Fin 104 S. 2019 Credit Analysis Collection

Republic of the Philippines
UNIVERSITY OF NORTHERN PHILIPPINES

Vigan City
COLLEGE OF BUSINESS ADMINISTRATION & ACCOUNTANCY
INSTRUCTIONAL MANUAL
in
Fin 105/COOP 105

(CREDIT ANALYSIS & COLLECTION)
by:
CORAZON BALALLO- URBIS

BSBA, MPA
Series 2019
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INTRODUCTION
Fin 105/Coop 105 (Credit Analysis & Collection) is a

major subject in both Financial Management and
Cooperative Management Program. It is therefore
necessary that the students must be provided with a
simple presentation and adequate knowledge and clear
understanding of the different practices in all phases of
credit transactions, including the use of credit
instruments and the different terms of sale. Likewise, it
deals with the management of credit transactions in
banking institutions/cooperatives from the time credit
information are gathered and analyzed up to the time
credit is granted, recorded and finally collected and
evaluated.
For this reason, there is a need for an instructional

manual in this subject area to be made available to
students, which will supplement the limited books in
the library.
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Republic of the Philippines
UNIVERSITY OF NORTHERN PHILIPPINES
Vigan City, Ilocos Sur
COLLEGE OF BUSINESS ADMINISTRATION & ACCOUNTANCY
COURSE SYLLABUS
I. CODE NO. & TITLE : Finance 105 - Credit Analysis & Collection NUMBER OF UNITS : 3
units
PREREQUISITE, IF ANY: Finance 101
II. SUBJECT DESCRIPTION : The subject deals with the different practices in all phases of credit
transactions, including the use of credit instruments and the different terms of sale.
Likewise, it deals with the management of credit transactions in banking institutions from
the time credit information are gathered and analyzed up to the time credit is granted,
recorded and finally collected and evaluated.
III. OBJECTIVES OF THE SUBJECT:
A. GENERAL: The course generally aims to provide the students clear understanding about
the different practices in credit analysis, granting and collections and how they are
being applied in the real world of banking business. It also provides the students
insights into the present problems of banks’ credit management and prepares the
students to make intelligent decisions regarding credit extensions and credit
collections.
B. SPECIFIC: At the end of the semester, the students shall be able: 1. to understand the
practices of banks/businesses in analyzing credit information, extension and collection of
credit;
2. to interpret financial statements and be able to use them as bases in granting
credit to borrowers; and
3. to understand and apply the credit collection policies and procedures in
banks/business establishments.
IV. REQUIREMENTS OF THE SUBJECT:

1. active participation in class discussion
2. passing quizzes and long tests
3. passing assignments/seatworks
4. oral reports
4. membership in the JBA & active participation in its lending &
general operations.
V. GRADING SYSTEM USED :

Midterm Grade Tentative Final Grade
FINAL GRADE IS COMPUTED AS FOLLOWS:
Mid-Term Grade x 50%

Tentative Final Grade x 50%
======
FINAL GRADE 100%
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VI. VISION OF THE UNIVERSITY :
A global University anchored on excellence.
VII. MISSION OF THE UNIVERSITY:
To produce globally competitive and pro-active professionals thru excellent instruction,

research, extension and production.
VIII. GOAL OF THE COLLEGE:To produce globally competitive and morally upright professionals in business
and allied fields.
IX. OBJECTIVES OF THE FM PROGRAM: After finishing the course, the graduates should be able to:
1. On Instruction
1.1 Possess a strong foundation on theory, principles and concepts, analytical

tools and perspectives for financial decision-making;
1.2 Enhance their professional capabilities in analyzing existing financial
management systems & procedures and identifying operating problems in
liquidity management, portfolio management, credit management and asset
management;
1.3 Adhere to high level of social and moral standards; and
1.4 Manifest t he core values of a true UNPians and uphold t he spirit of One
Heart, One Soul, One Family.
2. On Research
2.1 Prepare project feasibility studies to determine the financial and marketing
viability of proposed projects;
2.2 Conduct researches along banking and financial management concern; and
2.3 Adhere to the appropriate utilization of research outputs to stakeholders and
to the community;
3. On Extension
3.1 Provide assistance in seeking employment and facilitate the integration

process in the financial environment so they can immediately become
productive financial analysts, managers or executives;
3.2 Participate actively in the socio economic program/projects of their respective
communities by playing the role as adviser, proponent, financial
planners and consultants or resource speakers; and
3.3 Establish l inkages with the banking sector, NGO’s and local government units
(LGU’s) for a more effective delivery of extension services.
4. On Production. Organize a nd manage financial endeavors effectively and
efficiently such as investment portfolio.
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XI. SUBJECT CONTENTS:
Topics/Sub-Topics No. of Hours

A. AN OVERVIEW OF THE NATURE & FUNCTIONS OF CREDIT 3 hours B. CREDIT
INSTRUMENTS 6 hours
1. Credit Instrument Defined

2. Nature of Credit Instruments
3. Characteristics of Credit Instruments
4. Classifications of Credit Instruments
5. Legal Aspects Relating to Credit Instruments
5.1 negotiation
5.2 presentment
5.3 dishonor
5.4 endorsement
5.5 holder in due course
C. TYPES OF CREDIT TRANSACTIONS 18 hours
1. Personal Credit
2. Commercial/Mercantile Credit
2.1 definition
2.2 sources of commercial credit
2.3 terms of sale classified
2.31 cash prepayment terms

2.32 cash terms
2.33 ordinary terms
2.34 E.O.M. and M.O.M. terms
2.35 Proximo terms
2.36 R.O.G. or A.O.G. terms
3. Bank Credit
4. Investment Credit
D. CREDIT MANAGEMENT 6 hours
1. Credit Management Defined

2. Objectives of Credit Management
3. Terminologies
4. The Credit Executive
5. Qualifications of a Credit Man
6. Functions of Credit Management
7. Preventing Delinquent Loans
8. Credit Policies
E. CREDIT ANALYSIS 15 hrs
1. financial statements as source of credit information

2. analysis of financial statements
3. interpretation of financial statements
4. methods of analyzing financial statements
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F. CREDIT COLLECTION POLICIES & PROCEDURES 6 hrs
1. knowing & understanding the types of borrowers

2. fundamental requisites for designing a collection system
3. benefits from effective collection efforts
4. elements of a collection
5. importance of collection letters
6. qualities of a good collection letter
7. types of collection letters
8. friendly recovery of credit granted.
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XI. METHODS/TECHNIQUES USED:
1. Lecture-Discussion
2. Computation-Seatworks/Boardworks
3. Analysis & Interpretation of financial statements
4. Homeworks/Assignments
5. Participation in the lending operations of the JBA (Junior Bankers’ Association).
6. Participate in the Class Savings Mobilization.
7. Use of Internet
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PART I AN OVERVIEW OF THE NATURE & FUNCTIONS OF CREDIT
OBJECTIVE: To recall the basic concepts & nature of credit & be able to appreciate its
functions.
INITIAL SUMMARY: This topic deals with the basic concepts, nature & functions of credit.
A. INTRODUCTION:
In the various stages of economic development, many underdeveloped

nations have achieved higher levels of stability and growth in both economic and
social endeavors. It is most evident that the credit system has been very
instrumental in the development and progress of nations. Hence, the rate of
economic growth of a country depends on the availability of sufficient credit and the
proper use of credit.
Prosperous countries like USA, Canada, Japan and those in Europe are
becoming progressive. Their abundant credit supply has expanded more production,
more employment & more income for the people, hence, quality of life is improved
and ultimately, the whole society has been benefited.
In contrast, the poor countries which are in greater need of more funds for
developmental purposes suffer from a tremendous disadvantage. They lack capital to
develop their natural resources. They need credit to lay the foundation of economic
and social development but because their ability to obtain credit depends naturally
on their capacity to pay their debts, their credit ratings tends to be low.
B. HISTORICAL PERSPECTIVE:
The origin of credit the exchange of current resources for an obligation to

pay in the future dates back to primitive cultures and ancient civilizations.
Numerous records show proof of the existence of credit transactions in the form
of: gift giving or the redistribution of material possessions
through authoritative channels.
C. THE NATURE OF CREDIT:
Credit is predicated on the confidence of one in the debtor’s ability to pay
in the future. It is possessed by anybody in varying degrees. It is capable of
being appraised and recognized but cannot be bestowed. When credit is accepted,
an obligation is created; when debt is paid, credit is extinguished.
On the Part of the Debtor: Credit is represented both as the power and as an
obligation.
On the Part of the Creditor: Credit signifies the existence of a moral and legal right.
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D. THE MEANINGS OF CREDIT:
1. Lenders Viewpoint = credit is the trust and confidence of the lender in the
borrower’s willingness and ability to pay.
2. Borrower’s Viewpoint = credit represents the borrower’s ability to obtain goods

and services in exchange for a promise to pay in the future.
3. Economist’s Viewpoint = credit is the exchange of an actual reality with future

