LOAN AND DISCOUNT

DEPARTMENT
 In Finance,a loan is a lending of money by one or more
individuals,organization,and/or other entities to other
individuals ,organization [Link] recipient(i.e the
borrower)incurs a debt and is usually liable to pay interest on
that debt until its prepaid,and also to repay the principal of
borrowed
Loan
Committees
and the
approval
process
Loan Committees
Loan
Committees
– analyzes and
subsequently
approves or rejects
any loan that the initial
loan officer does not
have the authority to
approve.
 Loan
Loan Approval
Application Process

Governance and
Evaluation of the
Loan Application

Loan Approval
and Control
How does the loan approval
process work?
• The applicant submit a complete loan application
form and supporting documents.
• And then the applicant will be interviewed by the
two committee members.
Monitoring and controlling the
credit and collection fund
 Credit Collection Functions

• Banks and other lenders as well as independent collection agencies

perform credit collection functions. A variety of collection functions
can be used in recouping outstanding debts from consumers who have
fallen behind in their payments. Each company follows its own
business model, collecting debts using a variety of strategies, but the
method must follow the requirements of the Fair Debt Collection
Practices Act.
 Organization

• An organization designates the credit collection

function to be either centralized or decentralized.
The key to this function, whether branches or a
central office perform the function, is
standardization. Inside the company, the credit
collection management team adopts specific
procedures to collect payments from borrowers
pursuant to their individual situations.
 Collection Policy
•Monitoring receivables
• –Keep an eye on average collection period relative to your
credit terms
• –Use an aging schedule to determine percentage of
payments that are being made late
•Collection policy
• –Delinquency letter
• –Telephone call
• –Collection agency
• –Legal action
 Controls

• Collection functions must include built-in controls. An

organization adds controls, such as quality control monitoring
of debt collection phone calls and correspondence and
supervisor approval of payment plans and settlements, to
ensure consumers are treated appropriately. Under the Fair
Debt Collection Practices Act (FDCPA), consumers are
protected from debt collector practices that are deceptive,
abusive or unfair. When you are contacted by a debt collector,
you should keep notes and ensure that the specifics of this
contact do not violate your consumer rights under this act.
 Monitoring

 Solving Asymmetric Information Problems:

1. Screening and Monitoring:
─ collecting reliable information about prospective
borrowers. This has also lead some institutions to
specialize in regions or industries, gaining expertise
in evaluating particular firms
─ also involves requiring certain actions, or prohibiting
others, and then periodically verifying that the
borrower is complying with the terms of the loan
contract.
 Specialization in Lending helps in screening. It
is easier to collect data on local firms and firms
in specific industries. It allows them to better
predict problems by having better industry and
location knowledge.
 Monitoring and Enforcement also helps.
Financial institutions write protective
covenants into loans contracts and actively
manage them to ensure that borrowers are not
taking risks at their expense.
3. Loan Commitments: arrangements where the
bank agrees to provide a loan up to a fixed
amount, whenever the firm requests the loan.
4. Collateral: a pledge of property or other
assets that must be surrendered if the terms
of the loan are not met ( the loans are called
secured loans).
5. Compensating Balances: reserves that a
borrower must maintain in an account that act
as collateral should the borrower default.
6. Credit Rationing:
 lenders will refuse to lend to some borrowers, regardless of
how much interest they are willing to pay, or
 lenders will only finance part of a project, requiring that the
remaining part come from equity financing.
 Principles of Collection
• Certain principles have been found especially
useful in the field of collection and may be
grouped into the following areas:

• collect the money

• maintain a systematic follow-up

• get the customer to discuss the account

• and, preserve goodwill

 Collect the money
• The primary job of the person responsible for collections is to collect
the money as close to the terms of the obligation as possible. There
should never be any doubt as to why the individual is engaged in this
particular task. The debtor has an obligation to pay within the terms of
the agreement. It is the job of the collection person to make sure that
this obligation is met. The tone may be indulgent at first, but should be
intensified and accelerated as much as necessary to ensure payment
by a debtor.
 Systematic follow-up
• After the initial contact with the delinquent customer,
it is important to keep additional contacts on a strict
schedule. If the collector, for example, is told that a
check will be mailed in a few days, it should be noted.
If the check is not received at the promised time, a
follow-up is essential, otherwise the collection effort
will become ineffective.

