Republic of the Philippines

OCCIDENTAL MINDORO STATE COLLEGE

Labangan, San Jose, Occidental Mindoro
website: [Link] email address: omsc_9747@[Link]
Tele/Fax: (043) 457-0231 CERTIFIED TO ISO 9001:2015
CERT. NO.: 50500643 QM15

Learning Module
in
CREDIT & COLLECTION

Compiled by:
MARIA ANGELICA B. SUNGA, MBA
RUBY JANNE S. DUMALAOG, MBA

The compilers do not own any of the contents of this learning module. Due credits and
acknowledgment are given to the authors, internet sources, and researchers listed on the
reference page. Such sources are reserved to further explain concepts and cannot be credited to
the compilers and the school. All diagrams, charts, and images are used for educational
purposes only. The sole objective of this instructional material is to facilitate independent
learning and not for monetary gains because this is NOT FOR SALE.

2020 Edition
 Republic of the Philippines
OCCIDENTAL MINDORO STATE COLLEGE
Labangan, San Jose, Occidental Mindoro
website: [Link] email address: omsc_9747@[Link]
Tele/Fax: (043) 457-0231 CERTIFIED TO ISO 9001:2015
CERT. NO.: 50500643 QM15

APPROVAL SHEET

This Instructional Material entitled LEARNING MODULE IN CREDIT &

COLLECTION, authored by MS. MARIA ANGELICA B. SUNGA and MS. RUBY JANNE S.
DUMALAOG (A.Y. 2020-2021), is recommended for production and utilization by the
students and faculty members of the Occidental Mindoro State College.

PANEL OF EVALUATORS

Local Evaluation Committee

College of Business, Administration, and Management/ BSBA-Financial

Management

LIEZEL C. GARCIA, MBA ANGELA M. GALISANAO, PhD

Member Member

JOSUE C. DELFIN, DBM

Chairperson

Overall Instructional Materials Development Committee

VENESSA S. CASANOVA, PhD MA. IMELDA C. RAYTON, MAEd

Member Member

Recommending Approval:

JESSIE S. BAROLO, JR., MAEd

Chairperson

Approved:

ELBERT C. EDANIOL, EdD

Vice President for Academic Affairs
 ACKNOWLEDGMENT
The compilers are grateful to the people who in one way or another
contributed to this endeavor.
To the College President, Dr. Marlyn G. Nielo, for her boundless love and
concern for all students, and for steering this Institution towards development and
global quality goals and objectives;
To the Vice President for Academic Affairs, Dr. Elbert C. Edaniol, for the
generous help and support that enabled them to accomplish this instructional material.
To the Dean of CBAM, Dr. Josue C. Delfin, who encouragingly motivated the
authors to realize the completion of this instructional material; and
To the BSBA - Financial Management and Operations Management Program
Head, Dr. Angela M. Galisanao, for her untiring critiques and checking of the
instructional material.

-The Compilers
 DEDICATION
This module is dedicated to Almighty God. Also, to the students who are motivated to
learn and reach their goal.
 PREFACE
The College of Business, Administration, and Management demands progress in
students’ skills and knowledge which prepare them for employment both locally and
globally. In this regard, learning module in Credit and Collection would help them
develop their skills in formulating techniques, and highlight tools to measure and
analyze substantial circumstances in the business industry. This learning module will
address significant topics that will be discussed for the whole semester.
This module covers techniques of establishing the credit, obtaining and checking
information, servicing the loan, billing and collecting the amount due. Each of a bank’s
installment credit operation is carefully scrutinized. This module is organized into 2
parts: Part 1 consist of 4 lessons such as lesson 1-Principles, Meaning, Classification,
Nature, and Function of Credit; lesson 2- Practices and Procedures (Credit Investigation
and Property Appraisal, Both Real and Personal); lesson 3 - Credit Evaluation, financial
Analysis and Credit Decisions. Part 2 consist of lesson 4- Collection Procedures and
Techniques; lesson 5- Remedial Account Management and Skip Training; lesson 6-
Relevant Laws Affecting Credit Transactions.

-The Compilers
 TABLE OF CONTENTS
Lesson 1: Principles, Meaning, Classification, Nature, and Function of Credit 1-17
Principles of Credit and Collection 1-3
Background History of the development of credit in the Philippines 4-5
The Credit & Collection Unit, Type or Organization to Adopt 6-7
Credit and Collection Policies 8-12
Financing Installment Accounts 12-13
Recording & Accounting in Credit Collection 13-17
Lesson 2: Credit Practices and Procedures 19-27
Credit Application and Other Requirements 19-22
Sources of Credit Information 23
Credit Investigation Procedure and Reports 23-24
Appraisal of Real and Personal Property 24-27
Lesson 3: Credit Evaluation, financial Analysis and Credit Decisions 29-35
Credit Evaluation 29-30
Financial Analysis 30-35
Lesson 4: Collection Procedures and Techniques 37-47
Collection Policies and Practices 37-39
Methods for Improving Collections 39-42
Recommended Collection Timeline 43-46
Cash on Delivery Sales 46-47
Lesson 5: Remedial Account Management and Skip Training 48-55
Objectives of remedial Account Management 48-49
The interview 49-50
Analysis of the Problem and Application of Remedial Measures 51
Skip Tracing 51-52
Anticipating Debtor’s Defenses 52-55
Lesson 6: Relevant Laws Affecting Credit Transactions 57-64
References 65-66
 LESSON 1
Principles, Meaning, Classification, Nature, and Function of Credit

TOPICS
1. Principles of Credit and Collection
2. Background History of the Development of Credit in the Philippines
3. The Credit & Collection Unit, Type or Organization to Adopt
4. Credit and Collection Policies
5. Financing Installment Accounts
6. Recording & Accounting in Credit Collection
LEARNING OUTCOMES
At the end of the lesson, you should be able to:
1. define credit, collection, and management.
2. discuss the nature of credit.
3. explain the importance of credit.
4. differentiate credit from debt.
5. enumerate the elements of credit.
6. discuss the bases for the extension of credit.
7. explain and enumerate the different features of credit.
8. discuss the private users of credit.
9. define the credit card system
10. describe the credit and collection policies.
11. enumerate the composition of credit policy.
12. illustrate the cash flows of granting the credit.
13. explain the credit period.
14. discuss the cash discount.
15. compute the implicit interest rate.
16. discuss promissory notes, commercial drafts, and banker’s
acceptances.
17. enumerate the composition of collection policy.
18. compute for the average collection period.
19. discuss the protocols for customers’ past due accounts.
TOPIC 1: Principles of Credit and Collection

Meaning
Credit is a term derived from the latin word credo – meaning, to believe, to trust. As
applied to this subject, credit means securing something of the value, whether
tangible or intangible, in return for a promise to pay at some determined future
date. The first principle therefore to credit is: Do not give credit to anybody you do
not trust. Trust is the fundamental element of credit.
Generally, credit is defined as the process of providing a loan, in which one party
transfers wealth to another with the expectation that it will be paid back in full
plus interest.
Others define credit as follows:
1. Credit is purchasing power. (Mill)
2. The essence of credit is confidence on the part of the creditor in the debtor’s
willingness and ability to pay his debt. (Holdsworth)
3. Credit may be called a “short sale” of money. (Johnson)
4. Credit is a “sale on trust.”
5. The exchange of an actual reality against a future probability. (Le Vasseur)
6. Credit may be defined as the power time in return for some equivalent or
services at a future date.
7. Credit is a personal reputation a person has, in consequence of which he can
buy money, o goods, or labor, by giving in exchange for them, a promise to
pay at a future time. (Bullock)
8. Credit is the power to obtain goods or services by giving a promise to pay
money (or goods) on demand or at a specified date in the future. (Johnson)
9. A credit is the present right to a future payment. (Mac Leod)
Classification
Some of the more common forms of credit transactions are the following:
1. Charge Account - consists in the granting of credit on the more signature of
the customer/client or authorized representative.
These are usually payable within thirty (30) days from the date credit was
extended. In banking circles, this is what is commonly known as a “Clean
loan,” usually payable within six (6) months or, at most, one (1) year.
2. Secured Charge Account – Refers to the extension of credit payable usually
also in thirty (30) days – but this time, aside from the signature of the
customer/client, additional collaterals are required in the form of a bond
from bonding company r other valuable properties. This kind of charge
account usually involves substantial sum. Thus, the requirement of a bond or
other additional collaterals.
3. Installment Accounts – The account is payable in installments, usually
monthly. It is broken down in installments because the amount of credit
extended is substantial. This kind of account is common in sales of durable
goods, like appliances, cars, trucks and the like.

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 Because of the sum involved, a chattel mortgage on the unit is oftentimes
required. Real estate properties are also usually sold on installments.
4. Straight Loans – loans in the form of money or equivalent usually granted by
banks and other financing institutions. The loans may either ne secured or
unsecured, payable in installments or lump sum depending on the policies of
the lending institution.

Credit may also be classified according to the use it is availed of as follows:

1. Consumer Credit – when the property or service thus acquired is used for the
personal benefit of the credit grantee.
Example: Car purchased for personal use, house, furniture and fixture,
appliance, etc., or a loan for construction of a residential house or a credit
from a sari-sari store.
2. Industrial Credit – when it is used for business. In other words, the debtor
expects to accumulate the amortization from the use of purchased items.
Example: When one purchases a truck to be used as a bus or cargo truck.
3. Trade Credit – when the thing purchased is to be used in connection with the
business of the obligator, or without necessary expecting that the purchase
price could be accumulated from the use of the thing, though it is the
business of the debtor from where he/she expects to secure payment.
Nature of Credit
Credit then means many things to many people. And from this, one can easily
deduce the importance of credit not only in our people’s daily lives, but also to the
Philippines economy in general. Picture an economy without credit transactions and
you have the picture of a moribund nation. What then is the exact meaning of credit
as it affects everybody?
To the ordinary wage earners, laborers, carpenters, sidewalk vendors, or
even the so called, “white-collared” employees, this may mean eating regularly or
not. In between paydays, what would happen if the neighborhood sari-sari store will
not grant them credit (utang, in local parlance).
To the so-called “middle class,” you see them with their refrigerators, TV sets,
a car, even a beautiful house. But look closer. Most of these are being paid in
installments. “Enjoy now, pay as you earn” is the current craze. These essential
goods and/or semi-luxuries would not have been made possible without credit. In
the sale of vehicles, for example, a leading company’s financial statement will readily
show that 80% of its sale are on credit. And to the big time industrialists and
businessmen – credit is also their life blood. All one has to do is to take a look at their
financial statements and it would reveal that most of these impressive factories,
buildings, machineries, equipments and even stock in trade – are on their accounts
payable column. In other words, “credit.” No bug industry or commercial
establishment is possible without credit.
With the advent of computerization, some economist are now foreseeing in
the new future, a “cashless” society.

2
Credit in Finance vs. Credit in Accountancy
The terms of the contract specify the amount lent, the payback date and the
interest rate on the loan. In other words, a credit is a contract of a loan or delayed
payments of funds or goods. Credit can also refer to the borrowing capacity of an
enterprise or individual.
According to the book "Financial Accounting: An Introduction to Concepts,
Methods, and Uses," in accounting theories credit stands for a journal entry that
registers an increase in assets. Credit is also known as the part where payments of
debtors are registered, which is typically the right side of a ledger account.

Function of Credit
Credit performs functions which may be classified as economic, social and
managerial.
1. Economic function – The first function is to serve as a medium of exchange in
the economy. By the use of credit, transactions can be consummated quickly
and easily with confidence, without the banding of cash. Risk, as well as time
and effort, is minimized. A second economic function of the credit is to make
capital available for business purposes which would otherwise lie idle.
Induced by payment for use of their funds, people save to invest or to lend
their money.
2. Social Function – A social function of credit id to evoke for independence of
thought and action. Its use obviates the necessity for hoarding on the part of
those who desire to save and leads them to place their funds in institutions
where the principal is more secure than are hoardings. This, in turn, provides
uses for capital which people have no means of employing themselves.
Consider, for example, our country’s huge external debts incurred primarily
to alleviate our people’s social and economic condition.
3. Business Promotion – for the business executive, credit performs several
functions. It is a tool of business promotion, with which he may expand his
business by selling to customers who want to buy merchandise on credit.
Credit also gives him the opportunity to manage his business with the funds
of others and to adjust his volume of capital to the varying needs of his
business.
Basic Function of Credit & Collection
For this is the basic reason, the primary role that the credit and collection
unit must play in a business enterprise – to maximize profits and minimize bad
debts losses through proper credit evaluation of each application and through
efficient and consistent collection follow ups.

3
 No matter how substantial the value of sales, if bad debts losses are not
controlled thru the operation of an efficient credit and collection machinery, the
ultimate financial result of the business would be impaired. It would be like filling a
jar of water with a hole in it.
It is to be noted that the primary objective of the credit and collection unit is
to maximize profits. This, too, is the primary objective of sales. So there should be no
conflict between sales and credit. For both have the same primary objectives.