probability.
4. Legal Viewpoint = credit creates a legal right in favor of the creditor against the
debtor who is under obligation to pay.
E. ELEMENTS OF CREDIT:
1. Trust & Confidence = implies that the creditor has faith in the ability and
willingness of the debtor to fulfill his obligations to pay in the future.
2. Futurity or Time = refers to the specific date or time in the future for paying
one’s obligation.
3. Risk = refers to the hazard that is due to the uncertainty of payment or the
probability of non-payment.
Credit Risk = any applicant for credit. Credit Risk maybe categorized into:
1. Moral Risk = any applicant for credit who is granted credit based primarily on
his character to pay.
2. Business Risk = one who is granted credit based primarily on his capacity to
pay.
3. Property Risk = one who is granted credit based primarily on his property or
ownership of any investment.
F. BSP’S TOOLS IN CONTROLLING CREDIT:
1. Legal Reserve Ratio = the BSP decreases credit by raising the rate of legal
reserve; while it increases credit by lowering the rate of legal reserve.
2. Discount Rate = interest on loanable funds may be r educed by the BSP to
encourage borrowers to borrow; and it may be i ncreased by the BSP t o
discourage borrowers.
3. Rediscount Facilities of the BSP = this may be availed by a bank when it runs out
of loanable funds. To limit bank borrowings, the BSP increases its
rediscount rate; and to expand it, the BSP decreases its rediscount rate.
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4. Open Market Operations = refers to the buying from or selling to the public of
marketable securities. This maybe employed by the BSP toward off either
inflation or deflation. H
ence, if there is inflation, the BSP sells securities t o
the general public to lessen credit; b ut if there is deflation, the BSP buys
securities from the public to increase credit.
5. Selective Credit Control Program = this is a policy of first thing first which is
adopted so that the loanable funds are exclusively channeled to productive
uses.
G. THE FIVE C’s OF CREDIT:
1. Character = the peculiar qualities of a debtor which refers to his willingness &
determination to pay his debt when it falls due. This is measured by his
personal habits & activities such as: reputation for honest dealing; styles
of living; business & personal associates; social & religious affiliations; and
general standing in business & social community.
2. Capacity = the ability of the potential borrower to pay debt on the date of
maturity. This is best indicated by his present capital & earning capacity.
3. Capital = this refers to all properties owned by the debtor in procuring his income.
4. Collateral = any property which is pledged by the borrower deposited with the
lender to secure payment of the debt.
5. Condition = this may refer to economic, political and social conditions which
might affect the decision of the creditor to determine whether to grant or
not to grant credit.
H. BORROWER’S RISK RATING (BRR) SYSTEM. The BRR System is an instrument used to
help control credit risks; it helps creditors to identify and mitigate areas of risk
involved in extending financing to clients. It is a risk rating model that focuses on
four areas of concern in an enterprise:
Factors Points
Cash (financials) 50
Administration 20
Market 15
Production 15
Total Points 100 pts.
For an enterprise to qualify, it should at least get a score of 55 points or BRR 5

(BRR 1 as the highest). This system is being implemented to have a risk-based
lending approach in SME financing.
***
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PART II CREDIT INSTRUMENTS
OBJECTIVE: To have a working knowledge on the different kinds of instruments used in
credit transactions & appreciate the importance and advantages of credit instruments.
INITIAL SUMMARY: This topic deals with the nature, importance & advantages of credit
instruments as well as the different kinds of instruments used in credit transactions.
A. Credit Instrument Defined:
Credit Instrument = is a written evidence of the existence of credit contract entered
into between the creditor and debtor. It is a written agreement evidencing the
existence of debt that gives a legal claim to the creditor against the debtor.
B. Nature of Credit Instrument: A credit instrument becomes the evidence that there exists
a credit transaction. It starts after the creditor has accepted the application of the
borrower.
C. Characteristics of Credit Instrument:
1. presence of risk = because of the possibility of non-payment in the future.
2. stress on the debtor-creditor relationship = an agreement between the borrower

and the lender.
D. IMPORTANCE & ADVANTAGES OF CREDIT INSTRUMENTS:

1. Clear & definite details of the transaction can be stipulated by the parties. The
obligations of the debtor as well as the rights of the creditor are spelled
out in the instrument, including the rate of interest & terms of payments.
2. Credit instruments can be transferred to third parties. This is because it can be

used as collateral in securing loans to third parties.
3. It is an incontestable proof of the creditor. In cases of court proceedings, the

lender has an undefeatable proof or evidence.
E. CLASSIFICATIONS OF CREDIT INSTRUMENTS:
1. As to Acceptability
1.1 Unlimited Acceptability = those which pass from one hand to another
hand without question as to their source & possess the
characteristics of money. e.g. government credit money & private
bank notes.
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1.2 Limited Acceptability = those whose acceptance depend on the credit

standing of the issuer or maker. e.g. checks, postal money orders.
2. As to Form
2.1 Order to Pay = refers to the order of a person to a second person to pay
a third person a certain sum of money on demand or at a
determinable future time.
2.2 Promises to Pay = contain the promise of one person to pay another a
certain sum of money on demand or at a determinable future time.
Parties Involved in an Order to Pay:
a) drawer = one who gives the order

b) drawee = one who is ordered to make payments
c) payee = one who receives the payment.
Classes of Orders to Pay:
a) Check = an order of a depositor to his bank to pay a certain sum of

money to a third party or himself on demand. This is subject for
payment.
Kinds of Checks:
∙ Order or Bearer Check = a check payable to the order of a specified

individual or company or to the bearer of the
instrument.
∙ Crossed Check = a check that cannot be presented to the bank for

cash payment but to be deposited in the
account of the payee in his bank. It is easily recognized
by the presence of two (2) parallel lines on the top left
hand corner of the check.
∙ Certified Check = a check which has been certified by the bank

official as to the sufficiency of funds covering
the amount on the face of the check. The word certified is
stamped on the face of the check with the signature of the
certifier.
∙ Cashier’s/Manager’s Check = the bank’s order to pay drawn upon

itself & signed by the cashier/manager
payable to the person or firm designated by the depositor.
∙ Post-dated Check = a check which is issued by the drawer showing

a future date, hence, it should not be
presented for payment before the date it bears, nor
will it be acceptable for deposit.
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∙ Stale Check = a check which is not presented to the bank for cash
payment nor deposited to the payee’s account after six (6)
months from the date it bears. It is a six-month old check.
∙ Traveler’s Check = a form of check that is not drawn on any

particular bank but it is payable anywhere throughout the
world.
∙ Counter Check = is used by a depositor who wishes to withdraw all

his money from his account but whose check booklet has
been exhausted.
∙ Bouncing Check = a check which has no sufficient funds. Other
Classifications of Checks:
∙ Bank “On-Us” Checks = these are checks that are drawn on a

particular bank branch only.
∙ Local Clearing Checks = these are checks drawn against other

banks within the locality.
∙ Regional Clearing Checks = these are checks drawn against banks

in provinces with BSP regional clearing.
∙ Manila Clearing Checks = these are checks drawn against banks

branches in Manila with BSP Manila clearing.
b) Drafts = are orders to pay and are drawn by a drawer against a drawee
to pay a third party, a certain sum of money on demand or at a
future determinable time. These are orders to pay that are subject for
acceptance.
Types of Drafts:
∙ Money Order = may either be a bank money order or postal money
order.
o Bank Money Order =when the order is drawn by a bank on

another bank to pay a specified payee.
o Postal Money Order = when the order is from one post

office to another post office to pay a specified
payee.
The buyer of money order receives the draft in exchange for cash &
he also pays a nominal service charge. *
∙ Bank Draft = an order of a bank to another bank or the depositor to

his bank to pay a third person a definite sum of money.
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∙ Trade/Commercial Draft = an order drawn by a seller o

n the buyer
or another business firm to pay a certain sum of money to
bearer or to a third party on demand or at a fixed future
time.
∙ Sight/Demand Draft = a draft which is payable at sight or upon

presentation of the draft by the holder.
∙ Time Draft = is a draft wherein the order to pay sets a definite
determinable future time for payment.
Difference Between A Check & A Draft:

Check Draft:
Drawer must always have funds with Drawer may or may not have
the bank whether deposited or funds with the drawee
pre-arranged loans.
Drawee is always the depository bank Drawee maybe bank or a

person with the drawee
The name of the drawee bank is printed There is always the word To:
on the check itself. before the drawee’s name.
c) Acceptance = is originally a draft presented for acceptance to the drawee

and when the drawee accepts the draft it becomes now an
acceptance, hence, the drawee is now liable for the payment of the
draft at maturity.
Types of Acceptance:
∙ Trade acceptance = is an order of the seller on the buyer to pay a

certain sum of money at a stipulated future time. If the
buyer accepts the terms, he annotates the draft with the
word accepted across its face together with his signature &
the date of acceptance.
∙ Bankers’ Acceptance = when an order to pay is presented to a

bank for its acceptance. If the bank accepts the terms, the
word accepted is stamped on the face of the instrument & it
will be signed and stamped with the date of acceptance.
2.2 Promises to Pay = contain the promise of one person to pay another a
certain sum of money on demand or at a determinable future time.
Parties involved in Promises to Pay:
a) maker = person promising to pay
b) payee = person to receive payments
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Classes of Promises to Pay:
a) Open Book Account = implies the verbal promise of the debtor when he
buys consumable goods of credit and this is otherwise known as
charge account. The creditor enters the account in his notebook to
show the existence of credit transaction.
b) Promissory Notes = an unconditional promise in writing made by one
person to another, signed by the maker, engaging to pay on
demand or at a fixed future time a certain sum of money to order
or to bearer.
Kinds of Promissory Notes:
∙ single-name promissory note = one that bears only the name of the
maker.
∙ two-name or double-name = one that bears the signature of 2
persons – the maker and co-maker.
c) Collateral Promissory Note = one in which the collateral is described on
its face or one a separate document. The value of the collateral
shall be over and above the loan granted.
d) Commercial Letter of Credit = a written promise on the part of the bank
to honor drafts drawn against it or for its account by a specified
beneficiary or his order under the specified beneficiary of his order
under the specifications contained in the letter of credit.
A letter issued by a bank at the request of a buyer
authorizing the seller to draw drafts against the bank for a
designated sum of money payable at a specific time.
Parties to a Commercial Letter of Credit:

