Jiddeh Nidea-Selda, MBA

Faculty Member, CBMA

Policy prudence or sagacity in the conduct
of affairs, where prudence means sound
judgement and sagacity shrewdness.

In business ---
Policies are general statements used as guides
for the members of an organization as they
perform their jobs. It provides guidelines on
routine and repetitious tasks.
Proposed by the Credit Department, then
later approved by the Board of Directors
who may delegate this function to a credit
committee or the company president.

Revised from time to time and the inputs of
branches or district officers are sometimes
taken into consideration.
Bank are heavily regulated by the Bangko
Sentral. Most of their credit policies
have to conform with Bangko Sentral ng
Pilipinas regulations.
The decision to produce a written policy
manual would depend on:

1. Financial resources of the company.
2. Philosophy of the management.
3. Organizational size and structure.
4. Complexity of credit transactions.
5. Approval limits
Some of the areas where general policies have
to be designed are:

1. Approval Authority
2. Credit Limits
3. Loan-to-Market Value Ratios
4. Territorial limits
5. Single proprietor vs. Corporation
6. Other side agreements imposed by lender
7. Separation of credit from marketing
operations.

The authority to approve could either be
geographical, as in:

Amount of Loan or Credit To be approved at

Over P500,000.00 Head Office
P200,000 to P499,999 Regional Office
P50,000 to 199,999 Branch or
District Office

The approval authority could also be based on
rank or title, as in:

Amount of Loan or Credit To be approved by

Over P500,000.00 President
P200,000 to P499,999 Vice-President
P50,000 to 199,999 Loan Officer

The maximum amount of credit that could be
granted to one borrower.

The single-borrower rule in a bank ---
If a banks paid-up equity is P1B, the
maximum loan it can give is 15% of P150M.


The primary and the only purpose of a
credit limit is to protect the lender from a
large transaction that, if it turns sour,
could cause its financial collapse.

(The Banko Sentrals 15% single-borrower
limit)



The factors that may be used in determining a
companys credit limits are:
1. The average total purchase amount per
customer per order.
2. The nature of the product being sold.
3. The geographic distance between the branch
and the approving authority.
4. The nature of the companys competitors.
5. The credit quality of its customers.



In secured loans, this represents the maximum
loan that could be granted to a borrower
based on the propertys market value.

Market value of property .......... P100,000.00
Policy on loan-to-market value is 60% -----
P60,000.00 maximum loan


For brand-new durables (appliances and vehicles)
the loan-to-market value ratio has already been
established as the difference between the retail
selling price and the down payment:

Retail selling price ............................ P20,000.00
Policy on down payment 20% ........... 4,000.00
Amount to be financed 80% of the retail price 16,000.00

Note: The loan-to-market value ratio has been pre-established
by the company at 80%.


This limit is imposed as a performance tool of
branches or of the credit and collection
department.
Basis for promotability of employees.
Collection incentive program.

Among banks, the past due limit, which is 25% is very
crucial to the bank itself. When a bank goes
beyond the 25% limit, many of its privileges are
suspended by the Bangko Sentral.



Areas where credit could be granted are clearly
identified based on geographical limits. Some of
the factors used in delineating these limits are:

1. Peace and order situation, particularly in
provinces where insurgents are active.
2. Availability of regular public transport facilities.
3. Prevalence of crime.
4. Travel time.
5. Road conditions.







1. Compensation balance.
2. Annual clean-ups.
3. Submission of regular periodic financial
statements.
4. Exclusive marketing agreement.
5. Exclusive warehousing and transport
agreement.
6. Assurance of quick-response repair
services.





There are some of the terms that may be used:
1. Pay on demand.
2. Payment required immediately after the
occurrence, or completion of an event.
3. Payment required when merchandise is
sold.
4. Payment with specific due dates:
a. Lump-sum payment at end of credit period.
b. Payment of annual or periodic interest with balloon
payment at the end of the credit period of term.





Kinds:
1. Due dates in calendar days: 30,60,90 days for both
merchandise credit and short-term cash loans.
2. Fixed one-year with renewal.
3. Payment after availment.
4. Interest only, and balloon payment at end of term.
5. Amortized payments of equal amounts.
6. Graduated payment schemes.
7. Decreasing payment scheme.
8. Acceleration clause.





Art. 1956. No interest shall be due unless it
has been expressly stipulated in writing.

Art. 1959. Interest due and unpaid shall not
earn interest. However, the containing
parties may by stipulation capitalize the
interest due and unpaid, which as added
principal, shall earn new interest.






Whenever a promissory note does not provide
for interest (in writing) NO INTEREST is due
at all. That is clearly provided by law.






Principal Interest Balance Principal Interest Balance
End of Year End of Year

Yr. 1 P10,000 P1,200 P11,200 P10,000 P1,200 P11,200
Yr. 2 11,200 1,200 12,400 11,200 1,344 12,544
Yr. 3 12,400 1,200 13,400 12,544 1,505* 14,049*

* = rounded off

Simple interest - P13,400.00
Compounded interest P14,049.00





Interest, to be legally allowable, must be put
in writing. Compound interest must also
be clearly stated in the loan agreement.






Interest used in various kinds of credit have
different modes and are calculated in many
different ways:

1. Simple interest
2. Add-on interest rate
3. Compound interest-amortized
4. Fixed rate and variable rate






A. Principal P10,000 Net cash received
Interest for one year 12% 1,200 To be paid after 1 year

Total amount to be paid in one year P11,200

Effective interest rate = Interest/Net cash proceeds

= P1,2000/P10,000 =12%





A. Principal P10,000 Amount of loan
Interest for one year 12% 1,200 deduction in advance
Net loan proceeds P 8,800 Net cash received

To be paid in one year P10,000

Effective Interest Rate = Interest/Net Cash Proceeds
= P1,200/P8,800 = 13.636%

If you are a borrower, you would want to choose A; if you
are the lender, you would prefer B.







This is popular in appliance or installment
credits and consumer loans. It is called
add-on because the interest is added to
the principal and then divided by the term
of the credit.






Retail Price of the Appliance P10,000.00
Down Payment 2,000.00
Amount to be financed (the amount of credit) P 8,000.00
Add: (this is the add-on)
Interest at 3% / month X 30 months = _____% _________

Total Amount Due _________

Divided by 30 months P 506.66
Rounded up to the next peso _________

Add: Service fee of 100 monthly __________





Retail Price of the Appliance P10,000.00
Down Payment 2,000.00
Amount to be financed (the amount of credit) P 8,000.00
Add: (this is the add-on)
Interest at 3% / month X 30 months = 90% 7,200.00

Total Amount Due P15,200.00

Divided by 30 months P 506.66
Rounded up to the next peso 507.00

Add: Service fee of 100 monthly 607.00
Total (30 months) 607 x 30 18,210.00