CREDIT AND

COLLECTION

BEA CARMONA
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT 2

CHAPTER I - OUTLINE

INTRODUCTION
CONCEPT OF CREDIT
CREDIT DEFINITIONS
CREDIT INSTRUMENTS
ADVANTAGES / DISADVANTAGES OF CREDIT
CREDIT PROVIDERS
ROLE OF CREDIT IN ECONOMY
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT
INTRODUCTION
Why is credit important?
• Helps finance business when short on funds.
• Transfer of funds from system to productive
purposes promotes economic growth.
3
The process:
• Borrower takes from bank in form of loan; pays
back principal amount with interest.
• Bank manages credit process to avoid non
performance loans.
• Bank should deploy credit in such a way that
every sector of economy can develop.
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT 4

INTRODUCTION •
Credit Management Aspects
Distribute credit among all sectors of economy
so all sectors can develop; banks get profit.
• Grant credit to various sectors, individual, and
individual to avoid credit risk
• Maximize efficiency in terms of productivity and
profitability to achieve preferable economic
growth
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT
CONCEPT OF CREDIT
Etymology and Meaning
• Derived from Latin word “Credo”; means “I
believe or trust”
• In economics: trusting a person to pay back
after some time of lending money and receiving
of deposits.
5
• Credit is trust which allows A (creditor) to
provide resources (financial, goods, services)
to B (debtor) where B is bound to repay or
return resources at a later date.
• Credit encompasses any form of deferred
payment
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT 6

CREDIT DEFINITIONS

Prof. Kinley
“By credit, we mean the power which one person has to induce another to put economic
goods at his deposal for a time on promise or future payment. Credit is thus an attribute of
power of the borrower.”
Prof Gide
“It is an exchange which is complete after the expiry of a certain period of time”.
Prof Cole
“Credit is purchasing power not derived from income but created by financial institutions
either as on offset to idle income held by depositors in the bank or as a net addition to the
total amount or purchasing power.
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT 7

Prof. Thomas
“The term credit is now applied to that belief in a man’s

CREDIT probability and solvency which will permit of his being

DEFINITIO NS
entrusted with something of value belonging to another
whether that something consists, of money, goods,
services or even credit itself as and when one may
entrust the use of his good name and reputation.” On
the basis of above definitions, it can be said that credit
is the exchange function in which, creditor gives some
goods or money to the debtor with a belief that after
sometime he will return it. In other words, “Trust” is the
“Credit”.
Vasant Desai
”To give or allow the use of temporarily on the
condition that some or its equivalent will be returned.”
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT 8

CHARACTERISTICS OF CREDIT

Confidence Capacity Security

• Person or authority must have • Before granting advance, creditor • Before extending credit, bank
confidence on debtor should evaluate debtor’s capacity must ensure debtor’s security

Goodwill Credit Size Credit Period

• If debtor has good reputation • Generally smaller size credit is • Long term credit is not easily
of repaying in time, credit easier to obtain; Also depends obtainable; More risk involved
approval will be easy on above factors • Involves futurity and maturity
date
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT
TYPES CREDIT
Cash Credit
• Credit given to business firms
• Bank allows customer to borrow up to a certain limit
against tangible securities
• Borrowing limit is allowed to continue for years if
there’s good turnover in account and goods
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Overdraft
• Customer with current accounts is allowed to draw
more than his deposits up to certain extent
• Customer may pay when it is convenient
• Customer must pay interest on extra withdrawal
amount
• Allows the account holder to continue withdrawing
money even the account has insufficient funds to
cover the amount of withdrawal
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT 10

Demand Loans
• Has no stated maturity period
• May be asked to pay on demand
• Silent feature is, entire amount of sanctioned loan
is paid to debtor at one time.
• Interest is charged on the debit balance.
• Allows the lender to recall a loan on short notice-
once notified the borrower must repay the full
TYPES OF
amount of loan
Term Loans
CREDIT
• Advance for fixed period to person engaged in
industry, business or trade to meet requirement
(acquisition of fixed assets, etc)
• Maturity period depends on debtor’s future earnings
• a monetary loan that is repaid in regular payments
over a set period of time. 
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT 11

TYPES OF CREDIT
Bill Purchased
• a process where the unpaid invoices are sold to a third party (also known as factors) in exchange
for a discounted final settlement. Here, the credit-control and responsibility of collection of the
dues is transferred to the factor. 