∙ Buyer or Importer = the buyer of merchandise who will initiate the
letter of credit.
∙ Seller of Exporter = the party who is to receive the letter of credit.
∙ Opening Bank = bank of the buyer that issues and undertakes the
letter of credit for the account of the buyer. It will notify the
beneficiary that the letter of credit has been opened.
∙ Negotiating Bank = bank of the seller instructed to pay the letter of
credit.
Mechanics of a Commercial Letter of Credit:
Letter of Credit is initiated by the importer, that is, he makes

arrangement with his bank to open a letter of credit in favor of the
exporter. The establishment of a line of credit between the importer and
his bank precedes the opening of a letter of credit.
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Types of Commercial Letter of Credit:
a) As to Transmission
∙ Circular = when the opening bank issues a letter addressed
generally to persons or corporation indicating its intention to
honor the drafts of the beneficiary under the terms specified
therein.
∙ Specially Advised = when the opening bank notifies the beneficiary

directly of through a notifying bank.
b) As to Duration
∙ Revocable = when the bank has the right to cancel the credit
before negotiations without prior notice to the
beneficiary. This is no longer allowed by the Philippine
banks with a resolution of the MB of BSP.
∙ Irrevocable = when the bank waives its right to cancel of notify the
credit prior to negotiations. Here, the exporter is
accorded greater protection since the importer cannot
cancel the order.
c) As to Obligations of the Negotiating Bank

∙ Confirmed = when the notifying bank upon instructions of the
opening bank assumes the obligation to perform the
undertaking stipulated in the letter of credit. The liability of
the bank of the importer is also the liability of the bank
of the exporter, hence, the exporter enjoys the protection
of 2 banks.
∙ Unconfirmed = when the bank of the exporter does not assume

any other obligation except that of notifying the
beneficiary, in short, it acts only as the a
dvising or
paying agent for the issuing of bank.
3. As to Function
3.1 Credit money = emphasizes its use as a medium of exchange e.g. gov’t
credit money, bank credit money.
3.2 Commercial credit money = used to facilitate the use of credit in
short-term commercial activities. e. g. checks, drafts, acceptances
promissory notes, etc.
3.3 Investment credit/investments = used for long-term credit e.g. bonds,

stock certificate.
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4. As to Negotiability
4.1 Negotiable = these must contain the following essentials of

negotiability:
o the instrument must be in writing;
o there must be an unconditional promise or order to pay; o
there must be a determinable time for payment;
o there must be an indicated definite sum of money;
o it must be signed by the drawer or maker of the instrument; and
o it must be made payable to order or bearer on demand.
4.2 Non-negotiable = those instrument that lacks the essentials of

negotiability. e. g. open book account.
Legal Aspects Relating to Credit Instruments:

∙ Negotiation = the transfer of the instrument from one party to another
party either by:
∙ Presentment = exhibiting of the instrument at the bank either for payment
or for acceptance.
∙ Dishonor = this means that the instrument is refused payment or refused
acceptance.
∙ Endorsement = is simply indicated by the signature of the endorser at the
back of the instrument or on some paper attached thereto.
Kinds of Endorsement:
∙ blank endorsement = the printing of one’s name and signature at
the back of the instrument without specifying
the indorsee.
∙ full/special endorsement = one in which the indorser specifies the
person to whom or whose order the instrument
is to be payable.
∙ restrictive endorsement = an endorsement that prohibits the
further negotiation of the instrument.
∙ qualified endorsement = is one that limits the liability of the
endorser. It is made by writing the words “without
recourse”.
∙ conditional endorsement = is a special endorsement to which
words are added that create a condition which must
happen before the endorsee is entitled to payment.
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∙ Holder in Due Course = is one who accepts the instrument with the
understanding that:
∙ it is complete & regular on its face;

∙ he became holder before its maturity;
∙ he possesses no knowledge that the instrument has been
dishonored;
∙ he has no knowledge of any defect of the instrument; and

∙ he accepted the instrument in good faith and for value received.
***
PART III TYPES OF CREDIT TRANSACTIONS
OBJECTIVE: To have a clear understanding on the different types of credit transactions, the
different installment contracts and terms of sale & be able to differentiate one from the
other.
INITIAL SUMMARY: This topic deals with the different types of credit transactions – their
nature, characteristics & possible sources, the different installment contracts and terms
of sale.
A. Credit Transaction Defined:
Credit Transaction = refers to an exchange of goods or services in return for a

promise to pay its equivalent in terms of money in the future.
B. Types of Credit Transaction:
1. Personal Credit = the ability of an individual to obtain money, goods or services

to satisfy his personal needs in exchange for his promise to pay it in the future.
This is sometimes called consumption credit for this is intended for personal
consumption.
Reasons for Personal Credit
∙ consumers’ desire for convenience;

∙ consumers’ desire for improving his standard of living; and
∙ as a result of product necessity.
Characteristics of Personal Credit
∙ based largely on the character and capacity of the person;

∙ usually payable on short-term;
∙ usually non-self liquidating; and
∙ usually unsecured, evidenced or not evidenced.
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Types of Personal Credit
a) Charge Account Buying = a common way by which individual obtains consumers

goods on credit.
b) Installment Plan = buying with down payment and the balance to be paid on
equal amortization basis.
Truth in Lending Act = a law which provides that any creditor shall furnish
to each and every debtor before the transaction, a written, clear statement
setting the following information:
∙ cash price of the property;

∙ amount of down payment;
∙ itemized charges to be paid by the buyer; and
∙ the total amount to be financed.
Failure/Violation: Violation to the above law shall be liable to the debtor in

an amount of P100 or in an amount twice the finance charge whichever is
greater but not to exceed P 2,000.
Willful Violation: Fine of not more than P 5,000 but not less than P 1,000 or
an imprisonment for not less than six (6) months nor more than one (1) year.
Installment Contracts =installment buying is usually covered by installment

contracts. These often come in the form of collateral promissory notes for
most installment buying are secured. And the security is usually the object
purchased.
Types of Installment Contracts or Clauses:
a) Conditional Sales Agreement = a contract between the buyer and seller

whereby the former may take possession of the property and use the
same, however, title to the property r emains with the latter. The title will
only be transferred to the buyer upon full settlement of his account.
Default on the part of the buyer will lead to repossession of the property
purchased.
b) Chattel Mortgage = is executed by conveying to the creditor the title to

the property. If the debtor default payment, the mortgage is
foreclosed and disposed of according to legal proceedings. And the
amount realized from the sale will be used to satisfy the debt. If
the amount is greater than the obligation, the buyer will receive
the excess.
c) Acceleration Clause = a provision that accelerates the due date of the

loan or credit in case of non-payment of some periodic payments.
Hence, failure to pay for two (2) consecutive months shall make the
balance due and demandable.
d) Add-on or Open-end Contract = this contract leaves open the borrower to

purchase a number of articles, however, he can only have title to
all his purchases upon full payment of the last item
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purchased. Even if the first purchase has been fully paid for, the
buyer cannot obtain full title to any of the things purchased unless
he pays the last item fully. Failure to pay on time on any one item
will lead to repossession of all the merchandise bought on credit.
e) Balloon Contract = the buyer may be scheduled to pay equal installments

for a certain period, then at the end of such period, a big amount
will be paid.
f) Wage Assignment = the contract is accompanied by a provision that the

cashier of the firm where the buyer is working is authorized to
collect from the buyer’s salary/wages for the scheduled
installment.
g) Hidden Clause = means that the buyer is getting himself something

which he does not actually need, just only to get the item he
wishes to purchase.
c) Cash Loans = in the form of cash or money loans which are either secured or
unsecured.
Purposes:
∙ To purchase goods and services

∙ To pay off charge accounts;
∙ To consolidate debts incurred;
∙ To cope with emergencies; and
∙ To finance miscellaneous personal needs.
2. Commercial Credit = occurs when a businessman uses his power to obtain goods
for further production or distribution in exchange for his promise to pay at
a determinable future time.
Characteristics:
∙ there is transfer of goods from creditor to debtor;

∙ usually short-term;
∙ usually secured;
∙ it is self-liquidating; and
∙ exclusively for traders.
In commercial credit, terms of sale are very significant because of the

factors that influence the conditions attached to the sale. In its restrictive
sense, terms of sale = simply means the terms of payment and usually
includes two (2) aspects:
a) credit period; and (b) cash discount.

