COLLECTION
POLICIES AND
PROCEDURE
Legal Basis
The collection of just debt id backed up by the
coercive power of the law . The right of a creditor to
collect a just debt is provided in article 2236 of the
Philippines Civil code .
The debtor is liable with all his properties , present
and future for the fulfillment of his obligation
Some of the causes of non payment , many of them
unpreventable, are
1. Calamities : typhoon , earthquakes , floods, fire
2. Unrealistic payment schedule :mismatching of loans usage
versus loan term.
3. Unproductive investment : lavish and unnecessary outlays
for luxurious offices , building, contraptions, luxury vehicles.
4. Unproductive expenditures: fiestas , baptismal parties
5. Extended hospitalization without health insurance coverage.
Some of the causes of non payment , many of them
unpreventable, are
6. Large educational outlays
7. Death of family provider without life insurance
coverage
8. Product defects
9 non – compliance with warranties
10. Constant breakdown and efficient repair service .
General collection policies
One of the primary factors that should be considered in the
formulation of general collection policies is the need for
immediate recovery of the credit granted. In the appliance
industry , the interest rate is an effective 50 % to 70 % per year,
by design , because of
A) The high cost of collection , motorized field collector
B) Higher bad debts risk
Some of the areas where general collection policies have to be
formulated are :
1. Hiring of collectors :
a) Job requirement s
b) Protection against loss of cash collection thru selective
hiring and surety undertakings.
c) Customer orientation – a precautionary measure .
2. Procedure in the handling of collection
a) Collection for cash
b) Other collection techniques
3. Surcharges and penalties
Some of the areas where general collection policies have to be
formulated are :
4. Field motorized collection versus collection letters
5. When to send motorized collectors/ collection letters.
6. Collection incentive program
7 insurance policy to be assigned by debtor
8. Using service charges
9. Use of acceleration clause
Hiring policies for collectors . In appliance companies and
other small and medium sized suppliers of credit the job of
a collector is almost always a dead – end job . In large
financial institutions, the position of collector is truly an
entry – level position . Many top level started their careers
as collector or loan clerk.
Protection against loss of cash collection . In
the bank where the loans due are in large lump
sum amounts, borrower take the time to go to
the bank and make their payment to the bank
cashiers
There is an ever present and continuing temptation to
abscond ( depart with the money). This unauthorized
and illegal act of taking the company’s cash collection
is called defalcation
Selective hiring . If the credit investigator strictly screen credit
applicant for merchandise items worth P 10,000 on the average
, the company must also do the same in its hiring of new
collector . Its is preferable to hire collectors who have strong
attachment to the community where the branch or district office
located.
To protect the company , it would be wise to require the newly
hired collector to put up a surety undertaking, a surgery
undertaking is a document to be signed by the parents ,
preferably or close relatives who stables jobs or enterprises.
Customer orientation as a precautionary measure. It is best to
educate the installment customer prior to the release of the
merchandise. They must be oriented on the mandatory use of
company official receipts. It is recommended that a short leaflet
be provided to the installment customer with a statement using
the following as model: payment , repair service, complains.
Handling of cash collection – field . This refers to field
collections. The company must require all collectors to remit all
collection , cash or checks, before a designated cut off time every
day .
Other collection technique that compel installment customer to
pay direct to the company.
1. Monthly payment tickets , payment by current dated check s.
2. Direct bank payments
3. Salary deduction
4. Postdated check
Monthly payment tickets – or coupons are issued to the
installment customer , usually bound in a stub , similar to
personal check .
Direct bank deposit – in this collection system , the creditor uses
a bank with many branches reachable by its customers; it might
even help to have 2 or more commercial banks.
Post dated checks – a pre issued check (issued or written before the
release of a cash loan or merchandise is a strong motivator for the
customer to catch up with his check. The penalty for a returned check is
in the are of P 1,000 per check and banks tend to close the checking
accounts of those who frequently mishandle their checks.
Salary deduction – an arrangement is made with the employer .
