Certificate and endorsement certificate/s in favor of the bank

Assignment of Shares of Stock (Pledge)

 Deed of Assignment
 Certificate of Stocks

Assignment of Deposit

 Deed of Assignment
 Waiver of Confidentiality
 Original Certificate of Time Deposit (when applicable)

▪ Hold-Out on Deposits – is the transfer or setting over of deposit or of rights or interest

therein from one person to another, or the act by which one person transfers to another, or
causes to vest in another, his right over said deposit. It merely purports to convey the deposits
as collateral in order to secure the payment of a loan. If the borrower pays the loan on
maturity, the transfer becomes null and void.
▪ Third Party Mortgage – this is executed when the borrower is not the owner of the
offered collateral
▪ Negative Pledge – an undertaking on the part of the borrower whereby he agrees not to
mortgage, encumber, transfer or dispose of his fixed assets without the consent of the
creditor, while the loan is outstanding
▪ Mortgage Trust Indenture – this is executed by a borrower who has a huge property and
has assigned a trustee/custodian of this property. All the creditors will have to receive a
Mortgage Participation Certificate (MPC) indicating the extent of the collateral portion for the
corresponding loan amount of each creditor

Secondary Collateral

▪ Assignment of Inventory, Receivables and Proceeds of Export Letters of Credit – by

assignment, the deed convey the collateral to the lender to secure indebtedness
▪ Joint and Several Signature (JSS) – also known as suretyship where a surety binds
himself solidarily with the principal debtor. However, in this undertaking the surety does not
incur liability unless and until the principal debtor is held liable. In a suretyship a creditor
deals/transacts with both the principal borrower and surety. Generally, a JSS is executed when
the offered primary collateral is insufficient. It is a practice to require JSS under the following
rules:

− For a sole proprietorship, if the husband is the principal borrower, the wife shall execute a
JSS and vice versa or any third party other than the spouse
− If the borrower is a corporation, the principal directors and stockholders shall execute the JSS
− If the borrower is an association, the principal officers shall execute the JSS

▪ Parent Guaranty – written promise to pay for a debt in case of failure of the principal
debtor. Usually, applies to multinational companies, whose mother companies are based
outside the country. In case of default shall be done on the properties of the principal
borrower first. The guarantor’s property shall be subject to foreclosure if the total value of
properties of the principal debtor is insufficient to cover the loan.
▪ Cross Guaranty – this exists when a person or company guarantees the loan of another
and vice-versa.
▪ Co-maker – required for secured loans when borrower is more than 60 years old.
Preferably, co-makers must be the spouse or any single and gainfully employed children who is
also knowledgeable of the project. Unsecure loans granted to individual borrower shall require
at least 2 co-makers.

CREDIT EVALUATION
Evaluation is the process where the account officer evaluates all credit information about the
borrower and the project for financing. Prior to evaluation, the account officer must generate
all the relevant documents from the prospective client. Credit evaluation is made against the
credit fundamentals and specific risk asset acceptance criteria. The account officer must
always be mindful of the various risks associated with the account. No one person should
perform both the credit evaluation and credit investigation/collateral appraisal.

The following major factors should be considered in credit evaluation: quality of ownership,
management capability, financial capability, quality of collateral and conditions.

Ownership and Management

❖ Conduct deep analysis of the quality, skills, integrity, and reputation of the owners and
management team since superficial analysis has been a primary cause of credit problems
❖ In credit evaluation, character and capacity should come first. One may proceed with
detailed evaluation after he is satisfied of these areas
❖ Refrain from establishing personal involvement with the borrower to avoid
“clientism”, i.e., tendency to overemphasize the interests of the clients
❖ One must bear in mind that a borrower that is a “house name” is not a reason to
abandon common sense and sound practice during credit evaluation
❖ Pertinent information on the borrower may be generated during “client calls”. It is
therefore prudent to generate and record through call reports information on ownership and
management during “client calls”.
❖ In conducting evaluation of ownership and management, the following points and/or
questions should be considered:

Quality of Ownership

▪ Political Ties (Is shareholder political? Does he have political connections? Does he
have strong political ties? Is he identified with politicians as business partners, front or alleged
dummy, etc.?)
▪ Additional Equity (Do the owners have other sources of income? Are the other
businesses making money? Can they infuse more capital readily? Are owners heavily
indebtedness?)
▪ Character (What is the owners’ reputation in the business community? Any cases
against them, past or present? How have they handled their other investments/business? Do
they indulge in any vice like gambling, etc.)
▪ Track Record (What is the owners’ other businesses? Any risky undertakings?)
▪ Business Commitment (What is the commitment of owners to business being financed?
Is the commitment evident – fresh funds inflow, investments to improve, upgrade or
modernize operations? Are owners’ actively involved in decision or policy-making

Management Capability

▪ Quality/Integrity (What is management’s experience level? Are they professionals?