20
Classifications of Terms of Sale:
a) Cash Prepayment Terms
∙ C.B.D. Terms (Cash Before Delivery). This is usually known as Cash

With Order (CWO) or Cash in Advance (CIA). This term is
used when the seller does not desire to give credit to the
buyer. The seller assumes no risk at all because the
merchandise is paid for at once.
∙ C.O.D. Terms (Cash on Delivery). Here, the seller expects payment

upon delivery of goods and here, the seller is not riskless
because he may have to shoulder the freight both ways:
delivering the goods to the buyer
and their return to the seller. This happens when the buyer
refuses to accept the merchandise. To avoid this risk, the
seller may require the buyer to deposit a sum equal to the
freight expense.
∙ S.D./B.L. Terms (Sight Draft with Bill of Lading). This is merely a

modification of the C.O.D. terms wherein an order bill of
lading properly indorsed is attached to a sight draft & is sent to
the bank in the buyers city.
b) Cash Terms. A seller may consider the transaction as cash when the
merchandise is paid for in cash within a short period such as one to
two weeks.
c) Ordinary Terms. This merely state the two (2) important components of
the terms of sale: (a) free credit period; and (b) cash discount.
2/10; n/60 this means that if a bill is paid within 10 days, a 2%
discount is allowed the buyer but the bill is payable within 60 days.
d) E.O.M. and M.O.M. Terms (End of the Month & Middle of the Month). Their
main purpose is not to extend terms but rather for convenient
payments for numerous purchases.
E.O.M. = means that the net credit period will be reckoned on the
first of the succeeding month for shipments or sales made during
the preceding month.
∙ All purchases made from March 01 – 31, the credit period will start
on April 01. Term: 2/10; n/30, E.O.M. Here, the buyer takes the
discount privilege when he pays on the 11th of April and will
lose the discount when he pays at the end of the month. *
21
M.O.M = the dating is based on a half-month purchases.
∙ All purchases made from the 1st to 15th of the month are dated on the
15th of the month and all p
urchases made
from the 16th to the end of the month are dated on the
st
1 of the following month.
e) Proximo Terms = a specified date of the subsequent month following the

sale becomes the date of discount or net payment.
∙ 2/10, proximo net 30th on

an invoice dated Feb. 17. This will entitle
the buyer to a discount if payment is
rendered on the 11th of March. If not, the net amount of
the invoice is due on the 31st of March.
f) R.O.G. and A.O.G. Terms (Receipts of Goods & Arrival of Goods). The date
of discount period will start on the receipt or arrival of the
shipment rather than on the invoice date. Net credit term is not
affected.
∙ Suppose two buyers: Mr. X = from Laoag and Mr. Y = from C

agayan
purchase merchandise from a seller in
Manila. Terms: 2/10 day R.O.G.; net 60 days. If the
invoice is dated October 7, and the goods reach Laoag
on October 15 Mr. X may take the discount if he
makes payment by October 25, otherwise, he pays the
net amount of the invoice on December 6.
∙ Similarly, if the goods invoiced on October 7 reach Cagayan on

October 18 M r. Y has the option to the
discount if he pays on October 28 and he has to pay the
net amount also at the end of the credit period
December 6.
Factors Affecting the Credit Period:
1. nature of the article = highly perishable, low priced and easily consumed items
call for shorter credit period. Seasonal goods, newly introduced with
relative wide profits require longer credit period.
2. rate of stock turnover = goods which has faster turnover calls for shorter credit
period while those with longer/slower rate of turnover calls for longer
credit period.
3. location of the customers = further location calls for longer credit period while
customers with nearer location calls for shorter credit period.
4. competitive conditions = wholesalers of products having established and

accepted market requires for more conservative terms (shorter credit
period) while new products calls for longer credit period.
22
5. financial condition = seller with a weak capital are availed of a shorter credit
period while seller with a strong capital are availed of a longer credit
period.
6. nature of credit risk = inferior credit risk are extended with a shorter credit
period while satisfactory credit risk are extended with a longer credit
period.
7. stage of business cycle = depression period requires longer credit period while
prosperity period requires shorter credit period.
8. classes of customers = wholesalers are availed of a shorter credit period while

retailers are availed of a longer credit period.
Credit Period = refers to the length of time within which the credit is
extended.
Dating = dating in the terms of sale have the effect of extending the net
terms of credit. The extension is equal to the number of days between the
time of shipment and the dating. It refers to adjusting time of payment to
marketing period.
Kinds of Dating:
1. Season dating = to assist the retailer in financing the goods purchased

from the manufacturer the manufacturer considers the importance of
the relationship between the credit period and the buyer’s selling season.
This applies to merchandise purchased for a subsequent season

e.g. umbrella. Here, the buyer gets the advantages of having the stock on
hand at the start of the season, the possibility of getting a lower price
than that quoted just before the selling season and being usually
protected by the manufacturer from a price decline.
2. Indirect dating = here, the buyer is relieved of the disadvantage of

storage and insurance for ordering preseason. This type is accomplished
by putting the order ahead of the season but postponing the shipment to
a certain date, which in effect will also defer the payment.
3. Dating for distant territory = this serves to put a distant seller on a

competitive level with the nearby seller. The result of such dating will be
to extend the credit period by applying the date of arrival rather than the
date of shipment of the order.
4. Competitive dating = such dating may be resorted to because of keen

competition or to adjust to the buyer’s marketing period.
23
Discounts:
a) Trade Discounts = is given to buyers regardless of the promptness of

payment. It lowers the list price of the merchandise. This kind of
discount tends to induce quantity purchase and is also meant to
attract the business of a favored class of customers.
b) Cash discount = this is to stimulate prompt payment on receivables.
3. Bank Credit = this is represented by the bank’s power to attract deposits and its
ability to give out loans.
In accepting deposits, a bank becomes a debtor to the depositor while the
depositor becomes the bank’s creditor. Deposits = represent money borrowed by
the bank from the general public. When a bank extends loans, the borrower
becomes the debtor while the b ank becomes the creditor.
Characteristics of Bank Credit:
∙ Usually short-term;
∙ Usually secured and self-liquidating;
∙ Release & repayment is usually on installment basis;
∙ Always in the form of money or cash loans.
Purposes of Bank Credit:
∙ To finance working capital needs of a business;

∙ For the purchase of fixed assets; and
∙ For employment in profitable venture.
Forms of Bank Credit:
∙ Bank Notes = refers to the unconditional promise of a bank to pay the bearer on
demand a certain sum of money.
∙ Bank Deposits = refer to anything of value that is entrusted to the bank for
safekeeping. These represent liabilities of the bank and these are in the
form of cash or near money.
Kinds of Deposits:
a) As to Creation:
1. Direct Deposit = is one that originates from over-the

counter in the form of cash and near money. It changes the form
of money supply from currency to deposit money.
2. Derivative Deposit = arises out from the proceeds of loans such as

when one borrows from a bank and may open a current account in
his name: dr. = loans & discounts; Cr. = demand deposits
24
b) As to Method of Withdrawal:
1. Demand deposits = are withdrawable on demand upon the

presentation of checks.
2. Time deposits = are those which could be withdrawn after a

specified period of time.
3. Savings deposits =are covered by passbooks issued to the

depositor upon opening an account. Withdrawals are made by the
use of withdrawal slips.
3. E.T. Accounts = these are withdrawable through the operation of

an ATM (Automated Teller Machine) and are evidenced by an ATM
Card issued to the depositor.
c) As to Source:
1. Personal deposits = funds entrusted to the bank for safekeeping

by private individuals.
2. Business deposits = those coming from the business sector.
3. Government/Public deposits = represents those owned by the

government or its political subdivisions or instrumentalities.
∙ Bank Loans = refer to the major part of bank credit whereby a bank earns the
greatest portion of its income.
Lines of Credit =a consolidation of the credit needs of a certain borrower

based on experience and the bank extends it to facilitate the borrower in his
credit needs.
Types of Lines of Credit:
1. Overdraft Line = a special arrangement between the bank and the customer
whereby the latter is allowed to draw checks in amounts beyond his
balance up to a previously agreed amount.
2. Maximum Loan Commitment = this is similar to regular line of credit except that
after the amount is drawn upon, the used portion cannot be availed of
again. The amount available decreases as the line is availed of by
promissory notes until the amount is exhausted.
3. Regular Line of Credit = this usually comprises of an amount granted which is

ascertained from the businessman’s regular needs and regularity of
payments. It is availed of by promissory notes. It can be utilized over and
over again provided the amount granted is not exceeded and that the
specified period has not expired.
25
Illustration: A line of credit for P 100,000 is availed to Mr. A for a period of
one year from January 2, 2020 to January 1, 2020.
Total Amount available as of P 100,000
January 2, 2020
Mr. A signs PN on January 20, 2020 P 75,000

(payable on 3/20)
Amounts available for further P 25,000

borrowings
Mr. A signs PN on February 07, 2020 P 20,000

(payable on April 07,2020)

borrowings
Mr. A clears and pays PN due on P 75,000

March 20, 2020
borrowings
Mr. A signs PN on March 27, 2020 P 65,000

(payable on 06/27)

borrowings

April 07, 2020

borrowings
Mr. A signs PN on May 25, 2020 P 25,000

(payable on 10/25)

borrowings

June 27, 2020

borrowings

October 25, 2020

borrowings
Mr. A signs PN on Nov. 22, 2020 P 35,000

(payable on 01/22/20)

borrowings
***
26
4. Investment Credit = is resorted to for the purpose of utilizing it for long-term
capital needs. When borrower utilizes the borrowed money to buy fixed assets or
stocks and bonds, he is making use of investment credit.
Characteristics:
∙ Long-term;
∙ Self-liquidating;
∙ Issued/released in installment; and
∙ Repaid in installment.
Purposes:
∙ To meet the needs of business enterprises for fixed and working capital; ∙ To
meet the needs of national, provincial and local governments for projects; and
∙ For the purchase and improvement of real estate.
Forms:
∙ Machinery & equipment;

∙ Buildings;
∙ Bonds & stocks; and
∙ Promissory notes.
***
27
Name: _________________________________ Score: _________________ Course & Year:

__________________________ Date : ________________
*************************************************************** Test Application: Determine the: a) start

of the credit period; b) end of the credit period; c) start of the discount period; and d) end of
the discount period from the following transactions below:
1. Purchases made on Nov. 8, 2020. Term: 2/10; n/180, Ordinary Term.
a) ________________________
b) ________________________
c) ________________________
d) ________________________
2. Purchases made on October 28, 2020. Term: 2/20; n/120, Ordinary Term.
a) ________________________
b) ________________________
c) ________________________
d) ________________________
3. Purchases made on August 09, 2020. Term: 2/10, proximo net 180th.
a) ________________________
b) ________________________
c) ________________________
d) ________________________
4. Purchases made on October 10, 2020. Term: 5/15, proximo net 90th.
a) ________________________
b) ________________________
c) ________________________
d) ________________________
5. Purchases made from January 1 – 15, 2020. Term: 2/10; n/40, M.O.M
a) ________________________
b) ________________________
c) ________________________
d) ________________________
6. Purchases made from March 16-31, 2020. Term: 2/20; n/60, M.O.M
a) ________________________
b) ________________________
c) ________________________
d) ________________________
28
7. Purchases made from April 1-30, 2020. Term: 5/10; n/180, E.O.M a)
________________________
b) ________________________
c) ________________________
d) ________________________
8. Purchases made from June 1-30, 2020. Term: 2/10; n/120, E.O.M a)
________________________
b) ________________________
c) ________________________
d) ________________________
9. Miss Edna Que from San Fernando and Miss Malou Chua from Abra purchased
merchandise from a seller in Manila. The date of the invoice is March 18, 2020. The
goods arrived in San Fernando on March 22, 2020, while the goods arrived in Abra
on March 25, 2020. T
erms: 2/10 day R.O.G – net 180 days.
For Miss Myra Que:
a) ________________________
b) ________________________
c) ________________________
d) ________________________
For Miss Malou Chua:
a) ________________________
b) ________________________
c) ________________________
d) ________________________
***
29

__________________________ Date : ________________
*************************************************************** Test Application: Determine the: a) start

of the credit period; b) end of the credit period; c) start of the discount period; and d) end of
the discount period from the following transactions below:
1. Purchases made on February 07, 2020. Term: 2/10; n/180, Ordinary Term.
a) ________________________
b) ________________________
c) ________________________
d) ________________________
2. Purchases made on April 16, 2020. Term: 2/20; n/120, Ordinary Term.
a) ________________________
b) ________________________
c) ________________________
d) ________________________
3. Purchases made on September 25, 2020. Term: 2/10, proximo net 120th.
a) ________________________
b) ________________________
c) ________________________
d) ________________________
4. Purchases made on August 23, 2020. Term: 5/15, proximo net 150th.
a) ________________________
b) ________________________
c) ________________________
d) ________________________
5. Purchases made from August 1 – 15, 2020. Term: 2/10; n/50, M.O.M
a) ________________________
b) ________________________
c) ________________________
d) ________________________
6. Purchases made from October 16-31, 2020. Term: 2/10; n/80, M.O.M
a) ________________________
b) ________________________
c) ________________________
d) ________________________
30
7. Purchases made from January 1-31, 2020. Term: 2/10; n/80, E.O.M a)
________________________
b) ________________________
c) ________________________
d) ________________________
8. Purchases made from May 1-31, 2020. Term: 2/10; n/90, E.O.M a)
________________________
b) ________________________
c) ________________________
d) ________________________
9. Mr. ABC from Laoag and Mr. XYZ from Cagayan purchased merchandise from a seller in
Manila. The date of the invoice is January 20, 2020. The goods arrived in Laoag on
January 24, 2020, while the goods arrived in Cagayan on January 27, 2020. Terms:
2/10 day R.O.G – net 180 days.
For Mr. ABC:
a) ________________________
b) ________________________
c) ________________________
d) ________________________
For Mr. XYZ:
a) ________________________
b) ________________________
c) ________________________
d) ________________________
***
31
PART IV CREDIT MANAGEMENT
OBJECTIVE: To have a clear understanding & a working knowledge on the mechanics of credit
management.
INITIAL SUMMARY: This topic deals with the mechanics of credit management – the
credit work the principles of sound credit management, functions of credit management
& the qualifications of credit man.
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 c
redit granting;
o c redit limits; and
o c redit collection.
∙ To help the business attain its profitability objectives:
o m
aximize sales or business volume;
o c ontrol assets invested in receivables; and
o C ontrol 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.
32
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.
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.
33
o 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.
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
past-due 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 b usiness 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.
34
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 Qualifications
a) Accounting = is the recording, interpreting and analyzing of financial

records. A credit man must have knowledge of accounting so as to be able
to read, interpret and analyze financial statements.
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) o ral and written
communication skills.
35
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 up-dated.
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.
36
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:
Steps Person Responsible
1. Fills up loan application Member-borrower
2. Requests for financial data from Member-Borrower;

Treasurer/Cashier; Validates Treasurer/Cashier
financial data
3. Submits application to loan Member-Borrower

officer/manager
4. Conducts CIBI; Validates CIBI Loan Officer; Manager &

and evaluates loan proposal CreCom
5. Files pertinent loan Loan Officer

requirements/documents
6. Approves loan proposal CreCom/Manager/Lo

an Officer
7. Submits approved loan proposals Loan

to Bookkeeper or Accountant for Officer/Manager/CreCom
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
37
Loan Officer
∙ Responsible for undertaking the details of credit operations
∙ Promotes coops' credit facilities/services
∙ 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
non-repayment 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.
38
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.
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.
39
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.
Illustration: P 10,000 loan, 5 years to pay at 12% annual interest.

YEAR SIMPLE INTEREST COMPOUND INTEREST
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
4. The Credit Criteria. These are the c’s of credit or factors to be considered in
approving or disapproving credit application.
***
40
PART V CREDIT ANALYSIS
OBJECTIVE: To have a clear understanding & a working knowledge on the practices of
banks/cooperatives in analyzing credit information & be able to analyze & interpret
financial statements as bases in granting credit to borrowers.
INITIAL SUMMARY: This topic deals with financial statements as sources of credit
information and the different methods of analyzing financial statements & interpreting
the results as bases of granting credit to borrowers.
A. INTRODUCTION:
While it is true that it is a moral act on the part of the creditor to grant or to
extend credit, he has an important task and responsibility not only to himself but
to the economy as well, that is, only those entitled to the use of credit should be
availed such a prerogative. For this reason, there is a need to conduct a proper and
thorough analysis and evaluation of the credit risk. Therefore, it is necessary and
important that sources of information be tapped to the fullest extent and placed
under careful scrutiny. Here, financial statements are probably the most useful
source of information about a business firm seeking to buy on credit or to borrow
money for the enterprise.
B. FINANACIAL STATEMENTS AS SOURCES OF CREDIT INFORMATION:
Financial Statement = is a report summarizing the financial condition or financial

results of an organization’s operation.
a) Balance Sheet = a photograph of the financial condition or position of a

particular business at a given moment setting forth its assets, liabilities & owner’s
equity or net worth.
b) Income Statement = referred to as the profit-and-loss statement. It presents a

moving picture of the business, showing in a summary form the sales income,
costs of goods sold, gross profit, o
perating expenses and the net profit or loss.
Financial Statement Analysis =the process of selecting the data needed from the
financial statements, comparing them, determining their relationships and
interpreting the significance of their relationship.
∙ To be meaningful in credit decision-making, a financial statement must be

analyzed and interpreted. In judging a credit risk, the value of a financial
statement depends in large measure upon the meaning and reliability of
the individual items contained therein. *
41
C. ANALYSIS & INTERPRETATION:
1. Assets: In evaluating the assets of a credit risk, intangible goodwill, patent &
trademarks are usually deemed worthless for debt-paying purposes and therefore,
these are entirely disregarded.
a) Cash = this item should comprise the total of cash on hand, in banks & in
other financial institutions. Excluded here, are post-dated or stale checks.
b) Accounts Receivable = represents the most liquid assets for they are
merely book accounts or open accounts with customers. This item should
include all unpaid claims against solvent debtors arising from the sale of
goods and services. This should be shown in the balance sheet at face
value, less a valuation reserve for bad debts. *
c) Notes and Bills Receivable = this item should include only negotiable
promissory notes received from solvent purchasers in temporary
settlement for goods sold and delivered.
∙ Excluded here, are notes given in settlements of loans to

individuals, notes covering overdrafts, and notes which have been
discounted, assigned or transferred. *
d) Merchandise Inventories = this item covers all sorts of goods that are to
be sold in the normal course of business. It includes raw materials, goods
in process and finished products to which ownership is claimed by the firm
submitting the statement.
e) Investments = this includes short-term notes, stocks, bonds and other

securities of subsidiaries or other companies held by the maker of the
statement.
f) Deferred Assets = they have no direct debt-paying power but their

significance lies on the fact that they reflect the system of accounting
employed by the makers of the statement.
g) Plant, Machinery & Equipment = this constitutes an important part of the

fixed assets and are not to be sold in the normal course of business
activity. They add to the stability of the business and in event of a forced
liquidation, the proceeds from their sale would be applied in payment of
creditor’ claims according to priority.
h) Furniture & Fixture = here, adequate allowance should be made for

depreciation and since the worth of this in case of a forced sale is very
low, a substantial percentage is sometimes written off by credit grantors.
2. Liabilities & Net Worth:
a) Accounts Payable = this item represents the total sum owing to creditors
on open account and it is advisable from the standpoint of creditors to
have it segregated into amounts net due and amounts past due. Amount
owing for merchandise is excluded.
42
b) Notes Payable = includes: notes payable to banks; notes payable to
merchandise; and notes payable to others
c) Mortgages = ordinary mortgages represent indebtedness secured by a