Task/Activity

Each of you must make a written assessment based on the observation given
below. You may add some literatures on your assessment that could support your
evaluation.
“The consensus among our credit men is that the true and full concept of
credit consciousness has not yet found its mark on our people. Ask those companies
engaged in credit selling, look into their book if you may, and you will find
confirmation of this statement. To many buyers, a 30-day term may mean anywhere
between 90-120 days. To some, this may even mean that they pay any overdue
balance at the time they place the next order (which may vary naturally according to
the needs of the buyer), their credit is still good.”

Rubric assessment for written output:

% Description
The student elicits the correct ideas from the readings and
100% consistently contributes additional thoughts to the core
idea.
Task/Activity
The student not only elicits the correct ideas from the
90%
readings but also shows evidence of internalizing these.
The student is able to elicit the ideas and concepts from
85%
the readings and shows correct understanding of these.
The student is able to elicit the ideas and concepts from
80%
the readings but shows erroneous.
The student is unable to elicit the ideas and concepts from
70% the reading indicating that s/he has not read the prescribed
reading.
Starter Quiz
You are going to answer ten (10) questions before proceeding to the next
topic. These questions are intended to assess you learnings on the first topic that
was discussed.

4
 TOPIC 2: Background History of the Development of Credit in the Philippines

In the earlier times, even as the years before the last world war, Credit was
synonymous with debt (“utang” in local dialect) with all its negative connotations.
Thus, to the rich and poor alike, it was more of a stigma to avail of credit which
mean beings in debt, no matter how promptly one pays his indebtedness.
Conversely, to have no debt was viewed as a status symbol. True to this common
belief, credit transactions then attracted mostly people with not so good credit
standing who incurred debts out of pure necessity, or, worse, with intent to defraud
creditors. Examples of these are the poor tenants who are perpetually indebted to
their landlords or the poor laborers who live hand-to-mouth existence, and had to
depend on credit to survive.
Of course, when we described credit in its negative connotations, admittedly,
there were exceptions – and it should be understood in a general way. As far back as
1932, there was already an Association of Credit Men, Inc., taking care of the credit
needs of the metropolitan areas. But on the whole, the country was still in the stone-
age as far as credit was concerned. In fact, the vestiges of this concept are still much
evident to a great segment of our town and barrio populace.
When really good credit risk customers started to trickle in and finally flood
the credit establishments during and after liberation years, they were attracted in
large measure by the wide-scale advertisements of every type of credit come-ons by
installments houses. This sad state of credit orientation was still prevalent. This was
further deteriorated by cut-throats competitions in credit sales – some going as far
as offering no-down payment deals. The result. Credit-coddling. Even the customers
who would have turned into really good accounts were “contaminated” as it were
and many become acclimated to this deplorable credit practice. The philosophy that
seems to have developed is “others can get away with it, why not me”.

Some laws with connections to the different violations in credit and

collections were as follows:
1. Usury Law (CA No. 2655) – the provisions are so stiff as to prevent any
substantial protection to creditors who, more often than not, have to take
unusual credit risk. Consider, for example, the sale of cars and trucks. No
matter how substantial the down payment is, the risk is unusually high
because of the great ease by which the unit could be hidden or stripped of
vital parts (commonly known as cannibalization). And yet, this law through
the years has remained substantially the same, with only minor amendments
since enacted. By central bank and affirmed no less than our supreme court,
however, this law is now a dead law.
2. Two installments Default Rule Under Civil Law (Art. 1484, R.A.386) – before
any sale payable in installments can be cancelled, at least two installments
must be overdue. But supposed there is bad faith? Can the seller afford to
wait?
3. No Deficiency Judgment Rule in Foreclosure of Chattel Mortgages – in case
the value of the chattel foreclosed is less than the account, the judgment
creditor cannot recover the deficiency. If the chattels have been impaired

5
 while foreclosure proceedings is in process, what now? Impairment of the
mortgage is usually accompanied also by clandestine disappearance of the
debtor’s other assets, so in the end the credit is left holding an empty bag.
4. Our Laws on Bouncing Checks – rarely, if ever can one secure a conviction
under our present laws, even after the amendments purportedly making
them “stiffer.” Thus, bouncing checks is one of the major headaches of credit
men. It is heartening to note though that a bouncing check law has been
enacted. How effective it is as a deterrent is still open to question as
evidenced by the ever growing incidents of bouncing checks. Moreover, the
laws on this matter, as written, are still subject to many defenses.
5. Our Court Procedures in Replevin Cases – Under our present procedures, our
sheriffs cannot seize property under mortgage on their own authority but
must be armed with a court warrant seizure. Aside from the expenses
involved (a bond must be submitted to the court by the mortgagee, among
others), because of the time lag in obtaining such a warrant, the seizure
orders oftentimes cannot be served anymore after it is secured. The reason is
obvious, the debtor has ample time to “prepare” for such an eventuality.

Task/Activity
Each of you will be asked to watch a video clip and make a short reflection about
the video: “The History of Credit - How Debt Became A Way of Life”.
[Link]
Your reflective essay will be graded based on this rubric.

TOPIC 3: The Credit & Collection Unit

A credit & collection office does not have to be an elaborate on. In fact, it
may be started with one or two personnel with adequate background in such work,
gradually increasing the personnel in proportion to the volume of credit and sales
and its consequent increase of amount and number of receivables.
Credit and collection are two entirely different activities, though they are very
closely interrelated. The first refers to the processing, evaluation and extension of

6
credit and the latter refers to the activities related to collection of accounts. When
credit and collection activities are still small, this will not pose a problem as this can
be handled by only one unit or department. The problem starts when credit
business becomes voluminous. The problem that will inevitably confront top
management is: should credit function be separated from the collection function?
Or, more succinctly stated, should the same set of personnel handle both credit and
collection function as their collective responsibility? Or, these functions be
separated? These questions comes into play in connection with management’s
problem on internal control of these functions. For admittedly, a fatal mistake in this
matter could make or unmake the business. Actually, the decision will narrow down
to the basic question: How trustworthy are the members of the staff? For,
concentration of both credit and collection functions in one and the same person or
set of personnel is a source of great temptation. The ultimate decision in the
business would therefore lay squarely on the shoulder of the top management
which should consider all these circumstances.
As a general rule, banks and other allied lending institutions, like financing
companies, maintain separate sets of personnel for credit and collection. No explicit
studies or explanations have ever made why this is so. We surmise that because
these firms rely mainly on collaterals on their decisions whether to grant credit or
not, they find it very expedient that the processing of credit is lodged on a separate
unit which is presumed to be an expert on appraising properties and in credit
investigation.
Another problem that confronts the top management in the matter of
organizing the credit and collection unit is the question of who will make the final
credit decision. It may be surprise many to know that “Credit managers” in some
companies, although the title has been bestowed on them, do not make the final
credit decision. Theirs are merely recommendatory, the final decision being reserved
to a higher official. Some big outfits with national presence delegate final credit
decisions to a “credit Committee” composed of senior executives.

Current Status and Functions of Credit Managers

Irrespective of title though, the performance of credit work is the
responsibility of positions of both line and staff character in an organization,
positions which are specialized or not, depending upon the size and nature of the
business. The functions falling to the different positions vary from credit policy-
making at the top to the passing upon individual credit transactions at the bottom,
and they are determined throughout by the combinations of lines of merchandise
handled, territories served, classes of customer and volume of business.
The credit manager or executive usually reports directly to the chief
executive or chief corporate officer. The person in that position is responsible for the
formulation of credit policies and the administration of credit operations that will
maximize sales and profit, minimize loss, and maintain a satisfactory turnover of the
company’s investment in account receivable.
Atty. Santos Migallos, Jr. described the expanding role of the credit manager.
“He must understand business and the worked around him. As the person who must
eventually accept responsibility for the release of so much value of the company’s
goods and services on any one of countless “buy-now-pay-later” arrangements, the

7
credit manager must doubtless have a thorough understanding of his company’s
financial and production capabilities, his sales department’s selling ability, and to
bring the money back.”
The credit manager still highly placed in the organization, the person in
charge directs all credit and collection activities and is responsible for the
interpretation of policy and its application.

Task/Activity

“THE DUMMY CREDIT APPLICATON”

How does a credit manager treat and decide a dummy credit application? By dummy
application is meant that the applicant for credit is not the real party-in-interest but an
accommodating party who is willing to allow his name to be used by another party. There
are various reasons why a credit applicant would use the name of another party for
purposes of obtaining credit. Among the possible reasons:

1. The real credit applicant does not enjoy a good credit standing;
2. Even if he does not have a good credit standing, he does not keep records or
financial statements which a scrutinizing Credit Department would require him;
3. Where the applicant’s capital comes from illegal sources; and
4. Personal reasons why the applicant would not want his name used for a particular
credit transactions.

In a given credit application, assume that the credit manager, upon investigation, found out
that indeed it is a dummy application. The credit applicant himself does not enjoy an A-1
credit rating although he may not be totally unacceptable credit-wise. But the
accommodating party is established to be a very good credit risk.

Having full knowledge of these facts, should a credit manager approve or disapprove the
credit application? Explain your answer.

R.N. DULCE
Credit and Collection Management in the Philippine Setting

Rubric assessment for written output:

8
 TOPIC 4: Credit and Collection Policies
Illustrated below is a graph of the credit cycle to guide the credit man in the
planning and preparation of credit policies:

The credit cycle

Market planning and Credit Effective market size of partially

affected by terms extended to
customers and credit policies of the
company.
Sales Strategy and Pricing and Terms of The problem of cash flow and the
Sales customer are part of the credit
responsibility.
The Current Cycle and Credit The turnover of receivables and other
current asset items are affected by the
degree of deficiency of credit.
The Cost of borrowing and credit Credit policies must consider the
inevitable problems of cost of money
and the efficiency in the utilization of
funds.
Profitability and Credit Credit efficiency affects the ultimate
goals of profitability. The problems of
money costs are aggravated by
receivable write off
a. The effective credit man should view his responsibility from the broader
perspective of the key objectives of the company.
b. The concept of sound financial management incorporates the broad aspects
of credit management.

9
 c. The credit man cannot “insulate” himself from the problems of marketing
and sales.
d. The credit man who has direct contact with the market must consider a PR
representative of the company.

Factors affecting decisions

Before you can decide whether to use installment selling, you have to consider
several factors.

1. Kinds of Goods Sold – the majority of goods sold on installment terms are
durable items, of high unit value, and often have a repossession value.
2. Customer’s Desire – Do your customers really want installment credit? If you
are running a small variety store or a pastry shop, chances are your
customers do not want it.
3. Financial resources Available – Installment credit means longer credit
transactions and longer repayment periods than if you are selling on a 30-day
charge account.
4. Action of Competitors – selling on installment credit is one way to attract
customers. Your competitors may be offering this service already but you
might have to do it, too.
5. Regulatory Laws – The Philippine Government has status, special or regular,
directly related to installment selling.

Policies of Installment Credit

What policies should a small marketer use in carrying out an effective retail
installment credit operations? They sometimes fail to use time-tested policies that
would insure its success.

Goods to sell – confine your installment sales to high value lines. Be sure it is a major
purchase for the customer. A major purchase means different things to various
customers.
For instance, a Php1, 000 hard-driven mower may be a cash purchase for
some families but an installment purchase for others. So you have to consider your
customer’s buying habits before deciding what goods to offer on installment terms.

Down payment – The down payment should be big enough to give the customer a
sense of ownership. Without this feeling he may become discouraged and stop
making his payments.

Amount and Schedule of Payment – The amount and time of payment should be
related to your customer’s income and to his other debts. Let up installment
contracts so that the unpaid balance is never greater than the resale value of the
goods.

10
Installment Terms – the terms of your contracts should be as short as possible.
Adjust them to the useful life of the article you are selling.
For instance, terms on clothes will be over shorter period than terms on an
automobile. Twenty percent (20%) down on a woman party outfit with term no
longer than 4 to 6 months would be generally as acceptable as terms of one-third
down and 24 to 36 months on a new automobile. In each case, the enjoyment of the
purchase continues longer than the contract and encourages the customer to
complete his payments.

Carrying charges – installment customers expect to pay a carrying charge

(sometimes called a finance charge or service charge). Explain this charge to
customers so that there will be no misunderstanding later.

Credit Investigation – Investigation of installment customers is more important than

the credit check-out you do for open accounts. The reason: your installment credit
accounts usually represent a high average sale figure and they are extended over a
fairly long time.

Form of Contract – Sales are made on a conditional sales contract or on a chattel

mortgage basis because such risk are fairly large and financing is extended over a
long period. Such a contract allows you to repossess the item if the customer fails to
pay.
You should check our laws for:
1. Filing and recording requirements;
2. Conditions to repossess;
3. Costs; and
4. Other provisions.
Then, you can decide which type of contract to use.

Expenses and profits in installment selling – You will have certain expenses to pay
before you can make a profit from your installment operations. Here are some of the
expenses connected with installment selling:
1. Salaries for people to run your credit operations;
2. Expenses of the office space, supplies and utilities;
3. Collection and repossession expenses; and
4. Interest on money borrowed to carry on your business.

