Final Exam Reviewer (Credit Policy and Collection) PDF

FINAL EXAM REVIEWER (Credit Policy and Collection) Credit Procedure Loan the rules that apply to the granting of credit. a thing that is borrowed, especially a sum of money th...

FINAL EXAM REVIEWER (Credit Policy and Collection) Credit Procedure Loan the rules that apply to the granting of credit. a thing that is borrowed, especially a sum of money that the bases on which credit applications are assessed. is expected to be paid back with interest. act of giving money, property or other material goods to A. Questions that are included in Credit Procedures for another party in exchange for future repayment of the Evaluating Credit: principal amount along with interest or other finance 1. general business entity charges. 2. credit applicant‘s supplier payment history may be for a specific, one-time amount or can be available 3. credit applicant‘s banking relationship as open-ended credit up to a specified ceiling amount. 4. financial information on credit applicants 5. automatic credit approval Classification of Loans 6. ability to pay bills A. Secured Loans 7. reasonable time frame a loan in which the borrower pledges some asset (e.g. a car or property) as collateral. B. The following could be included in Credit Procedures for loans that rely on an asset as collateral for the loan. Credit Approval and Administration: In the event of loan default, the lender can take 1. Terms of Sale possession of the asset and use it to cover the loan. 2. Terms Codes Interest rates for secured loans may be lower than 3. Credit Instructions those for unsecured loans. 4. Credit Recommendations The asset may need to be appraised before you can 5. Credit Files borrow a secured loan. C. Credit Process in Philippine Financial Institutions B. Unsecured Loans 1. Initiation Stage don’t have assets for collateral. 2. Documentation and Closing These loans may be more difficult to get and have 3. Portfolio Management higher interest rates. rely solely on your credit history and your income to qualify you for the loan. In case of default, the lender has to exhaust collection options including debt collectors and lawsuit to recover the loan. For examples: o credit card debt o personal loans o bank overdrafts o credit facilities or lines of credit C. Open-ended Loans loans that you can borrow over and over. Credit cards and lines of credit are the most common types of open-ended loans. With both of these loans, you have a credit limit that you can purchase against. Collection Procedure Each time you make a purchase, your available credit set of procedures you define for your collections team to decreases. follow. As you make payments, your available increases the core component of your company‘s collections policy. allowing you to use the same credit over and over. should be practiced consistently and should aim to apply D. Close-ended Loans to all customers – but should also be flexible when necessary. cannot be borrowed once they’ve been repaid. As you make payments on closed-ended loans, the Target Market Identification balance of the loan goes down. defined by similar characteristics such as demographics However, you don’t have any available credit you can and behaviors. use on closed-ended loans. where they shop, what brands they like, what newspapers Instead, if you need to borrow more money, you’d they read or websites they visit, and what life events (such have to apply for another loan. as getting married or retiring) they are experiencing. Common types of closed-ended loans include mortgage loans, auto loans, and student loans. Pre-screening of Loan Applicants a highly effective marketing process used by savvy Types of Loans: marketers in the lending and banking industry every day. A. Term Loans involves making unsolicited offers of credit or insurance a loan provided for business purposes that needs to to consumers who might be in the market. be paid back within a specified time frame. It typically carries a fixed interest rate, monthly or quarterly repayment schedule - and includes a set maturity date.  FINAL EXAM REVIEWER (Credit Policy and Collection) It is secure type of loan. The Maximum loan tenure for LAP is up to 15 years usually have a lower interest rate than an unsecured (180 months). one. H. Home Loan NOTE a loan advanced to a person to assist in buying a Term Classification house or condominium. o Short Term – 1 year Purchasing a house can be a valuable form of o Medium Term – 1-5 years investment. o Long Term – more than 5years However, it requires considerable thought and careful financial planning before taking on such a big step. B. Personal Loan If owning a house is part of your financial goal, then typically issued for a specific amount and can be you’ll need to know whether you can afford from used for various purposes at the discretion of the your income and savings. borrower. can be a secured loan or an unsecured loan. I. Pay Day Loan If the borrower defaults on the loan, the creditor can Payday loans are short-term, high-interest loans take the asset. designed to bridge the gap from one paycheck to the next. C. Consolidated Loans a widely used term that can imply the use of a number J. Construction Equipment Loan of different debt assistance plans that combine provided for purchase of both new and used multiple debts, loans or payments. equipment like excavators, backhoe loaders, cranes, There are three main types of debt relief options higher end construction equipment etc. available: This is usually a secured loan where the machine o Debt Consolidation Loans itself is hypothecated until the loan is repaid. o Student Loan Consolidation o Debt Management Plans and Debt K. Business Loan Settlement require an adequate amount of capital to fund startup Things debt consolidation can do: expenses or pay for expansions. o Lower your interest rates As such, companies take out business loans to gain o Protect your credit rating the financial assistance they need. o Lower your monthly payments a debt that the company is obligated to repay o Help you get out of debt faster according to the loan’s terms and