CREDIT AND COLLECTION FINALS

Documentation

establishes the relationship between the lender and the borrower and forms the basis for any legal action on a court of law.

DOCUMENTATION

It is an essential part of the credit process and is required for each phase of the credit cycle, including credit application, credit analysis, credit approval, credit monitoring, collateral evaluation, impairment recognition, foreclosure of impaired loan and realization of security.

Purpose of Credit Documentation

• To set into a written form of the agreement between the lender and the borrower.

• To clearly define the respective rights and obligations of the parties.

• To provide the lender a clear course of action in the event of default.

• To serve as evidence in the event of litigation

Importance of Documention

• Legal Protection

• Risk Assessment

• Transparency

• Compliance

The lender

should ensure that contractual agreements with their borrowers are vetted by their legal advisers.

Basic Principles in Documentation

There is no binding contract unless the parties have the legal capacity to enter the contract and have given their consent to be bound under the terms and conditions of the contract.

All necessary legal documents prior to the initial release/ restructuring or availment

should be secured.

Specimen signatures of all signatories

should be maintained and updated.

Standard loan and collateral documents

should be used as evidences of indebtedness or to provide support to credit extensions.

Account officers

should serve as witness to the signing of all legal documents and should verify the signatures of borrowers to ascertain authenticity.

Names of all signatories

should be printed.

Principal Credit/ Lending Documents

• Loan/Line Agreement

• Receivables Financing/Discounting Line/Agreement

• Restructuring Agreement

Loan/Line Agreement

Contract between the lender and the client covering the grant of loan by the former to the latter under certain terms and conditions. Generally, it stipulates the loan type and purpose, amount, interest rate, penalties and charges, manner of repayment, availment, events of default, representations, warranties, covenants, and other stipulations or provisions not generally covered by the Promissory Note or collateral document securing the obligation.

Receivables Financing/Discounting Line/Agreement

Core document covering the terms and conditions whereby the proceeds of the credit facility are to be used for financing receivables.

Restructuring Agreement

This is used to document new terms and conditions affecting loan transactions in instances where borrower fails to meet his maturing obligations and/or by way of payment arrangement.

Availment Documents

• Promissory Note

• Disclosure Statement

Promissory Note

An unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. It is a principal evidence of indebtedness and is to be considered along with the loan/line agreement.

Disclosure Statement

A document disclosing to the client the details of the loans to be released.

Collateral/Security Documents

• Real Estate Mortgage

• Mortgage Trust Indenture

• Chattel Mortgage

• Assignment of Receivables

• Joint and Several Signatures

Real Estate Mortgage (REM)

A contract by which a client or third- party mortgagor secures in favor of the lender the fulfillment of principal obligation subjecting as security immovable (real) properties or real rights over them in the event the principal obligation is not fulfilled at the time stipulated.

Mortgage Trust Indenture (MTI)

A type of mortgage given to a trustee for the purpose of securing numerous creditors.

Chattel Mortgage (CM)

Similar to REM except that the subject is chattel or personal property.

Assignment of Receivables

A bilateral contract whereby one person transmits to another his rights, title, interests and actions against a third person either by way of payment or as a security.

Joint and Several Signatures (JSS)/Comprehensive Surety Agreement

Binds the key officers and management solidarily or severally with the principal borrower making them liable in case of default/non-payment due to misappropriation, fraud, mismanagement, etc.

The collateral or security documents are executed to accompany loan agreements.

These are, in effect, accessory contracts that cannot exist or stand along without the principal lending documents.

Release or availment

should be in accordance with the approved terms and conditions and subject to completion of all necessary and appropriate legal documents.

Prior to the release or availment, the following conditions should be met: All pre-release requirements and conditions

have been complied with, and proper legal documentation has been completed including the registration of mortgage documents with appropriate registrars

Prior to the release or availment, the following conditions should be met: The credit line

as not expired or has not been exceeded.