How Many Pesos?

Under certain conditions, what would be the maximum number of pesos you
could have tied up in installment receivables?

Suppose you hope to sell Php100, 000 of merchandise a month, or Php1,

200,000 annually, on installment terms. Suppose also that your contracts call for a
10% down payment, 6 months to pay, and a service charge of 1% per month. The
maximum pesos amount you would have tied up in installments receivables is shown
in the table below.

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 Maximum Peso Amount Tied Up to Installment Receivables
Month Business Written Installment Month End
Payments installment/receiva
bles
1 Php 95,400 Php - Php 95,400
2 95,400 15,900 174,900
3 95,400 31,800 238,500
4 95,400 47,700 286,200
5 95,400 63,600 318,000
6 95,400 79,500 333,900
7 95,400 95,400 333,900
8 95,400 95,400 333,900
9 95,400 95,400 333,900
10 95,400 95,400 333,900
11 95,400 95,400 333,900
12 95,400 95,400 333,900
Equals installment sales of Php10, 000 minus down payment of Php 1, 000
plus the service charges of Php5, 400 based upon the beginning unpaid balance.

In the table, the receivables increase by smaller and smaller amounts each
month. They reach a peak of 333,900 in the 6 th month and remain unchanged
thereafter.

With smaller down payment, you maximum pesos tied up in receivables

would increase. However, if you use a three (3) month instead of a sixth (6) month
contract, your number of pesos tied up in receivables would decrease.

Of course, this is a highly simplified case. It assumes that:

1. All the contracts have the same terms;
2. No customer is past due in his payments;
3. No one pays more than he agrees to each month;
4. No one pays in a shorter length of time than agreed; and
5. No one adds additional purchases on his installment contract prior to
completion of payments.

Should it be found that it is worthwhile to go into credit selling, then, just like
any area of management, the implementation of the decision to go into credit selling
should begin with a credit plan.
The credit plan should take into account the capabilities and needs of the
enterprise and how the credit arm could best serve the overall interests of the
business. Finally, the credit plan must be well understood and appreciated by the
credit plan people involved so that it will be implemented as fully as possible, both in
letter and spirit instead of just being another wonderful paper plan.

12
Responsibilities of Credit Department
1. The credit department decides on the financial responsibility of customers,
not the sales department or any other department.
2. The credit department determines the terms of credit, not the sales
department or any other department.
3. The credit department approves credit and must collect them all, not the
sales or any other department.

Task/Activity

“THE ENGINEER GOING ON HIS OWN”

The credit manager of a substantial wholesale trading received a visitor who gave his
name as Crispin De La Cruz. He was a Sales Engineer in a construction firm who
wanted to go on business for the sale of construction materials on his own. Engr. De
La Cruz felt that he would need more help from the Credit Department than from
the Sales Department. Accordingly, a meeting was arranged between Engr. De La
Cruz, the Credit Manager and the Sales Manager of the Trading Firm.

Engr. De La Cruz claimed that he worked for about two years as sales engineer and
then for three (3) years as Sales Supervisor and one (1) year as Manager. According
to him, he saved Php50, 000 which he could put up as initial capital and if a credit of
another Php50, 000 is extended to him, he could start with the business. Then he
said to the Managers: “I hope you are interested and will study my problem”.

The credit manager and sales manager said that they were always interested in
helping new business get underway especially when those business seemed to have
promise for the future.

The credit department proceeded to make a thorough investigation of Engr. De La

Cruz’s antecedents and reputation. The information was not only favorable but
highly complementary. He was well known, well liked, hardworking, honest to the
bone, and most conscientious.

After the credit manager had visited the proposed location of the business, he talked
with the Head of Division of their firm. He informed the Division Manager that from
his point of view, the risk seemed too great. But while he thought the risk is
substantial, yet he concluded that the risk should be accepted in view of the
experience and the reputation of the engineer. In every place, the engineer worked,
he acquired customers who kept coming back. His merchandising ability will help
him but more than that, he would be able to manage with small capital. He knows
the figures, expenses and what he is talking about.

The Sales Manager was less enthusiastic than the Credit Manager and suggested
that the account be turned down. How will this situation be handled?

M. Villanueva
Credit and Collection Management in the Philippine Setting

Questions:

13
 1. If you were the Credit Manager, what would you have done?
2. What considerations would you take into account in reaching your decision?
3. Considering the urgency of the decision, would you still call for additional
data or checking to be able to make a judgment? If so, what additional data
and checking would you require first before deciding on the matter?
4. What analytical procedures would you undertake to reach a decision?

Rubric assessment for case analysis:

TOPIC 5: Financing Installment Accounts

When you sell on installment or on credit or “charge account” basis, you have
created an installment account on your books. You have to carry this account until
the customer makes final payment or you sell it to a financial institution.

Carrying Your Own Accounts Receivable

Many retailers “carry” their own installment credit paper when the amount
involved is fairly small. For example, jewelry and clothing stores often carry their
own paper. These lines usually have shorter contract terms than “big ticket” items.
Carrying your own paper may take more cash than you have so you must be
able to get operating money when you need it. And if installment credit increases
your sales, you will need still additional capital.

Selling Your Accounts Receivable

Many financial institutions are willing to buy your accounts. Of course, you
have to pay a fee (or a discount) for this service.

14
Several things determine whether you can afford this expense. Among them are:
1. The gross profit (before expenses) that you made on the same;
2. Your ability to get cash from other sources cheaper than the discount
charged;
3. The extent of your other expenses; and
4. The volume of your installment sales compared to your cash sales.

Generally, installment paper is sold in three (3) different ways. They are:
1. The non-recourse;
2. The recourse; and
3. The repurchase.

Under Non-recourse plan of purchase, you are not responsible if your

customer fails to pay. The financial institution that bought the papers stands the loss.
In repossession, the financial institution is fully responsible. It retakes, reconditions
and resells the item and collects any balance the customer owes.
Under the recourse plan of repurchase, you are liable for any balance due in
case your customer does not pay. You have to do your own repossession,
reconditioning and reselling.
The condition of “With Recourse” may be further categorized as to degree or
recourse into:
1. With recourse – where the total amount of the receivables sold may be
collected from the seller in case of non-collection.
2. With partial recourse – where the seller guarantees collectability up to a
stipulated amount and is bound to pay that portion of the receivable in the
event of non-collection. In short, the seller and the finance company share
the risk of possible loss.

Task/Activity
You will be given a 15 item quiz. This will be done to raise your knowledge on
the previous and next topic.

TOPIC 6: Recording and Accounting in Credit & Collection

One of the necessary offshoot of credit extension is the recording and

accounting of such receivables. The way the company is able to keep track and
monitor the status of one of its substantial assets – the receivables installment.
Accounts receivable broadly include all receivables other than those
supported by some form of commercial paper. Although it would be appropriate to
refer to open accounts with customers arising from the sale of goods and services as
“Trade Debtors” or “Trade Receivables” to distinguish these from other receivables,

15
it has become established practice to use the designation “accounts Receivable” to
represent these claims.
Accounts receivables for reporting purposes should be limited to trade
accounts that are expected to be converted into cash in a regular course of business.
This balance, for example, should not include receivables arising from charges for
containers that will be cancelled when containers are returned.
While receivables for services to customers are properly recognized when the
services are performed. When work under contract has not been completed at the
end of the period, the amount due as of the balance sheet date will have to be
calculated. Accounts receivable should be recognized for the portion of work
completed under construction contracts and for reimbursable costs and accrued fees
on cost-plus-fixed-fee contracts.

Non-Trade Receivables
1. Claims arising from the sale of securities or property other than goods or
services;
2. Advances to stockholders, directors, officers, employees and affiliated
companies;
3. Deposits with creditors, utilities and other agencies;
4. Purchase prepayments;
5. Deposits to guarantee contract performance or expense payment;
6. Claims for losses or damages;
7. Claims for rebates and tax refunds;
8. Subscriptions for capital stock; and
9. Dividend receivables.

Documentation
Notes and accounts receivables should be properly documented. For
accounts receivable, the following documents are must:
1. Credit application duly filled up and signed;
2. Letter from the company approving the credit line, setting the limit and
defining the terms;
3. Purchase order/letter order/purchase requisition/telegram order/sales
order/RIV/vales slip duly signed by authorized signatories; and
4. Sales invoice/delivery receipt duly signed.

For notes receivable, the following documents are required:

1. Credit application duly filled and signed;
2. Letter from the company, bank or financial institution approving the loan;
3. Promissory note duly signed.

Recording of Accounts receivable/Notes Receivable

An Account in which to record transactions with the customer/borrower
should be open. The amount of each invoice for goods sold or services rendered
should be debited and the payment received from the customer/borrower, plus any

16
discount allowed and any credit granted for returned goods or other adjustments
credited to this account.

Monitoring and Controlling the Credit and Collection Functions

The following accounting documents are the minimum required to assist the
Credit Department in performing its function:

1. Aging of Accounts Receivable - This documents is required monthly either

typed or computer run. It should list every account in the accounts receivable
ledger bearing a balance either debit or credit, current or past due. Accounts
should be aged in the following categories: current (within terms), 0-30, 30-
60, 60-90, 90-180, 180-360 and more than 360 days past due.
2. Statements of Account for each account bearing the balance will be prepared
monthly and forwarded to the customers under the supervision of the Credit
and Collection Department.

Analysis of Receivables
In addition to the aging of accounts receivable previously described, the
analysis of receivables includes the computation of an accounts receivable turnover
ratio and the presentation of other reports which are designed to reflect activity and
the efficiency of the credit and collection function.

Accounts Receivables Turnover Ratio

The Turnover of accounts receivable may be calculated by finding the
relationship between the average balance of the book of accounts and the credit
sales for the period. Thus, if the credit sales for the month is Php90, 000 and the
average daily outstanding balance is Php45, 000, monthly turnover is two or 200%.
The average balance outstanding should be determined through the use of daily or
weekly balances. At least the period should not be so long that the effect of seasonal
fluctuations is lost sight of. Bad debts should be eliminated prior to computation of
the ratio, and all adjustments for returns and allowances, etc., should be treated
consistently. As a rule, the calculation should be in terms of the month of the quarter
rather than the year.
The turnover ratio, including trend, throws considerate light upon the
efficiency of credit administration, in that it is rather accurate gauge of whether the
normal term of credit is being observed. For example, if the regular credit term is 30
days, the monthly turnover rate should approximate one; a rate less than one
indicates that, on the average customers are not living up the stated term.
The expression of the number of average day’s sales included in the
receivables outstanding as of a particular date (also called “turnover” by some
authorities) is a closely-related measurement. For example, if the average daily
credit sales amounts to Php1, 000 (total credit sales for the period) and the average
uncollected balance for the period is Php40, 000, it is clear that the equivalent of 40
day’s credit sales is outstanding.

17
Determining the Efficiency of the Credit and Collection System

1. Collection Efficiency
2. Aging of Accounts Receivable
3. Turnover
4. Bad Debts Loss Ratio.

Accounts Receivable Performance Indexes

The purpose of the policy is to establish consistent and universal methods for
calculating performance indicators required to evaluate Accounts Receivable
performance.

Turnover
The evaluation of the number of month’s sales in Accounts Receivable.

Method of calculation:
Current month Accounts Receivable Balance
Deduct Current month gross invoicings
Deduct sufficient previous months until only a fraction of a month remains.

Example: December 31 balance Php1,000

December Gross Invoicing 500
December Gross Invoicing 500
Turnover 1.8 mos.

Collection Efficiency
A method of comparing funds actually collected with the funds available for
collection. It evaluates the performance of the collection effort since it is not a
function of the terms of sale.

Method of calculation:
Collection efficiency (expressed as %) = Amount Actually Collected

Month’s Starting Balance plus Gross Invoicing

Current Account Receivables = Amount Available for Collection

Aging Analysis
a. Total amount of receivables over 60 days past due
b. Percent of total receivables over 60 days past due

Bad Debts
It is a receivable which is uncollectible due to a customer’s inability to pay.
Each company should establish its own bad debt reserves in accordance with current
practice as defined by the credit or account manual. The adequacy of bad debt
reserve will be viewed periodically by the manager, Credit and Collection, and
Charges will be recommended as are appropriate to top management.

18
Bad Debt Write-Off
Bad debt write off shall be made when a receivable is deemed to be
“uncollectible” due to a customer’s inability to pay.
Before reaching the write off stage, an account will normally have been
previously recognized as “doubtful” and a collection effort made. A full written
report, or status of the account, along with a description of the effort to effect
collection must accompany the write-off recommendation.
All bade debt write-offs, regardless of amount, are instituted and
recommended by the Credit Manager, but it is advisable that the following
additional approvals must be obtained, depending on the amount involved, before
any write-off are made:

Write-off Account Additional Approval Required

0-10,000 Company Controller
10,000 – 50,000 Company General Manager
50,000 – 250,000 President
Over 250,000 Board of Directors

Task/Activity

You will be asked by your instructor to act as a credit officer/manager and fill
out a monthly credit report.

