Lesson 4 – CREDIT AND COLLECTION POLICIES

• Policy


  A general guideline on how to act in ordinary or extra-ordinary situations that recur from time to time, bearing in mind the accomplishment of established company objectives
• Levels of policies


  • Company
  • Major division
  • Department
• Credit policies


  Guides in the performance of the credit functions of the company - the granting of credit terms to customers, approval authorities, criteria for credit granting, securities and collaterals, treatment of delinquent accounts and other general guides
• Credit policiesare:

  • Designed to meet credit objectives
  • Intended as guide in the implementation of credit transactions
  • Minimum requirements under normal conditions, additional controls may be established when appropriate
  • Dynamic - must be flexible and responsive to changing conditions
  • Helpful in putting order and facilitating transactions necessary to ensure efficient customer service
• Factors affecting credit risk and credit policy

  • External factors
  • Internal factors
• External factors

  • Business cycle
  • Monetary and fiscal policies
  • Political
  • Regulatory
  • Industry
• Business cycle


  Impacts directly consumer and industrial demand, sales, supply, prices, profitability, etc., which in turn affect profit margins and cash flows
• Monetary policy


  Affects the level of interest rates and the availability of funds which impacts on both the creditors' appetites and those of their borrowers for funds
• Fiscal policy


  Influences the channeling of funds and spending patterns
• Political factors


  Environmental climate needs to be kept in mind as swings in priorities may affect the borrower
• Regulatory factors


  What needs to be aware of here is pending or probable regulations affecting the business community.
• Industry factors


  One must be aware which have a bearing on the credit policy of individual member companies in the industry.
• Internal factors


  • Overall company objective
  • Other department policies
  • Financial condition of the company
  • Accounting procedure
• Overall company objective


  Underlying factors to be considered in developing credit policies
• Other department policies


  Credit policies should be harmonious with established policies of the other departments within the company
• Financial condition of the company


  Determines the amount of credit exposure the company can take
• Accounting procedure


  Measurement of the credit department's efficiency and collection procedures needs a thorough knowledge of the firm's accounting system
• Bank credit policies cover loan functions and include types and amounts of loans, basis of loan extensions, kinds of collateral within the purview of the General Banking Act
• Bank loan policies aim for a fair return on investments, but should have for their primordial objectives the protection of the depositors' funds
• Written credit policies


  • Communicate to employees working in the loan department what procedures they must follow and what their responsibilities are
  • Help the lender move toward a loan portfolio that can successfully blend multiple objectives, such as promoting profitability, controlling risk exposure, and satisfying regulatory requirements
  • Provide rules, regulations and procedures necessary for consistent credit/sales management operations
  • Avoid unintentional changes caused by varied opinions on credit
  • Useful tool in training programs
• Most important elements of a well-written credit policy


  • Goal statement for the loan portfolio
  • Specification of the lending authority given to each loan officer and loan committee
  • Lines of responsibility in making assignments and reporting information within the loan department
  • Operating procedures for soliciting, reviewing, evaluating and making decisions on customer loan applications
  • The required documentation that is to accompany each loan application and what must be kept in the lender's credit files
  • Lines of authority within the lending company, detailing who is responsible for maintaining and reviewing the credit files
  • Guidelines for taking, evaluating and perfecting loan collateral
  • A presentation of policies and procedures for setting loan interest rates and fees and the terms for repayment of loans
  • A statement of quality standards applicable to all loans
  • A statement of preferred upper limit for total loans outstanding
  • A description of the lender's principal trade area from which most loans should come
  • A discussion of the preferred procedures for detecting, analyzing and working out problem loan situation
• Policing the Collection Function


  To get the money due to the company, but collection efforts should be made in line with the policy of the business firm, that is, collection costs must be kept within reasonable limits, goodwill of customers must be cultivated and maintained and risks must be reduced to the minimum
• Setting Collection Goals and Objectives


  The collection department will aim for maximum collection. Ideally, a maximum and periodic collection is the target of every business institution.
• Factors influencing collection policies

  • Terms of loan or sale
  • Time intervals in collection
  • Classification of debtors
  • Nature of the business
  • Profit margin
  • Nature of competition
• Communication of credit and collection policy


  The credit policy should be stated in clear and unmistakable terms so that it will be well understood by all who will be directly or indirectly affected
• Implementation of credit and collection policy


  Involves assignment of responsibilities and authorities, establishing procedures and controls, feedback and reports
• Periodic check-up is needed to ensure proper implementation of the credit and collection policy and ascertain its weak spots
• Exceptions to the written credit and collection policy should be fully documented and the reason why a variance from the credit and collection policy was permitted should be listed
• Business Cycle


  Being aware of the timing of the cycle, where it is and is expected to go, and in what time frame, is a key informational element in evaluating the viability of credit transactions.
• Monetary and Fiscal Policies 


  These two policies set the framework within which the economy operates influencing the flow of funds, business priorities, jobs, etc
• True or False

  FALSE : Certain business practices and policies that might be disastrous during a period of prosperity might prove successful during a period of depression or recession.
• True or False

  TRUE : The credit policy must change as business conditions modify the credit strength of customers and clients.
• True or False

  TRUE : Environmental issues such as pollution control requirements can mean higher production costs affecting profit margins; “consumerism” policy/regulations can change a borrower’s fortunes; labor instability can result in loss of production affecting a drag on the economy.
• True or False

  FALSE : Over-all company objectives are irrelevant factors to be considered in developing credit policies.
• True of False

  Bank credit policies do not cover loan functions and do not include types and amounts of loans, basis of loan extensions, kinds of collateral within the purview of the General Banking Act. (FALSE)
• True or False

  Bank credit policies cover loan functions and include types and amounts of loans, basis of loan extensions, kinds of collateral within the purview of the General Banking Act. (TRUE)
• True or False

  The bank’s income is derived substantially from the activities of the credit department.(TRUE)
• True or False

  1. The extent of the details of credit policies remains consistent across all companies. (FALSE)
• True or False

  1. In every business entity which is engaged in the grant of credit, granting credit is the only phase of its major activity; collection is not another. (FALSE)
• True or False

  Policy should be reviewed regularly as conditions change, and company requirements warrant. (TRUE)