What is the degree of professionalism, educational background and training? Has
management been involved in any anomaly, fraud, etc.?)
▪ Track Record (What is the performance of the borrower during the incumbency of
management? What is their previous track record with other institutions?)
▪ Manpower Turnover is turnover rate higher than normal? Can the fast turnover be
managed? Is the turnover contributing to enhancement of expertise or is it otherwise?)
▪ Hiring Policies (Is it done on a professional basis or is there politics involved?)
▪ Training/Coaching (Is there a training program for all levels? Is training adequate for the
needs of the institution? Are policies disseminated/discussed with the staff?)
▪ Bank Checking (Are bank checking favorable or show satisfactory dealings – current,
prompt payment, etc.? Are banks willing to extend clean lines?)
▪ Feedback from Servicing Units (How is the borrower perceives in the industry? Is the
borrower hard to deal with, professional conservative, etc.? Is there any rumor about the
borrower? What is the general perception of management compared to its competitors?
▪ Other areas that may be explored to further assess management quality are:
➢ Succession policy (Is it in place? Is it patriarchal or based on competence?)
➢ Structure of management (Is decision-making centralized or
decentralized?)
➢ Remuneration policy (How does compensation package compare with other
companies?)
➢ Management stance (Is it aggressive or conservative?)

Financial Analysis

Financial Viability

❖ A careful analysis of the financial condition of the borrower is one of the vital
components of credit evaluation. Generally, this analysis is conducted after all the
qualitative aspects of the borrower’s business have been analyzed
❖ Determine the past performance and financial trends to establish future financial
growth and directions of the borrower. This is the reason why borrowers are required to
submit financial statements.
 ❖ The financial analysis should focus on the following:
• Profitability (efficiency of operation)
• Current position (liquidity of assets)
• Capital position
❖ The financial ratios should not be analyzed in isolation. One should look at the historical
trends (ratio trend analysis) and at the relations of the ratios to the industry average (cross-
sectional analysis).
❖ One must bear in mind that ratios are mere indicators of performance. Of more
importance are the factors or reasons that gave rise to these indicators. Ratios
are simply the end-results of actions or a series of actions taken by the client that could be
critical inputs to credit analysis.

Industry Analysis

Industry Prospects

❖ Analyze the general industry outlook and determine its impact on the account
❖ The quality of industry analysis depends highly on accuracy, timeliness and
completeness of data gathered.
❖ Take note of any developments in the industry, including but not limited to the
following:
▪ Industry condition – the inherent risk in the industry, its importance to the economy and
the general outlook of the industry shall be considered in the evaluation of the credit risk
▪ Competition and market – the market share of the company, its rank with the industry
and its competitive position
▪ Supply and demand
▪ Tariffs and other regulatory policies affecting the industry

Quality of Collaterals

❖ Be prudent in considering collaterals as possible source of repayment. Although generally

considered as second way-out, their purpose as alternative sources of repayment for loans
should never be overlooked during credit evaluation ❖ In the evaluation of the offered
collateral, focus on the:
▪ Reasonableness of the valuation
▪ Marketability of the asset
▪ Realizability of the asset values
 Conditions

❖ Assess how the borrower anticipates and reacts to these factors:

▪ General economic and political condition
▪ Government decrees
▪ Developments in the financial market
▪ Competitive conditions
▪ Industry trends/forecasts

FIMA 30063 - CREDIT AND COLLECTION

By: Bernadette M. Panibio

❖ Economic and political conditions in the country should be considered in the evaluation
of credit. Conditions within a specific industry also have a bearing on credit analysis especially
if these conditions coincide with the general economic and political climate in the country
❖ Analyze the general industry outlook and determine its impact on the account