Ad Jesum Devt. Foundation, Inc.

Seminar on

Credit & Microfinance

16 November 2012
Mati City, Davao Oriental
Butch Ferriols
 Opening & Preliminaries

Objectives of the Seminar

At the end of the seminar, it is

anticipated that the participants would
have gained the knowledge of:
o A better understanding of the underlying
ideas & concepts of credit;
o The credit delivery process & the
importance of documentation.

Seminar Credit & Microfinance

 What is credit?

“Credit” from Latin word “Credo”

Meaning: to believe, to trust
As such, Credit means securing
something of value, whether tangible or
intangible, in return for a promise to
pay at some determined future date.
Trust, therefore, is the fundamental
element of credit.

Seminar Credit & Microfinance

 OTHER DEFINITIONS OF CREDIT
 Credit is a purchasing power
 The essence of credit is confidence on the part of the
creditor in the debtor’s willingness and ability to pay his
debt.
 Credit is a “sale on trust”.
 The exchange of an actual reality against a future
probability.
 Credit is the personal reputation a person has, in
consequence of which he can buy money, or goods, or labor,
by giving an exchange for them, a promise to pay at a future
time.
 Credit is the power to obtain goods or services by giving a
promise to pay money (or goods) on demand or at a specified
date in the future.
Seminar Credit & Microfinance
 FUNCTION OF CREDIT

 Economic Function
o To serve as a medium of exchange in the
economy. By the use of credit, transactions
can be consummated quickly & easily with
confidence;
o To make capital available for business
purposes which would otherwise lie idle.
Induced by payment for use of their funds,
people save to invest or lend their money.

Seminar Credit & Microfinance

 FUNCTION OF CREDIT

 Social Function
o Its use prevents the necessity for hoarding
on the part of those who desire to save and
leads them to place their funds in
institutions where the principal is more
secure than are hoardings. This, in turn,
provides uses for capital which people have
no means of employing themselves.

Seminar Credit & Microfinance

 FUNCTION OF CREDIT

 Business Promotion
o For the business executive, credit
performs several functions.
• It is a tool of business promotion, with which he
may expand his business by selling to customers
who want to buy merchandize on credit.
• Credit also gives him the opportunity to manage
his business with the funds of others and to
adjust his volume of capital to the varying needs
of his business.

Seminar Credit & Microfinance

 Brief History of Microfinance

 Bangladesh geographical location

 Prof. Muhammad Yunnus
 Poor people of Bangladesh & loan sharks
 Negotiation with Banks
 Initial loans
 Women only
 Lending activities expanded
 Grameen Bank
 Copied other countries
 2008 Nobel Prize
Seminar Credit & Microfinance
 Microfinance ACTIVITIES
 Microfinance activities usually involve:
o Small loans, typically for working capital
o Generally to finance a second income
generating activity of the family
o Informal appraisals of borrowers and
investments
o Collateral substitutes, such as group
guarantees or compulsory savings
o Access to repeat and larger loans, based on
repayment performance
o Streamlined loan disbursement and monitoring
o Secure savings product
Seminar Credit & Microfinance
 THREE TYPES OF
SOURCES OF MICROFINANCE

formal institution – i.e. rural

banks and cooperatives
semiformal institutions – i.e.
non-government organizations
informal sources – i.e. money
lenders and shopkeepers

Seminar Credit & Microfinance

 CORE PRINCIPLES OF MICROFINANCE

 The poor need sustained access of the

financial services.
 Sustained access is primary over
interest rates.
 The poor have the capacity to repay
loans and save.

Seminar Credit & Microfinance

 KEY SUCCESS FACTORS
 The key success factors for microfinance are:
1. Clearly identified market.
2. Capable and committed staff – The staff
must be skilled in providing financial services
to the poor. If they lack these resources,
they will not be able to go further than simply
identifying the problems.
3. Innovative methodologies and technologies.
4. Adherence to standards and best practices.

Seminar Credit & Microfinance

 MICROFINANCE OPERATIONS

 Savings
o Savings mobilization should be an integral part of
the operations of a microfinance institution.
o Savings habit should be encouraged as a value in
itself and not just a mere device to increase the
group’s position.
o It helps build the habit of thrift among members
and curtail excessive and unnecessary
consumption which can have a direct effect on
the capacity of the borrowers to pay back the
loan.