Rubrics
Originality 20%
Content 50%
Organization 30%
TOTAL 100%

Task/Activity

There will be a topic to be assigned to each of you. And, you will be asked by
your instructor to make an oral presentation or written report for the topic assigned
to you.

ASSESSMENT

You will be graded based on your presentation/written report. You must

consider the following mechanics for your presentation:

19
  You should participate during the presentation. (no presentation means no
grade)
 You should develop more effective presentation skills.
 Deliver message persuasively.
 Assess the performance.

Rubrics for written report:

20
 LESSON 2
Credit Practices and Procedures

TOPICS
1. Credit Application and Other Requirements
2. Sources of Credit Information
3. Credit Investigation Procedure and Reports
4. Appraisal of Real and Personal Property
LEARNING OUTCOMES
At the end of the lesson, you should be able to:
1. identify the different practices and procedures impost in the credit
and collection activities;
discuss the requirements in processing a loan application; and
2. discuss the appraisal of real and personal property.

21
 TOPIC 1: Credit Application and Other Requirements

Credit Application and Other Requirements

Applicant Bank checks High Credit

Hands it score leads to
fills the loan your
over to eligibility check
application eligibility
the bank basis
form score documentation

Low credit score

leads to loan Non eligibility Eligibility will lead
rejection leads to rejection to loan approval
of application
Fig. 1. Loan Application Process

The first activity in the Credit department as it start the actual operation of its
function is the credit application. A credit department, worth its salt, must have a
credit application form for use by its prospective customer/client. In fact, 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.
This is essential because the duly filled credit application provides the credit
department:
1. With initial credit information on which to base its credit decision, if credit
decision has to be made, for some reason or another, without further credit
investigation;
2. Information on which to further interview the applicant; and
3. With some “leads” on which to start his credit investigation process.
Moreover, to guide the credit applicant, it would be good practice to give a
listing/checklist of all the requirements upon his/her signifying his intention to apply
for such a credit accommodation or loan. This way, he will be able to find out
whether he/she is eligible to apply for a loan.

Documentation Required for Processing a Loan Application

The following documents, normally, should be submitted together with the

study accomplished loan application:

22
 1. Individual/Single Proprietorship
a. A certified photocopy of its trade name/style registered with the Bureau
of Domestic Trade;
b. Mayor’s Permit;
c. License to engage in business issued by the City or Municipal Mayor;
d. Income Tax returns for the preceding year and official receipt of payment;
and
e. Latest audited/unaudited financial statements.
2. Partnership
a. A certified photocopy of its trade name/style registered with the Bureau
of Domestic Trade;
b. Copy of Articles of Partnership, duly registered with the SEC;
c. Latest audited/unaudited financial statements.
d. Income Tax returns for the preceding year and official receipt of payment;
e. License to engage in business issued by the City or Municipal Mayor;
f. Resolution of the partnership authorizing the negotiation of the loan and
authorizing the partner to sign for and in behalf of the partnership; and
g. Curriculum Vitae or personal information.
3. Corporation
a. A certified photocopy of its trade name/style registered with the Bureau
of Domestic Trade;
b. Copy of Articles of Incorporation and By-Laws, Duly registered with the
SEC;
c. Latest audited financial statements;
d. Certified list of stockholders of the company as to date of application, to
include the following:
 Name of its stockholders
 Nationality
 Number of shares subscribed
 Amount subscribed
 Amount paid on subscription
e. Certified list of incumbent officers;
f. Curriculum vitae or personal information sheet of the officers;
g. Board Resolution authorizing the filing of the application and authorizing
the person to undertake the application;
h. License to engage in business issued by the municipality; and
i. Alien Registration Certificate of alien officers of the company, if any.

For purposes of inspection and appraisal of offered collateral/s and

investigation of co-makers, the following documents are also required:

1. Real Estate
a. Titled Real Estate
1. Two (2) Photocopies of Torrens Title
2. Location plan
3. Tax Declaration

23
 4. Latest realty tax receipts
5. Photograph of improvements, if any
b. For Properties under Administration
1. Letter of Administration
2. Court Order authorizing the guardian to mortgage the property of the
minors and to sign the promissory notes, mortgage contract, credit
agreement and other relative documents.
c. For Intestate Estate
1. Appointment order of the administrator of the Estate of the Deceased
and follow procedure for properties under administration; or
2. 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 the documents as co-debtors/mortgagors. If there are
minors, they should be represented by duly appointed guardians.
2. Chattels
a. Machineries and equipment/Office Furniture and Equipment – an
itemized list, certified by the borrower showing following:
1. Number of units
2. Location
3. Brief description of each piece or unit indicating engineering
specifications, make, serial number, etc.
4. Receipts or other evidences of ownership, like Deed of Sale, etc.
b. Motor vehicle – Land Transportation Commission Registration and Official
receipt of Payment.
c. Merchandise Inventory
1. Description
2. Number of units
3. Price of each item
3. Pledge on Shares of Stocks/Marketable Bonds
a. Stock Certificate/Bond or Photocopies thereof, and
b. Audited Financial Statements of issuing company.
4. Assignments on Cash Deposits
a. Savings account/Certificate of Time Deposits/Banker’s Acceptances
b. Letter of Credit
5. Signatories
a. Co-maker’s statement duly accomplished; and
b. Photocopy of income Tax Returns for the preceding year.

Should every customer be investigated?

This is an area that should be considered in the credit investigation. In any
context about credit and collection gives emphasis on credit investigation. A credit
investigation is a procedure undertaken by a financial institution to vet a potential
client's ability to pay back a loan. Failure to pass this procedure means disapproval of
a loan. As this is significant in the approval of the loan application, several major
questions that should be answered before launching a credit investigation.
1. Is there a problem? Or, rather, does a problem really exist? And, if so, what
should be done about it?

24
 2. Are you able to solve the problem? Is so, what is the best way to solve it? And
what do you need to do the job?
3. Do you have all the facts? You never have all the facts, but do you have
enough? You must take risk.
4. Can you make a decision now? It’s easy to say no, but is that the solution?
5. What additional facts do you need?
6. How or where do you obtain the missing facts? From trade groups? From
friends? Studies? Your own records? Customer contact? Telephone
confirmation?
7. Then ask yourself if an investigation is in fact needed. If so, how extensive?
Decide on the complete investigation only when the pros outweigh the cons.

Moreover, several major variables are considered when evaluating credit risk:
the financial health of the borrower; the severity of the consequences of a
default (for the borrower and the lender); the size of the credit extension;
historical trends in default rates; and a variety of macroeconomic
considerations, such as economic growth and interest rates.

Credit Interview
Another good practice would be to make it a point, as much as possible, and
if at all possible, to interview the applicant himself. The interview may be conducted
either at the time the credit applicant applies for credit, or late, if and when credit
investigation has been found to be necessary before the extension of the credit or
loan. Just like any human activity, the interviewer should prepare for such an
interview.

The importance of interview and the Credit Investigation

The interview is usually conducted with an individual who has applied for a
credit installment. The credit investigator generally is the one with whom the
applicant comes in contact. Basically, the credit investigator holds the key to
competent selections of credit risks, as well as customer’s satisfaction. It is important
that the credit investigator has the ability to meet and talk graciously with every type
of applicant, that he makes a neat appearance, and that he has a disposition
agreeable, independent and pleasant under all conditions.

The Purpose of the Interview

Credit investigator should seek to determine the following:
1. Whether the applicant is old enough to qualify for a loan;
2. Whether he is mature enough to appreciate the responsibility it would entail;
3. Whether he is capable of recognizing the seriousness of creating such an
obligation;
4. Whether he has sufficient regular income from which repayment likely to
continue during the life of the credit extension;
5. Whether his financial condition will permit making the payments after
considering such factors as living expenses, dependents, manner of living,
and obligations fixed and otherwise;
6. Whether his financial condition requires an endorser or security;

25
 7. True identity and status of the applicant;
8. Neighborhood reputation of the applicant; and
9. Credit experience of the applicant with other banks/companies.

It is the credit investigators responsibility to discover all pertinent facts on

which credit can be safely considered and extended so that only eligible applicant
can be accommodated.

Credit Qualities to Investigate

The following presents some of the more important or basic factors to which
attention should be given in a credit investigation. In some investigations, all those
points should be checked fully; in other investigations, certain points may not need
to be checked carefully since they may have little bearing on the risk.
The following credit information should be secured and verified:
1. Income;
2. Employment;
3. Payment record;
4. Residence;
5. Marital Status;
6. Age
7. References and Reputation;
8. Reserve Assets;
9. Equity in Purchase; and
10. Collateral.

Task/Activity

Your instructor will ask you to answer a 20 item quiz as lesson booster to the
class. The instructor will give the quiz according to your available resources.

TOPIC 2: Sources of Credit Information

There are multifarious sources from which a credit investigator could find and
secure these credit information. Some of these sources are the following:
1. Salesman’s report;
2. Customer Supplied Information;
3. Bank Information; and
4. Credit Interchange.

26
 Other sources of information are interchange Bureaus, Court and Securities
and Exchange Commission (SEC) listings, Securities and Exchange Commission and
Miscellaneous Sources.

Legal and Ethical Aspects of Credit Investigations

The credit department, owners, officers, sales management and other key
management personnel must have a secure knowledge of their legal right and
privilege to gather and disseminate credit information about mutual business
customers to which open account credit is provided by the company. They must also
know, and understand, the ethical implications of this process. In securing the
information of the applicant/client, the code of ethics in exchange of credit
information must be followed.
There are two cardinal principles in the exchange of credit information:
confidentiality and accuracy of inquiries and replies. Confidentiality includes the
identity of inquirers and sources, which cannot be disclosed without their
permission. Adherence to these and other principles embodied in this age-tested
code is essential as offenders jeopardize their privilege to participate further in the
exchange of credit information.

TOPIC 3: Credit investigation Procedure and Reports

Credit Investigation: Direct and Indirect

Direct Investigation. Creditor collects information through direct contact

with customer. The following are the procedures in conducting direct credit
investigation:
1. Customer visit;
2. Building Customer Relations;
3. Observe the Facilities;
4. Discuss and Review Financial Information;
5. Resolve Disputes, Develop Interaction;
6. Freight and Logistics;
7. Pricing and Terms;
8. Advertising;
9. “Team” Approaches to Visits;
10. Customer Education and Best Practices;
11. Account Status and Collecting Money; and
12. Preparation of agenda or list of questions.
Indirect Investigation. Creditor collects information through third party. The
following are the procedures in conducting indirect credit investigation:
1. Industry Credit Groups; and
2. Commercial (Business) Credit Reporting Agencies.

27
 Part of conducting an investigation is understand further and consider the
five (5) C’s of an enterprise or an individual loan applicant. The 5 C’s of credit will be
discussed in the next lesson.

Credit Investigation Report

Once the requirements and other factors were completed, it is important to

make immediate notes about the discussions, decisions and outcomes of such credit
investigation activities. These reports may be referred to as Credit Investigation
report. The documentation of these meetings should be kept in the customer file
and may first be circulated among the internal meeting participants or reviewed with
company management. Observations made about the facilities, financial information
discussed and questions specific to the customer’s business should be clearly noted
in the documentation. Several items were most likely discussed and possibly
assigned to various meeting participants, e.g., the credit professional was to check
on an invoice problem, the company president was to provide a copy of their most
recent financial statements, the sales representative was to inquire about a
backorder that had been promised last week, etc. Most companies use an
automated tickler system to track task due dates; other firms use a shared calendar.
However tracked, it is critical that a follow-up practice be in place and that someone
is responsible for managing completion of the tasks. The credit professional is well-
positioned to serve as a central point of communication.

TOPIC 4: Appraisal of Real and Personal Property

Appraisal refers to an opinion of value for property, as well as the process of

developing that value. It is an essential part of a credit investigator’s job. While he is
not expected to possess the highly specialized skills of a professional appraiser, he is
nevertheless expected to know at least the basic principles and procedures in
property appraisal.
Professional Appraisal is an estimate or opinion of value, usually transmitted
in writing, of an adequately described property as of a specified date, is supported
by a presentation and analysis of factual and relevant data.

The purpose and functions of an Appraisal

The value most commonly sought in an appraisal is market value. It is the
highest price estimated in terms of money which a property will bring if exposed for
sale in the open market, allowing a reasonable time to find a purchaser who buys
with knowledge of all the uses to which it is adapted and for which it is capable of
being used.
Other values:
1. Insurable value
2. Going concern value
3. Liquidation value or price
4. Assessed value

28
 Appraisal Functions
1. In connection with the transfer of ownership
2. In connection with the financing and credit
3. To establish just compensation in condemnation proceedings
4. To establish a basis for taxes
5. Others, like repossession or foreclosure of collaterals

An Approach to Value
An approach to value is a method based on factual data by which an
indication of value is evolved.

