Lesson 4: CREDIT MANAGEMENT

Learning Outcomes:

At the end of the lesson, student’s will be able to :

 Identify and discuss the credit management, its objectives and functions of the credit
management.
 Determine the importance of credit management in dealing with the operation of the different
sectors of the economy.
 Explain the principles of credit management and measures used in preventing delinquent loans.

A. Credit Management Defined:

Credit Management - deals with the scientific planning, organizing and controlling the manifold activities
of credit transactions.

 It is identified as special group of people whose job is to direct or redirect the efforts and
activities of other people toward the proper movement of credit.
 It also refers to a system that will insure close collaboration between the grant of credit and the
collection of credit.

The management of credit must be in line with predetermined objectives of the enterprise. It
embraces the gamut of activities and responsibilities from the initial consideration of a prospective
account until the completion of the collection aspect and a critical examination of the results achieved in
the over-all that may lead to alterations in policy and practice.

B. Principal Objectives:

 to adopt policies, practices and procedures regarding:

o credit granting;
o credit limits; and
o credit collection.
 To help the business attain its profitability objectives:
o maximize sales or business volume;
o control assets invested in receivables; and
o Control the costs of credit and collection.

C. Terminologies:

1. Credit Department - is that unit of the whole organizational set up which is responsible in the
conduct of credit transaction. It is responsible for the gathering of all credit information about the
applicant & assembling them as guide for the loan officer in his assessment and analysis in order to
establish credit rating.

2. Credit Manager - refers to a person responsible in supervising all the works of the credit department.
It is a man who occupies a very important position in the structure of credit. His decision spells the
success or failure of a credit granting.

3. Credit Investigator - is a person who is responsible in gathering information regarding the applicant.

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 4. Credit Investigation - the exhaustive study & evaluation of the credit risk as well as information and
supporting papers related to the applicant. In order to avoid or minimize the undesirable effect of credit,
there is a need for a more or less exhaustive investigation of the credit risk as well as the analysis of
information relating to the applicant.

E. THE CREDIT WORK:

The efficient performance of the credit work revolves around the presence and cooperation of a staff of
trained, experienced and capable personnel whose task and responsibilities are delineated by the kind of
positions they hold in the department:

1. Supervisor

 handles the over-all supervision of his section or department;

 receives request for Credit Investigation Report/Appraisal Report;
 assigns senior credit investigators/appraisers for completion and submission of CIR/AR on a certain
date;
 reviews, edits and check the accuracy of the submitted CIR/AR;
 answers credit inquiries from banks, trade firms, bank clients and other financial institutions;
 implement procedures and ascertains that all matters of importance are given top priority;
 supervises the preparation of monthly reports on output, etc.

2. Senior Credit Analyst

 assumes responsibility of the supervisor in his/her absence;
 evaluation of Cash Flow Projections based on the projected financial statements and feasibility studies
of various companies;
 works continuously on the revision of present and future credit rating sheets of credit evaluation
reports.

3. Junior Credit Analyst

 assist senior credit analyst;

 studies financial statements and other documents submitted by the client; and
 prepare the following reports:
o credit analysis and rating = an evaluation of the financial status of the client for evaluating the
credit worthiness of the client.

financial analysis = a study of the post-operating performance of the client. o cash flow evaluation = an
analysis and projection of cash generation capacity and future cash requirement of the client.

o project evaluation = a complete study of the technical, financial, marketing and management aspects
of the client’s project proposal.

4. Appraiser

 conducts ocular inspection of properties offered as collaterals;

 sketches the vicinity and location of the property under appraisal;
 verifies the authenticity of original/transfer certificates of titles with the Register of Deeds;
 summarizes in a report form findings on the ocular inspection made, etc.

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5. Credit Investigator

 conducts checking and evaluation of applicants for credit accommodations ;

 interviews co-makers and employers of applicants/clients to verify data gathered;
 prepares credit investigation report and other correspondence; and
 assist collection group in locating the whereabouts of clients with pastdue obligations and real
properties registered in their names.

