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RISK

MANAGEMENT
WHAT IS RISK?

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 Thepossibility of loss, damage or any
other undesirable event arising from
uncertainty about a situation.

 Lowrisk would translate to a high


probability of success, profit or some
form of gain.
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SOURCES OF RISK

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 Exposures resulting from business
processes and activities with the
potential to produce events that can
lead to the incurrence of losses.

 Exposures undertaken to produce


greater profits that can lead to
unanticipated costs and potential
losses. 3
TYPES OF RISKS

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 Strategic Risk
 your coop’s strategy becomes less
effective, hence, your coop struggles to
reach it’s goals as a result.

 Financial Risk
 refersspecifically to the money flowing
in and out of your business, and the
possibility of a sudden financial loss.
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TYPES OF RISKS

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 Operational Risk
 Refers to an unexpected failure in the day-to-day operations
 Arises from inadequate information systems, operational
problems, breaches of internal controls, fraud, or unforeseen
catastrophes resulting in unexpected losses. May be due to:
 Weaknesses in organizational structure

 Poor oversight function of the Board of Directors and Senior


Management
 Faulty Hiring Policy

 Weak Internal Control System

 Inadequate internal and external audit coverage

 Deficient Management Information System


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TYPES OF RISKS

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 Credit Risk
 obligor’s failure to meet the terms of
any contract with the cooperative as
agreed upon.

 Market Risk/Interest Rate Risk


 adverse movements in interest rates.

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TYPES OF RISKS

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 Liquidity Risk
 inability to meet obligations when they
come due because of:
 inability to manage funding sources
 failure to recognize or address adverse
conditions affecting ability to liquidate
assets quickly with minimal loss in
value.

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TYPES OF RISKS

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 Compliance or Regulatory Risk
 Arises from violations of laws, rules,
regulations, prescribed practices,
internal policies or procedures or ethical
standards.

 Legal Risk
 Arises as a result of unenforceable
contracts, lawsuits or adverse
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judgments.
TYPES OF RISKS

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 Reputational Risk
 Your reputation is everything. Can take
form of a major lawsuit, negative publicity,
or criticism of your products and services.
 Systemic Risk
 Presently, cooperatives in the Philippines
have still no support system, like, Liquidity
Fund, Deposit Guarantee Fund or
Stabilization Fund, that would support the
coops in cases of rehabilitation, bank run,
etc.
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RISK TOLERANCE

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 Theability and willingness to
assume risk.

 High risk = High return


 Low risk = Low return

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WHAT IS RISK
MANAGEMENT?

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Risk Management is
the identification,
classification and
prioritization of risks.
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WHAT IS RISK
MANAGEMENT?

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 Risk Management involves the following:
 Identifying the level of risks the institution
wants.
 Measuring the risk that an institution
currently has.
 Controlling the risks by taking actions to
bring the actual level or risk to the desired
level of risk.
 Monitoring the new actual level of risk so
that it continue to be aligned with the desired
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level of risk.
PRINCIPLES OF RISK
MANAGEMENT
The process should create value
It should be an integral part of
the organizational process
It should factor into the overall
decision-making process
It must explicitly address
uncertainty
PRINCIPLES OF RISK
MANAGEMENT
It should be systematic and
structured
It should be based on the
best available information
It should be tailored to the
project
It must take into account
human factors
PRINCIPLES OF RISK
MANAGEMENT
It should be transparent and
all-inclusive
It should be dynamic and
adaptable to change
It should be continuously
monitored and improved
upon
WHAT COMPRISE A
RISK MANAGEMENT SYSTEM?

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Control Environment
 Establishing and institutionalizing
acceptable business practices in
the day-to-day operations.
Board and Key Management

Policies, procedures and limits

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WHAT COMPRISE A
RISK MANAGEMENT SYSTEM?

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Control Activities
 Formulating and implementing a
wide range of policies and
procedures to ensure that
management’s directions are
effected.
Internal control

Internal audit 17
WHAT COMPRISE A
RISK MANAGEMENT SYSTEM?

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Risk Assessment
 Analyzing external and internal
factors that impact on the
achievement of the institution’s
objectives
 Providing for measures in
managing changing conditions 18
WHAT COMPRISE A
RISK MANAGEMENT SYSTEM?

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Information
and
Communication
 Identifying,
capturing, processing and
reporting timely information to Board
and Management
Reporting systems

Feedback mechanisms

MIS 19
WHAT COMPRISE A
RISK MANAGEMENT SYSTEM?