This will apply to large organization who have employees
scattered nationwide, or local - based employers with hundred
employers, which normally takes time.
Field collection vs. letter , or both . The decision to regularly
use field collectors or to dispatch collection letters or both ,
depends on :
1. The cost and speed of mail delivery
2. The availability of telephones
3. The practicable use of cell phones and text messaging
4. The interval between payments
5. The amount per payment
6. Cost of motorized field collection
The cost and speed of mail delivery. The Philippines domestic
letter size mail cost P5; however , in the country , snail – paced
mail delivery is the rule , rather than exception.
Land lines and customer at work. While text messages and
telephone calls are very cheap and also useful, particularly as
reminder before or after due date , they are not goods
substitutes for the pressure that could be exerted by a live
collector.
Calling the customer at work – especially if previously agreed with
the customer , and done politely( before due date ), is certainly very
useful and effective .
Intervals between payments – many banks loans have terms of
one year or more. There is a lot of time to spare until the next
collection activity . Most bank mail collection reminders and send
its collectors only when accounts are seriously overdue,
The status of an account and the type of intensity of the collection
effort could be described in 6 stages.
Stage 1 : reminder stage (statement of account , short
text message, phone calls)
Stage 2: request stage ( installment account – 1st visit by
field collector , very polite approach , bank loan letter
reminder.
Stage 3 . Appeal stage – 2nd visit by field collector, strong
reminder. Bank loan – strong letter of appeal; reminds of
penalties, surcharges.
Stage 4. threat stage – installment account – threat of
repossession or legal action Bank loan – threat of fore
closure.
Stage 5. friendly efforts at recovery
A) Installment account – deposit the units at the branch
Stage 6. Drastic recovery effort – repossession , foreclosure
Collection letters. For branches with computerized
operations, preformatted collection letter are encoded
in the computer , usually in data base programs.
Collection procedures
The simplest monitoring technique is by using a list accounts
generated at the beginning of each month. This is list then broken
down into smaller number of accounts to be assigned to every
collector . Account that historically do not need field collection (
those who pay at the office) should be given to the branch
secretary or cashier so that phone calls or text messages could
be sent out before the due date , emphasizing the prompt
discount.
The accounts for field collection are further broken
down into :
1. Seriously past due accounts for possible
repossession
2. Past due account, 2 months.
3. Past due accounts
4. Accounts falling due in this month ( current )
Permanent or fixed field assignment or not : it would be s good idea
for collector to be given permanent field assignment : each
collector is permanently assigned a number of installment
accounts.
Liaison between the collection and services departments:
Occasionally , collector come across customer who refuse to pay
because of services problems, the collection supervisor musty
maintain excellent relations with all personnel of the service
department.
The Collection Goal
The collection goal (for the month or year) is the total
amount that must be collected to bring all accounts up
to date in current form . The collection goal is made up
of the amounts due from both past due and current
accounts ( except those that are not due in the current
month)
The calculation of the collection goal of a bank (term
loans) or a supplier of merchandise credit differ from
that of an appliance company . The only difference
lies in the fact that bank loans and merchandise credit
are due in lump sum amounts . For example , when a
wholesaler grants credit to a retailer, the full amount of
the invoice is payable in lump sum. A term loan is
payable at the end of the term ( usually one year )
and in full.
The collection goals are calculated :
MERCHANDISE CREDIT
All past due accounts
Maturing accounts , April 2020
Total collection goal for APRIL 2020
AS OF APRIL 30 , 2020
P 250,000
P 1,500,000
P 1,750,000
Thus , for the supplier of the merchandise , it must collect the
goal of P 1,750,000 . If the does , the collection efficiency is
100% . The formula for calculating the collection efficiency is :
Note : the figure of P 1,500,000 for actual collection is an example :
Actual collections
P 1,500,000
Collection Goal
P 1,750,000
85.71%
In appliance companies , the amounts used are
not the balances of the accounts but the
installments that are due .
