IMUS INSTITUTE OF SCIENCE AND TECHNOLOGY

College Department
Nueno Avenue, City of Imus, Cavite

Nuestra Senora del Carmen Sugar Central Loan Account

A Case Analysis

Submitted to:
Mr. Nelson Tablizo, CPA, MBA

Submitted by:
Jovi Vonn Balcita

4-BS BA Management Accounting

March 26, 2020

 I. TIME CONTEXT

Nuestra Senora del Carmen Sugar Central, owned by Carmen Yu, defaulted her

monthly payments with Prosperity Bank starting from July 30, 2014.

II. VIEW POINT

The viewpoint to be used is from the viewpoint of the Remedial Management

Division that requested recommendations

III. CENTRAL PROBLEM

The problem that needs to be addressed is how the account could be restructured

or foreclosed entirely.

IV. OBJECTIVES

MUST OBJECTIVE

 To properly remedy the account of Nuestra Senora del Carmen Sugar Central.

WANT OBJECTIVE

 To have the optimal return of capital and an appropriate return on capital.

 To make sure that both the Bank and Sugar Central arrives at a reasonable

conclusion of the issue.

V. AREAS OF CONSIDERATION (SWOT ANALYSIS)

STRENGTH

Prosperity Bank’s strengths includes the interest of 10% per annum payable in

arrears, the penalty of 24% on the unpaid principal to run on the fourth month of non-

payment, and the collateral held by the bank with a total appraised value of 37,500,000.

WEAKNESSES

Prosperity Bank’s weakness is that it lacks an effective credit and collection

policy as shown by the 10% past due ratio of the bank as against the industry average of

8%.

OPPORTUNITIES

Prosperity Bank can now improve their collection policy to be on par with

industry standards.

THREATS

Prosperity Bank has the risk of having losses due to the bankruptcy or

delinquency of the debtor. Current inflation also plays a large role in the economic

strengths of businesses link banks and lending companies.

 VI. ALTERNATIVE COURSES OF ACTION

ALTERNATIVE COURSE OF ACTION I-A

SUPPORTING COMPUTATION FOR ACA I-A

Schedule 1: Present Value Of New Interest @ 12 %

Principal Interest @ 12% PV of OA @ 10% Present Value

18,000,000 2,160,000 0.90909 ₱ 1,963,636.36
12,000,000 1,440,000 0.82645 1,190,082.64
6,000,000 720,000 0.75131 540,946.66
Total Present Value Of Interest Payments ₱ 3,694,665.66

Schedule 2: Potential Earnings From Installments Collected

Collections Interest Income PV of OA @ 10% Present Value

8,160,000 1,713,600.00 (7) 0.82645 ₱ 1,416,198.35
7,440,000 744,000.00 0.90909 676,363.64
6,720,000 No recognition (8) - 0
Total Present Value Of Future Earnings ₱ 2,092,561.98

Schedule 3: Amortization Table For 3 Periods

Date Principal Repayment Interest Received Interest Income Amortization Present Value
8/1/2016 ₱ 22,574,110.86
8/1/2016 3,958,333.25 18,615,777.61

7/31/2017 6,000,000.00 2,160,000.00 1,861,577.76 298,422.24 12,317,355.37

7/31/2018 6,000,000.00 1,440,000.00 1,231,735.54 208,264.46 6,109,090.91
7/31/2019 6,000,000.00 720,000.00 610,909.09 109,090.91 0.00
Total 21,958,333.25 4,320,000.00 3,704,222.39 615,777.61
 SOLUTION FOR ACA I-A

New Principal ₱18,000,000.00

Annual Installment (P 18,000,000 / 3 years) ₱ 6,000,000.00

Old Interest Rate 10%

Number of Periods of Amortization 3
PV of 1 for 3 periods at 10 % 0.75131
PV of OA of 1 for 3 periods at 10% 2.48685

Present Value of New Principal (P 6,000,000 x 2.48685) ₱14,921,111.95

Present Value of Unpaid Interest (P 3,958, 333.25 x 1) 3,958,333.25
Present Value of New Interest (Schedule 1) 3,694,665.66
Total Present Value of New Loan Account ₱ 22,574,110.86
Less: Carrying Amount of Old Loan Account (29,891,527.69)
Gain (Loss) on Debt Restructuring (₱ 7,317,416.83)
Add: Gain on reversal of loan loss provision (50% of Unpaid Principal) 9,000,000.00
Total Gain (Loss) on Debt Restructuring ₱ 1,682,583.17
Add: Potential Earnings from Installments Collected
until the last payment of new restructured debt (Schedule 2) 2,092,561.98
Less: Amortization of Premium on New Loan Account (Schedule 3) (615,777.61)
Total Potential Impact of ACA No.1 to Bank's Financial Performance ₱ 3,775,145.15

Advantages of Alternative Course of Action I-A:

ACA I-A offers a net gain for the bank of 1.6 million after considering the reversal of

loss provision. Overall, the potential impact of ACA I-A is approximately 3.8 million. It offers a

larger interest rate of 12%. The 36 monthly amortization and the full waiver of penalty and

interest on interest is an advantage for the debtor because she is more likely to pay these rather

than a lump-sum payment of the total loan.