Seminar Credit & Microfinance

 MICROFINANCE OPERATIONS
 Savings
o Studies have shown that even the poor would really
want to save.
o This can be seen through the many informal savings
mechanisms that are ever present in rural and poor
communities throughout the world.
• RoSCAs or the Rotating Savings and Credit Association
• There are also many door-to-door deposit collection
mechanisms and the many savings club.
o All these mechanisms are informal.
o But given the opportunity to save in a formal
institution, the poor would easily put aside certain
amount from their income in exchange for a future
assurance of financial availability.

Seminar Credit & Microfinance

 MICROFINANCE OPERATIONS - SAVINGS

 Microfinance Operations have to mobilize its

own resources by:
o Providing Safety & Attractive Return
• Studies have shown that the poor doesn’t mind to pay
a certain amount just so they are assured that their
money is protected.
o Promoting Voluntary Withdrawable Savings
• Some institutions tie savings with the capital
build-up mechanisms & is usually non-
withdrawable. Such practice simply drove savers
away.
• The poor wants to save so they can get their
money back when they need it, if they need it.
Seminar Credit & Microfinance
 MICROFINANCE OPERATIONS - SAVINGS

 Providing Doorstep Collection Services

• The poor need accessibility of financial services.
• Providing doorstep collection services will enhance
their willingness to save.
• Their uneasiness on formal infrastructure makes
them reluctant to save in banks.
 Offering Suitable Products
• The poor has specific needs and services that MFIs
have to identify in order to make them save.
• Microfinance institutions need to design product
services in line with the needs and peculiarities of
the poor.

Seminar Credit & Microfinance

 PRINCIPLES OF CREDIT

 Understanding the principles of credit is

important to properly maintain and manage
credit services.
 Knowing these principles will minimize risk
while at the same time increase collection
efficiency.
 Among the principles include:

Seminar Credit & Microfinance

 PRINCIPLES OF CREDIT

1. The quality of credit is more important

than exploiting new opportunities.
2. Every loan should have at least two (2)
ways out that are not related and exist
from the beginning.
3. The character of the borrower or in
the case of corporations, the
management and shareholders, must be
free of any doubt as to their integrity.

Seminar Credit & Microfinance

 PRINCIPLES OF CREDIT

4. If you do not understand the business,

do not lend to it.
5. It is your decision and you must feel
comfortable decisions are properly
evaluated and appraised.
6. The purpose of the loan should contain
the basis for its repayment.
7. If you have all the facts, you do not
need to be a genius to make the right
decision.
Seminar Credit & Microfinance
 PRINCIPLES OF CREDIT

8. The business cycle is inevitable.

9. Although it is harder than evaluating
financial statements, assessing a
company’s management quality is vital.
10. Collateral security is not a
substitute for repayment.
11. Where security is taken, a
professional and impartial view of its
value and marketability must be
obtained.
Seminar Credit & Microfinance
 PRINCIPLES OF CREDIT
12. Do not let poor attention to detail and
credit administration spoil an otherwise
sound loan.
13. Local banks should be participating in
lending to local borrowers.
14. If the loan is guaranteed, be sure that
guarantor’s interest is served as well as
the borrower.
15. See where the creditor’s money is going to
be spent.

Seminar Credit & Microfinance

 PRINCIPLES OF CREDIT

All these principles can be summed

up in one (1) cardinal principle; that
is,

KNOW THE ACCOUNT EVEN

BEFORE IT BECOMES
DELINQUENT.

Seminar Credit & Microfinance

 THE CREDIT DECISION PROCESS

1. Know your customer.

2. Recognize the purpose of the
loan.
3. Identify source of repayment.
4. Know the risk involved.
5. Equate risk with rewards.
Seminar Credit & Microfinance
 Five Cs of credit

Evaluating credit risk is an essential

process that financial institutions
undergo.
To evaluate such risk to come up with an
acceptable degree on amount of risk,
the institution generally assesses the
borrower’s credit factors.
These are what are generally known as
the five (5) C’s of credit.

Seminar Credit & Microfinance

 Five Cs of credit

1. CHARACTER means how a person has handled past

debt obligations. From credit history to personal
background, honesty and reliability of the
borrower to pay credit debts are determined.
These comprise those qualities of credit risk which
make him want or intend to pay when a debt is due.
Under this category, it is helpful to look into the
borrower’s:
o Social Background
o Family Background
o Educational Attainment
o Applicant’s vices or lack of it
o His habit and other personal trait

Seminar Credit & Microfinance

 Five Cs of credit
2. CAPACITY means how much debt a borrower
can comfortably handle. Income streams are
analyzed and any legal obligations looked into,
which could interfere in repayment. This
generally refers to his total and disposable
income.
o Total Income may refer not only to applicant’s
income from his employment, or business, or real
estate properties, stockholdings or investments, and
other such income, but also to his spouse income
from similar sources.
o Disposable Income. Capacity to pay is that portion
of his income which is not yet committed

Seminar Credit & Microfinance

 Five Cs of credit
3. CAPITAL means current available assets of the
borrower, such as real estate, savings or
investment that could be used to repay debt if
income should be unavailable.
4. CONDITION refers to the economic
environment in which the risk exists over which
individuals do not have control.
5. COLLATERAL. Sometimes, collateral is included
in the list of credit risk factors but it is usually
given a minimal influence in the evaluation of the
applicant’s credit worthiness.