pledge of real estate, whereas chattel mortgages represent indebtedness
secured by personal and other movable properties such as stock of goods,
automobiles, refrigerator, cash registers, etc.
d) Bonds = in the event of forced liquidation, bondholders claims takes

precedence over those of bank and merchandise creditors if the bonds are
secured by specific property.
e) Contingent Liabilities = these are potential and do not become real until
& unless certain contingencies occur such as: when the debtor guarantees
payment of another’s account; when a merchant indorses his N/R for the
purpose of discounting them at the bank; by indorsing a note for the
accommodation of another; and when commitment for future delivery of
merchandise purchase are made.
f) Net Worth = represents the equity of owners partners or stockholders in

the business and is determined by subtracting total liabilities from total
assets.
g) Capital Stock = only those stocks which are actually issued and
outstanding should appear in the balance sheet.
h) Surplus = the difference between the net worth of the business and the
value of the capital stock issued and outstanding. It is the excess of book
value over the amount which the liabilities and value of the capital stock
issued and outstanding. A reasonably substantial surplus is usually looked
upon with favor, for it indicates a safe equity.*
D. METHODS OF ANALYSIS:
1. The Valuation Method = it consists of a simple evaluation of the different items
appearing on the balance sheet without reference to proportions or relationships
except in the most casual manner.
∙ It is a means by which the asset items on the balance sheet are trimmed
down to figures that are regarded as reasonable and conservative and the
credit decision is based on the financial status of the subject revealed by
the corrected amounts*
Kinds of Valuation Method:
a) Vertical Analysis = this shows the percentage relationship of each item in

the statement.
b) Horizontal Analysis = it shows the percentage change or changes of the

same item and account in a comparative financial statement.
43
2. Ratio Analysis of Financial Statement = a method by which the true financial
position and operating efficiency of a business can be revealed.
Ratio = is the quotient showing the relationship existing between two pertinent
and relevant items on the financial statement.
Financial Ratio = is defined as a relationship between two quantities on a firm’s

financial statement which is derived by dividing one quantity by another.
CLASSES OF FINANCIAL RATIOS:
A) LIQUIDITY RATIOS:
1. Current Ratio = is the most direct relationship between the company’s
current resources and current obligations. This ratio measures the
margin of safety of the business against unforeseen events. They
are measures of the company’s capacity to meet its current
obligations out of its liquid assets. A high current ratio is an
indication that the company has enough current assets to pay its
currently maturing obligations. A low current ratio may indicate a
lack of cash to pay off debt. Ideal ratio is 2:1
Current Ratio = current assets

current liabilities
2. Acid Test or Quick Ratio = measures the firm’s capacity to cover its
short-term obligations using only its more liquid assets. Inventories
are excluded.
Ideal ratio is 1:1
Acid Test = Current Assets - Inventories

Current liabilities
3. Inventory Turnover = this ratio is an indication of the velocity with which

merchandise moves through the business. Usually, the higher the
turnover, the better the performance of the company. An increase
in the size of inventory may indicate additional stocks required for
an expanding business or an accumulation of merchandise as a
result of falling sales. Ideal is 4-20 times.
Average Inventory = is one-half of the sum of the beginning and

ending inventories.
Inventory Turnover = Cost of Goods Sold

Average Inventory
Receivable Turnover = indicates the number of time average amount

of receivables is collected during the period & the efficiency in
collection.
Receivable Turnover = Sales

A/R
44
4. Collection Period Ratio = this ratio relates to receivable to the sales from
which they arose. The collection period can be roughly compared to
the credit terms extended to members/consumers and are a rough
measure of the overall quality of the receivable and the
effectiveness of the credit policy. Ideal is 20-60 days.
Collection Period Ratio = 360 days

Sales/Accounts Receivable
5. Debt/Equity Ratio =this ratio indicates the debt capacity of a company. It

expresses the relationship between the capital contributed by the
creditors & that contributed by the owners. For every P 1.00
liability there is a corresponding P 1.00 equity to meet such
obligation. A low debt/equity ratio indicates that the company
could borrow money more easily. A high debt/equity ratio indicates
that most of the risk in the business is assumed by the creditors.
Debt/Equity Ratio = total liabilities

total equity
B) PROFITABILITY RATIOS:
1. Return on Investment = this measures how much net earnings before

taxes was derived from the owner’s investment in the company. If
the percentage of the net surplus is at least 10% of the members’
share capital and liabilities, it means the business is doing well. It
can recover its investment within a shorter period. At least 10 %
Return on Investment = net surplus

Shareholders’ equity
2. Return on Assets = this ratio measures the ability of the company’s

assets to generate income. A low rate of return on assets indicates
poor performance or poor use of the assets by management.
Return on Assets = net surplus

total assets
3. Operating Expenses to Sales =this ratio indicates the efficiency with which
human and non-human resources are being used in the
cooperative. The calculation of this ratio over time and among
various similar cooperatives will indicate the effect of volume upon
the cost per unit of merchandising products and services. Ideal
10-50%
Operating Expenses to Sales = operating expenses

------------------------- x 100
Sales
***
45
APPLICATION:
1. Apply the vertical analysis on the:
2. Apply the horizontal analysis using the comparative financial statement of the ABC
Coop Laboratory (for 2008 & 2009).
3. Determine the following ratios and interpret the result by using the financial
statement below:
***
ABC COOPERATIVE LABORATORY
COMPARATIVE STATEMENT OF FINANCIAL OPERATION
For the Period Ended February 28, 2019 & 2020
2019 2020
Sales 1,542,077.30 1,085,272.00
Less: Cost of Sales

1,137,739.56 782,897.46
Mdse Inventory, Beg. 66,029.87 27,850.67
Add: Net Purchases 1,141,220.25 798,359.0

0
Total Goods Available for Sale 1,207,250.12 826,209.6

7
Less: Mdse. Inventory, End 69,510.56 43,312.21
Gross Savings from Sales 404,337.74 302,374.54
Add: Other Income 98,286.39 76,377.46
Total Operating Revenue 502,624.13 378,752.00
Less: Operating Expenses 294,285.34 203,571.71
NET SAVINGS FOR THE YEAR 208,338.79 175,180.29

COMPARATIVE STATEMENT OF FINANCIAL CONDITION
2019 2020
Cash in Bank 277,822.72 195,684.96
Petty Cash Fund 10,000.00 10,000.00
Accounts Receivable 95,011.72 83,320.55

Loans Receivable 31,080.00 27,080.00
Merchandise Inventory 69,510.56 38,795.78
Total Current Assets 483,425.00 354,881.29
Total Fixed Assets 243,004.09 242,550.29
TOTAL ASSETS 726,429.09 597,431.58
Total Current Liabilities 286,070.09 142,821.99
Share Capital 395,687.16 373,087.75
Total Reserves 44,671.84 81,521.84
TOTAL LIAB., ME. & RESERVES 726,429.09 597,431.58
46

__________________________ Date : ________________
*************************************************************** ANSWER SHEET:

[1] [2]
Vertical Analysis Horizontal Analysis
2019 2020 P Inc./Dec. %

Inc./Dec.
Sales
Less: Cost of Sales
Mdse Inventory, Beg.
Add: Net Purchases
Total Goods Available for Sale
Less: Mdse. Inventory, End
Gross Savings from Sales
Add: Other Income

Total Operating Revenue
Less: Operating Expenses
NET SAVINGS FOR THE

YEAR

[1] [2]
2019 2020 P Inc./Dec. %

Inc./Dec.
Cash in Bank
Petty Cash Fund
Accounts Receivable
Loans Receivable
Merchandise Inventory
Total Current Assets
Total Fixed Assets
TOTAL ASSETS
Total Current Liabilities
Share Capital
Total Reserves
TOTAL LIAB., ME. &

RESERVES
47

2019 2020
Sales 1,085,272.00 937,526.95
Less: Cost of Sales 782,897.46 732,643.19
Mdse Inventory, Beg. 27,850.67 33,075.85
Add: Net Purchases 798,359.00 731,948.44
Total Goods Available for Sale 826,209.67 765,024.29
Less: Mdse. Inventory, End 43,312.21 32,381.10
Gross Savings from Sales 302,374.54 204,883.76
Add: Other Income 76,377.46 111,450.63
Total Operating Revenue 378,752.00 316,334.39
Less: Operating Expenses 203,571.71 191,320.54
NET SAVINGS FOR THE 175,180.29 125,013.85

YEAR

2019 2020
Cash in Bank 195,684.96 110,202.18
Petty Cash Fund 10,000.00 10,000.00
Accounts Receivable 83,320.55 112,148.89
Loans Receivable 27,080.00 89,680.00
Merchandise Inventory 38,795.78 32,381.10
Total Current Assets 354,881.29 354,412.17
Total Fixed Assets 242,550.29 320,523.08
TOTAL ASSETS 597,431.58 674,935.25
Total Current Liabilities 142,821.99 93,760.38
Share Capital 373,087.75 480,810.51
Total Reserves 81,521.84 100,364.36
TOTAL LIAB., ME. & RESERVES 597,431.58 674,935.25

48

__________________________ Date : ________________
*************************************************************** ANSWER SHEET:

[1] [2]
2019 2020 P Inc./Dec. %

Inc./Dec.
Sales
Less: Cost of Sales
Mdse Inventory, Beg.
Add: Net Purchases
Total Goods Available for Sale
Less: Mdse. Inventory, End
Gross Savings from Sales
Add: Other Income
Total Operating Revenue
Less: Operating Expenses
NET SAVINGS FOR THE

YEAR

[1] [2]
2019 2020 P Inc./Dec. % Inc./Dec.