conditions. D. Education or Student Loan Loan Packaging A loan offered to students which is used to pay off the presentation of the credit facilities that will be granted education-related expenses, such as college tuition, to a client. room and board at the university, or textbooks. After a thorough financial analysis and getting to know well the client and his/her business operations, you will be E. Vehicle Loan able to provide him/her with the necessary credit facility Most people today need a loan when they buy a new for his/her financing needs. or used car. And the high cost of many cars means Underwriting in commercial banking and real estate that consumers spend years paying for their vehicles. refers to the formal analysis of a loan request by a lender Because a car loan is such a huge debt for most to determine the amount of risk that can be accepted. people, it pays to understand it before entering into Generally, underwriters review factors such as a an agreement. borrower’s credit history and debt-to-income ratio. A car loan is a secured loan, which means the vehicle referred to as pre-underwriting, is a process used to help serves as collateral on the debt. speed up the loan approval process. If you fail to make your payments, the lender can It entails gathering and preparing all necessary seize it as payment. information related to the approval of a borrower’s loan request. F. Policy Loan issued by an insurance company that uses the cash Cash and Repayment Terms value of a person's life insurance policy as collateral. referred to as prepayment or closed terms. Traditionally, these were loans issued at a very low call for payment before the transaction or at the time of interest rate, but that is no longer universally true. the transaction. If the borrower fails to repay the loan, the money is withdrawn from the insurance death benefit. Cash in Advance (CIA) Sometimes referred to as a "life insurance loan." require the buyer to make payment via one of the cash methods (e.g., electronic transfers, company check, G. Loan Against Property (LAP) certified check, cashier‘s check, etc.) before an order will The individual takes the loan by mortgaging the be shipped. house property. most often used for very weak credit or when It is a secured loan. unsatisfactory, limited or no credit information is Maximum loan eligibility is determined primarily by available. the value of the property and income.  FINAL EXAM REVIEWER (Credit Policy and Collection) Cash Before Delivery (CBD) If the loan is given without documents, it is a chance that are synonymous with CIA. the bank or financial institution will fail to get the same no delivery is allowed until the buyer has made payment. loan from a borrower. Otherwise, the seller could bear the same risks as Cash on Delivery. A. Documents Required for Income Verification 1. Proof of Identity Cash with Order (CWO) 2. Proof of Residence are offered when the seller requires payment before 3. Income Tax Return for the Past Three Years manufacturing of a product can take place. 4. Past 6 Months’ Bank statements and copies of pay slips where his income added Cash on Delivery (COD) 5. Profit and Loss account of three years if he has his require payment to the transportation company for the full own business invoice amount at the time of the delivery. 6. Show proof of any other type of income There is the risk that the buyer will not accept the shipment 7. Proof of continuity of business or cannot pay for the shipment at the time of delivery, which means that the seller will have to bear the costs of B. Documents Required for Asset Verification freight to and from the buyer‘s location, preparation, and 1. Balance Sheet for the past three years packaging costs and the possible deterioration of the 2. Stocks and Bonds Investments Proofs product. 3. All The Vehicles Ownership Proof which has been paid in full Loan Approval Formal authorization to get a loan (usually from a bank). C. Documents Required for Already Taken Debt 1. Credit Card Bills for the past 6 months Credit Approval Process 2. Proofs of the Debt which you have taken A. What possible sources of error: Substantive errors Loan Disbursement o These comprise the erroneous assessment of a A loan is disbursed when the agreed-upon amount is credit exposure despite a comprehensive and actually paid into the borrower's account and is available transparent presentation. for use. Procedural errors o Procedural errors may take one of two forms. Purpose of Credit Review o On the one hand, the procedural-structural to gauge creditworthiness design of the credit approval process itself may examine credit history be marked by procedural errors. reveal potential negative information o These errors lead to an incomplete or wrong presentation of the credit exposure. Loan Administration part of the loan operations team and supports or oversees B. Segmentation on Credit Approval: the bank‘s loan administration processes. 1. Type of borrower is banking function that involves determining loan 2. The source of cash flows eligibility, tracking loan documentation, and generating 3. Value and type of collateral reports. 4. Amount and type of claim A. Loan Administrator C. Important Factors for Credit Approval provide administrative and clerical support to a 1. Purpose of credit and sources of repayment. loan department. 