Seminar Credit & Microfinance

 Five Cs of credit
 The ultimate decision in a credit situation
must be one of a judgment and not a mere
computation through the financial statements.
 Financial institutions must analyze, evaluate
and consider the available credit information
and on the basis of such evaluation, make a
credit decision.
 The weight to be given for each of the credit
factors may be summarized either in
mathematical percentage or through a
process known as “credit equation”. “Credit
Equation” can be illustrated as the one below:
Seminar Credit & Microfinance
 Five Cs of credit

Mathematical Percentage:

o Character 40 or 35
o Capacity 35 or 35
o Capital 25 or 15
o Condition 0 or 15
100
100

Seminar Credit & Microfinance

 Five Cs of credit
 CHARACTER + CAPACITY + CAPITAL = GOOD CREDIT RISK
o Should some of the C’s be impaired but not totally absent, the nature
of the credit risk involved may be expressed in these equations:

1. Character + Capacity + Insufficient Capital = Fair Credit Risk

2. Character + Capital + Insufficient Capacity = Fair Credit Risk
3. Capacity + Capital + Impaired Character = Doubtful Credit Risk
4. Character + Capacity – Capital = Limited Success
5. Capacity + Capital – Character = Dangerous Risk
6. Character + Capital – Capacity = Inferior Credit Risk
7. Capital – Character – Capacity = Distinctly Poor Risk
8. Character – Capacity – Capital = Inferior Credit Risk
9. Capacity – Character – Capital = Fraudulent Credit Risk.

Seminar Credit & Microfinance

 Five Cs of credit
 In case when risks is below average, or that there is a necessity
to improve the credit rating, the transaction can still be salvaged
by asking either for an acceptable guarantor or by requiring
additional collaterals to improve the risk.
 The credit decisions thus made may then be classified according
to the degree of risk involved in each case as:
o A or Above Average or Excellent Risk
o B or Fail or Satisfactory Risk
o C or Below Average or Unsatisfactory Risk
 Curiously, it should be noted that of all the equations and
mathematical percentages, nowhere can one find collateral as
part of any of it. Collateral are only there as guarantees and/or
security but in the final analysis of the borrower’s credit
worthiness, it is not considered.

Seminar Credit & Microfinance

Documentation,
its Role &
Importance

Seminar Credit & Microfinance

 Credit Documentation

1. Application Form
a. To have the initial basic information about
the borrower.
b. To know reason for loan.
c. To get authorization to get more
information
2. Interview Slip
a. To confirm initial basic information
b. To know more about the borrower and
his/her business
Seminar Credit & Microfinance
 Credit Documentation

3. BI/CI Form
a. To find out about the character of the
borrower his/her spouse
b. To learn about the credit worthiness &
financial habits of the borrower
4. Cash Flow Analysis Form
a. To find out the revenues & expenses of the
borrower’s business
b. To find out family living expenses of the
borrower
c. To find out the borrower’s capacity to pay
the loan amortization.
Seminar Credit & Microfinance
 Credit Documentation
5. Credit Approval Memorandum
a. Document showing that the loan was
approved by the Credit Committee
b. Also shows the loan amount approved
6. 2x2 Colored Picture of Borrower,
Spouse, Co-Makers
a. To know the face of the borrower, spouse &
co-makers
b. To have a guide when looking for the
borrower, spouse & co-makers in the future

Seminar Credit & Microfinance

 Credit Documentation

7. Valid IDs of Borrower, Spouse & Co-

Maker
a. To verify the names & faces of the
borrower, spouse & co-makers against the
information in the forms and pictures
8. Community Tax Certificate (CTC of
Cedula) of Borrower, Spouse & Co-
Maker
a. To verify the actual addresses of the
borrower, spouse & co-maker
Seminar Credit & Microfinance
 Credit Documentation
9. Co-Maker’s Statement
a. Serves as collateral or guarantee to the loan
b. Commitment of co-maker to guarantee the
loan
c. Shows basic information on the co-maker
d. Shows employment, business or source of
income of the
e. Indicates if co-maker has any real estate
f. Describes the relationship of co-maker with
the borrower