Cash in Bank
Petty Cash Fund
Accounts Receivable
Loans Receivable
Merchandise Inventory
Total Current Assets
Total Fixed Assets
TOTAL ASSETS
Total Current Liabilities
Share Capital
Total Reserves
TOTAL LIAB., ME. &

RESERVES
49
PART VI CREDIT COLLECTION POLICIES & PROCEDURES
OBJECTIVE: To have a clear understanding & a working knowledge on the credit
collection policies and procedures in cooperatives and banking institutions & be able to
identify different types of debtors.
INITIAL SUMMARY: This topic deals with the different types of debtors, and the different
policies & techniques in credit/loan collection.
A. INTRODUCTION:
The success of credit management not only depends upon the efficiency of
estimating the credit risk but also on the enforcement of collection. The creation
of efficient collection machinery is a necessary and legal undertaking. Prompt
collection will not only enable the company to avoid bad debts but also retain the
customers of the firm. In every business entity which is engaged in lending,
granting credit is only one phase of its major activities; credit collection
is another phase. Hence, the job of collection is to get the money due to the
company. However, all collection efforts should be made in line with the policy of
the business firm; that is:
1. Collection cost must be kept within reasonable limits. The expense in collection
must be minimized.
2. Goodwill of customers must be cultivated and maintained. Collection efforts should
be exerted so as to induce the customers to settle their accounts willingly
on their own initiative without the necessity of any reminder. Goodwill =
the favor or prestige that a business has acquired beyond the mere value
of what it sells.
3. Risks must be reduced to its minimum. To minimize risks, it is imperative to bill
one’s customer as quickly as possible so that payments can be received
quickly. This is because the longer the receivable remains outstanding, the
higher is the hazards and risks of non
payment.
B. TYPES OF DEBTORS: Collection efforts are not intended for those who pay their
obligations promptly and religiously. Rather, they are directed to those who take
time to pay the slow payers and more so to those who try to avoid meeting their
obligations if they could. For this reason, many business firms classify their
debtors into certain types for purposes of insuring a sound policy & an effective
collection procedure. Debtors are classified according to the:
1. Attitude & behavior they manifest and display:
1.1 The Cooperative Debtor = debtors who become delinquent due to

unavoidable circumstances beyond their own control such as: prolonged
illness or untimely death of a member of a family, which may have caused
a heavy drain of funds.
50
Where such is the case, the debtor in a gesture of cooperation may enlist
the help of the creditor for a grace period in an effort to be able to pay his
obligations eventually and thus maintain his self-respect and reputation as
well.
This type of debtor will not hesitate to settle his financial obligations as
soon as he is provided with the opportunity to do so, hence, a good moral
risk.
1.2 The chronic complainer = debtors who are fond of airing baseless
complaints which will serve as a smoke screen for their failure to meet
their obligations on time, e.g. poor service of the company, defective
merchandise, over-pricing of the goods, etc.
1.3 The politician-type = this debtor does not deny the existence of his
obligation nor shun away from the presence of bill collectors, however, he
has a number of reasons to explain why he cannot or should not pay at
least for the time being. Hence, the necessity for postponement in the
settlement of the obligation.
1.4 The uncooperative and indifferent debtor = this type of debtor does not
pay on time, not because he cannot pay, but rather because he finds it
difficult to part with his money, hence, they are not concerned with what
society or their fellow-beings think of them.
1.5 Paranoiac = this type of debtor usually claims close association with
influential, powerful and affluent individuals. They enjoy talking about their
wealth, their power, their affluent ancestors and everything that will help
inflate their ego. They keep on promising that they will settle their accounts
although the question that remains unresolved is when?
1.6 Belligerent or pugnacious type = this debtor thinks that he is entitled to

the use of credit regardless of his poor credit standing. This type of
debtor, when reminded of their obligation, always exhibit an air of
defiance, they become haughty and arrogant. Some of them even let
loose their dogs so as to chase bill collectors.
1.7 The elusive type = this type of debtor is as elusive as an eel. It is hard
for bill collectors to find them in their offices or in their homes.
2. Paying habits:
2.1 Prompt payers = this group consists of individuals and business entities
that are conscious of their financial obligations which they discharge
promptly without the need of being reminded about them. They are rated
as good, if not excellent credit risk.
2.2 Delinquent debtors:
a) Fair debtor
∙ Careless borrower = merely needs reminding
regularly
51
∙ Complainer = he has grievances after he falls

behind.
∙ Unforeseen problems = unemployment, shrunken
income, medical expenses.
b) Slow debtor
∙ Poor manager of his finances
∙ Marital problems
∙ Coward
c) No good debtor
∙ Lives beyond his income
∙ Gypsy = in residence or employment
∙ Crook = directly attempting to defraud.
C. GENERAL COLLECTION POLICIES: One of the primary factors that should be

considered in the formulation of general collection policies is the need for
immediate recovery of credit granted. Some of the areas where general collection
policies have to be formulated are:
1. Hiring of Collectors.
2. Procedures in Handling Collections
3. Surcharges & Penalties
4. Field Motorized Collection vs. Collection Letters
5. Collection Incentive Program
6. Insurance Policy to be Assigned by Debtor
7. Using Service Charges
8. Use of Acceleration Clause
D. QUALITIES OF A GOOD BILL COLLECTOR:
1. Industry = 99% perspiration (meaning industry & hard work) + 1% inspiration.
2. Persistence = a good bill collector is never tired and afraid of making repeat
calls until the amount owed by the debtor is turned over to the company.
3. Tact = a good bill collector is one who must as possible avoid offending the
delinquent debtor while making the collection for the company, as
possible. He should possess tact- prudence and good judgment.
4. Resourcefulness = a good bill collector should spare time or effort in making

sure that they do their task well out of a desire for achievement or a
desire for fulfillment and not merely the desire for prestige or recognition.
52
E. BENEFITS FROM EFFECTIVE COLLECTION EFFORTS:
1. Reduction in the volume of accounts receivable;

2. Freeing capital for carrying the business operation;
3. Increasing profits through decreased expenses;
4. Shortening of credit period; and
5. Establishing a line of customers who are financially sound.
F. ELEMENTS OF A COLLECTION:
1. Collection is made easier when the credit extended is a package. 2.

Timing.
3. Be selective in your clientele.
4. Employ well-trained credit technicians.
5. Maintain a continuity of the human-relationship once established. 6. T
ell the
story of your company to your community at every opportunity. 7. Admit that
there is a collection problem in your hands.
G. IMPORTANCE OF COLLECTION LETTERS:
1. To collect the money due to the bank/cooperative.

2. To keep and retain the goodwill of the customer.
H. QUALITIES OF A GOOD COLLECTION LETTER:
1. It should be short and direct.

2. It should use dated action.
3. It should be written from the customer’s viewpoint.
4. It should not provide any cause or occasion to arouse the anger and bitterness
of the customer.
5. It should be revised periodically
6. It should have a humanistic approach.
7. It should follow a progressive pattern.
8. It should make it appear that as if it were the last to be sent to the debtor.
I. STEPS IN THE COLLECTION PROCEDURE & TECHNIQUES:
1. Preliminary Stage. This is a preparatory stage whereby monthly statements are

sent to the customer: (a) to serve as a reminder of the amount borrowed
or due; (b) give the customer an opportunity to check the accuracy of the
account; and (c) forestall the possible excuse of the debtor that the
payment was overlooked.
2. Reminder Stage. This is undertaken before the account becomes due and
payable where reminder is sent before several days from the date the
account will be due and payable. e.g duplicate statement, stickers,
reminder letters, aged statement, printed cards, etc.
3. Follow-Up Stage. This is resorted to after the reminder stage proves to be

useless and ineffective. It is consists of successive actions undertaken at
regularly spaced intervals. e.g. follow-up letters, follow-up by telephone,
by telegram, by registered letter, by personal calls.
53
4. Drastic Stage. If the overdue account remains unpaid despite reminders and
follow-ups, the only recourse is the drastic stage as a final attempt to
collect. e.g. collection by draft or collection by an attorney or collection
agency, threat of repossession or foreclosure.
J. TYPES OF COLLECTION LETTERS:
1. The reminder letter;

2. The follow-up letter;
3. The discussion letter;
4. The appeal letter; and
5. The demand letter.
K. FRIENDLY RECOVERY OF CREDIT GRANTED:
1. Term Extension. This gives the debtor extra time to recognize his resources
and make good on his obligation.
2. Merchandise Return or Swap. This arrangement is a good option-the unsold

merchandise is re-taken by the seller and new merchandise provided its
customer.
3. Condonation of Penalties & Surcharges. In this set-up, the debtor must be given
a definite period of time to take advantage of this offer.
4. Restructuring. This is changing the debtor’s account from accounts receivable

to notes receivable.
5. Deposit of Durables & Movables. It would be practical to request the buyer to
deposit the items purchased to be deposited at the branch store.
6. Debtor Substitution. Here, the debtor is replaced by another debtor who has an
established credit reputation.
7. Dacion en pago. This means that a debtor, who has a property securing the
debt, sells the property to the creditor to settle his debt.
8. Addition of Guarantor or Surety. The objective here is the protection of the

creditor’s asset, particularly the safety of the principal.
9. Securitization. The creditor simply & politely requests the debtor to collateralize
his debt, by putting up real estate or personal property as security.
***
54
REFERENCES:
BRIONES, Jose Glenn, Sr., “Credit and Collection Management: Made Easy for
Filipino Students”, Mandaluyong City: National Book Store. 2005
LEUTERIO, Mercedes M. & Evangeline G. Cenizal, Fundamentals of Credit &

