Assignment 4

Loan Function

BY: ASSOC. PROF. RIA SANTOS FAJILAGO

DEPARTMENT OF BANKING AND FINANCE
COLLEGE OF ACCOUNTANCY AND FINANCE
PUP STA. MESA, MANILA
Importance of Loan Function

a. Represents good source of income

b. Represents an invaluable contribution to the increase in the productive

capacity of commerce and industry

c. It makes possible the financing of the agricultural, commercial and

industrial activities of the nation

d. It makes possible what economists have called indirect production, as

compared to the direct production where consumable goods are
secured by the direct application of labor to land or natural wealth

e. It makes possible production of inventory

Different types of Credit
Accommodation

As to Term As to Discounting

Short-term loan- with the period of a Bills Discounted-with the period of less
year or less than a year and whose interest is
deducted in advance
Medium-term loan-with repayments
made over a period of between one Time Loan-with the term more than a
and five years year and is payable upon maturity plus
interest
Long-term loan-with repayments made Demand Loan-with term payable upon
over several years, usually between five demand together with the interest
and ten years Call Loan-granted to banks to cover
reserve deficiencies
Importance and functions of
credit department

Credit Department Importance of Credit Department

Functions
Loan Releasing
Gathering of Information Loan Payment
Analyzing credit information Bookkeeping
Analyzing credit information Records Section
Credit checking and
authorization
Filing and recording
Credit adjustments
Collection correspondence
Other functions
Credit investigations and reports

Credit Department and Investigation

Appraisal of a prospective borrower’s ability and willingness to repay a loan,

carried by a credit analysis.

Before approving a loan, a lender may ask for credit references and personal or
corporate financial statements, obtain a copy of the applicant’s Credit Report
and also verify the applicant’s salary with his or her employer
Credit Manager
a. Devoid prejudices
b. Not Biased
c. Morally upright
d. Intellectually honest

Credit Analyst
1. Person who evaluates the financial history and financial statements of credit
applicants toward assessing credit worthiness:

a. Financial strength
b. Probability of full repayment
c. Whether a collateral is needed to secure a loan

2. Person who evaluates the earning and financial performance of corporations

(financial/securities analyst)
Request for Credit Investigation Report

Client seeking loan accommodations/credit line

Clients applying for international banking
-letter of credit
-export/import bills
-trust receipts
Clients opening current account or savings account for the first time
Clients transferring business to the treasury department
Co-makers or guarantors of credit
Clients updating client information
Insurance companies requesting accreditation/offering to act as surety
On beneficiaries named in the LC
On prospective buyers of the assets acquired by the bank
On prospective suppliers of office equipment and supplies and contractors of
services
And other subject for special cases
Scope of Credit Investigation
Purposes and types of investigations
-routine/special case
-general/ specific
Company credit policy
-conservative/liberal
-comprehensive or representative
sampling
Client classification
-new/established
-past due/valued
Amount involved
-big/small
Time and resource constraint
Other considerations for Scope of Credit
Investigation
I. Company’s Background or History
II. Financial Conditions
III. Dealings with Government Lending
Agencies
IV. Bank’s Experience with the Subject
V. Court Cases

I. Company’s Background or History
Business Record
Date of incorporation
Type of business Organization
Record of Registration with proper
authorities
Names of incorporators
Summary of operating records
For Individual Borrower
Personal Background
Business
Identity
Membership in Organizations
For Single Proprietorship
For Single Proprietorship
Capacity of the owner
If married woman, legal right to transact
business as required by the Civil Code of
the Philippines
For Partnership
Limited or general
Registered with SEC or not
Others:
There must be a contract
The partners must have legal capacity
to enter into the contract
There must be a mutual contribution of
money, property or industry for a
common fund.
For Partnership cont.
The purpose must be to obtain
pecuniary profits and to share the same
The purpose for which the partnership is
formed must be lawful
The Articles of Co-partnership must not
be kept secret
Contribution of each partner
Citizenship of the partners
Division with respect to division of
profits/losses
Term/designation of the officers
For Corporation
Name of the Corporation
Its purposes, objectives, nature and
powers
Location or place of business
The term of duration of corporate
existence
The names and residences of the
incorporators
Names of incorporating officers
The capital stock and number of shares
into which it is divided
The names and citizenship of the
stockholders and the amount of shares
they actually subscribed.
II. Financial Conditions
Financial Statements
-Balance Sheet
-Income Statement
-Cash Flow Statement
III. Dealings with Government
Lending Agencies
Size and degree on fluctuations
on borrowings
Nature of the security pledged to
secure the loan
Maturity of loans
Facts from merchandise suppliers
Other banking institutions
-nature of accommodation
granted
-borrowings: secured/clean
-security: real mortgage, shares
of stocks, warehouse receipts,
chattel mortgages, assigned
receivables, discounted notes
receivables, claims under a
government contract
Credit Analysis Audits or surveys of the business

