Rachel Ann P.

Razonable
BSBA FM 3-A
EXERCISES:
Instruction: Answer the following in a short and concise manner.
1. What is a credit process?
The credit process refers to evaluating a borrower’s loan application to determine the
financial health of an entity and its ability to generate sufficient cash flows to service the debt. In
simple terms, the credit process begins with a thorough analysis of the borrower's
creditworthiness, or capacity and willingness to repay the loan.

2. Stages of credit process.

1. Information collection
 Collecting information about the applicant
The first step in credit analysis is to collect information of the applicant regarding his/her
record of loan repayment, character, individual and organizational reputation, financial
solvency, ability to utilize the load (if granted), etc.
 Collecting information about the business for which a loan is required
The loan officer should know the purpose of the loan, the loan amount, and if it is
possible to implement the project by that amount. The banker should make sure the project is
feasible.
 Collecting information about the recovery process
The loan officer should collect information about the sources from which the borrower
would repay the loan. Information for this purpose may include the profitability of the
project, the payback period, the sensitivity of the project cash flow to different economic
factors, etc.
 Collecting information about the security
Banks, most often than not, lend money against personal and non-personal securities. A
bank would always prefer getting the loan repaid by the borrower to realizing the loan from
the sale proceeds of the security.
2. Information analysis
 Analyzing the accuracy of information
The information given in and along with the application is analyzed to judge their
accuracy.
 In this regard, the analyst would scrutinize the national identity card, driver’s license,
trade license, partnership deed, corporate charters, resolutions, and other legal documents
attached to the application.
 Analyzing the financial ability of the applicant
In this stage, the financial ability of the applicant is taken into consideration. The
financial solvency of the applicant and his skill and capability are important factors in
this Analyzing the effectiveness of the project.
 Analyzing the effectiveness of the project
One aspect of credit analysis is the analysis of the quality, purpose, and prospect
of the project for which the loan has been applied. The banker will be at ease to grant
loans if the project is productive, expandable, and of course, profitable regard.
3. Decision- Making Stage
The final stage in the credit analysis process is the decision-making stage. After obtaining
and analyzing the appropriate financial data from the borrower, the lender makes a decision on
whether the assessed level of risk is acceptable or not.

3. What is credit investigation?

Credit Investigation is conducted on all credit applications to immediately ascertain
applicant’s credit worthiness. It is intended to detect and eventually prevent extension of credit
to applicants with already unfavorable credit records.

4. Sources of Credit investigation.

Internal Sources
 Loan Application Form
This form provides general information about the Borrower. The information supplied by the
Borrower is treated as statements of facts which have not been verified.
 Personal Interview
This provides an opportunity to obtain supplementary information of the data provided in the
Application Form and determine “leads” that will be used in the credit investigation.
 Financial Statements (3 years)
These will show the applicant’s –
•liquidity position – ability to meet day to day current obligations
• solvency – determines dependence on financial support from creditors
 • managerial efficiency – ability of the firm to operate profitably and successfully for a long
time
A minimum of three year financial statements should be required to enable the CI to establish
the trend or pattern in the subject’s financial position.
 References
These provide supplementary information about the identity and general integrity of the
applicant.

External Sources

 Neighborhood and Residence Checking

This should confirm the address of the applicant, the length of residence and status as owner
or tenant of the property. The relationship of the applicant with neighbors will provide clues
about the identity, character and financial condition of the applicant.

 Negative Files
The Bank’s Customer Information File (CIF) System provides data on accounts blacklisted
by the Bank due to mishandled deposits and bad loan accounts. In addition, the Bank relies
on the following external sources of negative credit data:

Bankers Association of the Philippines (BAP) – provides the following:

• current accounts closed by member banks due to mishandling

• court cases – venue, sala and reasons for such actions thru the Credit Management of the
Philippines (CMAP)
• cancelled credit cards • credit dealings with member banks thru the Loandex System

Credit Information Bureau, Inc. (CIBI) – this provides information on credit history of
applicant with banks and other financial institution, negative data and complete CIR works.

 Public Records and Filings with Government Institutions

Government agencies such as the Securities and Exchange Commission (SEC) and
Department of Trade and Industry are sources of information about applicants doing
businesses.
Articles of Incorporation, By-Laws, Minutes of the Board Meetings and Audited Financial
Statements are required to be filed with the SEC.
 Employer
This will provide information about type of work done, amount/trend of wages, status of
employment and chances for advancement, behavior in the office and relationship with co-
employees. Existing obligations with the company should also be inquired on.
Similar information may also be obtained from former employers including the reason for
subject’s departure from the company.