APPLIANCE COMPANY
AS OF APRIL 30,2020
Past due installment as of 4-30 -20
P 100,000
P250,000
Installment falling due in April
Total collection goal for April 2020
P 350,000
If the collection (example ) for April is 295 , then the collection efficiency is :
Actual collections
P295,000
Collection Goal
P350,000
84.28%
Because cash collection have a significant impact on the
operations of the appliance companies, the use of this efficiency
ratio is accepted and widely used in the industry .
Banks prefer to use the aging of accounts . They are particularly
concerned with their past due ratios .their past due ratios are
continually being monitored by top management and also by the
Bangko Sentral. The past due ratio is calculated :
Past Due Accounts
Total Amount of loans
Past Due Ratio
If the bank’s past due ratio is over 25% , some of
their privileges are suspended by the Bangko Sentral
. Past due accounts are also called NPL’s or non –
performing loans.
Incentive Program for Collectors
The incentive program that is in place in many appliance
companies use only 2 C’s . Of course , it is prudent management
practice to recognize some collectors during some annual events;
after all , Maslow’s model on need states that employees should
also be socially recognized . But month by month a cash incentive
always works.
Some incentive programs have 3 elements: the size or number of
accounts ,the aging efficiency and the collection efficiency.
An incentive programs is designed to make employees do what
the management wants them to do . Its motivates them to do
things ..
1. The number of accounts have been stressed , the bigger the
number of accounts handled by a store , the bigger the
incentives.
Service charges
The creditor company must decide whether it should use service
fees or charges . These fees are :
1st they are usually expressed in terms of percentage of the
principal amount .
2nd , they are justifiable as expenses for appraisal, investigation ,
collection ,paperwork; and
3rd , many financial institutions use these service charges or fees
to increase their on the loans, without violating interest limits on
certain types o loans.
Loan interest limits (maximum) are imposed on loans that will
later be rediscounted with the Bangko Sentral. By rediscounting
, a bank could use the same promissory note signed by
borrower as a collateral for a fresh loans from the BSP .
RECOVERY OF CREDIT GRANTED
It will propose remedies on unpaid debt, based on the following
assumption:
1. The loan or credit transaction ahs been consumed .
2. There was complete transfer of possession ( by delivery ) or
both ownership and possession ; question on goods in transmit
will not be covered here.
3. The seller has discharged with his obligation to deliver a
determinate thing , but the buyer refuses to, or cannot , pay .
4. There are no product defects or violations of warranties on the
part of the seller .
Loans of fungible or consumable things . Fungible
things are products expressed in units of measure ,
like weight , number , or volume.: cooking oil, rice , salt
, canned goods. Consumable are classified according
their nature . Loans of fungible and consumable things
are technically called mutuum. The borrower’s
obligation is to give back the items borrowed with
similar items provided that they are of the same kind,
quality, and quantity.
Cash loan: In cash loan, the borrower’s obligation is to pay back
the loan in the same currency , in the same amount , useless
otherwise provided. Cash loan are either secured or unsecured.
This kind of transaction is a loan ,and should be governed by
Civil Code provision on sales.
Credit for merchandise . In cash loan, cash is given by the
lender and he is to be paid back also cash . In merchandise
credit , the supplier provides merchandise and the debtor pays
him back in cash . The transaction for merchandise credit is a
sale .
Credit for consumer durables . Example of durables
are TV and refrigerator which are sold by the
appliance companies on installment basis. The
document used in installment sales of durables, but
not movable, is a deed of conditional sale, or sale
with Reservation of title, which transfer the possession
of the TV’s and ref’s but withholds or reserve the
ownership, which is retained by the seller .
Credit on sale of movables . Examples are motorcycles sold by
appliances companies and financed by them , and car sold by the
car dealers and financed by the bank. In consumer durables, the
ownership is retained by the appliance company for its protection
against non payment. Movables, however, have to be sold on an
absolute basis to the buyers. The law on mortgage (Art. 2085,
paragraph 2) required that the mortgagor must be the absolute
owner of the thing mortgaged. The only way to do that is by using
to the buyer an Absolute Deed of Sale. Then the buyer , and new
owner , can mortgage it back to the seller.
