credit & collection - start to credit risk

8/11/2019 Credit & Collection - Start to Credit Risk

http://slidepdf.com/reader/full/credit-collection-start-to-credit-risk 1/35



What is Credit?• (Finance) It is the availability of Money

• (Accounting) Opposite of Debit

• (Accounting) An increase in liabilities or

owners' equity or in a decrease in assets

• (Personal / Business) The ability to borrow or

to purchase goods and services with payment

delayed beyond delivery.



Function of Credit:• Economy in use of Metal

• Provision of Working

Capital

• Sales of Bonds

• Case of Young Firm

• Large Scale Production



Function of Credit:• Shifting of Capital to

Productive Hands

• Entrance of new

Entrepreneurs

• Purchase of Goods

• International Payments

• State Revenue



Importance of Credit:Personal Importance

• Shelter

• Transportation

• Employment

• Entrepreneurship

• Utility Services

• Seasonal

• Education

• Emergency



Importance of Credit:Business Importance

•

Payment Terms• Pre-ordering

• Check Payments

• Zero Collaterals

• Business Identity &Integrity

• Price Negotiation &Discounts



4Cs of Creditworthiness• Character includes factors such as: size, location, number of years in

business, business structure, number of employees, history of principals, appetitefor sharing information about itself, media coverage, liens, judgments or pendinglaw suits, stock performance, and comments from references.

• Capacity assesses the ability of the business to pay its bills, i.e., its cash flow. It alsoincludes the structure of the company’s debt—whether secured or unsecured—and the existence of an unused lines of credit. Any defaults must also be identified.

• Capital assesses whether a company has the financial resources (obtained fromfinancial records) to repay their creditors. In general, this portion of the credit

report is the one most closely reviewed by the credit analyst. Heavy weighting isgiven to such balance sheet items as working capital, net worth and cash flow.

• Conditions consider the external factors surrounding the business underconsideration - influences such as market fluctuations, industry growthrate, political/ legislative factors, and currency rates.



What is Credit Report?• A detailed report of an individual's credit history prepared by

a credit bureau and used by a lender to in determining a loan

applicant's creditworthiness, including:

– Personal data (current and previous addresses, social

security number, employment history)

– Summary of credit history (number and type of accounts

that are past-due or in good standing)

– Detailed account information



What is Credit Report?• A detailed report of an individual's credit history prepared by

a credit bureau and used by a lender to in determining a loan

applicant's creditworthiness, including:

– Inquires into applicant's credit history (number and type of

inquiries into applicant's credit report)

– Details of any accounts turned over to credit agency (such

as information about liens, wages garnishments via

federal, state or county records)

– Information on how to dispute any of the above

information.



Companies Managing Credit Reports; – US & International Credit Reports

• Equifax

• Experian

• TransUnion

– Philippines or Local Credit Report• Credit Management Association of the

Philippines Inc (CMAP).



Companies Managing Credit Reports;



Companies Managing Credit Reports;• Report Request Requirements;

– Social Security Number

– Credit Card(s) number

– Residential History

– Certificate of Residency

– Employment History

– Notarized Affidavit



US / International Application of Credit Reports;

– Buy or lease a car

– Buy a house

– Refinance a mortgage

– Rent an apartment

– Apply for a job

– Be up for a promotion – Apply for a professional license (such as a license

to sell securities or insurance)



US / International Application of Credit Reports;

– Apply for a security clearance

– Join the military

– Get married

– Get divorced

– Switch insurance companies or buy new insurance



Negative & Positive Credit Reporting ;

• Negative Credit Report – information that

makes you look like a potential financial risk

• Positive Credit Report – information that

makes lenders want to invest on you or at

least won’t deny loan applications




• Survey : According to CMAP

– 78% of Americans have

negative credit reports – 72% of Filipinos have negative

credit reports

WHY?




• Incurring Negative Credit Reports:

– A failure or payment delays

– Irregularities in Mortgage, Loan and Credit Cardpayables & surcharges

– State / Branch cut-offs (Inter branch connectivity)

–Interconnectivity / System Failure (E-Banking)

– Government and Local Holidays




• Negative Credit Reports FAQ:

– How long does bad marks stick around?

