FIMA 30063 - CREDIT AND COLLECTION

By: Bernadette M. Panibio

Week 13 – 15 Collections and Repayments

Remedial Accounts Management
Credit Review

At the end of the lesson, the student is expected to:

▪ Discuss the tools and aids in collecting

▪ Describe the strategies and tactics of collection
▪ Discuss remedial accounts procedure
▪ Recognize situations for possible work-out
 FIMA 30063 - CREDIT AND COLLECTION
By: Bernadette M. Panibio

Collection Program – strategies, organization and procedures for recovery of

receivables

The company may consider various collection strategies: should it subcontract

collections through a collection agency or should collections be done in-house? As a
policy, should it employ “high pressure” collection tactics or the more indirect
approaches? The choice for collections may range from the use of salesmen to double-
up as collectors to a separate decentralized collection unit responsible only for that
function. Finally, procedures involve the keeping of records, billing, conducting follow-up
phone calls or personal client visits and undertaking legal actions.

The objectives of a collection program are:

a) To reduce the amount of bad debt losses while controlling collection costs
b) To reduce the company’s investment in accounts receivable

Collection Policy

Collection Department – responsible for monitoring and following up on receivables

The credit manager should determine the reasons why accounts become overdue
and delinquent and then the customers so that proper measures can be initiated.

Customers may be classified into the following:

- Customers who honestly misunderstood the terms of sale

- Customers who overlook their accounts
- Customers who disregard due dates
- Customers who tend to stretch their payables
- Customers who usually pay but are temporarily illiquid
- Customers who are deliberately delinquent
- Customers who are insolvent

Stages of Collection

1. Preliminary stage- usually involves the sending of monthly statements

2. Reminder stage – reminder is sent to customer several days after due date
 FIMA 30063 - CREDIT AND COLLECTION
By: Bernadette M. Panibio

3. Follow-up stage – where successive action are undertaken at regularly spaced

interval
4. Drastic stage – this stage is only resorted to if the company is ready to lose the
customer (collection is through an attorney or collection agency)

PROBLEM ACCOUNTS AND REMEDIAL ACCOUNT MANAGEMENT

Generally, lending problems may be caused by lapses in loan packaging and/or

customer and related factors. The specific causes of these factors may be as follows:

Loan Packaging

▪ Neglect of basic criteria and standards

▪ Excessive emphasis on project earnings and setting aside the capability of client
to run the project
▪ Unclear/unspecific loan purpose thereby allowing disbursements not related to the
project
▪ Source of repayment is not tangible and quantifiable
▪ Weak second way out
▪ Inappropriate amortization schedule
▪ Giving in to competitive pressures resulting to soft credit terms/conditions and
sacrificing standards

Customer-Related Factors

▪ Dominance by one or few officers of business/project operations

▪ Dependence on one product line resulting to inflexibility to changes in the market
▪ Inability of management to cope with changes in the industry
▪ Short-term borrowings used for the acquisition of fixed assets and/or non-earning
projects
▪ Inappropriate timing of projects and inadequate financial planning
▪ Lack of professionalism of officers and management

Related Factors

▪ Failure to detect early warning signals

▪ Inadequate loan agreement provisions and/or other terms and conditions
▪ Unrealistic high targets on loan releases resulting to deviation from credit
standards
 FIMA 30063 - CREDIT AND COLLECTION
By: Bernadette M. Panibio

▪ Neglect of basic credit criteria

▪ Lapses in loan implementation/non-compliance to approved terms and conditions

Account Officers should always take note of the symptoms of weakened accounts
since their early recognition is critical to the formulation of appropriate courses of action.
The following are the early warning signals of weakened accounts:

Violation of Loan Agreement Provisions

▪ Diversion of funds/loan proceeds

▪ Lapses in installment payments
▪ Waiver or violation of safeguards against defaults
▪ Unremitted collection

Internal Problems

▪ Failure to submit financial statements on time

▪ Management shake-up
▪ Emergency/unscheduled BOD reorganization/meetings
▪ Willful default among members
▪ Disappearance of officers/assets
▪ Marked difference between projections and actual operations
▪ Returned checks to suppliers and creditors
▪ Failure to submit financial statements on time