• Systematic follow-up of accounts, even those which

can not pay immediately, reinforces the serious nature
of the outstanding debt and emphasizes the
importance attached to it by the creditor. That in itself
is an important collection advantage.
 Discussing the account
• Once the collector gets the customer to talk about the delinquent
account, the collector is well on the way to receiving payment. That
is why emphasis is placed on inviting the debtor to talk. The object
of the discussion is to get the debtor's explanation of the
delinquency. It may be a question of a dispute; it may be due to a
temporary shortage of funds; or the customer may intend to hold
off payment so the creditor's money can be used in its own
business.

• During the discussion, the collector may begin to see the debtor's
situation more clearly. If the slow payment is the result of a
tempory cash flow problem, tolerence of slower payments may be
accepted, but it should be emphasized to the customer that the
new schedule of payments must be completed.
 Preserve goodwill
• Even though the customer may be experiencing some
difficulty in meeting payments, it does not preclude
them from becoming a good customer in the future.
Therefore, it is important to preserve goodwill while
pressing for collection. This requires not only tact, but
knowledge of the customer and industry. One of the
advantages claimed by specialized collection personnel
is that they can develop these techniques to their
fullest. On the other hand, the team concept presents
the opportunity for credit and customer service
personnel to better understand the relationship of the
customer to the industry and overall marketing
objectives of the company.
 Phone Calls

• Most debt collectors use phone calls to attempt to collect

debts. Even small business owners must use practices to get
unpaid accounts current. As a consumer, you should know your
rights regardless of the type of company contacting you. Even
companies not regulated by the FDCPA should follow good
business practices by not abusing or deceiving you during
phone calls. You should not be contacted before 8 a.m. or after
9 p.m., and a creditor cannot call your line multiple times in
one day. Some companies put your phone number on auto-
ring, and you may be called more than once a day. You should
keep track of the number of times a company calls you each
day, and you may consult an attorney to file a complaint
against a debt collector that harasses you.
 Handing Over Accounts

• Lenders and companies, even small businesses, initially may

try to collect debts from consumers directly. After a certain
amount of time with an unpaid balance, such as 90 days, 120
days or 180 days, a business may decide to transfer an
outstanding account to a credit collection agency. If you've had
an outstanding medical bill, you've probably received a letter
from the provider stating that this is your final notice before
your account is turned over to collections. When you're ready
to make payments on an account, you must determine
whether you should pay the original creditor or the credit
collection agency.
 RECORDING,
COLLECTION &
ACCOUNTING IN
CREDIT AND
COLLECTION
• The federal FAIR DEBT COLLECTION
PRACTICES ACT strictly regulates
how debts collectors can operate
when trying to recover a debt. They
can’t threaten you with
imprisonment- or make any kind of
threat-if you don’t pay, they can and
typically do- report the unpaid debt
to credit reporting agencies.
RECORDING