 Income Tax Returns (3 years)

These provide data on sources and trend of income once validated as correct by the BIR or the
filing agent. This will also confirm the marital status and the number of dependents of the
applicant. For applicants availing of the itemized deduction scheme, data on interest expense can
provide leads as to the present debts of the applicant.
 Banks and Other Financial Institutions
These will provide information on the amount/status of the applicant’s debts and paying history.
The general reputation and financial condition of the applicant may also be obtained since these
entities also have conducted their own credit checking on the subject.
 Trade References
The volume of business done with these firms will give an indication of the reasonableness of
income figures and the status of business operations of the applicant. The credit history with
suppliers will also indicate if the applicant is a good payer or not.
 Transfer Certificate of Title
Annotations on the TCT will locate the previous creditors of the Borrower, wherein we could
inquire from them their experience with the Borrower.
 Top 1,000 Corporations
This provides information on sales/net income figures, industry and company profiles.
 Plant Visit
This gives an insight on how an applicant –firm conducts its business and its production process.
Business prospects and operating problems can also be learned from discussions with officers
and employees on the site. This will also confirm reasonableness of financial figures presented
in the financial statements and loan application.
The Confidential nature of credit information must be safeguarded at all times. All personnel
involved in gathering credit data must exercise due care not to reveal the identity of sources of
information to the subject of inquiry or other outside parties.

5. Functions of the Credit Department.

• Gathering credit information – Through the credit investigators, the credit department
gathers information about the applicant from direct and indirect sources. Sometimes information
for policy formulation is also gathered.
•Analyzing credit information – All the information gathered is sent to the credit analyst who is
in charge of applying the standard tests and measurements for performance. The non-financial
data are critically subjected to analytical tools to determine the creditworthiness of the debtor.
• Credit checking and authorization – Once the analysis is undertaken, verification is made of
the applicant’s papers and the proper authorization for credit is given by the authorized officer or
committees as the case may be.
• Filing and recording – A record of the transaction is made and the credit folder of the
applicant is prepared and filed. From time to time, the file or records, or both, whichever is the
case, are updated.
• Credits adjustments – Adjustments are made in accordance with discount or net credit period,
or both. In the case of banks, this may pertain to increasing or decreasing the credit lines, or
perhaps extensions.
• Collection correspondence – Credit granting does not end with the approval of the
application but with its collection. When the credit has been granted, collection follow up,
reminders, and other correspondence are sent to the debtor.
• Other functions – Other functions, which may fall within the jurisdiction of the credit
department, are the exchange of credit information with other organizations and the
dissemination of credit information to valued customers in case of banks. Credit information
may also be used by other departments of the organization.

5. The Cardinal Cs of a Credit Man.

 Competence and Capability
He should know his areas of responsibilities. He must be aware of institutional
viewpoints and correspondingly acts in behalf of the institution as a whole. He should know
and understand the goals, objectives and policies of the company, of the other departments in
the organization; of his own department which is credit. He must have a clear understanding
of what the end points of his efforts are and should be.
 Communication
He must have the ability to effectively convey his ideas. This includes the preparation of
reports and correspondence and also the delegation of duties and the corresponding authority
to subordinate.
 Constructiveness
He must be positive and constructive in his approach to both credit and collection
management. He must find a way by which credit can be granted and in the process free
himself of the negative image of one concerned with finding a way by which credit should be
denied.
 Creativity
 He must keep pace with changing times and changing conditions. He should constantly
pursue creative answers to new questions. He must be able to put old ideas together to solve a
new problem.
 Conscientiousness
He must be devoted and dedicated to his job. He must be a strong proponent of
cooperation and coordination in the entire organization.
 Consistency
He must be consistent in making credit decisions. He must have a consistent performance
which is consistent with company goals and objectives. He must not unnecessarily deviate,
nor completely veer away from policies and guidelines to accommodate friendships and other
personal consideration.
 Certitude and Celerity
He must not only act with certainty and accuracy but also with swiftness and speed.
 Contact
He must have good contact, good public relations both within and outside the
organization. It is particularly needed in gathering and verifying credit information.