AN EVALUATION OF THE EFFICIENCY OF LOAN COLLECTION

POLICIES AND PROCEDURES AMONG SELECTED MULTI-

PURPOSE COOPERATIVES
OFFERING CREDIT SERVICES IN
TAGBILARAN CITY

Ararao, Cathylene

Campecio, Nia Joy

Dungog, Maximo Jr.

Idong, Rodel
CHAPTER 1

INTRODUCTION

Rationale

In the earlier times, even as late as the years before the last world
war, credit was synonymous with debt with all its negative connotations.
Thus, to the rich and poor alike, it was more of a stigma to avail of credit
which mean being in debt, no matter how promptly one pays his
indebtedness. Conversely, to have no debt was viewed as a status symbol.
True to this common belief, credit transactions then attracted mostly
people with not so good credit standing who incurred debts out of pure
necessity, or worse, with intent to defraud creditors. Examples of these
are the poor tenants who are perpetually indebted to their landlords or
the poor labourers who live hand-to-mouth existence, and had to depend
on credit to survive. (Apolo,2003)

With this, one can easily deduce the importance of credit in the
peoples daily lives. More often than not, people rely on credit especially
in times of financial difficulties. An economy without credit transactions
is a moribund nation. (Ibid)

Technically, credit is a term derived from the Latin word Credo

which means to believe and to trust. Trust is the fundamental element of
credit. (Ibid)

On the part of the creditor, what he has is the confidence in the

debtors willingness and ability to pay his obligation. The challenge is on
how to demand payment from the debtors efficiently which would mean
of lesser cost and at a reasonably acceptable collection period.

Furthermore, every business, regardless of its form, needs

appropriate management policies and procedures for its every distinct
procedure because having such aids the organization in achieving an
orderly and organized flow of operations. The same goes in terms of the
collection of the credit extended by the firm to its customers.

It is noticeable that credit procurement is one of todays most

rampant sources of financing not only for business establishment but also
for individual households. Large number of credit institutions has been
emerging occupying a significant niche in the society. One of these
institutions are credit and multi-purpose cooperatives; the latter referring
to the cooperatives engaging in diversified nature of operations.

The primary objective of every cooperative is to help improve the

quality of life of its members. (http://www.cda.gov.ph/website/html/about
%20coops.html#). Since it plays a vital role to the development of the
society, their operation must be properly managed so that the
contribution from its members placed as capital together with donations
and grants will be expected to generate returns. And in case of credit
cooperatives, these are made available for credit. With this, returns
heavily depend on how collections of these receivables are done.

This research project is geared towards the evaluation of the

collection policies and procedures employed by the selected multi-
purpose cooperatives rendering credit services with a corresponding
assessment of the degree its implementation efficiency.

Review of Related Literature

The cooperative credit idea in general, however was introduced in

the Philippines as early as 1907. The first cooperative credit society was
organized in Cabanatuan, Nueva Ecija, under the Act No. 2508 (Rural
Cooperative Credit Law) on October 19, 1916.

The term cooperative was derived from a French word co-operari

which means to work together. This meaning has been expanded to
convey the primary aims of the various types of objectives. (Fajardo and
Abella, 1981)

Moreover, a cooperative is an autonomous and duly registered

association of persons, with a common bond of interest, who have
voluntarily joined together to achieve their social, economic and cultural
needs and aspirations by making equitable contributions to the capital
required, patronizing their products and services and accepting a fair
share of risks and benefits of the undertaking in accordance with the
universally accepted cooperative principles.
(http://www.cda.gov.ph/website/html/about%20coops.html#)

The primary role that the credit and collection unit must play in a
business enterprise is to maximize profits and minimize bad debts losses
through proper credit evaluation of each application and through efficient
and consistent collection follow-up. (Apollo, 2003)

A number of collection techniques, ranging from letters to legal

action, are employed by firms in order to provide efficiency in the
collection process. This also includes collections by telephone calls,
personal visits, and collection agencies. As an account becomes more and
more overdue, the collection efforts become more personal and more
intense.(Gitman, 2009)

According to Ross, 2005, the firm usually employs the following

step-by-step procedures for customers that are overdue: First, the entity
must send delinquency letter information to customers past overdue
accounts. Second, call the customer through telephone. Third, employ
collection agency to collect the receivable. Lastly, if no response is
received from the customer after exhausting the prior ways, the entity
must take legal actions against the customer.

In his book, Judge Jose Apolo enumerated the following collection

efficiency criteria:

1. Collection Efficiency- The relationship (percent) between

monies collected and the money available to collect

2. Aging of Receivable- Money amounts and percent past due

beyond terms of sale. Emphasis is on the older aging of
accounts.
 3. Turnover- Number of months sales (invoicing) in receivables.
This is more of an assessment of the total investment in
receivables to include terms of sale, than it is a reflection of the
credit functions operating efficiency. The most effective
utilization of turnover is for purposes of comparison with
reporting from competitive and related industry sources.