Prior to the release or availment, the following conditions should be met: The borrower

must have no past due availment.

Prior to the release or availment, the following conditions should be met: Amount to be released

should not exceed the approved credit limit or in accordance with the approved schedule of releases.

Prior to the release or availment, the following conditions should be met: All availment documents

have been signed by the borrower, and signed by the account officer as witness and other documents duly authenticated.

Prior to the release or availment, the following conditions should be met: All PNs with Deed of Assignment

should be accomplished and executed by the borrower and signed by the account officer as witness.

Releases should pass through different authorized signatories.

No one person or division can singularly approve or effect a release.

Releases may be made in the following manner:

• One-time/lump sum release

• Partial release

All original documents related to each availment

should be reviewed and maintained.

Exceptions, deviations or deferrals from standard terms and conditions

should be subject to approval.

Cancellation of mortgages and release of collateral

are allowed upon full payment of the loan, including other attendant obligation such as insurance, real estate taxes, etc.

Release of mortgages, guarantees, and other documents after the full payment of the loan

should be consistent with the provisions.

The Lender

must establish policies on information to be documented at each stage of the credit cycle.

LENDER

should maintain a checklist that can show that all their policies and procedures ranging from receiving applications to the disbursement of funds have been complied with. The checklist should also include the identity of individuals and/or committees involved in the decision-making process.

Credit files

refer to all the documents that are related to the account.

The credit file

provides credit officers a convenient reference about the basic information on the subject, and a history of the credit relationship with the borrower.

The format of credit files

must be standardized, and files neatly maintained with an appropriate system of cross indexing to facilitate review and follow up.

A separate credit file

should be maintained for each customer and if a subsidiary file is created, it should be properly cross-indexed to the main credit file.

All photocopied documents submitted by the client

should be stamped “certified true copy” upon presentation of the original copy and authenticated by the account officer.

Photocopied documents including the amendments thereto sourced from the government agency/s or office/s

must be authenticated by the authorized officer from the source government agency/s or office/s.

Credit files

should also be stored in fireproof cabinets and should not be removed from the lender’s premises.

Credit folders

must be treated as confidential and only authorized personnel may have access to these files.

The documents in the credit folders

must be reviewed and maintained in good order.

Major Areas of Account Monitoring

• Compliance to Terms and Conditions

• Collection of Loan Amortization

Compliance to Terms and Conditions Collection of Loan Amortization

Availments under the approved credit facilities should conform to the terms and conditions stipulated in the approved credit proposal.

Collection of Loan Amortization:

• Prompt Payment of Accounts

• Collection of Past Due Obligations

• Compliance with Key Covenants

• Periodic Submission of Requirements

• Monitoring of Industry Situation

• Appraisal/Inspection of Collateral

Prompt Payment of Accounts

All outstanding loans must be monitored closely to ensure prompt payment at maturity of the amortization and any other charges or expenses associated with the transaction.

Collection of Past Due Obligations

Past due obligations for collection should be properly handled. Remedial actions should be promptly instituted to keep the account in current status.

Compliance with Key Covenants

Loans must be monitored periodically to ensure compliance with key covenants, repayment schedule, and other terms and conditions governing the loan.

Periodic Submission of Requirements

Borrowers with outstanding credit facilities should submit the documents that are required on a period basis as stipulated in the loan agreement.

Monitoring of Industry Situation

Industry and market developments should be regularly monitored and the impact of any development in the industry on the loan account be evaluated. If the industry development signals a potential problem, a client call to discuss the issue with the borrower should be conducted as soon as possible.

Appraisal/Inspection of Collateral

Periodic inspection and appraisal of supporting collaterals must e done to validate the conditions/existence and adequacy of collateral vis-à-vis the outstanding risk.

NEGOTIATION

A process of developing a customer need’s analysis and structuring the product for the customer It involves discussions between the borrower and lender to agree on the terms of a loan.