Basic Approaches to Value

1. Cost Approach. A valuation method based on the principle that no
prudent purchaser will pay more than what it will cost him to acquire an
equally desirable substitute site, and to build a similar improvement of
equal desirability and utility.
2. Income Approach. A method of evaluation based on the principle that
value tends to be set by the present worth of the rights to future net
benefits that may be derived from ownership.
3. Market Data Approach. This method of valuation is based on the
principle that no property is worth more at a given date than the amount
of money necessary to purchase a similar property of like kind with equal
utility and desirability.

Appraisal Diagram

Define the Preliminary Survey Data Collection &

problem and Appraisal plan analysis

Problems
Highest & Best use
OK

Decide on 1 or
more approach/es

Income
Cost Approach Market Data
Approach

Reconciliation

Final Estimate of
Value
29
Fig. 2. Appraisal Diagram

Task/Activity

You will be asked by the instructor to act as a credit officer/investigator and

prepare a credit investigation report. Your instructor will give you the format for the
credit investigation report.

Rubrics
Originality 20%
Content 50%
Organization 30%
TOTAL 100%

Task/Activity

You will be asked to watch videos about the practices and procedures of
credit. After watching the video, you will make a reflective essay about the videos.
Here are the links:
[Link]
[Link]

30
 Task/Activity

There will be a topic to be assigned to each of you. And, you will be asked by
your instructor to make an oral presentation or written report for the topic assigned
to you.

ASSESSMENT

You will be graded based on your presentation/written report. You must

consider the following mechanics for your presentation:
 You should participate during the presentation. (no presentation means no
grade)
 You should develop more effective presentation skills.
 Deliver message persuasively.
 Assess the performance.

Rubrics for written report:

31
 LESSON 3
Credit Evaluation, Financial Analysis and Credit Decisions

TOPICS
1. Credit Evaluation
2. Financial Analysis

LEARNING OUTCOMES
At the end of the lesson, you should be able to:
1. define credit evaluation;
2. enumerate the factors affecting the credit scoring;
3. explain the 5Cs of credit;
4. define credit scoring;
5. discuss and explain financial analysis; and
6. make credit decisions with credit evaluation and financial analysis.

32
 TOPIC 1: Credit Evaluation

Credit Evaluation

Credit evaluation and approval is the process a business or an individual must

go through to become eligible for a loan or to pay for goods and services over an
extended period. It also refers to the process businesses or lenders undertake when
evaluating a request for credit.

After all the necessary credit information have been collated and written in a
report from (usually called the Credit Investigation report (CIR)), the next task is to
evaluate the credit risk. Credit evaluation simply means that process of finding out
by proper analysis of what constitutes the acceptable degree on amount of risk the
company, bank, or other financing institution is willing to undertake in a particular
case.

The first task is to evaluate the different credit factors as reported in the CIR.
These credit factors are what are generally known as the Five (5) C’s of Credit –
Character, capacity, capital, condition and collateral. These C’s of credit are simply
defined and explained, thus:

1. CHARACTER – comprises those qualities of credit risk which make him or her
want or intent to pay when a debt is done. Or, stated in a simple question:
“will he pay his account when it becomes due?” It will, therefore, be helpful
to look into his:
a. Social background
b. Family background
c. Educational Attainment
d. Applicant’s vices or lack of it

33
 e. His/her habit and other personal traits
More importantly, the credit evaluator must examine closely the applicant’s
paying records, for credit character primarily refers to his/her previous credit
dealings with the company, bank or other financing institutions. In other
words, this factor has something to do with his credit history.

In the credit report, records of payment are usually classified into:

a. Prompt and Satisfactory if he/she pays promptly on due dates;
b. Satisfactory – if he/she pays promptly but misses a due date or two;
c. Slow but collective – if his/her payment is normally delayed, and
collection letters have to be sent; and
d. Poor or unsatisfactory – when forced collection procedures, like a court
suit, or replevin (repossession), foreclosure proceedings have to be
undertaken to effect collection.
2. CAPACITY TO PAY – the ability to pay when a debt is due. Generally refer to
his/her total and disposable income.
3. CAPITAL – for credit purposes is the financial strength of a risk as measured
by the equity or net worth of the person or business. There are the
applicant’s assets in the form of real estate, stockholdings, valuables, or other
investments in business. There are assets on which we can fall back on in
case applicant’s capacity and character should fail for some reason or
another.
4. CONDITIONS – in a limited sense, and as they relate to credit, refer to the
economic environment in which the risk exists over which individuals do not
have control. Example: typhoon belt areas, devaluation, tight money
condition, ethnic customs and idiosyncrasies of the people, habits and similar
factors. In general sense, this includes also the conditions of the sales
contract itself, like the amount of down payments, the period of installments,
the collaterals offered, the usage of the items subject of the credit stock
position of the Company (whether overstocked or not), product
obsolescence, and the like.
5. COLLATERAL – Personal assets pledged by a borrower as security for a loan
are known as collateral. Business borrowers may use equipment or accounts
receivable to secure a loan, while individual debtors often pledge savings, a
vehicle, or a home as collateral. Applications for a secured loan are looked
upon more favorably than those for an unsecured loan because the lender
can collect the asset should the borrower stop making loan payments. Banks
measure collateral quantitatively by its value and qualitatively by its
perceived ease of liquidation.

Task/Activity

Watch the video and make a reflection about the video that you have watched.
Credit Analysis Process; 5 C's of Credit Analysis; Ratios:
[Link]

34
 TOPIC 2: Financial Analysis
Financial analysis is the process of evaluating businesses, projects, budgets,
and other finance-related transactions to determine their performance and
suitability. Typically, financial analysis is used to analyze whether an entity is stable,
solvent, liquid, or profitable enough to warrant a monetary investment. Financial
analysis in credit purposes refers to the analysis of the financial statements
submitted by the applicant and duly verified by the credit investigator should also be
made.
The financial analyses will be presented through financial ratios which
present relationship between financial statement items or accounts expressed in
mathematical fashion.
In doing the analysis we shall cover the company status in terms of:
1. Liquidity – pertains to the firm’s ability to pay any immediate and incoming
cash disbursements.
2. Asset Utilization – measures how often is the turnover of accounts
receivable, inventory and long term assets.
3. Debt-Utilization – estimates the overall debt status of the firm in light of its
asset base and earning power.
4. Profitability – this measures the firm’s capacity to earn sufficient return on
sales, total assets and owner’s investment.

Financial Ratios

LIQUIDITY RATIOS SIGNIFICANCE

a. Current Ratio Current Assets Signifies the firm's
= Current liabilities capacity to pay or
meet current
obligations
b. Acid test Ratio/Quick Ratio Current assets (except A stricter test of
= inventory) liquidity. Suggests the

35
 Current Liabilities firm's ability to pay
current obligations by
considering more
liquid current assets.

ASSET UTILIZATION
a. accounts receivable turnover Net sales Signifies the number of
= Ave. Accounts times the average
Receivable receivables are
No. days/year collected during the
Receivable turnover year.

b. Inventory turnover ratio Cost of goods Sold Suggests the number

= Ave. inventory of times the average
inventory was
No. days/year disposed of during the
Inventory turnover accounting period.

c. PPE/ Fixed Asset Turnover Net sales Indicates the firm's

= Ave. Net PPE ability to efficiently
manage their PPEs to
generate revenue.

d. Total Asset Turnover Net Sales Indicates the firm's

= Ave. Total Assets ability to efficiently
manage their assets to
generate revenue.

DEBT UTILIZATION (Leverage)

RATIOS
a. Debt-Equity Ratio Total Liabilities Measures the
= Total Equity relationship or
proportion of the
capital provided by
creditors to the capital
provided by owners.

b. Debt Ratio Total Liabilities Measures the

= Total Assets proportion of the
firm's assets coming
from its creditors.

GROSS PROFIT RATIOS

a. Gross Profit Ratio Gross Profit Measure the gross

36
 = Net sales profit per peso of sales
revenue. This ratio is
important in
ascertaining the
adequacy of gross
profit to meet
operating expenses
plus their desired
profit.

b. Net Profit Ratio Net Profit Measures the amount

= Net Sales of net income per peso
of sales. It also shows
the proportion of net
income to the firm's
sales revenue.

Measures the
c. Return on Assets Net Income company's profitability
= Ave. Total Assets in using their total
assets. It indicates the
net income generated
by using the firm's
total assets.

d. Return on Equity Net Income Indicates the amount

= Ave. Equity of return per peso of
owners' equity.

Financial Analysis and Decisions

Financial accounting allows a business to keep track of all its financial
transactions. It is the process in which the company records and reports all the
financial data that go in and out of its business operations. The accounting data is
recorded on a series of financial statements including the balance sheet, income
statement, and cash flow statement.
Further, through the data gathered from financial accounting, the financial
analysis comes. This analysis can be done through financial ratios stated in the table
above. But, how these analyses can help the top management and the business
make decisions especially in the matter of lending. It helps creditors assess the
solvency, liquidity, and credit worthiness of the businesses.
Financial analysis is also a key for lenders. Because financial statements
outline all its assets as well as the short- and long-term debt, lenders get a better
sense of a company's creditworthiness.
A number of common accounting ratios creditors rely on, such as the debt-
to-equity (D/E) ratio and times interest earned ratio, are derived from a company's
financial statements. Even for privately-owned businesses that do not necessarily

37
follow the requirements of the Financial Accounting Standard Board (FASB), no
lending institution assumes the liability of a large business loan without critical
information provided by financial accounting techniques.
Ultimately, a lender wants to know just how much risk is involved by lending
a company money, which can be determined by reviewing the company's financial
accounting. Once this is determined, the lender will also be able to outline exactly
how much to lend and at what interest rates.

Task/Activity
There will be a topic to be assigned to each of you. And, you will be asked by
your instructor to make an oral presentation or written report for the topic assigned
to you.

ASSESSMENT

You will be graded based on your presentation/written report. You must

consider the following mechanics for your presentation:
 You should participate during the presentation. (no presentation/written
report means no grade)
 You should develop more effective presentation/written skills.
 Deliver message persuasively.
 Assess the performance.

Rubrics for written report:

38
 Task Kindly give your insights about this quote: “If the thing pledged is returned by
the pledgee to the pledger or owner, the pledge is extinguished. Any stipulation to
the contrary shall be void.” Relate your answer to the topic credit evaluation.
Rubric assessment for written output.

Numerical
Description
Score
Task/Activity The student elicits the correct ideas from the readings or
video, shows evidence of internalizing these, and
4
consistently contributes additional thoughts to the core
idea.
The student not only elicits the correct ideas from the
3 readings or video but also shows evidence of internalizing
these.
The student is able to elicit the ideas and concepts from
2 the readings or videos and shows correct understanding of
these.
The student is able to elicit the ideas and concepts from
1
the readings or video but shows erroneous.
The student is unable to elicit the ideas and concepts from
0 the reading or video indicating that s/he has not read the
prescribed reading or watched the video.
With the sample of balance sheet and income statement given below, kindly make
an analysis using some formulas discussed and decisions as a credit manager
towards the approval of a loan. Kindly enumerate and elaborate the circumstances
that you think could affect your decision.

39
Source: [Link]

Source: [Link]

40
Rubric assessment for written output.

Numerical
Description
Score

4
LESSON 4
The student elicits the correct ideas from the readings or
video, shows evidence of internalizing these, and
consistently
Collection contributes
Proceduresadditional thoughts to the core
and Techniques
idea.
The student not only elicits the correct ideas from the
3 readings or video but also shows evidence of internalizing
these.
TOPICS The student is able to elicit the ideas and concepts from
1. 2Collection
the readings
Policies andorPractices
videos and shows correct understanding of
2. Methodsthese.
for Improving Collections
3. Recommended Collection
The student Timeline
is able to elicit the ideas and concepts from
1
4. Cash on Delivery Salesor video but shows erroneous.
the readings
The student is unable to elicit the ideas and concepts from
0 the reading or video indicating that s/he has not read the
LEARNING OUTCOMES
prescribed reading or watched the video.
At the end of the lesson, you should be able to:
1. discuss the procedures and techniques employed in the collection
of receivables;
2. determine and explain the collection objectives and structure;
3. identify the Collection calendar and suggested collection
approaches;
4. identify and discuss the roles of Collectors to the business; and
5. discuss the cash on delivery sales.

41
 TOPIC 1: Collection Policies and Practices

Good business requires that collection of receivables be made promptly and

without any damage resulting to the customer relationship. Somehow, every
business that extends credit has some collection problems. These problems may be
very minor if the creditor’s policy is only to extend to those individuals or firms with
the highest credit rating.
No matter how sound the company’s credit policy is, unforeseen factors will
inevitably arise and cause some collection problems. (Pagoso, 2010)

Cause of Delinquent Accounts

1. The debtor who misunderstands the credit terms.
2. The careless debtor
3. The debtor who ignores small bits
4. The debtor who is good but temporarily out of funds
5. The chronic slow debtor
6. The unethical unfair debtor
7. The insolvent debtor
8. The dishonest debtor

Importance of Prompt Collection Policy

Every business that extends credit has some collection problems but it has to
be noted that prompt collection policy is very important. As stated in Money, Credit
and Banking, 2010 edition, the following are some of the advantages of prompt
courteous policies:

1. Requires less working capital tied up in receivables.

2. Reduces the losses from bad debts.
3. Decreases the probability of expensive legal action.
4. Reduces costs of correspondence, bookkeeping and collections.
5. Discourages poor risks from customers.
6. Reduces loss of sales which often occurs when a delinquent customer
believes he will refused further credit and so buys elsewhere.