4. Bad debts loss ratio- The ratio between total credit sales/loans
to bad debts.

In their Study on the Performance of Selected Credit

Cooperatives in the Philippines, Julius P. Relmpagos, Mario B. Lamberte
and Douglas H. Graham claimed that despite the impressive growth rates
in nominal assets achieved by the 12 credit cooperatives in the past five
years, a number of them still have not sustained a continuous increase in
their net incomes/savings .Thereby motivating the researchers to look
into loan collection policies of the cooperative.

With the above mentioned related literatures, the researchers took

the opportunity to study about the efficiency of the collection policies of
some cooperatives offering credit services in the City of Tagbilaran.

Research Questions

This study attempts to provide an adequate understanding about the

collection policies and procedures currently employed by selected multi-
purpose cooperative offering credit services. Specifically, it attempts to
answer the following questions:

1. What are the collection policies and procedures employed by multi-

purpose cooperatives offering credit services in Tagbilaran City?
2. What among these policies and procedures is critical as to the
collection of loans receivable?
3. What is the degree of implementation of these policies and
procedures?
4. What are the problems encountered by these cooperatives when it
comes to collection?
 5. How much are the recognized bad debts or what is the rate of bad
debts that the cooperatives recognize?
6. How fast is the Loan Receivable Turnover of these cooperatives?
7. What is the managements evaluation about the efficiency of the
collection of loans? Are they assessing themselves as efficient or
not? Why or why not?

Significance of the Study

Once credit or loan is extended inevitably, the responsibility to

collect ensues. The need for a collection system is more acute in the
Philippines at this present age and time since the responsibility to collect
is greater than the responsibility to pay. In other words, one has to run
after his peso to be able to collect. A sale is not complete until the last
peso is collected. It is therefore imperative that a collection system
should be set up if a company is to be assured of efficient collection. The
specific objective of collection management is to see to it that the unit or
the department tasked with the responsibility to collect is able to obtain
payment promptly at a minimum cost and to maintain the goodwill of the
customer or client at the same time., (Apolo,2003).

As what the title of this study suggests, the primary goal of the
researchers is to determine the current collection policies and
procedures of multi-purpose cooperatives extending credit services in
Tagbilaran City and to evaluate how efficient they are in the
implementation of their loan collection policies and procedures.

The study also aims to produce valuable information that will aid in
the improvement of these collection policies and procedures.

Specifically, this study aims to equip relevant information to the

following users:

To the respondent cooperatives:

Members in the cooperative will be able to know how

efficient the existing collection policies and procedures.
The result of this study can be used as a control tool for the
enhancement of the firms current collection to improve the
policies they are currently implementing
 Potential Debtors

The information regarding the credit collection policies and

procedures will serve as a basis for them to decide in
whether to procure credit/debt in a particular credit
institution such as a cooperative.
The information generated will also provide the potential
debtors with protection as to their interest especially in
cases when the existing collection policies and procedures of
a particular cooperative are not favourable to them.

Other credit institutions

Similar lending agencies may use the information gathered

as a benchmark in assessing the efficiency of their current
collection policies and procedures.
The researchers recommendations may be of significant
help in the enhancement of the existing policies and
procedures.

Scope and Limitations

With the nature of the multi-purpose cooperatives whose operation

is made up of at least two business activities, the researchers are only
focusing on the collection policies and procedures of loans receivable.
Other receivables as a result of their other operations are not included in
the scope of this study.

The respondents of this study are selected multi-purpose

cooperatives extending credit services located in Tagbilaran City only.

The evaluation of the degree of compliance with the particular

cooperative-based collection policies and procedures and its
corresponding implementation will be based only from the information
gathered through questionnaire and interview.
 The project is only up to the determination of problems regarding
the collection policies and procedures and not on the causes of such
problems.

Proposed Research Methodology

This study will use descriptive type of research methodology which

measures the status rather than the prediction. The Delphi Method is
applied which is a survey technique that involves the use of
questionnaires in an attempt to get consensus on a topic. Subjects
respond to a first questionnaire, then, based on these responses a second
questionnaire is developed and administered. Each time the
questionnaire is administered is called a "round." Responses will be
acquired through written and oral means. At the same time, a
supplemental interview will be administered personally by the
researchers so as to clarify points regarding their responses.

The first questionnaire will be distributed to the cooperative

personnel who has an access to the information needed. This may involve
but not limited to those handling treasurership functions. The succeeding
questionnaire shall be given to the personnel directly involve in the
implementation of the loan collection policies and procedures with direct
reference to the information gathered in the first questionnaire.

The first and second questionnaires will be composed of open-

ended and closed questions. Open-Ended Questions allow the responder a
variety of response options. The good part is that responders are free to
say what they like. On the other hand, Closed Questions direct
responders to certain choices among provided options. The researchers
can ask responders to rank order choices, select a score on a scale, or
respond to provided categories.
Bibliography

Apolo, J. 2003. Credit And Collection Management.

Gitman, L. 2009. Principles of Managerial Finance, 12 th Edition.

Pearson Education, Inc. Publishing as Addison-Weasly, Copyright
2009

Fajardo, F., et al. 1981

Ross, S. 2005. Corporate Finance, 7th Edition. MacGraw Hill

Relampagos, J., et al. A Study on the Performance of Selected Credit

Cooperatives in the

Philippines. Working Paper Series No. 90-23.

http://www.cda.gov.ph/website/html/about%20coops.html#