Importance of Negotiation

A crucial part of the loan process, allowing borrowers to actively participate in shaping the terms of their loans and achieving favorable outcomes.

Benefit of Negotiation

Can lead to a loan package that is more tailored to the borrower's needs and financial situation.

MATURITY

The length of the agreement upon its inception.

TENOR

The remaining time left until a financial instrument matures or is repaid.

While tenor changes as time passes , maturity remains constant.

If a 2-year loan was obtained two years ago and a year is gone, the maturity would be 2 years while the tenor is one year (the remaining year).

Loan covenants

series of small, independent agreements made between a debtor (borrower) and a creditor (lender). It expressly outline behaviors that a borrower must – or must not – engage in.

Types of Loan Covenants

• Standard

• Non-Standard

• Affirmative

• Negative

• Financial

• Non-Financial

Standard

Generally outlined in a boilerplate template.

Non-Standard

Designed based on particular characteristics or risks related to a credit request of a borrower.

Affirmative

Outlines what a borrower must do.

Negative

Stipulate actions that the borrower must not do.

Financial

Explicitly related to a borrower’s financial metrics.

Non-financial

Expected behaviors that are not specific to the borrower’s financial measures.

LOAN PACKAGING

The presentation of the credit facilities that will be granted to a client.

Structure of credit package including the terms and conditions

must be clearly stated.

The terms and conditions

must be flexible.

Fund matching principle

must be observed.

Should the account be denied, a denial/disapproval notice

shall likewise be sent.

Every credit extension

is supported by the required approval which are properly documented.

The client

should be informed of the approval of his application.

Repayment mode and tenor

must be based on the purpose of credit being applied for.

Deviations from the standard and terms and conditions

highlighted and justified in the proposal.

Documents/Reports in Credit Proposal

• Executive Summary

• Credit Proposal

• Basic Business Information

• Credit Investigation Report

• Appraisal Report

• Types and Valuation of Collaterals

Credit Proposal

contains the highlights of the proposal such as:

• information on the client/applicant

• the project description

• the type, amount, major terms and conditions

• recommendation and justification

Executive Summary

contains the detailed information on the:

• applicant

• the project

• the results of evaluation of the financial performance/ historical financial statements

• projected financial statements

• results of credit investigation

• marketing aspects on the project

• plans and prospects

Basic Business Information

contains a brief background on the:

• applicant

• the project

• the products and services

• the market and the affiliates

Credit Investigation Report

the results of the credit investigation conducted.

Appraisal Report

covers the results of the appraisal conducted on the collaterals offered.

The lender must

have in place written guidelines on the credit approval process and the approval authorities of individuals or committees as well as the basis of those decisions.

Approval authorities

will cover new credit proposals, renewals of existing credits and changes in terms and conditions of previously approved credits particularly credit restructuring.

Prudent credit practice

requires that persons empowered with the credit approval authority should not also have the customer relationship responsibility.

Depending on the nature and size of credit

it would be prudent to require approval of two officers on a credit application in accordance with the policy.

The approval process

should be based on a system of checks and balances.

All credit approvals

should be based on established criteria.

Credits to related parties

should be closely analyzed and monitored so that no senior individual in the organization is able to override the established credit granting process. Related party transactions should be reviewed under due processes of good governance.

An officer’s initials or signature

is uniquely his own. It’s his password and therefore care must be taken in its use.

Initials/signature

should never be placed on the credit transaction medium unless completely satisfied with all aspects of the transaction.

The responsibility of having an approving authority

carries with it the duty to effectively manage the portfolio being supervised.

Collection Program

strategies, organization and procedures for recovery of receivables.

The objectives of a collection program are:

• To reduce the amount of bad debt losses while controlling collection costs.

• To reduce the company’s investment in accounts receivable.

Credit or loan collection

is a crucial process that ensures lenders recover funds lent to borrowers while maintaining financial stability.