Bill Discounted
• Banker loans funds by receiving promissory note or bill payable at future date and
deducting that from the interest on the amount of the instrument
• Main feature of is the interest is received by the banker in advance.
• More or less a clean advance; banks rely mainly on the creditworthiness of the parties.
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT 12

INNOVATIVE CREDIT PRODUCTS

Credit Cards Debit Cards

• Alternative to cash • Can be used as credit card for purchasing
• Banks allow customer to buy goods and products and drawing money from ATMs
services on credit • Upon swiping, money is debited from account
• Different facilities and features are based on
annual income of holder
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT 13

Housing Loans

INNOVATIVE • Various type are offered for purchasing or

CREDIT
renovating a house
• Amount given depends on lending policies and

PRODUCTS •
repayment capacity of customer
Usually granted for a long period

Auto Loans
• Granted for purchase of vehicle

Personal Loans
• Excellent service provided by banks
• Granted to individuals to satisfy personal
requirements without any substantial security
• Usually with simple procedure; grants loan In
every short period with minimum documents
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT 14

INNOVATIVE CREDIT
PRODUCTS
Educational Loans Consumption Loans for Purchase
of Durables
• Granted to student to pursue higher education
• Banks fulfill dream by providing durable loans
• Available for inside and outside country
• Can be borrowed to purchase TV, REF, Laptop,
Loan Against Securities Mobile, etc

• Provided against fixed deposits, shares in Hybrid Loan Products

• Done to keep up with new technologies
bonds, mutual fund, life insurance policy, etc.
• With fluctuating interest rates and inflation, banks
must protect interest of borrowers
• Has virtue of both fixed and floating interest rates
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT 15

CREDIT INSTRUMENTS

Cheque
• Most popular instrument
• An order drawn by depositor on bank to pay certain amount money which is deposited
with bank
Bank Draft
• Used on either main or branch to send money from one place to another
• Cheaper, convenient and less risk - a check drawn by a bank on its own funds in
another bank.
Bill of Exchange
• Enables seller to issue order to buyer to make payment either to him or person specified
either on site or within a specified time -  written order binding one party to pay a
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT 16

CREDIT INSTRUMENTS

Promissory Note Government Bonds

• Instrument in writing • Issued by the government to support
• Contain unconditional undertaking signed by government spending
the maker to pay certain sum of money
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT 17

Treasury Bills

CREDIT • Short-term debts issued by the government

INSTRUMENTS
• Issued in anticipation of the public revenue

Traveler’s Cheque
• generally used by people when traveling to
foreign countries.
• Used to avoid risk of having cash while
traveling
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT 18

ADVANTAGES OF CREDIT

Exchange of ownership Increase consumption

• Enables debtor to use something
• Debtor is provided with control
Employment encouragement
• people can be encouraged to do some
creative business work
• helps increasing the volume of employment.
• Credit increases the consumption of all types of
goods.
Saving encouragement
• gives encouragement to the saving habit of the
people
• attraction of interest and dividend
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT 19

ADVANTAGES OF
CREDIT
Capital formation
• makes available huge funds from able people to unable people to use some things

Development of entrepreneurs

• helped different entrepreneurs to fight with difficult periods of financial crisis

• One can borrow money and grow business at a greater return

Easy payment
• Credit instrument helped people pay without much difficulty and botheration
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT
ADVANTAGES OF CREDIT
Elasticity of monetary system
• Credit system provides elasticity to the
monetary system of a country because it can
be expanded without much difficulty
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Priority Sector Development
• Banks in developing countries are providing
credit for development in rural areas and
• other priority sectors too
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT 21

DISADVANTAGES Encouragement of expenditure

OF CREDIT •
•
Credit encourages wasteful expenses by the
individuals as well as commercial institutions

Encourage weakness
• shortcomings are met by the borrowed capital

Economic crisis
• Recession and depression in an economy

Dangers beyond limit

• Over issue credit takes beyond safe limits
that result in over investment, over
production and rise of prices.
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT 22

DISADVANTAGES OF CREDIT

Evil of monopoly Encourage inefficiency

• monopoly—the domination of a market by a • Credit gives encouragement to certain
single entity inefficient and worthless producers.
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT 23

CREDIT PROVIDERS
Bank
an organization licensed to take deposits and extend loans

Building Societies (Savings and Loan Companies)

provides banking and other financial services to its members.

Finance Houses
broad range of lending institutions licensed to provide consumer credit.

