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Lesson 4

The document discusses elements of credit investigation for both individual and corporate borrowers. For individuals, factors like identity, age, health, character, income sources, credit history, and purpose of the loan are examined. For corporations, the focus is on legal registration, management strength, business operations, financial condition, and credit history. The purpose of credit investigations is to validate applicant information and gather enough data to make sound credit decisions. Field investigations include verifying an individual's residence, employment, and business, as well as trade and bank references.

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74 views

Lesson 4

The document discusses elements of credit investigation for both individual and corporate borrowers. For individuals, factors like identity, age, health, character, income sources, credit history, and purpose of the loan are examined. For corporations, the focus is on legal registration, management strength, business operations, financial condition, and credit history. The purpose of credit investigations is to validate applicant information and gather enough data to make sound credit decisions. Field investigations include verifying an individual's residence, employment, and business, as well as trade and bank references.

Uploaded by

Rachel Ann Razonable
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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LESSON 4

EXERCISES
Instruction: Please answer in a short and concise manner.
1. 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 self-employed
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. First-hand 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 long-term 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 finance
 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.

2. 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
− 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
3. What consists Field Investigation?
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

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