Financial

▪ Low sales turnover

▪ Diminishing margin of profitability
▪ Decline in inventory turn-over
▪ Build-up of receivables vs. sales/total assets
▪ Increase in liabilities
▪ Decline in net worth
▪ Competitive operations
▪ Deteriorating cash position
▪ Increasing collection period
▪ Rise in inventory costs as a percentage of total assets without justifiable reasons
▪ Marked decline in current assets as a percentage of total assets
▪ Increasing bad debts
▪ Rising sales, falling profits
▪ Rising operating expenses as a percentage of sales/revenue
 FIMA 30063 - CREDIT AND COLLECTION
By: Bernadette M. Panibio

Non-financial Indicators

▪ Unreasonable request for substantial increase in credit

▪ Investment in non-related ventures of business
▪ Fast turn-over of employees without justifiable reasons
▪ Problems or squabble among and between stockholders or owners
▪ Flurry of insolvencies or bankruptcies in the field of business or area of operation
of the debtor or customer
▪ Habitual issuances of bouncing checks
▪ Buying at big volumes and selling at cost or at a loss
▪ Substantial or repeated rumors about the unsatisfactory credit habits of the debtor
▪ Sudden unexplainable decrease in manpower
▪ Poor appearance of the office or place of business
▪ Dishonesty of officers or employees of the debtor
▪ New laws adversely affecting a debtor’s business
▪ Insufficiency or lack of insurance coverage

Remedial Account Management

❖ The art of preventing the occurrence of, and bringing about prompt and satisfactory
conclusion to problem account situations

Problem Account

❖ One in which there is a major breakdown in the repayment agreement resulting in

an undue delay in collection, or in which it appears legal action may be required to
effect collection, or in which there appears to be a potential loss

Objectives of Remedial Account Management

1. To nurse a substandard or doubtful account back to health

❖ A firm or bank sometimes does absorb such accounts, maybe due to faulty
credit processing and evaluation, or due to the exigencies of the business, e.g.,
the firm must sell its goods which are about to become obsolete or the bank
has excessive loanable fund, or that because of business reverses,
management or even acts of God, the debtor has subsequently become a
substandard or doubtful risk
 FIMA 30063 - CREDIT AND COLLECTION
By: Bernadette M. Panibio

2. To regularize credit and document deficiencies

❖ Hurried credit decisions sometimes had to be made, or for some reason or the
other. There is, therefore, the need to gather more credit information on the
debtor in order to find out exactly his credit worthiness – and credit rating.
Should he turn out to be doubtful or substandard risk, then remedial measures
must have to be applied to save the account from turning into bad debt. Or
sometimes, due to oversight or haste, the supporting documents of loan or
credit extension are defective or deficient or even absent.

3. To strengthen weaknesses of the credit extension by way of additional collateral,

security or guaranty

4. To locate missing customers (skip tracing)

❖ One principal headache of collection is tracing the missing customer. A

customer may be missing intentionally or unintentionally. If the disappearance
is intentional to defraud creditors, then the task becomes doubly difficult.
Sometimes, though, a customer is missing, not intentionally but because of
transfer of residence or office.

5. To anticipate debtor’s defenses

Requisites for Effective Remedial Management

1. Specific unit to handle problem account

▪ Organizational structure
▪ Defined responsibility
▪ Adequate authority

2. Adequate manpower

▪ Qualifications
▪ Selection
▪ Training and development

3. Policies, systems and procedure

▪ Criteria for account take-over

▪ Process management guidelines
 FIMA 30063 - CREDIT AND COLLECTION
By: Bernadette M. Panibio

Remedial Process

1. Account Review

▪ Determine weaknesses (financials, documentation, collaterals)

▪ Determine cause of problem (consult, categorize client)

2. Capability Analysis

▪ Evaluate alternatives available

▪ Your strengths and weaknesses
▪ Possible support (internal, external)

3. Strategy Formulation

▪ What ought to be done

▪ How to achieve it
▪ Approvals/time frame
▪ Commitment/determination to achieve what ought to be done

4. Strategy Implementation

▪ Monitoring
▪ Revision/s
▪ Timing
▪ Record arrangements
▪ Reports

Remedial Measures

Strategies and activities that compromise an overall rehabilitation plan to help the client
meet its maturing obligations and improve lender’s chances of recovery. The remedial
measures may include the following:

1. Loan Restructuring – Any change in the principal terms and conditions of the loan in
accordance with a restructuring agreement setting forth a new plan of payment on a
periodic basis. The following are circumstances that warrant restructuring:

▪ Admission by the borrower than can no longer comply with the present
amortization schedule due to business reverses
 FIMA 30063 - CREDIT AND COLLECTION
By: Bernadette M. Panibio

▪ Occurrence of unfavorable events that are beyond the control of the borrower and
which will greatly impair the cash flow or liquidity of the project like natural
calamities, fire, labor and management problems

❖ Loan restructuring should be done only if the borrower still has the capacity to
pay his obligations and needs a set of new repayment terms. The sources of
repayment must be validated and the results of which must be included in the
restructuring proposal

2. Compromise Settlement – Covers lump sum payment either through cash payment
and generally includes penalty changes
3. Off-setting/Linkage – Involves the provision by the borrower of services and/or goods
as loan settlement. The good/services shall be used to liquidate the borrower’s
obligation
4. Strengthen Collateral Credit Position – Involves the securing of additional collateral to
secure the loan and/or continuing Guaranty and/or JSS by a more viable and/or
acceptable party as further security of the loan
5. Assumption of Mortgage – Involves the assumption of mortgage by a third party, e.g.
a private individual, partnership, company, etc. wherein he assumes the obligation of
the borrower
6. Foreclosure – Procedure by which mortgaged property is sold upon default of a
mortgage in satisfaction of mortgage debt

CREDIT REVIEW

Credit Review is an integral part of a total system for managing the credit portfolio.
The overriding concern is to help develop correct credit practices and procedures to
minimize credit risks. The following are the primary goals of credit review:

▪ Assess the management of credit risks

▪ Identify areas in the credit operation that need improvement and recommend
corrective action
▪ Instill awareness adherence to credit standards and practices
▪ Provide inputs for credit policy formulation
▪ Provide feedback on the overall credit risk assessment

Scope of Credit Review

1. The credit review focus on the assessment of two major credit aspects. The major
credit standards to properly evaluate credit practices are as follows:
 FIMA 30063 - CREDIT AND COLLECTION
By: Bernadette M. Panibio

3.1. Portfolio Quality – This is principally evaluated using a quantitative assessment of

the portfolio mix and past due rate
3.1. Process Quality – Is an assessment of the procedures in the marketing and
administration of accounts based on established credit policies and procedures.
The process is also categorized into the following:
1.1. Target Market – The review determines if the account solicitation activities
are systematically undertaken considering the prescribed target market
1.2. Credit Initiation and Analysis – The review will focus on the quality of
evaluation and analysis of credit risks that results in the extension of credit
1.3. Loan Documentation and Disbursement – This involves the verification of
the appropriateness, adequacy and completeness of loan documentation,
as well as compliance to all pre-release conditions of loan and collateral
documentary requirements. The review sees to it that all availments,
renewals, extension and other credit-related transactions are properly
approved
1.4. Credit Administration and Documents Management – The review validates
the effectiveness of the credit monitoring and supervision and support
system
1.5. Problem Recognition – The review assesses the ability to anticipate
adverse factors affecting credit risk and detects potential problem accounts,
as well as timely reporting of such events to the p roper authorities

2. Organization and Staffing

2.1. Organization and Deployment – This aspect of the review establishes the
appropriateness of the organizational set-up in terms of staff adequacy, work
experience, delineation of functions, account assignment, among others
2.2. Coaching and Training – The review determines the availability and effectiveness
of training programs and other coaching tools in the delivery of functions

3. On loan recovery, the review focuses on two major aspects, as follows:

3.1. Remedial Management – This generally shows the action plan as well as results
of recovery measures on distressed accounts. Assessment of this block includes
the evaluation of work-out plans, actions on vital documentary deficiencies,
tracking of remedial actions and actual results of recovery programs and actions.

Normal Management – This is an evaluation of the processes in the

administration of problem accounts. The review deals basically on the credit
monitoring and supervision activities, anticipation and recognition of problem