Seminar Credit & Microfinance

 Credit Documentation
10. Marriage Contract
a. To verify if borrower & spouse are actually
married
b.If not married, check with the barangay and
neighbors (thru the BI/CI) if borrower and
claimed spouse are actually co-habitating
11. Barangay Clearance
a. To verify if the borrower is actually a
resident of the barangay
b.Barangay Captain vouching for character of
borrower

Seminar Credit & Microfinance

 Credit Documentation

12. Proof of Residence for Billing:

Electricity, water, cellphone
a. Additional verification of the borrowers
residence
b. Also shows an indication of the borrowers
level of expenses
13. If Employed, (BIR 2316), Certificate
of Employment
a. To confirm borrowers employment, if
employed
Seminar Credit & Microfinance
 Credit Documentation

14. If Self-Employed, DTI Registration,

Municipal or Barangay License
a. To check if the borrower has a duly
registered business or may be bogus
b. If part of the underground economy,
secure other documents to show
legitimacy of the business
15. Disclosure Statement / Discount
Statement
a. Shows details of loan & net loan proceeds
Seminar Credit & Microfinance
 Credit Documentation

16. Promissory Note (PN)

a. The loan/credit contract
b. Indicates commitments of the borrower
c. Indicates payment schedule and other terms
& conditions of loan
17. Borrower’s Ledger Card
a. Shows payment history of borrower
18. Post-Dated Checks
a. Additional security that the bank may
require
Seminar Credit & Microfinance
 Credit Documentation
All the documents have a purpose.
With complete documentation the credit
decision will not be very difficult.
With complete documentation the risk of
not being able to collect is lessened.
In case of default, with complete
documentation there is information on who
the bank can run after.
Complete documentation will result in
lower PAR
Seminar Credit & Microfinance
 PRACTICAL COLLECTION GUIDELINES
1. Review all principal contracts of indebtedness
and collateral documents.
2. Collection effort should be done in-house
first before field collection.
3. Conduct an exhaustive collection interview
upon contact with a delinquent customer.
4. Record all information of vital importance on a
collection history card.
5. During field call, always ascertain the
existence and current value of the collateral.

Seminar Credit & Microfinance

 Five Cs of BAD credit

There are always two (2) sides in one

coin. Creditors should likewise be wary
of the five (5) Cs of bad credit. This
includes:
1. Competition
2. Carelessness
3. Complacency
4. Communication (Lack of)
5. Contingencies (Lack of)

Seminar Credit & Microfinance

 CARDINAL Cs OF THE CREDIT PERSON

1. Competence & Capability

2. Communication
3. Constructiveness
4. Creativity
5. Conscientiousness
6. Consistency
7. Certitude & Celerity
8. Contact
Seminar Credit & Microfinance
 CARDINAL Cs OF THE CREDIT PERSON

9. Cost Consciousness
10.Character
11. Confidence
12.Computer Literate
13.Congeniality
14.Considerateness
15.Common Sense

Seminar Credit & Microfinance

 CARDINAL Cs OF THE CREDIT PERSON
 Credit persons, with the possible exception of
a few who have been privileged to be schooled
abroad, never had the opportunity of learning
their craft in college or in the university.
 Even the credit person of the highest local
multinational companies learned the tricks of
the trade not from scholastic training but
directly from the University of Experience.

Seminar Credit & Microfinance

 CARDINAL Cs OF THE CREDIT PERSON
 In sum, the good credit person possesses the
following essential traits and characteristics:
o Poise, necessary to relate well with customers and
an understanding of business psychology. He must
be able to match an understanding of customer
motivations with the manner and method of his
approach.
o Good articulations, to effectively communicate in a
variety of media –letter, phone and personal
interview.

Seminar Credit & Microfinance

CARDINAL Cs OF THE CREDIT PERSON
o An aggressive attitude capable of maintaining
persistent and continuous follow-up of the credit
and collection problems – in recognition of the
relatively short time frame available for
accomplishment
o Analytical mind.
o Academic experience and/or indicated interest
should be in the subject areas related to credit –
corporate finance, accounting, business law and
economics.
o Personal ambition necessary to achieve committed
goals.

Seminar Credit & Microfinance

 If you want to work in a
financial institution, take the
Credit Principles to heart.

 Complete documentation, will

lessen your headaches, as this
will lower PAR.
Seminar Credit & Microfinance
May all of you have
a good weekend.

Seminar Credit & Microfinance