Friendly Recovery Efforts
An enterprises , whether it is bank, retailer , is in
business in long term. It is going concern and its
perpetuation or long – term existence is a primary
objective of its owners.
It is also unwise to disturb a seller – buyer or lender borrower
relationship that took years to nurture and develop.
The debtor’s motivation to pay : in a cash loan with a
real estate mortgage, the debtor is motivated to pay for
2 reasons:
1. He may need more bank financing in the near
future, or
2. The market value of the property mortgaged is
substantially more than the balance of the loan.
Term extension : a creditor simply adds a few more
days or week even a month , to the due date of an
account.
Merchandise return swap : a swap arrangement is
also a good option ; the unsold merchandise is
retaken by the seller and new merchandise provided
to its customer.
Condonation of penalties: In this arrangement, the
seller or the lender is willing to condone , or not to
collect , all penalties and surcharge , perhaps part of
the interest , also , in exchange for the full payment of
the of the account.
Restructuring : it should be a simple restructuring ,
where the term are extended and monthly payment
reduced to affordable b. Documents substitution
Deposits of Durables at the branch office : in this situation
where installments payments have remained unpaid for many
month, it would be practical to request the buyers to deposits
the items purchased to be deposited at the branch store , with
the promise to that surcharges and penalties are suspended.
Debtor substitution: in this technique, the debtor is
replaced by another debtor who has an
established credit reputation .
Dacion en pago : roughly translated this means that
the debtor who has property securing the debt, sell
the property to the creditor to settle his debt.
Addition of guarantor or surety: the objective here is
the protection of the creditor’s asset , particularly the
safe of the principals.
Securitization : real this applies to unsecured
credit obligation . The creditor simply and politely
request the debtor to collateralize his debt, by
putting up reals state or personal as security
Court order to pay , then levy or garnishment: a levy
is an essential act by which the property is set apart
for the satisfaction of the judgment and taken into
custody of the law . While garnishment applies to the
properties of the debtor where third parties are
involved.
Consumer durables. Articles 1484 of the civil code
states . In a contract of sale of personal property , the
of which is payable in installments , the vendor (
seller ) may exercise any of the following remedies.
1st exact fulfillment of the obligation , should the
vendee fail to pay two or more installments
2nd cancel the sale , should the vendee ( buyer) fail
to pay 2 more installments.
Real estate sale on installment: this refer to the sale
of subdivision lots and similar real estate properties.
To protect estate installment buyers , we have
Republic act No. 6552.
Repossession : for consumer durables such as
appliances, the most common recovery technique is
by repossession of the installments units , this mean
that the sale has been cancelled . The documents
used for the appliance installments sale is the Deed
of the Conditional Sale with Reservation of title.
Replevin : this is resorted to when the buyer or
debtor refuses to surrender the installment units.
The replevin applies only to personal properties.
SOME LEGAL ASPECT OF CREDIT
The law on guaranty(Acts. 2047 to 2048, civil code ) states that
guarantor is only secondary liable and he is required to pay only if the
principal cannot pay. In credit transaction with a guarantor, there are 2
debtors: the principal debtor or obligor and the guarantor, whose
obligation to pay is only secondary.
The word cannot has been emphasized because the guarantor is
required to pay only if all the resources of the principal debtor has been
fully exhausted and if all available legal remedies have been applied.
If the intent of the creditor is to have someone sign a promissory note as
another principal debtor, that someone (if he consent to it) is called a co
– principal . Art . 2047, paragraph 2: ‘ if person binds himself solidarily
with the principal , the provision of section 4, chapter 3 , title 11 , shall
observed, in such as the contact is called a suretyship.
He who signs a suretyship contact binds himself to the debt
solidarily . Art .1207 states that ‘ there is solidarily liability only when
the obligation expressly so states.”
A solidary obligation is one where each one of the debtors is liable to pay
the full amount. For example , a borrower P 10,000 from the B and C
signed the promissory note, which expressly note, which expressly
stipulates that the obligation is solidary. If A does not pay , B can compel
C to pay the full P10,000. Note that verb used is does and not ‘ cannot .