Disadvantages of Alternative Course of Action I-A:

The full waiver of penalty and interest on interest is indeed a large amount of money to

aive as it amounts to almost 7.3 million. In addition, the increased interest rate of 12% from 10%

makes the debt harder to pay.

ALTERNATIVE COURSE OF ACTION I-B

SUPPORTING COMPUTATION FOR ACA I-B

Schedule 1: Present Value Of New Interest @ 10 %

Principal Interest @ 10% PV of OA @ 10% Present Value

21,958,333 2,195,833 0.90909 ₱ 1,996,212.11
14,638,889 1,463,889 0.82645 1,209,825.52
7,319,444 731,944 0.75131 549,920.69
Total Present Value Of Interest Payments ₱ 3,755,958.33

Schedule 2: Potential Earnings From Installments Collected

Collections Interest Income PV of OA @ 10% Present Value

9,515,277.74 1,998,208.33(3) 0.82645 1,651,411.84
8,783,333.30 878,333.33 0.90909 798,484.85
8,051,388.86 No recognition - 0
Total Present Value Of Future Earnings 2,449,896.68
 SOLUTION FOR ACA I-B

Old Principal ₱ 18,000,000.00

Add: Capitalization of Unpaid Interest 3,958,333.25
New Principal ₱ 21,958,333.25
Annual Installment (P 21,958,333.25 / 3 years) ₱ 7,319,444.42

Old Interest Rate 10%

Number of Periods of Amortization 3
PV of 1 for 3 periods at 10 % 0.75131
PV of OA of 1 for 3 periods at 10% 2.48685

Present Value of New Principal ( P 7,319,444.42 x 2.48685 ) ₱18,202,374.92

Present Value of Remaining Penalty ( P 7,920,000.00 x 25%) 1,980,000.00
Present Value of New Interest (Schedule 1) 3,755,958.33
Total Present Value of New Loan Account ₱ 23,938,333.25
Less: Carrying Amount of Old Loan Account (29,891,527.69)
Gain (Loss) on Debt Restructuring (₱ 5,953,194.44)
Add: Gain on reversal of loan loss provision (50% of Unpaid Principal) 9,000,000.00
Total Gain (Loss) on Debt Restructuring ₱ 3,046,805.56
Add: Potential Earnings from Installments Collected
until the last payment of new restructured debt (Schedule 2) 2,449,896.68
Total Potential Impact of ACA No.2 to Bank's Financial Performance ₱ 5,496,702.24

Advantages of Alternative Course of Action I-B:

This alternative offers a net gain for the bank amounting to at most 3 million after

considering the reversal of loss provision and a potential impact of approximately 5.4 million.

Higher interest rate of 12%. 25% of the penalty will be recovered and the 75% waiver of penalty

and full waiver of interest will create good relationship between the bank and Ms. Yu.
Disadvantages of Alternative Course of Action I-B:

This alternative will take 3 years to be collected and the collection of the amounts cannot

be reasonably assured. There would be a lost collection due to the 75% waiver of penalty and full

waiver of interest on interest

ALTERNATIVE COURSE OF ACTION I-C

SUPPORTING COMPUTATION FOR ACA I-C

Schedule 1: Potential Earnings from Collections

Potential Return to be Year of Reinvestment

Recognized 1st 2nd 3rd
(P 19,979,166.63 x 10%) 1,997,916.66 1,997,916.66 ₱ 1,997,916.66
(P 1,997,916.66 x 10%) 199,791.67 199,791.67
(P 199,791.67 x 10%) 19,979.17
Total 1,997,916.66 2,197,708.33 2,217,687.50
Grand Total ₱ 6,413,312.49

SOLUTION FOR ACA I-C

Old Principal ₱ 18,000,000.00

Add: Unpaid Interest (50% is waived) 1,979,166.63
New Principal ₱ 19,979,166.63

Old Interest Rate 10%

Number of Periods of Amortization 3
PV of 1 for 3 periods at 10 % 0.75131
PV of OA of 1 for 3 periods at 10% 2.48685

Present Value of Old Principal ( P 18,000,000 x 1 ) ₱ 18,000,000.00

Present Value of Unpaid Interest ( P 3,958,333.25 x 50% x 1) 1,979,166.63
Total Present Value of New Loan Account ₱ 19,979,166.63
Less: Carrying Amount of Old Loan Account (29,891,527.69)
Gain (Loss) on Debt Restructuring ₱ (9,912,361.07)
Add: Gain on reversal of loan loss provision ( 50% of Unpaid Principal ) 9,000,000.00
 Total Gain (Loss) on Debt Restructuring ₱ (912,361.07)
Add: Potential Earnings from Installments Collected
until the last payment of new restructured debt (Schedule 1) 6,413,312.49

Total Potential Impact of ACA No.3 to Bank's Financial Performance ₱ 5,500,951.42

Advantages of Alternative Course of Action I-C:

If the bank elects to apply ACA I-C for the disposition of Sugar Central’s account, the

bank could take advantage of the total potential impact 5.5 million. The potential impact was the

result of adding into consideration the potential earning from installments collected until the last

payment of new restructured debt. In addition to that, the consideration of gain on reversal of

loan loss provision which is equal to 50% of unpaid balance resulted to a lower loss. This is if

the payment of interest and principal balance was not waived.