Principles of a Sound Collection Policy

The following principles may serve as bases when formulating collection
policies (Pagoso, 2010)

1. The creditor should inform the debtor in precise, clear words, the terms of
credit. He should be certain that the debtor understands the credit terms.
2. The creditor should enforce the credit terms.
3. When the account becomes overdue, the collection machinery should be
started at once.

42
 4. It is useless to undertake prompt collection action unless the follow up steps
are just as prompt.
5. The regularity and the timing of the successive steps in the collection
procedures are as important parts of an effective collection policy as
promptness in following up the initial action.

Collection Procedures

The collections staff may deal with an enormous number of overdue invoices.
If so, the collection manager needs a procedure for dealing with customers in a
standardized manner to resolve payment issues. The detailed collection procedure is
listed below. The process flow noted here only generally represents the stages of
interaction with a customer. These steps might be shuffled, supplemented, or
eliminated, depending on the payment status of each invoice. The steps are:

Fig. 3. Collection Procedures

Source: [Link]

It is more likely that the outlined collection procedure will be used by new
collections personnel. More experienced staff should be allowed to vary their
activities from this list, based on their opinions regarding the best way to collect
from certain customers.
From the foregoing diagram, the following collection efforts from part of the
entire collection system:
1. Statement of accounts;
2. Collection Reminders;
3. Collection letters;
4. Telephone Calls;
5. Personal Calls;
6. Dunning by wire;
7. Use of Registered Letters;
8. Use of Collection Agencies;
9. Use of Attorneys; and

43
 10. Suing Debtor/foreclosure.

Task/Activity

Make collection letters which are categorize into reminders, polite request or
appeals and demands.
Rubrics
Originality 20%
Content 50%
Organization 30%
TOTAL 100%
Watch the full video
Task/Activity
of “Credit and Debt in Personal Finance” on this link:
[Link]
Give your insight on the importance of credit to our personal finance? Discuss your
insights in a 1 whole sheet of paper or make it in 1 long bond paper.

TOPIC 2: Methods for Improving Collections

Awareness is the first step in collections--awareness of what is happening in

the economy, in the industry, company, and customer. The same investigative and
analytical techniques which are used for credit approval are valid for the collection
process. ([Link])
As defined by the Fair Debt Collection Practices Act (FDCA) debt collector is
any person who regularly collects or attempts to collect, directly or indirectly, debts
owed or due or asserted to be owed or due another.
44
 Debt collectors who attempt to collect their own debts are referred to as
“primary” or “first party” debt collectors and the debt is referred to as “primary” or
“first party” debt. In first party debt situations, the debt collector is also called the
“credit grantor”
Debt collectors who collect debts for others are referred to as “third party
collectors” and the debt is referred to as “third party” debt.([Link])

The common questions the collectors ask ([Link]):

 When do I start collecting?

 Whom do I contact?
 How do I say or write it?
 How often do I follow-up?
 When should I consider litigation?

When to start?
 Collection really starts with the customer invoice. Make sure the terms are
clearly stated so the customer knows exactly when and how much to pay,
and where to mail the check (or electronically transfer the funds).
 Check to make sure the billings go out promptly, preferably the same day as
shipment, and that have abided by the customer's request concerning correct
billing addresses, duplicate invoices, etc.
 When this begins, depends on a number of things--the selling terms, the
custom in industry, the competitive position, and the company's own
financial requirements. Some industries, due to their competitive nature are
notorious for not following up for 30-45 days after the due date, thereby
extending terms. If the company is dominant in the industry, stand a better
chance of having customers adhere to the terms
 As with a credit policy, collection practices must be flexible. If the company is
in the midst of large promotion requiring customer cooperation, may want to
alter the normal timing until after the promotion is over. Conversely, if the
company is in a cash bind, and needs cash more than new sales, then would
tighten up. Because collection is one of the least popular things the company
does, make sure to keep management informed of what they are doing, and
the success rate.
 When to start should not be left up to individual collectors, but should be
part of a formal credit and collection policy. If there is a different product
lines with different type customers, and different selling terms, the collection
practices should be tailored to those differences.
 As a rule, the longer a customer ages past due, the more frequently to
contact them. Also, at each step, the tone should be more demanding. If the
personnel resources are limited, choose the larger accounts first, and possibly
consider outsourcing the smaller delinquencies from the time the customers
become delinquent.
 The longer an account is past due, the less the chances of collecting it.

45
  Many customers pay only after contacting them, believing that if they will not
be asked for the money, they do not really care if they pay slowly. After a
while they know who pressures them and who does not, so are one of the
"early birds" and start the collection process promptly.
 If a customer had traditionally paid within your discount terms, and is a large
purchaser, do not wait until the next terms expire, contact them after the
discount period has expired.
 If there are certain large customers they only wait for the call before they
pay, call them a few days before the payment is due to find out if there are
any billing or shipping problems that need to be resolved before they mail
their check. This diminishes any excuse they may have to delay payment.

Who to contact?
Name should be obtained of the individual who has the authority to issue
payments when the initial credit investigations begin.

How should you collect--by letter, telephone, fax, in person?

Make sure to have complete information before making a letter/call/visit.
These items should include purchase order and/or contract numbers, invoice detail,
credit memo detail, unapplied checks, related correspondence, previously disputed
open items, statements, and copies of any billing/shipping instructions. If the
business routinely provides proofs of delivery for the customers, include these too.

Also review the credit file for recent information about the customer’s paying
habits with the organization as well as with the trade. Furthermore, review the
customers' financial condition, and operations. If the file is not updated, this may be
a good time to do it. This information may give clues as to why the customer is not
paying. Also, it will give the opportunity to ask more incisive questions and tailor
payment request for better results.

In person is probably the best method of collecting, because you are face-to-
face with the customer. In addition, hearing what they are saying can also watch
facial expressions and body language, have an opportunity to look around the
premises for any signs of physical deterioration, examine inventory levels, watch
customer activity, etc. In some instances, if you know your customer is going to be in
your vicinity, invite them to your office to talk about the account, or meet them in a
neutral place. A problem with personal visits is that they are expensive. You may
want to save them for your largest and most troublesome accounts.

Telephoning is probably your most cost-effective collection method. It's fast,

it gives you the opportunity to listen to what your customer has to say, and yet you
are at your own desk with access to all the information you need.

If you are new to collections, ask your supervisor, team leader/coach or an

experienced co-worker to do some role playing with you. This is the best way to
learn to counter some of the most common excuses why your customer cannot pay,
such as:

46
  The product was defective, missing, mispriced, returned
 The check is in the mail
 The bookkeeper is on vacation
 The system is down

Always observe good telephone manners. It's OK to be understanding of a

customer's problems, but do not be sidetracked by small talk or taken in by "hard-
luck" stories.

When you are dealing with a delinquent customer, expect some emotion
from them. Infrequently, a customer will become agitated and abusive. Even though
it's difficult, remain calm and businesslike, let your customer blow off steam, and
then resume the conversation when they are calm. If this does not work, and
particularly if they become abusive, tell them politely that you are terminating the
conversation, and hang up. After you calm down, try again. Most of the time, the
second call is more productive, and many times the customer will offer an apology.
Accept it, and go on with your business.

 Before making your payment request, decide what your fallback position is.
 Even though you should always ask for full payment immediately, you know
that in some instances you may not get it.
 Know the timing and minimum dollar amount that you will accept.
 If you do not have the authority to make concessions, discuss the matter with
someone in charge, and agree on how far you can extend your offer.
 However, do not let your intent be known to the customer.
 Keep this as a negotiating tool.

In some instances you will better protect your interests by agreeing to a

payout, rather than insisting on a full payment immediately. You never know if your
request will be the one to push your account over the edge to bankruptcy.

How often to follow-up?

If the customer makes a commitment, note the date and amount on a
calendar, and follow up with them if the check does not arrive. This is important. If
you do not do it, your customer may think you really do not care, and may delay
even longer.

When Should Litigation Be Considered?

Never threaten a customer in writing or orally that their credit reputation will
be ruined if they do not pay you. In the first place, you are not telling them
something they do not already know, and secondly, you could be sued. Also, do not
threaten legal action unless you are fully prepared to follow through, and have
received the necessary approval from your management.

Using letters is another option for collecting. These can be useful for
confirmation of telephone agreements, or may be used in mass mailings if you have
the ability to automate the process.

47
Consider these points if you use letters:

 address them to a specific individual rather than to a title

 they should be short and to the point, avoid overused, trite and meaningless
expressions
 be serious and firm, just ask for what you want
 write as though you were speaking to the customer

The student will be tasked to make a detailed script about a conversation of a

debt collector and customer on how credit will be collected, be it thru phone call or
online. Write the conversation in a 1 whole sheet of paper or in 1 long bond paper.

Rubric assessment for written output.

Numerical
Description
Score
The student elicits the correct ideas from the readings or
video, shows evidence of internalizing these, and
4
consistently contributes additional thoughts to the core
idea.
The student not only elicits the correct ideas from the
3 readings or video but also shows evidence of internalizing
these.
The student is able to elicit the ideas and concepts from
2 the readings or videos and shows correct understanding of
TOPIC 3: Recommended
these. Collection Timeline
The student is able to elicit the ideas and concepts from
1
the readings or video but shows erroneous.
The student is unable to elicit the ideas and concepts from
0 the reading or video indicating that s/he has not read the
prescribed reading or watched the video.
Once the credit policy is established, it’s time to have a collection timeline. A
timeline will help to collect in an organized, fair and reasonable manner avoiding too
few contacts that don’t communicate seriousness of the matter or too many that can
be just counterproductive.
. Sending the right amount of reminders at the right time can lead to
successful debt recovery (Resources, 2012). The diagram below is a timeline
assuming a 30-day credit term.

Day 15
Day 0 Day 45
Day 35
A call to
confirm, Send past
that they due follow
Send received the Past due up notice
Invoice invoice and 48 reminder or initial
the notice past due
shipment is
correct. call.
Fig. 4. A timeline of 30-day credit term
Critical to the success of this timeline is follow-up. If the client makes a
promise, follow up if they fail to follow through. If things get to the point that a final
demand letter must be sent, stay true to the actions you state in it. If you say that
you’re returning the debt over to a third party collection agency, do it. If you do not
take the action that you’ve promised, you’ll lose credibility with the customer in the
future collection efforts.

Assuming that you are an online seller and one of your classmates purchased
your products on June 1, 2020 worth P2, 000.00 on credit. She promised to pay the
said amount after 1 month. Prepare your own credit timeline on how you will collect
the credit of your classmate. Write your timeline in a 1 whole sheet of paper or in 1
long bond paper.
Rubrics
Originality 20%
Content 50%
Organization 30%
TOTAL 100%

ASSESSMENT: Case Study Analysis

49
Pagoso, C. M. (2010). Money, Credit and Banking. In C. M. Pagoso, Money, Credit and
Banking

50
51
Questions:

1. If you were a consultant to Hyundai’s Credit Card, propose some

strategies to improve its business.
2. If you were the Head of Collection Department in a company, how
would you improve its collection system?

Rubric assessment for case analysis:

52
 TOPIC 4: Cash on Delivery Sales

COD (Cash on Delivery) Sales

Cash on delivery (COD) is a type of transaction in which the recipient makes
payment for a good at the time of delivery. The terms and accepted forms of
payment vary according to the payment provisions of a purchase agreement. Cash
on delivery can also be referred to as collect on delivery since delivery may allow for
cash, check, or electronic payment.
If a customer is dealing with a merchant in person and the customer makes a
purchase from readily available inventory, payment is collected at the time of sale
and this can be a form of cash on delivery. For longer-term accounts receivable
agreements, companies can setup COD shipping which allows the customer to defer
payment until the time of delivery.
For many businesses, in-person COD can provide for the immediate payment
of goods and services. This is a significant accounting advantage since it can greatly
shorten the days receivable for a business.

Task/Activity
There will be a topic to be assigned to each of you. And, you will be asked by
your instructor to make an oral presentation or written report for the topic assigned
to you.

53
 ASSESSMENT

You will be graded based on your presentation/written report. You must

consider the following mechanics for your presentation:
 You should participate during the presentation. (no presentation/written
report means no grade)
 You should develop more effective presentation/written skills.
 Deliver message persuasively.
 Assess the performance.

Rubrics for written report:

54
TOPIC 1: Objectives of Remedial Account Management
55
What is remedial management?
The process of instituting effective and practical approaches in the collection
and recovery of hardcore delinquent accounts. Management of problem accounts,
where early detection plays a major role. This is to be done by the remedial
management unit of the company where it functions as a specialized unit to manage
the collection and recovery of all written off or hardened accounts.