G. PRINCIPLES OF SOUND CREDIT MANAGEMENT:

1. Estimation - all available sources of credit information must be tapped and utilized so that a proper
estimation of the credit risk can be obtained. For individuals who buy for consumption, character and
their ability to pay serve as important bases of credit; and for business concerns, it is the net worth and
condition of the business. All gathered credit information must be kept confidential.

2. Enforcement - collection of accounts should start from the moment they become due. There should
be no room for vacillation insofar as collection is concerned. The task and responsibility of every
collection department is to get the money due to the company. Collection records must be kept and
maintained and should indicate when notices were sent; dates when calls were made by the collectors;
payments made; balances due; and action taken, if any.

3. Evaluation - the results must be evaluated against company policies and procedures and records must
be periodically reviewed and kept up to date.

H. QUALIFICATIONS OF A CREDIT MAN:

1. Personal Qualifications:

a) Adaptability - the credit man must be able to adjust to circumstances. He must be prepared to react to
different personalities without losing his correct or balanced disposition.

b) Tactfulness - the credit man must be courteous tempered with sound judgment. He must be able to
listen patiently to details and try to appreciate the views of others and place himself in the shoes of
others. A credit man may reject a customer’s application for credit but still he can retain his goodwill if
the rejection is done tactfully.*

c) Analytical Ability - the credit man must be able to discern the important parts of the facts gathered
and must be able to keep an eye for details and weigh facts objectively and he must be able to arrive at a
quick and wise decision.

d) Decisiveness - a credit man must make a decision promptly and with conviction based on facts. He
must be ready to give judgment right away.

e) Firmness - the credit man must stand with his decisions when made and he must be able to support
these with reasonable facts.

2. Educational records. A credit man must have knowledge of accounting so as to be able to read,
interpret and analyze Qualifications

a) Accounting - is the recording, interpreting and analyzing of financial financial statements.

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b) Economics - the credit man must be acquainted with basic economics so as to appreciate the
movements of business activity such as price changes, banking policies, tax measures, etc.

c) Finance - the credit man must be equipped with a good knowledge of finance because it covers the
principles and practice of credit and collection.

d) Business Law - the credit man must have knowledge about legislation related to business such as law
on sales, negotiable instruments, etc.

e) Marketing - the credit man must have knowledge about new methods, techniques and practices of
marketing for this has relations to the credit work of maximizing sales.

f) Others - the credit man must also have knowledge and understanding of the (a) management
principles and practices; and (b) oral and written communication skills.

I. FUNCTIONS OF CREDIT MANAGEMENT:

1. Supervision of the credit department’s operation. To supervise the works of the credit department.

2. Gathering & Sorting of Credit information. The credit department, through the credit investigator,
gathers and sorts out information about the applicant from internal and external sources.

Internal Sources - can be obtained from internal records (data which are in files of the creditor) and from
the applicant’s information which could be obtained from personal interview, ocular inspection, mailed
questionnaire and analyses of financial statements of the business of the applicants.

External Sources - can be obtained from mercantile agencies, trade references, banks, newspaper
clippings, court cases, report of competitors, etc.

3. Analyzing Credit Information. All information gathered is sent to the credit analyst for him to apply the
standard test and measurement for performance. Here, the non-financial and financial data are critically
subjected to analytical tools to determine the credit worthiness of the applicant.

4. Credit Checking & Authorization. Verification is made of the applicant’s papers and the authorized
officer gives proper authorization/ approval for credit.

5. Recording & Filing. A record of the transaction is made and the credit folder of the applicant is
prepared and filed which are from time to time updated.

6. Credit Adjustments. Adjustments are made in accordance with discount or net credit period. This
pertains to increasing or decreasing the credit line or extension.

7. Credit Follow-Ups & Collection. When credit is granted, follow-ups, reminders are sent to the debtors
on or before the maturity date. Here, payments made are credited and debtors are classified as to their
paying habits.