2. The current risk profile of the borrower or They obtain loan documents and collect client counterparty and collateral and its sensitivity to information. economic and market developments. They perform all modifications and ensure 3. The borrower‘s repayment history and current compliance to lower requirements in addition to capacity to repay, based on historical financial processing fees. trends and future cash flow projections, under They compile data, gather information from various various scenarios. sources, prepare reports, coordinate meetings, and 4. For commercial credits, the borrower‘s business manage correspondence to ensure the loan expertise, the status of the borrower‘s economic department generates maximum business revenue. sector, and position within the sector. Loan administrators maintain a professional and 5. The proposed terms and conditions of the credit, healthy relationship with existing and prospective including covenants designed to limit changes in the clients. future risk profile of the borrower. They are responsible for documenting, closing, 6. Where applicable, the adequacy and enforceability dispersing, and servicing loans that pertain to of collateral or guarantees, including under various construction, small business mortgages, or scenarios. commercial lending. Loan Documentation B. Qualifications of Loan Administrators Involves showing all the documents to banks or financial Bachelor's Degree in business, finance or business institutions to get loans. administration, or equivalent experience. These documents are very necessary for the security of Strict attention to detail and enthusiasm for loans. collaboration.  FINAL EXAM REVIEWER (Credit Policy and Collection) Advanced general ledger and spreadsheet 3. Follow-up stage – where successive action are management skills. undertaken at regularly spaced interval Strong command of English language and good 4. Drastic stage – this stage is only resorted to if the communication skills. company is ready to lose the customer (collection is Comprehensive understanding of lending and through an attorney or collection agency) refinancing processes. Ability to work independently. G. Tools and Aids in Collecting Statement of Account Collections and Repayments Notice or Reminder A. Collection Program Letters strategies, organization and procedures for recovery Third Party Letters of receivables. Telephone To reduce the amount of bad debt losses while SMS controlling collection costs. To reduce the company’s investment in accounts Remedial Account Management receivable. A. Objectives To nurse a substandard or doubtful account back to B. Forces of Collections health Salesmen To regularize credit and document deficiencies House Collectors To strengthen weaknesses of the credit extension by Attorneys (Legal Counsel) way of additional collateral, security or guaranty Collection Agency To locate missing customers (skip tracing) Government To anticipate debtor’s defenses C. Collection Department B. Remedial Measures responsible for monitoring and following up on 1. Loan Restructuring receivables. Any change in the principal terms and The credit manager should determine the reasons conditions of the loan in accordance with a why accounts become overdue and delinquent and restructuring agreement setting forth a new then the customers so that proper measures can be plan of payment on a periodic basis. initiated. The following are circumstances that warrant restructuring: D. Unfair Collection Practices (BSP Circular 454 Series of o Admission by the borrower than 2004) can no longer comply with the Use or threat of violence or other criminal means to present amortization schedule harm the person physically, his/her reputation, or due to business reverses property. o Occurrence of unfavorable Disclosing the names of persons who refuse to pay events that are beyond the for past due accounts. control of the borrower and Use of profane language, insult, or obscenities to which will greatly impair the intimidate you or put you to shame. cash flow or liquidity of the Informing family, friends, or colleagues that you are project like natural calamities, in debt. fire, labor and management problems E. Prohibition on Unfair Debt Collection Practices of Financing o Note: Loan restructuring should Companies and Lending Companies (SEC Memorandum be done only if the borrower still Circular 18 s. 2019) has the capacity to pay his Employment of threat that a legal action will be obligations and needs a set of taken in case of non-payment. new repayment terms. Contacting the person during unreasonable hours 2. Assumption of Mortgage (before 6am and after 10pm) EXCEPT when the Involves the assumption of mortgage by a account is past due for more than 60 days or you third party, e.g. a private individual, agreed to be contacted at anytime. partnership, company, etc. wherein he Communicating or threat to communicate to a assumes the obligation of the borrower person a credit information, which is known to be false. Credit Review Use of false representation or deceptive means in an integral part of a total system for managing the credit portfolio. order to collect or attempt to collect debt or information about the cardholder. The overriding concern is to help develop correct credit practices and procedures to minimize credit risks. F. Stages of Collection 1. Preliminary stage – usually involves the sending of monthly statements 2. Reminder stage – reminder is sent to customer several days after due date  FINAL EXAM REVIEWER (Credit Policy and Collection) A. Scope of Credit Review Process Quality Credit Administration and Documents Management o The review validates the effectiveness of the credit monitoring and supervision and support system. Problem Recognition o The review assesses the ability to anticipate adverse factors affecting credit risk and detects potential problem accounts, as well as timely reporting of such events to the proper authorities Organization and Staffing A. Organization and Deployment This aspect of the review establishes the appropriateness of the organizational set-up in terms of staff adequacy, work experience, delineation of functions, account assignment, among others. B. Coaching and Training The review determines the availability and effectiveness of training programs and other coaching tools in the delivery of functions. Loan Recovery A. Remedial Management This generally shows the action plan as well as results of recovery measures on distressed accounts. Assessment of this block includes the evaluation of work-out plans, actions on vital documentary deficiencies, tracking of remedial actions and actual results of recovery programs and actions. B. Normal Management This is an evaluation of the processes in the administration of problem accounts. The review deals basically on the credit monitoring and supervision activities, anticipation and recognition of problem.