IN CREDIT &
COLLECTION
 At the time of the credit and sales, business record
accounts receivable as a debit and sales as a credit in
the amount of the sales revenue.
 Determine the allowance for doubtful accounts
receivable.
 Record bad debt expense from uncollectable accounts
receivable.(to properly record credit sales, bad debt
expense from uncollectible accounts receivable in the
period when the credit sales occur.)
 Record cash collection.( specify in terms of credit
sales when customers must make their cash
payments. The term may also allow customers to
make early cash payments for a discounts.)
COLLECTION
IN CREDIT &
COLLECTION
 LENDERS CAN COLLECT MONEY FROM DEBT IN THE
FOLLOWING WAYS:
 Contact you in their own and ask for payment
using their internal collection department
 Hire a collection agency to try and collect
 For revolving debts, such as credit card debt, the
credit card company could sell your debt to a
collection agency, which would then try to get the
money from you.
 For installment loan debt, such as an auto loan, the
lender may repossess the car, sell it auction, and
then sell the remaining debt to a collection agency.
 ACCOUNTING
IN CREDIT AND
COLLECTION
 ACCOUNTING IN CREDIT AND COLLECTION
 The credit and collection accountants prepare profit and loss
statements and monthly closing and cost accounting reports.
 Compile and analyze financial information to prepare entries
to accounts, such as general ledger accts., and document
business transactions.
 Analyze and review budgets and expenditures for local , state,
federal, and private funding, contracts, and grants.
 Prepare and review budget, credits , revenue, expense, payroll
entries, invoices and other documents.
 Explain billing invoices, credit details, and accounting policies
to staff, vendors and clients.
 Resolve accounting discrepancies.
 Interact with internal and external auditors in completing
audits.
Financing Installment Accounts
 Financing
 Financing is the process of providing funds for
business activities, making purchases or
investing. Financial institutions such as banks
are in the business of providing capital to
businesses, consumers and investors to help
them achieve their goals.
Types of financing

• Debt
• Equity
 DEBT
 Debt is a loan that must be paid back often
with interest, but it is typically cheaper than
raising capital because of tax deduction
considerations.
 Debt financing must be repaid, and lenders
want to be paid a rate of interest in exchange
of their money.
 Some lenders require collateral.
• An installment loan is a type of loan that
is repaid in periodic installments (usually
monthly payments) that
include principal and interest.
• An installment loan can also be referred to
as installment debt.
• For example, let's assume you take out a loan for $1,000 at an
interest rate of 10% (or 0.10) APY to be paid back in 12 monthly
installments.
• $1000 + ($1000*0.10) =
$1000 (principal) + $100 (interest) =
$1100 to be repaid in 12 installments
$1100/12 months = $91.66 per month

• Based on the calculations, you would make 12 monthly payments of

$91.66 each. This $91.66 comprises a portion of principal and a portion
of interest.
• After you make 12 complete and on-time payments of $91.66, your
loan will be paid off and no more payments will be required.
 Installment account

• are those that have a fixed payment

for a fixed period of time.

• As you make the payments, the balance

of the account lowers.
 Examples:

• Mortgage loans
• Home equity loans
• Car loans
• Student loans
revolving account
• A revolving account allows you to borrow an amount up to a
specific limit.
For example,
– if you have a credit card with a $5,000 limit, you can borrow any
amount up to $5,000. The payment amount on a revolving account
varies depending on how much you borrow.

• As with an installment account, the balance decreases as you make

payments. However, unlike an installment account, you can choose to
continue borrowing against the account as you make payments. In
addition to credit cards, other examples of revolving accounts include
home equity lines of credit and accounts with overdraft protection.
What is Aging Accounts? An accounts
receivable aging is a report that lists unpaid
customer invoices and unused credit memos
by date ranges. The aging report is the
primary tool used by collections personnel to
determine which invoices are overdue for
payment.
 Loans are used for many
reasons
• Feed, seed and fertilizer purchases
• Machinery,livestock,and equipment purchases
• Land ,building,and home purchases
• Business start up expenses like attorney fees,incorporation
fees, and product development costs
• Emergencies
 Short term loans
• Less than 1 year
• Used to buy items like feed, seed, fertilizer, and other
consumables
• Referred to as an operating note
• Can be financed by merchants, banks and private
individuals
• Interest generally calculated using simple interest
method.
• Used to even out highs and low in income and
expenses
 Intermediate term notes
• 1 to 10 years in duration
• Used to buy depreciable assets like machinery,
equipment , breeding livestock, and vehicles
• Banks, Individuals, Ford credit
• Interest calculated several ways including remaining
balance and add on
 Long term loan
• Used to purchase land, buildings, homes
• Longer than 10 years in duration
• Usually a mortgage with equal payments
• Provided by commercial banks, Farm credit system,
individuals, insurance companies, and mortgage
companies
 Mortgages
• Mortgages are long term loans that are
generally used to finance the purchase of
homes.
• Mortgages are generally offered in 15 and 30
year lengths with many options to choose
from.