J. CREDIT MANAGEMENT: For a cooperative to manage effectively its credit operations, it must consider
the following:

1. Credit Operations Flow. In a normal process of loan approval, the cooperative generally observes the
following steps:

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 Steps Person Responsible
1. Fills up loan application Member-Borrower
2. Request for financial data from Member-Borrower; Treasurer-Borrower
Treasurer/Cashier; validate financial data
3.Submits application to loan office/manager Member-Borrower
4.Conducts CIBI; Validates CIBI and evaluates Loan Officer;Manager and Crecom
loan proposal
5. Files pertinent loan Loan Officer
requirements/documents
6.Approves loan proposal CreCom/Manager/Loan Officer
7.Submits approved loan proposals to Loan Officer/Manager/CreCom
Bookkeeper or Accountant for preparation of
Cash Voucher
8.Conducts pre-audit verification Audit & Inventory Committee
9. Forwards CV to Treasurer for Checks Bookkeeper/Accountant
10.Signs Check BOD Chairman & Treasurer
11. Releases Check Treasurer or Cashier

2. Presence of Key Staff & Functioning Credit Mgt. Units.

To successfully run and manage the credit operations of a cooperative, the following persons and units
are greatly needed and must be functioning:

Board of Directors.

 Responsible of maintaining safe productive lending operations in order to protect the funds of the
cooperative.
 Responsible for the approval of loan policies.
 Setting up of operating standards.
 Granting lending authority

Credit Committee
 Responsible for protecting the quality of the coops' loan portfolio.
 To evaluate and approve loan applications.
 Review all delinquent & problem loans.
 Recommend appropriate collection/and or remedial actions to the Manager.

Manager

 Responsible for the day to day management of the coops' lending operations which includes:
 loan processing
 maintaining credit files,
 verifying loan security,
 monitoring and reviewing outstanding loans,
 implementing delinquency controls

Loan Officer

 Responsible for undertaking the details of credit operations

 Promotes coops' credit facilities/services

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  Analyses and recommends approval of loan applications
 Obtain all required loan documentation.
 Maintains credit files

K. PREVENTING DELINQUENT LOANS:

1. Continuous Orientation and Education of Members. Enhance the credit worthiness of the members
through continuous education by inculcating the value of banking/cooperativism and the importance of
credit in banking/coop operations, highlighting its positive and negative effects.

 An excellent repayment performance among borrowers will enable the bank/coop to finance more
production projects and providential needs;

 The opposite could erode the capability of the bank/coop to lend.

2. Installation of Credit Management System Prior to Credit Delivery. Appropriate credit policies and
trained personnel prior to actual extension of credit to members will help minimize the occurrence of
bad loans/accounts. Institute fines, penalties such as surcharges, foreclosure of collateral, etc.

3. Conduct of Honest-to-Goodness CIBI. This will give a good assessment of the borrowers' loan
repayment performance and provide the bank/coop a sound basis for credit decisions.

4. Closer Monitoring of Loans and Establishing Relationship with the Borrower. Frequent visits and
interactions with the borrower will have a two-pronged effect, to wit:

 The borrower will be reminded of his obligations;

 Loan officer who will promptly apprised of the possible delay or nonrepayment of loans, will be in a
better position to institute safeguards to prevent its occurrence.

5. Provision for Insurance. This will help minimize losses for the bank/coop and provide a buffer fund to
bank/coop-funded projects which are damaged by natural calamities.

6. Appropriate Loan Releases. The bank/coop should match or equate the total amount of loan to be
granted with the members' past credit performance, and the budgetary requirements of the project, as
well as their capacity to pay and staggered disbursement of loan based on the farm plan and budget.

7. Efficient Collection Systems. In designing an effective collection system, one must remember the
objective of credit management.

L. CREDIT POLICIES: Credit Policies are formulated by the credit department and these should be
approved by the Board of Directors, who in turn may delegate this function to a credit committee or the
company president.