By the mere refusal of the debtor, A in this example , the creditor B can
immediately go after C.
The existence and validity of a solidary obligation cannot be presumed. It
must be expressly indicated in the promissory note or contract of loan. It
must also have the ‘’informed” consent of the person signing a solidary
obligation.
Who Pays for the Deficiency?
In a pledge , in case of non – payment the property pledged is sold at
public auction and the sale proceeds goes to the pawnshop, or the
creditor. If the proceeds of the sale is not sufficient to pay for the loan, the
pawnshops cannot collect the difference from the pledger. If the
proceeds of the sale exceed the loan , the excess is kept by the pawnshop
In real estate mortgage, if the proceeds of the foreclosure sale is not
enough to pay the loan, the mortgage or creditor is entitled to recover the
deficiency(Sec.6, rules of court). In most cases, however, especially
foreclosure by banks, the highest bidder is the bank- creditor itself and the
amount bid is equal to the amount owed. In such a procedure, there is no
deficiency. The buyers obligation is extinguished and the creditor
becomes the owner of the mortgaged property subject to the redemption
rights of the property owner.
In a chattel mortgage, Article 1484 of the civil code states that if the
creditor chooses to foreclose, he is no longer entitled to recover any
unpaid balance.
Forfeiture of installment made
In sales of personal property by installments, or leases
of personal property with option to buy the seller and
the buyer may stipulate that the installments or rents
are not to be returned. This is provided for in article
1486.
Payment of execution and registration of the sale
Expenses for the execution and registration of the sale of the property
is to be the responsibility of the vendor, unless expressly stipulated.
Many terms & condition must be in writing
The law on obligation and contracts and sale and credit transaction require that some
conditions cannot be presumed and have to be expressly stipulated. In the review of credit
documents and instruments, the prudent credit manager must see to it that there are
provision relevant to these terms and conditions:
1. Charging of interest
2. Charging of compound interest
3. Forfeiture of installment payments
4. The right to collect deficiencies
5. The right to foreclose extrajudicially
6. A solidary obligation
7. Acceleration clause
Forfeiture of installment payments
With the exception of sales of real estate by installments, as
provided by R.A. 6552, installment payments could be forfeited
by the seller. However , this provision must be put in writing. For
installment sales of personal properties, articles allows the seller
to forfeit( not to refund) the installment already paid by the buyer.
In article 1484, one of the remedies of the seller is to cancel the
sale: by canceling the sale , the installment already paid by the
buyer could be forfeited if such a provision has been included in
the credit agreement.
Right to collect deficiency
With the exception of personal properties sold on installment, the seller
or creditor has the right to collect from the debtor if the sale proceeds in
a foreclosure sale is not sufficient in the credit agreement.
Right foreclosure extrajudicially
A judicial foreclosure takes time. An extrajudicial foreclosure can be
initiated any time ,a s long as 2 installments have been missed, in case
of sales on installments or the, or the account has become overdue, in
the case of single due date accounts.
Solidary obligation
A creditor who need to use a 2nd signer in a promissory note and who
wants that signer to be responsible for the debt as a surety must make
sure that the promissory note clearly provides for a solidary obligation,
and that the person signing fully knows the nature of his obligation.
Acceleration clause
An acceleration clause is a provision in a loan or credit agreement
where the loan amount or the credit payables is declared due and
demandable upon the payment of one or two installment payments
or violation of any of the terms an condition of the loan or credit
agreement.
If the acceleration clause was not inserted un the agreement, what is
to be followed is the due date. Article 1193 clearly says: ‘ Obligation
for whose fulfillment a day certain ahs been fixed shall be demandable
only when that days comes.
In the case of personal properties on installment, Article 1484
specifically provides that upon non payment of 2 or more
installments, the creditor or seller may foreclose the property
mortgaged and have it sold to pay for the debt. This is the
equivalent of an acceleration of the due date.