• US & International (7 years)

• Local (5 years)

• Bankruptcy (10 years)

* Most credit payment urgency lessens with time. Credit

Collection Agencies will lose interest with an account and will

resume only upon the request of the bank.





– How much does one mistake cost you when it

comes to your credit report?• Positive Credit can lessen the negative impact

• Loan mistake size or degree (C. Card is less serious than

a mortgage)

• Credit Score computation and deductive equation





– How do those who view your report interpret bad

marks?• Priority payment (Bank Intervention)

• Credit / Payment History

• Remaining Credit

• The Maxed Out Rule




• Positive Credit Reports:

– Report duration; between

10 – 30 years – More positive

information, the less impact

of a single negative item

– Internationally recognized



The Credit Score (History);

• FICO Era

– During the 1950’s, the company Fair Isaac Corporation

(FICO) developed a Credit Risk Scoring system using a

series of deductive analysis and early algorithm to

determine an individual or firms creditworthiness.

– Clients: Equifax, Experian & TransUnion




• FICO Era

3%

41%

30%

13%

13%

Available Credit

Payment History

Utilization

Balances

Dept of credit




• Vantage Score Era

– More recently (2006), the VantageScore was created in

collaboration with the three major credit bureaus

(TransUnion, Equifax, and Experian) as a new generic

proprietary credit score model marketed as a more

"consistent interpretation" and "accurate score" than FICO.




• Vantage Score Era

2%

28%

21%9%

9%

31%

Available Credit

Payment History

Utilization

Balances

Dept of credit

Recent Credit



Managing Credit Risk

The concepts of adverse selection and moral

hazard will provide the framework to

understand the principles financial managersmust follow to minimize credit risk, yet make

successful loans.




Solving Asymmetric Information Problems:

1. Screening and Monitoring:

– collecting reliable information about prospectiveborrowers. This has also lead some institutions tospecialize in regions or industries, gainingexpertise in evaluating particular firms

– also involves requiring certain actions, orprohibiting others, and then periodically verifyingthat the borrower is complying with the terms ofthe loan contract.

http://www.calculatedriskblog.com/2009/04/corporate-credit-union-portfolio-from.html

http://www.myfico.com/myfico/CreditCentral/LoanRates.asp?LoanType=60MNAuto&Region=HI&MonthlyPmt0=&InterestOverLoan0=&range0=720-850&MonthlyPmt1=&InterestOverLoan1=&range1=690-719&MonthlyPmt2=&InterestOverLoan2=&range2=660-689&MonthlyPmt3=&InterestOverLoa

http://www.myfico.com/myfico/CreditCentral/LoanRates.asp?LoanType=60MNAuto&Region=HI&MonthlyPmt0=&InterestOverLoan0=&range0=720-850&MonthlyPmt1=&InterestOverLoan1=&range1=690-719&MonthlyPmt2=&InterestOverLoan2=&range2=660-689&MonthlyPmt3=&InterestOverLoa

http://www.calculatedriskblog.com/2009/04/corporate-credit-union-portfolio-from.html




Specialization in Lending helps in screening. It

is easier to collect data on local firms and firms

in specific industries. It allows them to betterpredict problems by having better industry and

location knowledge.




Monitoring and Enforcement also helps.

Financial institutions write protective

covenants into loans contracts and activelymanage them to ensure that borrowers are

not taking risks at their expense.




2. Long-term Customer Relationships: past

information contained in checking

accounts, savings accounts, and previousloans provides valuable information to more

easily determine credit worthiness.




3. Loan Commitments: arrangements where the

bank agrees to provide a loan up to a fixed

amount, whenever the firm requests theloan.

4. Collateral: a pledge of property or other

assets that must be surrendered if the termsof the loan are not met ( the loans are called

secured loans).




5. Compensating Balances: reserves that a

borrower must maintain in an account that

act as collateral should the borrower default.6. Credit Rationing:

lenders will refuse to lend to some borrowers, regardless

of how much interest they are willing to pay, or

lenders will only finance part of a project, requiring that

the remaining part come from equity financing.

credit & collection - start to credit risk

Documents