CREDIT
MANAGEMENT
Need for credit
Development economies recommends an
infusion of massive capital into the
economies of the poor or developing nation.
This is the only way to stop the vicious cycle
of poverty.
AI yuchengco gains leadership in
banking and insurance sector.
Taipan alfonso yuchegco – is emerging as a
leader in the financial service sector through
a combination of banking insurance
investment.
Owner of Rizal Commercial Banking
Corporation (RCBC) the sixth largest bank in
the Philippines in terms of resources.
Banking
RCBC- is also on an expansion mood; it
recently acquired Merchant bank, a thrift
bank.
It has grown by leaps and bounds.
It focused on expanding its customer reach
via traditional bricks and mortar and
electronic channels.
It expects to boost its performance through
the expansion of its SME portfolio
RCBC is a strong player in the remittance
subsidiaries.
Credit experience of former
developing nation
Credit experience of former
developing nation
United states- it was once a colony of
england.
Russia- in development economics, an
agricultural country is classified as a poor,
undeveloped, backward or developing
economy.
Japan-the country was once a feudal and
primitive society.
The World Bank
Formal name is International Bank for
Reconstruction and Development (IBRD)
Primary goal is for financing economic
development.
First loan was extended to finance the
reconstruction of western Europe on late 1940’s
The international community assigned to the
fund was reacting to the unresolved financial
problems instrumental in initiating and
protracting the Great Depression of the 1930’s
CMAP
Credit Management Association of the Philippines
(CMAP)
Established when a group of individuals involved in
credit work banded themselves to form a credit
association in 1976.
It is composed of about 200 member-companies
from banking, trading, manufacturing, financing and
insurance sectors.
Its philosophy revolves in 3 main themes:
1. To inculcate credit consciousness in the public mind
2. To place the credit man in his proper place as a
professional
3. To infuse credit discipline to the greater mass of our
people.
Importance of Credit Management
Granting credit is one thing and collection is
another, thus there is a need for a system.
Ensure a close collaboration between the
grant of credit and its collection.
Selling goods on credit and rendition of
services only to customers who have shown
and demonstrated willingness and ability to
pay on the basis of their record will reduce
the incidence of risks.
Advantages of credit
1. Credit facilitates exchange
2. Credit increases the volume of production
3. Credit eliminates the risk involved in making
payments to distant places
4. Credit economizes the use of coins and
paper money
5. Credit eliminates the danger of being robbed
of large amounts of money.
6. Credit makes possible the accumulation of
small savings and their employment for
productive purpose.
Disadvantages of credit
1. Credit facilitates the over-expansion of
business activity which might lead to
recession.
2. A too liberal credit encourages ex-
travagance.
3. Credit sometimes increases business risks.
4. Easy borrowing by the government has
often led to the wasteful use of public funds.
Credit Management
1. CM is important because it will insure the close
collaboration between granting credit and
collection .
2. Credit risk is the risk associated with granting of
credit.
3. The significance of CM is that they are done to
avoid risk and loss on the part of the lender or
creditor or other business firm
4. CMAP is important because it inculcates credit
consciousness in public minds.
5. Competent, efficient and effective people are
necessary in order to have a sound credit
management.
Credit policy
The strength of credit power at any time is a
function of two factors affecting the credit risk.
1. Factors external to the risk.
2. Factors inherent in the risk.
External factor which influence the
credit policy as follows:
1. The business cycle – business activity does not
remain at the same level over a long period of
time. Certain business practices and policies might
be successful during the period of prosperity
might prove disastrous during a period of
depression or recession.
2. Banking policy – it tends to affect credit policy
by its effect upon the financial condition of the
creditor and the debtor. The close relationship
that exists between bank and trade credit tend to
move in the same direction.
Continuation-
Factors that influence trade credit policies;
a. The size of credit lines
b. The length of bank loan terms
c. The level of interest rate
d. The character of bank loans in respect to the
use of funds
e. Collateral requirements
3. Monetary and Fiscal Policies - monetary policy
is to influence the money supply available to the
economy. Fiscal policies affect the expenditures of
individuals and businesses through their effect on
the expenditures through tax collection.
Continuation
4. Local economic developments – any
developments that influences the costs and sales
volume of a firm affects the firm’s financial
condition.
5.Condition of the creditor firm:
a. The financial condition of the creditor’s business
b. The competitive position of the creditor
c. The nature of business – can be classified as:
I. Increasing cost
II. Constant cost or decreasing cost
III.The cost per unit of goods produced
IV.Sales volume increases until it reached the optimum level
Sources of credit information
Major resources of credit information are the ff;
1.Personal interviews
2.Personal references
3.Credit reporting agencies
4.Credit bureaus
5.Banks
Credit information can be obtained from salesmen,
lawyers and customer’s financial statements.
To have a sound judgment, credit manager must know:
◦ Whether the owner or managers concerned are hones and
intend to repay their debt
◦ Whether the history of the concern shows satisfactory progress
◦ Whether current operations and financial position of the
concern are sound.
Collection of Policies and Practices
Every business that extends credit has some
collection problems.
Minor problem if creditor is only to the extend to
individuals or firms with the highest credit rating.
Major problem is creditor who accepts credit risks
of a medium or lower credit rating, resulting into
many slow paying accounts or bad debts.
The method of collecting determines to some
extent the percentage that will be collection and
also whether goodwill or ill-will is created in the
process.
Cause of delinquent accounts
Several types of debtors such as;
1. The debtor who misunderstands the credit terms
2.The careless debtors
3.The debtors who ignores small bits
4.The debtors who is good but temporarily out of
funds
5.The chronic slow debtors
6.The unethical unfair debtor
7.The insolvent debtor
8.The dishonest debtors
Importance of a prompt collection
policy
Advantages of prompt collection policies are:
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 refuses to pay.
Principles of sound collection policy
1. The creditor should inform the debtor the terms
of credit
2. The creditor should enforce the credit terms.
3. When an account becomes overdue, the
collection machinery should be started at once.
4. It is useless to undertake prompt collection
action unless follow up steps are prompt.
5. The regularity and timing of the successive
steps in the collection procedure are as
important as parts of an effective collection
policy follow ups.
Collection methods and procedures
Regardless of collection system, collection
instruments may include the following:
1. Statements
2. Collection letters
3. The personal call
4. The use of telephones
5. The use of registered mail
6. Attorneys and collection agencies