Collection, rev. ed. Manila, Philippines: Phoenix Publishing House, Inc.,
2002.
MIRANDA, Gregorio S., Essentials of Money, Credit & Banking, C

opyright 1994,
Manila, Philippines.
MUTYA, Ruby F., Introduction to Philippine Money, Credit & Banking, Copyright
2002, Pasig City, Philippines.
Manual:
Landbank Countryside Development Foundation, Inc., Credit Management: A

Handbook for Cooperatives, Organizational Development Foundation, Inc.,
C. 1994.
Landbank Countryside Development Foundation, Inc., Trainers’ Manual on

Cooperative Entrepreneurship for Board of Directors, rev. ed., 2004.
/cbu
05/05/20
***

Fin 104 S. 2019 Credit Analysis Collection

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Republic of the Philippines

UNIVERSITY OF NORTHERN PHILIPPINES

COLLEGE OF BUSINESS ADMINISTRATION & ACCOUNTANCY

Fin 105/COOP 105

CORAZON BALALLO- URBIS

Fin 105/Coop 105 (Credit Analysis & Collection) ​is a

For this reason, there is a need for an instructional

COLLEGE OF BUSINESS ADMINISTRATION & ACCOUNTANCY

III. OBJECTIVES OF THE SUBJECT:

IV. REQUIREMENTS OF THE SUBJECT:

V. GRADING SYSTEM USED :

Mid-Term Grade x 50%

VI. VISION OF THE UNIVERSITY :

A global University anchored on excellence.

VII. MISSION OF THE UNIVERSITY:

To produce globally competitive and pro-active professionals thru excellent instruction,

1.1 Possess ​a strong foundation on theory, principles and concepts, analytical

3.1 Provide ​assistance in seeking employment and facilitate the integration

XI. SUBJECT CONTENTS:

Topics/Sub-Topics​ ​No. of Hours

1. Credit Instrument Defined

C. TYPES OF CREDIT TRANSACTIONS 18 hours

2.31 cash prepayment terms

D. CREDIT MANAGEMENT 6 hours

1. Credit Management Defined

E. CREDIT ANALYSIS 15 hrs

1. financial statements as source of credit information

F. CREDIT COLLECTION POLICIES & PROCEDURES 6 hrs

1. knowing & understanding the types of borrowers

XI. METHODS/TECHNIQUES USED:

PART I AN OVERVIEW OF THE NATURE & FUNCTIONS OF CREDIT

In the various stages of economic development, many underdeveloped

The origin of credit ​ ​the exchange of current resources for an obligation to

C. THE NATURE OF CREDIT:

2. Borrower’s Viewpoint ​= credit represents the ​borrower’s ability to obtain goods

3. Economist’s Viewpoint ​= credit is the exchange of an ​actual reality ​with ​future

F. BSP’S TOOLS IN CONTROLLING CREDIT:

G. THE FIVE C’s OF CREDIT:

Total Points 100 pts.

For an enterprise to qualify, it should at least get a score of 55 points or BRR 5

PART II CREDIT INSTRUMENTS

A. Credit Instrument Defined:

C. Characteristics of Credit Instrument:

1. presence of risk = ​because of the possibility of non-payment in the future.

2. stress on the debtor-creditor relationship = ​an agreement between the borrower

D. IMPORTANCE & ADVANTAGES OF CREDIT INSTRUMENTS:

2. Credit instruments can be transferred to third parties. ​This is because it can be

3. It is an incontestable proof of the creditor. ​In cases of court proceedings, the

E. CLASSIFICATIONS OF CREDIT INSTRUMENTS:

1.2 Limited Acceptability = ​those whose acceptance depend on the credit

Parties Involved in an Order to Pay:

a) drawer = ​one who gives the order

Classes of Orders to Pay:

a) Check = ​an order of a depositor to his bank to pay a certain sum of

∙ ​Order or Bearer Check = ​a check payable to the order of a specified

∙ ​Crossed Check = ​a check that ​cannot be presented to the bank for

∙ ​Certified Check = ​a check which has been ​certified by the bank

∙ ​Cashier’s/Manager’s Check = ​the bank’s order to pay drawn upon

∙ ​Post-dated Check = ​a check which is issued by the drawer ​showing

∙ ​Traveler’s Check = ​a form of check that is not drawn on any

∙ ​Counter Check = ​is used by a depositor who wishes to withdraw all

∙ ​Bouncing Check = ​a check which has no sufficient funds. ​Other

∙ ​Bank “On-Us” Checks = ​these are checks that are drawn on a

Fin 105/Coop 105 (Credit Analysis & Collection) is a

1.1 Possess a strong foundation on theory, principles and concepts, analytical

3.1 Provide assistance in seeking employment and facilitate the integration

Topics/Sub-Topics No. of Hours

The origin of credit the exchange of current resources for an obligation to

2. Borrower’s Viewpoint = credit represents the borrower’s ability to obtain goods

3. Economist’s Viewpoint = credit is the exchange of an actual reality with future

1. presence of risk = because of the possibility of non-payment in the future.

2. stress on the debtor-creditor relationship = an agreement between the borrower

2. Credit instruments can be transferred to third parties. This is because it can be

3. It is an incontestable proof of the creditor. In cases of court proceedings, the

1.2 Limited Acceptability = those whose acceptance depend on the credit

a) drawer = one who gives the order

a) Check = an order of a depositor to his bank to pay a certain sum of

∙ Order or Bearer Check = a check payable to the order of a specified

∙ Crossed Check = a check that cannot be presented to the bank for

∙ Certified Check = a check which has been certified by the bank

∙ Cashier’s/Manager’s Check = the bank’s order to pay drawn upon

∙ Post-dated Check = a check which is issued by the drawer showing

∙ Traveler’s Check = a form of check that is not drawn on any

∙ Counter Check = is used by a depositor who wishes to withdraw all

∙ Bouncing Check = a check which has no sufficient funds. Other

∙ Bank “On-Us” Checks = these are checks that are drawn on a

∙ Local Clearing Checks = these are checks drawn against other

∙ Regional Clearing Checks = these are checks drawn against banks

∙ Manila Clearing Checks = these are checks drawn against banks

o Bank Money Order =when the order is drawn by a bank on

o Postal Money Order = when the order is from one post

∙ Bank Draft = an order of a bank to another bank or the depositor to

∙ Trade/Commercial Draft = an order drawn by a seller o

∙ Sight/Demand Draft = a draft which is payable at sight or upon

c) Acceptance = is originally a draft presented for acceptance to the drawee

∙ Trade acceptance = is an order of the seller on the buyer to pay a

∙ Bankers’ Acceptance = when an order to pay is presented to a

Letter of Credit is initiated by the importer, that is, he makes

∙ Specially Advised = when the opening bank notifies the beneficiary

∙ Unconfirmed = when the bank of the exporter does not assume

3.3 Investment credit/investments = used for long-term credit e.g. bonds,

4.1 Negotiable = these must contain the following essentials of

o the instrument must be in writing;

o there must be an unconditional promise or order to pay; o

o there must be an indicated definite sum of money;

o it must be signed by the drawer or maker of the instrument; and

o it must be made payable to order or bearer on demand.

4.2 Non-negotiable = those instrument that lacks the essentials of

∙ it is complete & regular on its face;

∙ he has no knowledge of any defect of the instrument; and

Credit Transaction = refers to an exchange of goods or services in return for a

1. Personal Credit = the ability of an individual to obtain money, goods or services

∙ consumers’ desire for convenience;

∙ based largely on the character and capacity of the person;

a) Charge Account Buying = a common way by which individual obtains consumers

∙ cash price of the property;

Failure/Violation: Violation to the above law shall be liable to the debtor in

Installment Contracts =installment buying is usually covered by installment

a) Conditional Sales Agreement = a contract between the buyer and seller

b) Chattel Mortgage = is executed by conveying to the creditor the title to

c) Acceleration Clause = a provision that accelerates the due date of the

d) Add-on or Open-end Contract = this contract leaves open the borrower to

e) Balloon Contract = the buyer may be scheduled to pay equal installments

f) Wage Assignment = the contract is accompanied by a provision that the

g) Hidden Clause = means that the buyer is getting himself something

∙ To purchase goods and services

∙ there is transfer of goods from creditor to debtor;

In commercial credit, terms of sale are very significant because of the

a) credit period; and (b) cash discount.

∙ C.B.D. Terms (Cash Before Delivery). This is usually known as Cash

∙ C.O.D. Terms (Cash on Delivery). Here, the seller expects payment

∙ S.D./B.L. Terms (Sight Draft with Bill of Lading). This is merely a

M.O.M = the dating is based on a half-month purchases.

e) Proximo Terms = a specified date of the subsequent month following the

∙ 2/10, proximo net 30th on

∙ Suppose two buyers: Mr. X = from Laoag and Mr. Y = from C

∙ Similarly, if the goods invoiced on October 7 reach Cagayan on

4. competitive conditions = wholesalers of products having established and

8. classes of customers = wholesalers are availed of a shorter credit period while

1. Season dating = to assist the retailer in financing the goods purchased