Disadvantages of Alternative Course of Action I-C:

This alternative course of action would be a disadvantage to the bank because if the gain

in reversal of loan provision of 9 million was not taken into consideration, the bank would incur

a loss of almost 10 million. This is because the bank would only have an almost 20 million

present value on new loan as a result of full waiver of penalty and interest on interest as well as

the 50% waiver on interest. Therefore, it would not be convenient for the bank to waive fully

both penalty and interest on interest.

 ALTERNATIVE COURSE OF ACTION II

SOLUTION FOR ACA II

Collateral Appraised Value

Sugar Central ₱ 25,000,000
House and Lot 12,500,000
Total ₱ 37,500,000

Effective Interest Rate 10%

PV of 1 for 5 periods at 10 % 0.62092
PV of 1 for 6 periods at 10 % 0.56447
PV of OA of 1 for 5 periods at 10% 3.79079
PV of Deferred OA of 1 for 5 periods at 10% 3.44617

Present Value of Cash Inflow from Selling ( P 37,500,000 x 0.56447 ) ₱ 21,167,772.38

Less: Present Value of Cash Outflow from Insurance (P 700,000 x 3.44617) (2,412,318.85)
Net Present Value of Foreclosed Property ₱ 18,755,453.52
Less: Carrying Amount of Old Loan Account (29,891,527.69)
Gain (Loss) on Debt Restructuring ₱ (11,136,074.17)
Add: Gain on reversal of loan loss provision ( 50% of Unpaid Principal ) 9,000,000.00
Total Gain (Loss) on Debt Restructuring ₱ (2,136,074.17)

Advantages of Alternative Course of Action II:

It is advantageous to the bank that the account of Sugar Central be foreclosed. The

following are the three advantages of this decision.

First, in foreclosing the bank account of the debtor, there will be a great opportunity for

the bank to use the collateral as a source of cash inflow by putting it up for rent while waiting for

the five year waiting period to be finished.

 Second, in the sale of the foreclosed property after five years, there will be a gain relative

to the appraised value and carrying amount of loan.

Lastly, there will also be a gain on the reversal of loan loss provisions as well as

improvement of the past due ratio of the bank.

Disadvantages of Alternative Course of Action II:

It is disadvantage to the bank that the account of Nuestra Senora del Carmen Sugar

Central should be foreclosed. There are three disadvantages of this decision.

First, there will be a cost incurred such as professional expenses of hiring lawyer for

trials, title search of the real property, and other marketing and administrative expenses that are

necessary in foreclosing the account

Secondly, if in case the property will be used for rental purposes, there will be additional

cost incurred also such as insurance premium or property taxes that will be shoulder by the bank.

Aside from these, there will be a possibility that the asset can be recovered by the debtor which

will have a negative implications to your tenants once it happened.

Lastly, it is not practical to wait for five (5) years just to sell the property. There will also

be a possibility of inflation which may have a negative effect on the value of the property.
VII. RECOMMENDATION

Restructure 1-C provides the highest gain among the alternatives with ₱

5,500,951.42 compare with alternatives 1-A, and 1-B which have a gain of ₱

1,682,583.17, and ₱ 3,046,805.56, respectively. Restructure 1-C has the highest gain

because it includes one-time payment of the principal, but it looks unrealistic considering

the financial standing of the debtor. On the other hand, if we look into what will be

convenient to the debtor, Restructure 1-A is the most recommended. Restructure 1-A will

form good relationship between the bank and its debtor. Although, it provides the least

gain among all the restructuring alternatives. The most balanced alternative that will

benefit both parties is Restructuring 1-B because it provides a gain of ₱ 3,046,805.56 and

it considers the ability to pay of the debtor. Furthermore, Restructure 1-B is more realistic

than Restructure 1-C and will gain more income than Restructure 1-A.

Alternative 2 provides a loss of ₱ (2,136,074.17) which is very disadvantageous

to the bank however, it will give the bank an immediate asset that it can use as soon as

possible. Also, considering the fact that the debtor already defaulted on his payments, it is

more practical to just foreclose his account compare to restructuring to his debt which has

no assurance that the bank will receive payments.

VIII. PLAN OF ACTION

1. Nuestra Senora del Carmen Sugar Central’s account should be foreclosed. Considering

their ability to pay the rest of the loan, an immediate source of cash is most advantageous

for the bank.

2. The collateral property should be put up for rent as soon as possible so that the bank

could have a reliable source of income while they are waiting for the property to be sold.

3. The collection practices and standards of the bank should be reassessed and improved.

4. Debtors should be carefully assessed in order to check their capability to pay a large loan.

Applications should be more stringent as to avoid losses for the company.