Credit Information External Sources

-Mercantile Agencies
Internal Sources -Trade references
-Debtor’s previous credit records -banks
-Credit man’s personal -newspaper clippings
knowledge of the debtor’s -court cases
character and reputation -Reports from competitors of the
-personal contacts with the borrower
debtor (through
correspondence, personal visits,
reports of salesmen)
Analysis of the debtor’s financial
statements
Inspection and Appraisal
1. To evaluate the property
subject to inspection and
appraisement to arrive at its fair
market value based on existing
conditions in the locality and
general economic conditions.
2. Used to ascertain the actual
existence of the property,
determine its exact location and
to look into actual condition
Types of Properties
Real Estate
-commercial, residential,
industrial, agricultural, raw land
Land Improvements
-fence
-planting fruit bearing trees
-installation of water pumps
-construction of buildings
Chattel

A conditional transfer of rights in

movable property as security for
a debt or obligation, insuring the
debtor reversion of ownership
upon payment of the obligation

Types of Chattels

Machineries and equipment

Motor vehicles
Inventories
Credit Report

Meaning Contents
Personal Data
A detailed report of an Summary of Credit History
individual’s credit history Detailed Account Information
prepared by a credit bureau and Inquiries into the applicant’s
used by the lender in determining credit history
a loan applicant's credit Details of any accounts turned
worthiness over to credit agency
Other information
Collection letters are documents issued by collection

agencies in order to extract unpaid debts from faulty

debtors to send a warning to defaulters and to apprise

them of the stern steps that the institution shall be forced

to take in case of further non-payment and delay.

Collection letters must be:

curt and businesslike in tone without losing civility or politeness,

must strongly convey their message to the recipient

must be such as to brook no arguments

must be firm as well

must clearly specify the details of the financial transaction of the individual or company with the
bank, collection agency or Credit Card Company

must use all evidence to provide the defaulter’s negligence

should provide no leeway to the defaulter at all

must end with a warning to the defaulter

must remind the debtor of the forced action he will face in case of non-payment or non-compliance

must create pressure on the defaulter so that he feels compelled to cooperate

Collection Policies and Procedures
Meaning Payment Habits

Must be kept within reasonable limits, Prompt payers/payors

goodwill of customers must be Delinquent debtors
cultivated and maintained and risks Fair Credit
must be reduced to the minimum -careless borrower
-complainer
Classification of Debtors -unforeseen problems
Cooperative (good moral risk) 2. Slow Credit
Chronic complainer -poor manager of finances
Politician type -marital problems
Uncooperative or indifferent -coward
Paranoiac (feeling rich) 3. No good credit
Belligerent or pugnacious type (they are -lives beyond his income
entitled to it) -gypsy
Elusive type (cannot be found) -crook
Benefits from Good Collection Collection Letter
Efforts It should be short and direct
It should use dated action
a. Reduction in the volume of It should be written from the
accounts receivable customers viewpoint
b. Freeing the capital for carrying It should not provide any cause
the business operation or occasion to bring about the
c. Increasing profits through anger and the bitterness of the
decreased expenses customer
d. Shortening of credit period It should be revised periodically
e. Establishing a line of customers It should have humanistic
who are financially sound approach
It should follow a definite pattern
Last letter sent as if
Types of Collection Letters

Reminder
Follow-up
Discussion
Appeal
Demand
The Lending Procedure
Computation of bank charges and interest rates