Problematic Account has been defined as 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. Because a problem account may eventually turn
into a bad debt if not properly handled, it must be given special attention – and thus
the necessity of discussing this subject thoroughly.”
Specifically, the functions of the remedial management unit were as follows:
1. Transfer the responsibility of recovery to a specialized unit that has trained
and responsible solely to the recovery of hardcore delinquent accounts; and
2. Relieve branches of “uncollectible” accounts to focus on serving existing
productive accounts and generating new accounts.
Where, the monitoring and identification of the problem accounts where
discussed in lesson 1 p. 14.

The Objectives of Remedial Management

The following statements are the objectives of remedial management:
1. Implement preventive measures to minimize delinquency
2. Incorporate monitoring processes to detect when accounts begin to
deteriorate and to classify problem accounts before they become hard core
delinquent
3. Maximize collection efforts through assigning a specialized unit to manage
the recovery process.

TOPIC 2: Interview

As soon as a problem account has been identified, the credit man should
make it a point to visit the debtor for the purpose of getting the details firsthand
as to the cause of causes of the delinquency, discuss the problem with him in the
process, and find a naturally acceptable solution to the problem.

56
 In determining the magnitude of the problem, the credit man’s actions will
largely depend on the following:
a. The firm’s or bank’s collateral/security position;
b. the availability of the debtor’s fund or repayment;
c. extent of the debtor’s involvement with other creditors; and
d. the attitude of the debtor.
It should be very helpful for the credit man who is to interview the debtor with a
problem account, to follow the following points:
1. An interviewer has a plan
2. An interviewer has adequate account knowledge
3. An interviewer has adequate background information on client
4. An interviewer schedules interviews so that he has enough time
5. An interviewer insures that interviews are held in private
6. An interviewer puts the applicant at ease
7. An interviewer lets the applicant talk
8. An interviewer avoids leading questions
9. An interviewer adjusts the level of his language to the ability of respondent
10. An interviewer keeps control of the interview
11. An interviewer is aware of his own prejudices and tries to avoid their
influences on the judgments
12. An interviewer knows how and when to close the interview
13. An interviewer records the facts during the interview and impression and
judgments immediately thereafter
The evaluation interview is basically an exercise in “indirection.” By
encouraging spontaneous response on the part of the client, we hope to learn as
much as possible about this problem. By means of “indirection,” moreover, we hope
to get information in the more critical and sensitive areas. The table below shows
the comparison between the two approaches in asking questions during the
interview to the client with problematic account:

Too Direct More Appropriate

1. Why did you have trouble with 1. To what do you attribute the
your finances? Sign that blank little difficulties you
pro-note? experienced with your
2. Why did you leave that job? finances?
3. Do you lack knowledge of the 2. How did you happen to sign a
papers you signed? blank pro-note?
3. Would you say that you might
desirably acquired a little
more knowledge of the papers
you signed?
4. In connection with your
business activities, will you

57
 find anyone with whom you
would like to settle down, or is
this decision being deferred?

TOPIC 3: Analysis of the Problem and Application of Remedial Measures

After the interview, the credit man will then be in a better position to analyze
the problem and correspondingly apply appropriate remedial measure.
The process of analyzing the problem account should include the following:
a. A review of the financial statements of the debtor
b. A review of the debtor’s account history
c. A review of the supporting documents to find out if there are any defects
or deficiencies that must be corrected
d. An ocular inspection of the business and a re-appraisal of the collaterals
or security of the loan or credit extension, possibly also to include an
appraisal of the debtor’s other assets
e. And, of course, as earlier described, an interview of the debtor.
In applying solution to a problem account, the credit man may use
any of the following tools at his command to effect collection of the account:
1. Curing or adjustments in case there are any problems on balances, like
reconciliation of accounts, in order to put the account in proper
perspective.
2. Extension of the term of the credit or loan, provided this is within the
policy of the company or bank and provided further that the
collateral/security position of the creditor is maintained or even
strengthened.
3. Repayment schemes to adjust to the debtor’s fluctuating income. The
amount of repayment should be at its peak also.
4. Settlement of arrearages.
5. Restructuring or rewriting the obligation.
6. Assumption of obligation.
If everything else fails, then the account is ripe for referral to an attorney for
legal action, or to a collection agency which specializes in the collection of
delinquent accounts.

TOPIC 4: Skip Tracing

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Skip tracing
It is an industry term used to describe the process of locating a fugitive that
can’t be found at their place of residence or usual hangouts. “Skip” refers to the
person being searched for (derived from the term “to skip town”) and “tracing”
meaning the act of locating the skip. Skip tracing, however, may be performed by a
professional — called a skip tracer — who is an expert in this process.

How is skip tracing done?

Skip tracing is performed by collecting information on the individual in
question. All information recovered by the skip tracer is analyzed, verified, and used
to determine the location of the individual. Skip tracing may involve gathering and
analyzing a great deal of information or very little information, both of which have
their own set of advantages and disadvantages.
It is the job of the skip tracer to use any number of resources and databases
to collect the required information. As such, skip tracing often involves accessing the
following:
1. Phone number databases
2. Credit reports
3. Credit card applications
4. Job applications
5. Criminal background checks
6. Loan applications
7. Utility bills
8. Public tax information
9. Public records databases
10. Courthouse records
11. Department store loyalty cards
12. Air travel records
13. Driver’s license/vehicle registration departments

TOPIC 5: Anticipating Debtor’s Defenses

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The best way to prevent problem account is to follow well-established principles
and procedures in credit and collection management. In addition, the credit man
should be able to anticipate the possible defenses that a debtor would set up in
case of forced collection. Experiences tells us that the following are the more
common defenses put up by delinquent debtors and should alert the credit man
accordingly.
1. Lack of authority on the part of the person signing the evidence of
indebtedness. Among these evidences of indebtedness are:
a. Application for credit
b. Purchase orders
c. Delivery receipt
d. Accident cases
2. Defense of absence of proof of “Genuineness and Execution”
a. Usually, in contracts, there are two spaces for witnesses. Make sure that
at least one of these is signed by your own witness, possibly even two
witnesses should be creditors’ representatives.
b. Absence of the debtor in the country at the time of the approved
evidence of indebtedness was signed.
c. For expediency, sometimes, the debtor is asked or allowed to sign in
blank forms of indebtedness. This is a very dangerous practice as the
debtor can prove that he signed in blank forms and it opens the
possibility of the creditor being sued for falsification or fraud.
d. Unauthenticated instruments
e. If the indebtedness is not evidenced by any written instrument, the
defense under the “statue of Frauds” may be invoked and the contract
become unenforceable.
f. Sometimes, differences in the dates of invoices, the supporting,
promissory notes, chattel mortgage and other evidences of indebtedness
is set up as defects in the due execution and genuineness of the
instrument or obligation.
3. Defense in Issuance of Checks
a. Signature in the specimen card varies from the signature in the check
b. The signature and/or entry in the check is forged.
c. The check was issued without consideration.
4. Defense of Lack of Evidence of Due Delivery of Proper Acceptance
a. No delivery receipt or proof of delivery
b. No acknowledgment of receipt by a person duly authorized to receive and
accept deliveries
c. Unsatisfactory quality or quantity of the goods delivered or services
rendered.
d. Non-compliance with warranties for labor and/or parts

60
 e. Violation of the “usury Law” and of the “Truth in Lending Act.” The
creditor is sometimes furthermore sued criminally for violation of these
laws.
f. “Actionable documents” not alleged or denied under oath.
g. Novation of contract which releases the guarantor.
h. Estoppel due to changes made in the contract.
5. Usual defenses in secured receivables
6. Defenses in Case There is Already a Judgment and/or Writ of execution

Task/Activity

The instructor will give 20 item quiz.

Task/Activity

Make a reflection on the video “Rule of Law: Tackles issue on loans with high interest
rates within individuals” from [Link]

Task/Activity

Case Study: Answer the question given at the end of the case.

61
Rubric assessment for case analysis:

62
 Task/Activity

There will be a topic to be assigned to each of you. And, you will be asked by
your instructor to make an oral presentation or written report for the topic assigned
to you.

ASSESSMENT

You will be graded based on your presentation/written report. You must

consider the following mechanics for your presentation:
 You should participate during the presentation. (no presentation/written
report means no grade)
 You should develop more effective presentation/written skills.
 Deliver message persuasively.
 Assess the performance

63
Rubrics for written report:

64
TOPIC 1: Relevant Laws Affecting Credit Transactions
65
 The following laws, in one way or the other, whenever and wherever
applicable, govern the relationship between debtor and creditor, obligor and oblige,
and other forms of credit transactions:
1. New Civil Code, specifically the following provisions:
a. Emancipation and age of majority – Arts. 397 to 406
b. Obligations and Contracts – Arts. 1156 to 1439
c. Sales – Arts. 1458 – 1638
d. Varter or Exchange – Arts. 1638 to 1641
e. Lease – Arts. 1642 – 1688
f. Partnership – Arts. 1767 to 1866
g. Agency – Arts. 1868 – 1932
h. Loan – Arts. 1933 to 1960
i. Deposit – Arts 1962 – 1967
j. Compromise and Arbitrations – Art 2028 to 2046
k. Guaranty – Arts. 2047 to 2081
l. Pledge, Mortgage and Antithesis – Arts. 2085 to 2141
m. Concurrence and Preference of Credits – Arts. 2236 to 2251
2. Negotiable Instruments Law
3. Chattel Mortgage Law
4. Revised Penal Code
5. P.D. No. 22 on the New Bouncing Check Law
6. Insolvency Law
7. Financing Law (RA 5980), as amended by RA 1454 (Usury Law)
8. Truth In Lending Act
9. Corporation Law
10. Warehouse Receipts Law
11. Banking and Retail Law
12. The Rules of Court
The most frequently invoked laws in litigations arising out of credit
transactions are BP 22 (Bouncing Checks Law) and Usury Law. These laws are
discussed in details as follows:
BATAS PAMBANSA BLG. 22
AN ACT PENALIZING THE MAKING OR DRAWING AND ISSUANCE OF A CHECK
WITHOUT SUFFICIENT FUNDS OR CREDIT AND FOR OTHER PURPOSES.
Section 1. Checks without sufficient funds. - Any person who makes or draws and
issues any check to apply on account or for value, knowing at the time of issue that
he does not have sufficient funds in or credit with the drawee bank for the payment
of such check in full upon its presentment, which check is subsequently dishonored
by the drawee bank for insufficiency of funds or credit or would have been
dishonored for the same reason had not the drawer, without any valid reason,

66
ordered the bank to stop payment, shall be punished by imprisonment of not less
than thirty days but not more than one (1) year or by a fine of not less than but not
more than double the amount of the check which fine shall in no case exceed Two
Hundred Thousand Pesos, or both such fine and imprisonment at the discretion of
the court. Chan robles virtual law library
The same penalty shall be imposed upon any person who, having sufficient funds in
or credit with the drawee bank when he makes or draws and issues a check, shall fail
to keep sufficient funds or to maintain a credit to cover the full amount of the check
if presented within a period of ninety (90) days from the date appearing thereon, for
which reason it is dishonored by the drawee bank.
Where the check is drawn by a corporation, company or entity, the person or
persons who actually signed the check in behalf of such drawer shall be liable under
this Act.
Sec. 2. Evidence of knowledge of insufficient funds. - The making, drawing and
issuance of a check payment of which is refused by the drawee because of
insufficient funds in or credit with such bank, when presented within ninety (90) days
from the date of the check, shall be prima facie evidence of knowledge of such
insufficiency of funds or credit unless such maker or drawer pays the holder thereof
the amount due thereon, or makes arrangements for payment in full by the drawee
of such check within (5) banking days after receiving notice that such check has not
been paid by the drawee.
Sec. 3. Duty of drawee; rules of evidence. - It shall be the duty of the drawee of any
check, when refusing to pay the same to the holder thereof upon presentment, to
cause to be written, printed, or stamped in plain language thereon, or attached
thereto, the reason for drawee's dishonor or refusal to pay the same: Provided, That
where there are no sufficient funds in or credit with such drawee bank, such fact
shall always be explicitly stated in the notice of dishonor or refusal. In all
prosecutions under this Act, the introduction in evidence of any unpaid and
dishonored check, having the drawee's refusal to pay stamped or written thereon or
attached thereto, with the reason therefor as aforesaid, shall be prima facie
evidence of the making or issuance of said check, and the due presentment to the
drawee for payment and the dishonor thereof, and that the same was properly
dishonored for the reason written, stamped or attached by the drawee on such
dishonored check.
Notwithstanding receipt of an order to stop payment, the drawee shall state in the
notice that there were no sufficient funds in or credit with such bank for the
payment in full of such check, if such be the fact.
Sec. 4. Credit construed. - The word "credit" as used herein shall be construed to
mean an arrangement or understanding with the bank for the payment of such
check.

