CREDIT PROCESS

Expectation Setting:
From the facilitator
From co-participant

What is Credit Process?

. . . basically describes what normally transpires when a loan transaction is prepared and eventually consummated and repaid

Credit process includes

A. Credit Initiation
B. Documentation & Disbursement C. Credit Administration D. Remedial Management

REALITY IN DOING BUSINESS

Aggressive mktg. Peaceful mktg.

Quantity sales

SALES

Quality sales

Poorly manage Losses RECEIVABLES

Well manage Gains

Insufficient cash
Closure REPAYMENT

Sufficient cash
RL, SL, NL

A. CREDIT INITIATION

Objectives:

Identify acceptable customer segments within your respective business environment

Write a target market policy statement to identified market and the selection process.
Call plan of activities that should undertaken to reach out the target market Demonstrate the existing client call strategies

Target Market Definition

Identifying of acceptable market segment in the entire business environment Set acceptable criteria in the market selection process.

Steps in target market identification

1. Identify the various economic sectors 2. Decide which sectors you wish to be involved 3. Draw up acceptable criteria to potential sector

4. Develop a marketing plan

5. Implementation of marketing plan & strategies

6. Reassess marketing strategies against result

7. Review process on the target market

Workshop No. 1
1. In your respective area, identify the acceptable market in the entire business environment Make a policy statement to target market identification and the selection process
Collateral Requirement Eligibility requirements Business Requirement Product Packaging Other security / Papers needed

2.
Market Sector

Preparation of a call plan

1. Pre-call activities

Get to know your market Know more about the target market Make a listing of your prospective client Get to know the existing services of the competitors Plan carefully schedules and activities of your call

Determine question to ask on the following areas

Financial standing and performance Present creditors and the terms offered

Production process and business cycle

Supply and demand fundamentals Clients Financial requirements

Know the requirements for loan processing

Audited and Interim Financial Statements Loan Application / corporate papers & its profile Business Projections or planning Photocopy of collaterals if any

Now we know where we are going

BUSINESS ENVIRONMENT
Target market

Grapevine CDA SEC DTI Municipal DEPED

Competitor

MYFC

2.

Client Call

Make a personal call with potential client Meet the client at his place of business Interview
* Approach all client with flexibility on credit accommodation * Make sure that you understand the facility you are offering to * Do not afraid to ask relevant question even if they are personal

* Set to it that you have asked all possible question to the client
* Do not hesitate to express yourself forcibly, when necessary * Never do business with whom you do not trust after the interview * Be courteous, cordial, and tactful in asking questions.

After the personal call, prepare a call report

Workshop No. 2
1. Make a Call plan of activities that should be undertaken to reach out the target market

2.

Role playing to demonstrate the client call strategies .

There are reasons some businesses are hugely successful, others get by and the less fortunate fail. From a marketing perspective it seems quite simple: You must know your customers and what it takes to make them happy
Bruce Johnson

1. CREDIT INITIATION
MARKET DEFINITION
Market definition Market Identification Call plan ORIGIN Walk in Referral Re-loan EVALUATION Purpose Background Business analysis

Redemption

Risk Analysis

2. DOCUMENTATION & DISBURSEMENT

DOCUMENTATION Signature verification APPROVAL Branch Manager NEGOTIATION Loan amount

Duly filled out loan documents

Collateral attachment Legal drafting

Credit Committee
President Board of Directors

Pricing
Term & condition Collaterals

DISBURSEMENT Complete Documentation Notice of release Issuance of check

PORTFOLIO MANAGEMENT / CREDIT ADMINISTRATION

Acknowledgement receipt

CREDIT EVALUATION AND ANALYSIS

Importance of Credit Evaluation

1. 2. 3. Determine the paying capacity of the borrower Establish borrowers historical performance Forecast the borrowers financial performance

4.

Identify risk involve and mitigate its impact

Objectives
1. To determine if a loan application / renewal should be granted To determine the paying capacity of the borrower by examining the past, present and future

2.

Background checking or CIBI

Six Cs of credit
1. Character - Personal traits and reputation of the debtor

History profile How did you know the applicant? How the applicant seen in the community?

