, New Era University

VANTAGE EDUCATION MANAGEMENT

(Distance Education)
9 Central Avenue, New Era, Quezon City, 1107, Philippines

Subject : Credit and Collection FM 11-06

Term : 1st Semester, 2018 – 2019
Professor : Elizabeth T. Banan
E-Mail Add. : etbanan@neu.edu.ph

Topic: Credit Investigation and Property Appraisal

Week: No. 12 and 13

Introduction
 Assessing the creditworthiness of a borrower by a lender before granting the credit
is termed credit appraisal. The borrower applying for the credit goes through a number
of tests. Banks pursue an extensive process of credit assessment before approving
any credit facility.

Credit appraisal of a term loan denotes evaluating the proposal of the loan to find
out repayment capacity of the borrower. The primary objective is to ensure the safety of
the money of the bank and its customers. The process involves an appraisal of market,
management, technical, and financial.

Getting term loans from a financial institution is not so easy. The corporate asking

for the term loan has to go through several tests. The bank follows an extensive process
of credit appraisal before sanctioning any loan. It analyses the loan proposal from all
angles. The primary objective of credit appraisal is to ensure that the money is given in
right hands and the capital and interest income of the bank is relatively secured.

MARKET APPRAISAL

As part of the market appraisal, the very first thing a financial institution would look at is
the gap between demand and supply. Bigger the demand-supply gap, higher is the
chances of the flourishing of that business. The demand versus the proposed supply by
the borrower should have a wide difference in demand of 50000 units against the
proposed supply of 10000 units.

Another most important parameter is marketing efforts and infrastructure. This is the
factor which converts a demand into sales for a business. The marketing side of the
company needs to be very strong as it is very critical to the success of the venture

FINANCIAL APPRAISAL

After all the other kinds of appraisal, everything boils down to financial appraisal. This
probably is the most important part of credit appraisal of business loans. The reason is
that it expresses everything in terms of money.

Financial appraisal tries to assess the correctness or reasonability of the estimates of

costs and expenses and also the projected revenues. These may include the estimation
of the selling price, cost of machinery, the overall cost of the project and the means of
financing.

Financial appraisal involves extensive financial modeling in excel. Basically, it takes the

financial statements of previous periods and forecasts the future financial position for at
least till the loan matures. From that, the cash flows of each year are compared with the
installment of loan because ultimately the cash flows are going to honor the payments
of the bank.
Feasibility of the project is evaluated in terms of debt servicing capacity of the firm. Debt
service coverage ratio is a key ratio which is calculated for each future financial period
and if that ratio is satisfying the norms accepted by the bank, the loan would get another
green signal.
It is difficult to explain the process of appraisal in an article or even a set of articles. It is
a very extensive work being done at financial institutions. They have a separate team of
professionals for conducting such project appraisals.

Real estate appraisal, property valuation or land valuation is the process of developing

an opinion of value, for real property (usually market value). ... However,
since property cannot change location, it is often the upgrades or improvements to
the home that can change its value.
.
CREDIT APPLICATION AND OTHER REQUIREMENTS

A credit department, worth its salt, must have a credit application form for use by its
prospective customer/client. In fact, as a matter of policy, no credit extension, however
large or small, should be approved and released, unless the customer/client has at least
filled up a credit application form.

Documentation Required for Processing a Loan Application

Individual/Single Proprietorship

A certified photocopy of its trade name or style registered with the Bureau of Domestic
Trade;

- Mayor’s Permit;

- License to engage in business issued by the City or Municipality;

- Income Tax Returns for the preceding year and official receipt of payment; and

- Latest audited/unaudited financial statements

Partnership

• A certified photocopy of its trade name registered with the Bureau of Domestic
Trade;
• Copy of Articles of Partnership, Latest audited/unaudited financial statements of
the partnership;
• Income Tax Returns for the preceding year of each member of the partnership;
• License to engage in business issued by the City or Municipality;
• Resolution of the partnership authorizing the negotiation of the loan and
authorizing the partner to sign for and in behalf of the partnership;
• Curriculum Vitae or personal information.