67
Sec. 5. Liability under the Revised Penal Code. - Prosecution under this Act shall be
without prejudice to any liability for violation of any provision of the Revised Penal
Code.
Sec. 6. Separability clause. - If any separable provision of this Act be declared
unconstitutional, the remaining provisions shall continue to be in force.
Sec. 7. Effectivity. - This Act shall take effect fifteen days after publication in the
Official Gazette.

PRESIDENTIAL DECREE No. 116 January 29, 1973

AMENDING FURTHER CERTAIN SECTIONS OF ACT NUMBERED TWO THOUSAND SIX
HUNDRED FIFTY-FIVE, AS AMENDED, OTHERWISE KNOWN AS "THE USURY LAW"
WHEREAS, the interest rate, together with other monetary and credit policy
instruments, performs a vital role in mobilizing domestic savings and attracting
capital resources into preferred areas of investment;
WHEREAS, the monetary authorities have recognized the need to amend the present
Usury Law to allow for more flexible interest rate ceilings that would be more
responsive to the requirements of changing economic conditions;
WHEREAS, the availability of adequate capital resources is, among other factors, a
decisive element in the achievement of the declared objective of accelerating the
growth of the national economy;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue
of the powers in me vested by the Constitution as Commander-in-Chief of the Armed
Forces of the Philippines, and pursuant to Proclamation No. 1081, dated September
21, 1972, and General Order No. 1, dated September 22, 1972, as amended, and in
order to effect the desired changes and reforms in the social, economic, and political
structure of our society, do hereby order and decree the amendment of Act No.
2655, as amended, as follows:
Section 1. Section one of Act Numbered Two thousand six hundred fifty-five is
hereby amended to read as follows:
"Sec. 1. The rate of interest for the loan or forbearance of any money, goods, or
credits and the rate allowed in judgments, in the absence of express contract as to
such rate of interest, shall be fix per centum per annum or such rate as may be
prescribed by the Monetary Board of the Central Bank of the Philippines for that
purpose in accordance with the authority hereby granted."
Section 2. The same Act is hereby amended by adding the following section
immediately after the section one thereof, which reads as follows:

68
"Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate
or rate of interest for the loan or renewal thereof or the forbearance of any money,
goods or credits, and to chance such rate or rates whenever warranted by prevailing
economic and social conditions: Provided, That such changes shall not be made
oftener than once every twelve months.
"In the exercise of the authority herein granted, the Monetary Board may prescribe
higher maximum rates for consumer loans or renewals thereof as well as such loans
made by pawnshops, finance companies and other similar credit institutions
although the rates prescribed for these institutions need not necessarily be
uniform."
Section 3. Section two of the same Act is hereby amended to read as follows:
"Sec. 2. No person or corporation shall directly or indirectly take or receive in money
or other property, real or personal, or choses in action, a higher rate of interest or
greater sum or value, including commissions, premiums, fines and penalties, for the
loan or renewal thereof or forbearance of money, goods, or credits, where such loan
or renewal or forbearance is secured in whole or in part by a mortgage upon real
estate the title to which is duly registered, or by any document conveying such real
estate or an interest therein, than twelve per centum per annum on the maximum
rate prescribed by the Monetary Board and in force at the time the loan or renewal
thereof or forbearance is granted: Provided, That the rate of interest under this
section or the maximum rate of interest that may be prescribed by the Monetary
Board under this section may likewise apply to loans secured by other types of
security as may be specified by the Monetary Board."
Section 4. Section three of the same Act is hereby amended to read as follows:
"Sec. 3. No person or corporation shall directly or indirectly demand, take, receive,
or agree to charge in money or other property, real or personal, a higher rate or
greater sum or value for the loan or forbearance is not secured as provided in
Section two hereof, than fourteen per centum per annum or the maximum rate or
rates prescribed by the Monetary Board and in force at the time the loan or
forbearance is granted."
Section 5. Section four of the same Act is hereby amended to read as follows:
"Sec. 4. No pawnbroker or pawnbroker's agent shall directly or indirectly stipulate,
charge, demand, take or receive any higher rate or greater sum or value for any loan
or forbearance than two and one-half per centum per month when the sum lent is
less than one hundred pesos; two per centum per month when the sum lent is one
hundred pesos or more, but not exceeding five hundred pesos; and fourteen per
centum per annum when it is more than the amount last mentioned; or the
maximum rate or rates prescribed by the Monetary Board and in force at the time
the loan or forbearance is granted. A pawnbroker or pawnbroker's agent shall be

69
considered such, for the benefits of this Act, only if he be duly licensed and has an
establishment open to the public.
"It shall be unlawful for a pawnbroker or pawnbroker's agent to divide the pawn
offered by a person into two or more fractions in order to collect greater interest
than that permitted by this section."

"It shall also be unlawful for a pawnbroker or pawnbroker's agent to require the
pawner to pay an additional charge as insurance premium for the safekeeping and
conservation of the article pawned."

Section 6. The same Act is hereby amended by adding the following section
immediately after Section four thereof, which reads as follows:
"Sec. 4-a. In the exercise of its authority to fix the maximum rate or rates of interest
under this Act, the Monetary Board shall be guided by the following:
"1. The existing economic conditions in the country and the general requirements of
the national economy;
"2. The supply of and demand for credit;
"3. The rate of increase in the price levels; and
"4. Such other relevant criteria as the Monetary Board may adopt."
Section 7. Section five of the same Act is hereby amended to read as follows:
"Sec. 5. In computing the interest on any obligation, promissory note or other
instrument or contract, compound interest shall not be reckoned, except by
agreement: Provided, That whenever compound interest is agreed upon, the
effective rate of interest charged by the creditor shall not exceed the equivalent of
the maximum rate prescribed by the Monetary Board, or, in default thereof,
whenever the debt is judicially claimed, in which last case it shall draw six per
centum per annum interest or such rate as may be prescribed by the Monetary
Board. No person or corporation shall require interest to be paid in advance for a
period of not more than one year: Provided, however, that whenever interest is paid
in advance, the effective rate of interest charged by the creditor shall not exceed the
equivalent of the maximum rate prescribed by the Monetary Board."
Section 8. Section seven of the same Act is hereby amended to read as follows:
"Sec. 7. All covenants and stipulations contained in conveyances, mortgages, bonds,
bills, notes and other contracts or evidences of debts, and all deposits of goods or
other things, whereupon or whereby there shall be stipulated, charged, demanded,
reserved, secured, taken, or received, directly or indirectly, a higher rate or greater
sum or value for the loan or renewal or forbearance of money, goods, or credits than
is hereinabove allowed, shall be void: Provided, however, That no merely clerical
error in the computation of interest, made without intent to evade any of the

70
provisions of this Act, shall render a contract void: Provided, further, That parties to
a loan agreement, the proceeds of which may be availed of partially or fully at some
future time, may stipulate that the rate of interest agreed upon at the time the loan
agreement is entered into, which rate shall not exceed the maximum allowed by law,
shall prevail notwithstanding subsequent changes in the maximum rates that may be
made by the Monetary Board: And Provided, finally, That nothing herein contained
shall be construed to prevent the purchase by an innocent purchaser of a negotiable
mercantile paper, usurious or otherwise, for valuable consideration before maturity,
when there has been no intention on the part of said purchaser to evade the
provisions of this Act and said purchase was not a part of the original usurious
transaction. In any case, however, the maker of said note shall have the right to
recover from said original holder the whole interest paid by him thereon and, in case
of litigation, also the costs and such attorney's fees as may be allowed by the court."
Section 9. The same Act is hereby amended by adding the following section
immediately after Section nine thereof, which reads as follows:
"Sec. 9-a. The Monetary Board shall promulgate such rules and regulations as may
be necessary to implement effectively the provisions of this Act."
Section 10. Section ten of the same Act is hereby amended to read as follows:
"Sec. 10. Without prejudice to the proper civil action, violation of this Act and the
implementing rules and regulations promulgated by the Monetary Board shall be
subject to criminal prosecution and the guilty person shall, upon conviction, be
sentenced to a fine of not less than fifty pesos nor more than five hundred pesos, or
to imprisonment for not less than thirty days nor more than one year, or both, in the
discretion of the court, and to return the entire sum received as interest from the
party aggrieved, and in case of non-payment, to suffer subsidiary imprisonment at
the rate of one day for every two pesos: Provided, That in case of corporations,
associations, societies, or companies the manager, administrator or gerente or the
person who has charge of the management or administration of the business shall
be criminally responsible for any violation of this Act."
Section 11. All Acts and parts of Acts inconsistent with the provisions of this Decree
are hereby repealed.
Section 12. This Decree shall take effect immediately.
Done in the City of Manila, this 29th day of January, in the year of Our Lord, nineteen
hundred and seventy-three.

Task/Activity

71
Case Study: Give your insights on the case given below. Digest it into 1-2 pages of
long bond paper or sheet of paper.

Unconscionable lending rates

Philippine Daily Inquirer / 04:07 AM November 04, 2019

It’s time to seriously address a fraught burden faced by ordinary consumers seeking
temporary financing for household needs and budding micro entrepreneurs with no
access to traditional bank lending: exorbitant interest rates.
The recent crackdown on unlicensed online lending companies should now be
followed by a move to cap how much authorized lending companies can charge their
borrowers.
The Securities and Exchange Commission describes the practice as “predatory
lending,” which the agency wants stopped. It has asked the Bangko Sentral ng
Pilipinas to put a limit on interest rates and other fees that money-lending
companies could charge on consumer and pay-day loans (borrowings that are repaid
on installment every 15th or 30th of the month).
In an Oct. 8 letter to Bangko Sentral Governor Benjamin E. Diokno, SEC chair Emilio
Aquino noted that the policymaking Monetary Board of the Bangko Sentral has the
power to fix maximum interest rates, fees and other charges that lending and
financing companies could impose.
The Lending Company Regulation Act of 2007 allows lending firms to loan money to
borrowers at “reasonable” rates and charges. It provided that the Monetary Board,
in consultation with the SEC and other stakeholders, may set ceilings on interest
rates depending on prevailing economic and social conditions.
“Predatory lending continues to be one of the major subjects of complaints that the
commission receives from the public,” Aquino noted in his letter. He lamented that
lending and financing companies charge as much as 2.5-percent interest a day “on
top of other fees and charges.”
A rate of 2 percent a day is 60 percent a month, or a mind-boggling 720 percent a
year. This is way more atrocious than high credit card rates of more than 2 percent a
month, or over 24 percent a year. In contrast, banks charge prime borrowers less
than 10 percent a year.
The Bangko Sentral should move quickly to put a cap on interest rates as requested
by the SEC. The ceiling would not apply to the whole financial sector, but only to
consumer loans and pay-day loans that lending and financing companies offer
ordinary consumers. The various complaints received by the SEC relating to
outrageous interest rates should be reason enough to act.

72
This issue also relates to one of President Duterte’s campaign promises more than
three years ago, that of clamping down on the 5-6 lending scheme victimizing
ordinary Filipinos and small entrepreneurs.
Borrowers of a 5-6 lending scheme pay an exorbitant interest rate of 20 percent a
month, which many Filipinos are nevertheless forced to tap because they are hard-
pressed to go through the tedious loan processing of banks, or do not have the
documents and collateral required when borrowing from traditional financial
institutions.
The Philippines used to have an anti-usury law that set a cap on the interest rate on
loans. However, it was suspended in 1983, and efforts to revive the law have
languished in Congress. It was scrapped on the belief that the court can decide
whether or not an interest rate in a loan agreement is acceptable once a case is
brought before it. But everyone is acutely aware of how slow the wheels of justice
move in this part of the world, and how the expenses and effort for such litigation
may, in the end, prove even more costly than the money matter in question.
The Supreme Court had already noted in previous rulings that while the usury law
was suspended by Central Bank Circular No. 905 effective Jan. 1, 1983, and that
parties to a loan agreement were given wide latitude to agree on any interest rate,
“nothing in the said circular grants lenders carte blanche authority to raise interest
rates to levels which will either enslave their borrowers or lead to a hemorrhaging of
their assets. The stipulated interest rates are illegal if they are unconscionable.”
An interest rate of 2.5 percent a day is truly unconscionable. The Bangko Sentral
needs to cap interest rates on consumer loans and pay-day borrowings, and
Congress should look into reviving the anti-usury law.
Rubric assessment for case analysis:

73
 Task/Activity
There will be a topic to be assigned to each of you. And, you will be asked by
your instructor to make an oral presentation or written report for the topic assigned
to you.

ASSESSMENT

You will be graded based on your presentation/written report. You must

consider the following mechanics for your presentation:
 You should participate during the presentation. (no presentation/written
report means no grade)
 You should develop more effective presentation/written skills.
 Deliver message persuasively.
 Assess the performance.

74
Rubrics for written report:

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Apolo, J.J. (2003). Credit & Collection Management in the Philippine Setting. National
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Bounty Hunter Resources (2020). Skip Tracing Jobs and Training. Retrieved July 23, 2020,
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 [Link]
%20is%20an%20industry,act%20of%20locating%20the%20skip.

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 [Link]

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