2. Capacity ability of the debtor to earn or pay

How much is the income earn from business

How much is the personal disposable income of the applicant

How much is the income derive from investments

3. Capital Financial strength of the debtor

How much is the total asset of the applicant

How much is the total networth of the applicant

How much is the existing obligation of the applicant

4. Collateral property available for security to repay the loan

What are other properties that can secure the loan aside from the business

Who are the guarantor or co-maker of the applicant

Is the collateral eligible for mortgages

5. Condition economic climate that will affect the business

How feasible the business after five years

What type of management that the business have

What are the business plan, if any

6. Connection Who do you know

How influential the applicant is What are the organizations that the applicant is a member of

Does the applicant known to any officer of the company

Five Cs of bad credit

1. Complacent
Over confidence
Self satisfaction

2. Carelessness
Inadequate attention to the task on hand Loose control

3. Communication
Assumption Lack or breakdown of communication can destroy a company

4. Contingencies
Ignore contingencies
No anticipation

5. Competition
Business rivalry Benchmarking with rest

Collaterals / Security

It is not always the value of the property that matter, but also on the following:

Marketability of the asset

Realizability of the asset values

Acceptable Collaterals
1.

Real estate property

Prime residential lot

Commercial lot
Agricultural lot, on a case to case based

2.

Personal property

3.
4. 5. 6.

Certificate of Time Deposit

Third party mortgage Negative pledge Mortgage trust indenture

Process of credit evaluation

1.

Data sourcing
Understand the credit request

Verify the submitted documents

Analysis of the data gathered Preliminary data collection

Consultation, interviews, and site visit

2.

Data analysis
Non-financial Financial

3.

Preparation of credit proposal (CRAM)

Loan Purpose
* Why the client is asking for a loan * What type of loan the client needs * How the client repay its obligation * How long the client needs the loan

Background Qualitative Information

* Character of the client / organization * Principals / ownership composition / management * Production lines

Quantitative Information
* Financial statements * Financial ratio analysis

Facility utilization
* High / low and average outstanding * Compliance with the term and conditions * Repayment history and credit rating

Industry and business conditions

* Competition and markets * Political climate and effect of political changes * Unions * Traffics

Credit Dealings
* How the other banks are being handle by this client * What are the status of the existing loan

Management Analysis
* How the business is being managed * What are the educational attainment of the officers * Do the management has the expertise in the business

Financial Analysis
* Liquidity ratio * Profitability * Solvency

Financial Forecast
* Are projection feasible * Are projection consistent * Are projection correspond with known condition in the industry * Are projection supported by sufficient resources

Loan Structure or terms and conditions

* Limitation on liquidity and leverage * Maintenance of insurance * Restriction on dividend payment * Limitation on withdrawals * Others, when deem necessary

Pricing
* It depends upon the risks involve * Set in relation to competition * Set based on the result of special deliberation * It depends on the cost of funds

Tenor
* The bank should avoid evergreen loan * Based on the business cycle of the project

Risk analysis
* Industry condition * Competition and market * Political climates and effects of political changes * Technological changes * Changes in management / ownership

* Others

Ways out analysis / Source of repayments

* How will the credit facility be repaid * What if the plan for repayment does not work * Conversion of current assets * Sale of equity * Conversion of non-current asset

* Others

Conclusion and recommendation

* Final assessment of the account

MAKING OF CRAM Credit Recommendation Approval Memo

CRAM is compose of
I. PROPOSAL
II. EXISTING FACILITY III. BACKGROUND

IV. FINAL ASSESMENT

I.

PROPOSAL
* Loan amount * Loan facility * Loan purpose * Loan tern * Interest rate * Payment scheme * Security

* Other terms and condition

II.

EXISTING FACILITY WITH THE COMPANY

* Total Availments * No. of availments * Maturing PN * Loan balance * Loan Status * Remarks

III.

BACKGROUND
* Incorporation * Capital Structure / initial investment * Directors / ownership * Management * Depository Bank * Credit checking * Trade checking * Product and services

* Financial highlights and ratio analysis

* Ways out analysis and personal cash flows * Company profile / business profile

IV.

FINAL ASSESSMENT
* Basis for final recommendation

* Justification of the weak portion on the credit rating sheet

CREDIT SCORING