Credit Unions
they are member-owned, and funds contributed by members are used to provide credit
services to other members
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT 24

CREDIT PROVIDERS

Utility Companies Pawnbrokers

• most utility supplies (water, gas, electricity and • Pawnshop
telecoms) are provided on a credit basis, with bills • secured loans to people, with items of personal
being issued in arrear at regular intervals, usually property used as collateral.
monthly or quarterly.
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT 25

Government Agencies
• federal government offers several types of loans,
including: Student loans. Housing loans, including
disaster and home improvement loans.

Licensed Moneylenders
CREDIT
• Any individual or organization who has obtained a
credit license PROVIDERS
Unlicensed Moneylenders
• Loan shark
INTRODUCTION TO CREDIT AND COLLECTION AND MANAGEMENT 26

ROLE OF CREDIT IN
ECONOMY
• Bank credit provides assistance to production and business process.
• Credit provides financial ability to use advanced technology in the production.
• Credit makes it easy and convenient for the consumers to purchase or hire durable
goods.
• Enables the entrepreneurs to run their business and day to day transactions very
smoothly
• It makes possible the financing of the agricultural, industrial and commercial activities of
the country
CREDIT AND COLLECTION OPERATIONS 27

CHAPTER II - OUTLINE

OVERVIEW OF CREDIT AND COLLECTION

MANAGEMENT
ORGANIZING CREDIT AND COLLECTION
DEPARTMENT
CREDIT AND COLLECTIONS TEAM
CREDIT AND COLLECTION OPERATIONS 28

OVERVIEW OF MANAGEMENT

CREDIT CONUNDRUM TWO RESULTING RISK

• Most unpopular dept. • Risk of granting too much credit to customer
• Customer want unli credit; credit manager only that cannot pay
grant credit which is likely to be paid • Risk of denying credit to a customer who can
pay
CREDIT AND COLLECTION OPERATIONS 29

OVERVIEW OF CONUNDRUM

MANAGEMENT • Sales dept believes sales is stifled; financial

officer believes extension of too much credit is
resulting in outsized bad debt losses
• Due to confidentiality, decisions may be
misinterpreted
• Balancing is needed; Support from senior
manager which understands the role of the
dept
CREDIT AND COLLECTION OPERATIONS 30

ORGANIZING THE DEPT

SIZE STAFFING FUNCTION

• Almost always constant
• Depressed economy means more collection
problems
• Prosperous times means more new account
volumes
• Like a janitor; Incorrect billing, Flawed product
design, damaged goods, etc must be worked
around during efforts to collect cash from
customers; May seem inefficient due to
problems outside of the dept
• Company wide feedback to achieve reasonable
results; Expertise in dealing with other dept and
collection skill is needed
CREDIT AND COLLECTION OPERATIONS 31

ORGANIZING THE
DEPT
ORGANIZATION
• Measure of permanence & stability must be ensured so dept functions under all
conditions
• Dept should not be static but experienced and capable employees are desired
• Cross training of employee can lead to more flexibility
• Accounting dept personnel can be trained to do routine task and called upon as
necessary and temp staff that can be outsourced to companies specializing in credit
related functions
CREDIT AND COLLECTION OPERATIONS 32

STRUCTURE
• Credit collection functions may be centralized and

ORGANIZING decentralized, there are advantages and

THE DEPT
disadvantages to the 2 types

CENTRALIZED
• Operations based solely at the main head quarters
• In theory this allows credit managers and staff to
focus on most impt customers and situations
• May be modified; Credit functions may be carried at
HQ, Collections are located in the field
• Reduction in operating cost, more efficient income
stream, enhanced customer service
• Adherence to standard protocols, consistent
decisions, updates on protocols is also quick
CREDIT AND COLLECTION OPERATIONS 33

ORGANIZING THE DEPT

DECENTRALIZED Security
• Mid management credit level manager
reports to exec level credit manager at
HQ and to division chief (same to Credit Period
branch)
• Authority provided by exec level credit
manager
• All other aspects middle management
establishes procedure which credit
professional must conform
CREDIT AND COLLECTION OPERATIONS 34

ORGANIZING THE DEPT

DECENTRALIZED Security
• Better rapport to customers due to
closer relationship to customers
• Promotes better understanding of Credit Period
business goals, fosters exchange of
info of market needs
• Reduces interdepartmental conflicts
CREDIT AND COLLECTION OPERATIONS 35