1. General Policies on Credit.

Some of the areas where general policies have to be designated are:

1.1 Approval Authority . The decision as to who will approve the loan application will require practical &
common sense consideration. This could either be geographical or be based on rank or title.

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 Amount of Loan/ Credit To be Approved at/by
Over Php 500,000 Head Office/President
Php 200,000 to 499,999 Regional Office/Vice President
Php 50,000 to 99,999 Branch or District/Loan Officer

1.2 Credit Limits. The credit limits is the maximum amount of credit that could be granted to one
borrower. There are factors that may be used in determining a borrower’s credit limit:

a) average total purchase amount per customer per order;

b) nature of the product being sold;
c) geographic distance between the branch & the approving authority;
d) nature of the company’s competitors.
e) Credit quality of its customers.

1.3 Loan to Market Value ratios. This represents the maximum loan that could be granted to a borrower
based on the property’s market value (which is usually 60% to 80%.

1.4 Past Due Limits. This limit is imposed as a performance measurement tool of branches or of the
credit & collection department.

1.5 Territorial Limits. Areas where credit could be granted are clearly identified based on geographical
limits:

a) peace & order situation;

b) availability of regular public transport facilities;
c) prevalence of crime;
d) travel time; and
e) road condition.

2. Loan Payment Terms. Loan Payment terms should be considered in different aspects such as: pay on
demand, payment required immediately after the sale; payments with specific due dates-30, 60, 90 days,
interest payments only and balloon payments at the end of the term, amortized payments of equal
amounts, etc.

3. Interest Rates. Article 1956 of the Civil Code states, “That no interest shall be due unless it has been
expressly stipulated in writing”, while Article 1959 states, “That interest due and unpaid shall not earn
interest, hence the payment of interest on unpaid interest should be provided in writing in the
promissory note, otherwise the unpaid interest is not entitled to more interest. The payment of interest
on unpaid interest is the heart and core of the concept of compound interest. There are 2 kinds of
interest – simple and compound interest.

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Illustration: P10,000 loan , 5 years to pay at 12% annual interest.

SIMPLE INTEREST COMPOUND INTEREST

YEAR Principal Interest Balance Principal Interest Balance

End Year End Year

Year 1 P 10,000 P 1,200 P 11, 200 P 10,000 P 1,200 P 11, 200

Year 2 11,200 1,200 12,400 11,200 1,344 12,544

Year 3 12,400 1,200 13,600 12,544 1,505 14,049

Year 4 13,600 1,200 14,800 14,049 1,686 15,735

Year 5 14,800 1,200 16,000 15,735 1,888 17,623

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 References :

Mutya, Ruby F.A (2014) Introduction to Philippine Money, Credit and Banking. 3rd ed. National Book
Store,Mandaluyong City, Philippines

“Money, Credit and Banking”. Rose Marie B. Laman & Vincent Patrick B. Laman. GIC Enterprise & Co. Inc.,
Recto Manila (2015)

Urbis, Corazon B., Fin 105 Credit Analysis and Collection: Instructional Manual, (Unpublished) Updated,
2016.

Bragg, Steven M. (2017) Credit & Collection Guidebook: Third Edition. Accounting tools, INC. Centennial,
Colorado.2017

The Editorial Team. (2023, July 18). Difference between Bearer Cheques and Order Cheques (Bearer
Cheques vs Order Cheques) (2024). onlydifferences.com. https://onlydifferences.com/difference-
between-bearer-cheques-and-order
cheques/#:~:text=The%20main%20difference%20between%20bearer,and%20convenient%20method%2
0of%20payment.

Mint. (2022, July 11). What is a certified check? MintLife Blog. https://mint.intuit.com/blog/money-
etiquette/what-is-a-certified-check/

Team, W. (2024, January 5). Endorsement.

WallStreetMojo. https://www.wallstreetmojo.com/endorsement/