Corporations

• A certified photocopy of its trade name or style registered with the Bureau of
Domestic Trade and the SEC;
• Copy of Articles of Incorporation and By-Laws, duly registered with the SEC;
• Latest audited financial statements;
• Certified list of stockholders of the company as of date of application, to include
the following:
 - Name of its stockholders

- Nationality

- Number of shares subscribed

- Amount subscribed

- Amount paid on subscription

• Certified list of incumbent officers;

• Curriculum Vitae or personal information sheet of the officers;
• Board Resolution (with Corporate Secretary’s Certification) authorizing the filing
of the application and authorizing the person to undertake the application;
• License to engage in business issued by the City or Municipality; and
• Alien Registration Certificate of alien officers of the company, if any.

Real Estate

a. Titles Real Estate

-Two (2) Xerox copies of Torrens Title (TCT/OCT to be submitted letter)

-Location Plan

-Tax Declaration

-Latest realty tax receipts

-Photograph of improvements, if any.

b. Untitled Real Estate

- Tax Declaration

- Affidavit that applicant has been occupying openly for at least five (5) years, the
property he offers as security.

- Realty Tax Receipts for the last five (5) years or certification from the City or
Municipal Treasurer

- Certification from the Clerk of Court of the place where offered collateral is located
that same is not subject of any litigation or land registration proceedings.
Affidavit of two (2) adjacent lot owners confirming that applicant has been in continuous
possession of the lot for the last five (5) years

- Certification from the Bureau of Lands

- Survey or location plan of lot showing names of streets and the distance of same to
the nearest intersection

- Photograph of improvements, if any

c. For Properties Under Administration

- Letter of Administration

- Court Order authorizing the guardian to mortgage the property of the minors and to
sign the promissory note/s, mortgage contract, credit agreement and other relative
documents.

d. For Interstate Estate

- Appointment order of the Administrator of the Estate of the Deceased and follow
procedure for properties under administration; or

- Effect an extrajudicial partition of the estate and have properties transferred in the
name of the heirs. If co-heirs are all of legal age, all should sign documents as co-
debtors/mortgagors. If there are minors, they should be represented by duly appointed
guardians.

Chattels (To be accompanied by Affidavit of Ownership)

a. Machineries and Equipment – an itemized list, certified by the borrower showing

the following:

• Number of Units
• Location
• Brief description of each machinery or equipment indicating engineering
specifications, make, serial number, etc.
• Receipts or other evidences of ownership, like Deed of Sale, etc.

b. Office Furniture and Equipment – an itemized list, certified by the borrower

showing the following:

• Number of units
 • Location
• Brief description of each piece of furniture and equipment
• Serial number, if any
• Other evidences of ownership, like Deed of Sale, if receipts are not available.

c. Motor Vehicle – Land Transaction Commission Registration and Official Receipt of

payment.

d. Merchandise Inventory – an itemized list, certified by borrower, shoeing the

following:

• Description
• Number of units
• Price of each item

Pledge on Shares of Stocks/Marketable Bonds

• Stock Certificate/Bond or photocopies thereof; and

• Audited Financial Statements of issuing company.

Assignments on Cash Deposits

• Savings Account/Certificate of Time Deposits/Banker’s Acceptances

• Letter of Credit

Signatories

• Co-Maker’s statements duly accomplished; and

• Photocopy of Income Tax Returns for the preceding year.

ACTVITIES

MAKE A PROPOSAL FOR A PROPERTY EVALUATION OR LOAN FOR A FINANCIAL

INSTITUTIONS.

References:
• http://finance.lycos.com
• Credit and Collection by Gregorio S. Miranda, Latest Edition
• Fundamentals of Credit and Collection by Mercedes Euleterio
• www.wikepedia.com
• www.investopedia.com
Submission:
e-mail : Elizabeth.banan@yahoo.com.ph
EDMODO Code : (please sign-in for discussions)
filename : Week 12 AND 13
subject (Re) : Credit and Collection Management
Note:
+ 0.25 – EARLY BIRD (submitted the prior to scheduled
deadline)
No additional point – Submitted on time
– 0.25 –l

Criteria:
Contents 60%
Timeliness of submission of report/assignment 30%
Presentation/Organization 10%
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100%