ORGANIZING THE DEPT

CREDIT MANAGER Management Task

• Responsible for entire credit granting process
• Generally reports to treasurer or chief financial
officer
• Should not report to sales; to act as balance and
check
• Maintain dept org structure sufficient to meet all
goals and objectives
• Properly motivate credit staff
• Measure dept. performance
• Provide ongoing training for credit staff
• Manage relations with credit reporting agencies,
credit insurance providers, sales dept
CREDIT AND COLLECTION OPERATIONS 36

CREDIT MANAGER Operations Task

• Maintain corporate credit policy
• Monitor industry trends
• Recommend changes in credit policy to senior mgt
• Create credit scoring models
• Update customer credit files
•
•
Monitor credit granting and updating process
Accept or reject credit recommendations forwarded by
ORGANIZING
•
credit staff
Conduct on-site visits with largest customers
THE DEPT
• Monitor periodic credit reviews
• Monitor deductions taken from payment by customers
• Monitor corporate leasing program
CREDIT AND COLLECTION OPERATIONS 37

ORGANIZING THE DEPT

CREDIT CLERK
• Responible for reviewing credit application from new customer
• Monitor current customers
Key Elements
• Process credit applications from new customers
• Conduct trade and bank reference checks
• Establish credit limits based on credit criteria
• Maintain records of credit reviews and docs reasons for credit limits granted
• Monitor credit usage by existing customers
• Monitor financial credit condition of customers
CREDIT AND COLLECTION OPERATIONS 38

ORGANIZING CREDIT CLERK Key Elements

THE DEPT •
•
Review existing credit limits at reg interval
Provide credit info to 3rd parties upon request

• Not necessary to have college degree

• Necessary to have thorough understanding of
financial statements and how it relates to
granting of credit
CREDIT AND COLLECTION OPERATIONS 39

ORGANIZING THE DEPT

COLLECTIONS MANAGER Management Tasks

• Responsible for all collection activities,
• Maintain a dept org structure that can meet all goals
accumulating info about reasons for collection
and objectives
problems and reports back to company for
• Monitor use of collection techniques
resolution
• Monitor payment deductions taken by customers
• Usually reports to controller
• Properly motivate staff
• Standardize the process used for contacting
• Measure dept performance
customers
• Conduct staff training as needed
• Set boundaries for acceptable behaviors
• Review and approve negotiated settlements
CREDIT AND COLLECTION OPERATIONS 40

ORGANIZING THE DEPT

COLLECTIONS MANAGER Third Party Interaction

• Provide feedback to other departments regarding collection issues originating internally
• Manage relations with collection agencies
• Manage relations with collection attorneys
• Manage relations with outside skip tracers
CREDIT AND COLLECTION OPERATIONS 41

ORGANIZING THE DEPT

COLLECTOR Key Elements

• Responsible for collecting overdue payments
• Stratify collection activities to maximize cash
• May include variety of collection techniques,
receipts
legal claims, selective use of outside collection
• Issue drumming letters to overdue accounts
services
• Use skip tracing techniques to locate customers
• Not necessary to have college degree
• Contact customers regarding overdue accounts and
• Must have dogged persistence in contacting
determine reasons for non-payment
customers at regular interval, negotiating skills
• Issue payment commitment letters
to extract payments from customers
• Negotiate the return of unpaid merchandise
CREDIT AND COLLECTION OPERATIONS
ORGANIZING THE DEPT
COLLECTOR Key Elements
• Repossess merchandise when payment is unlikely
• Monitor cash on deliver payments
• Issue credit hold notifications
• Recommend that accounts be shifted to a
collection agency
• Process small claims court complaints
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Management Task
• Maintain dept org structure sufficient to meet all
goals and objectives
• Properly motivate credit staff
• Measure dept. performance
• Provide ongoing training for credit staff
• Manage relations with credit reporting agencies,
credit insurance providers, sales dept
CREDIT AND COLLECTION OPERATIONS 43

OVERVIEW OF MANAGEMENT

SKIP TRACER
• A priv invesitagator which locates people who
doesn’t want to be found
• Research, database skills are needed
• Working hours are long, likely self directed
• Need social skills to extract info from
associates of missing person
• Frequently Outsoruced
CREDIT AND COLLECTION OPERATIONS 44

OVERVIEW OF PROBATIONARY PERIOD

MANAGEMENT • When hiring for precedent position, certain

qualities are needed.
• This period is used to evaluate whether the
person is suitable for the job
• Once a person is deemed not suitable, the
person must be terminated
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