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Monitoring
 Ensuring
appropriate procedures
and mechanisms are in place to
Evaluate effectiveness of internal
systems
Report deficiencies

Modify procedures accordingly


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RISK ASSESSMENT
 Provide Management with a view of
events that could impact the
achievement of objectives.
 Best integrated into existing
management processes.
 Qualitative assessments are the
most basic form of risk assessment.
RISK ASSESSMENT
Risk assessment include:
 Strategic Risk Assessment –
evaluation of risks relating to the
organization’s mission and
strategic objectives.
 Operational Risk Assessment –
evaluation of the risk of loss
resulting from inadequate or failed
internal processes, people,
systems, or from external events.
RISK ASSESSMENT
Risk assessment include:
 Compliance Risk Assessment –
evaluation of risk factors relative to
the coop’s compliance obligations,
considering laws and regulations,
policies and procedures, ethics and
business conduct standards,
contracts, strategic voluntary
standards and best practices to
which the coop has committed.
RISK ASSESSMENT
Risk assessment include:
 Internal Audit Risk Assessment
– evaluation of risks related to the
value drivers of the organization,
covering strategic, financial,
operational and compliance
objectives. The assessment considers
the impact of risks to shareholder
value as basis to define audit plan
and monitor key risks.
RISK ASSESSMENT
Risk assessment include:
 Financial Statement Risk
Assessment – evaluation of risks
related to a material misstatement of
the organization’s financial statements
through input from various parties
such as the Controller, Internal Audit
and Operations. Considers the
characteristics of the financial
reporting elements and the
effectiveness of the key controls.
RISK ASSESSMENT
Risk assessment include:
 Fraud Risk Assessment –
evaluation of potential instances of
fraud that could impact the
organization’s ethics and compliance
standards, business practice
requirements, financial reporting
integrity, and other objectives.
RISK ASSESSMENT
Risk assessment include:
 Market Risk Assessment –
evaluation of market movements that
could affect the organization’s
performance or risk exposure,
considering interest rate risk, currency
risk, option risk and commodity risk.
RISK ASSESSMENT
Risk assessment include:
 Credit Risk Assessment –
evaluation of the potential that a
borrower will fail to meet its
obligations in accordance with agreed
terms. This considers credit risk
inherent to the entire portfolio as well
as the risk in individual transactions.
RISK ASSESSMENT
Risk assessment include:
 Customer Risk Assessment –
evaluation of the risk profile of
customers that could potentially
impact the organization’s reputation
and financial position. This assessment
weighs the customer’s intent, credit
worthiness, affiliations and other
relevant factors.
RISK ASSESSMENT
Risk assessment include:
 Information Technology Risk
Assessment – evaluation of potential
for technology system failures and the
organization’s return on information
technology investments.
RISK MANAGEMENT
PLAN
 Help keep small issues from developing into
emergencies.
 Help the organization deal with adverse
situations when they arise and head them off
before they arise.
 Deal with calculating the probability of an
event, and how that event might impact you,
what the risk are with certain ventures, and
how to mitigate the problems associated with
those risks.
BOD ROLE
IN
RISK
MANAGEMENT
IMPLEMENT THE SIX STEPS
RISK MANAGEMENT PROCESS

Policy Structure
Risk Setting Limits
Management
Framework

Exposure
Decision Making Measurement

Implementatio Oversight
n
BOD ROLE IN COOP RISK
MANAGEMENT
Policy Structure / Risk Management Framework

Approve policies for key risks


Set up management framework
Specify responsibilities for
carrying out policies
Institute controls to comply with
policies
BOD ROLE IN COOP RISK
MANAGEMENT

Setting Limits
That reflects the Board’s
maximum tolerance for each
major risk
Limit structure is essential for
financial risks ( interest rate,
credit, liquidity, and foreign
exchange )
BOD ROLE IN COOP RISK
MANAGEMENT

Exposure Measurement

Risk exposures are


qualified
With appropriate
operational controls
BOD ROLE IN COOP RISK
MANAGEMENT

Decision-Making

Thoughtful, well-informed and


coordinated risk management decisions are
taken in a timely manner.
BOD ROLE IN COOP RISK
MANAGEMENT

Implementation

Management is responsible for carrying


out the risk management decisions, under a
system of delegated authorities, and subject
to close monitoring and controls that the
Board sets up.
BOD ROLE IN COOP RISK
MANAGEMENT

Oversight

Policies must be
followed
Limits must be
respected
Controls must be in
place
CONCEPTS AND
PRINCIPLES OF
SAVINGS AND CREDIT
 The cooperative, in enhancing the
values of equality, equity and
mutual self-help, seeks to promote
the concept of human development
and unity by working together to
achieve a better quality of life for the
members and their families.
CO-OP’S MISSION
 Increase the income and purchasing
power of the members
 Pool their resources by encouraging
savings and promoting thrift
 Stimulate capital build-up for
economic development activities
 Extend credit services to the
members.
CAPACITY-BASED
LENDING
 Aids in improving loan portfolio quality
 Aims to provide the cooperatives with
tools required for reducing delinquency by
enabling them to evaluate loan
applications more effectively and
efficiently.
 Helps eliminate the situation of the
members being saddled with loans they
can hardly afford to repay, and in the
process ruin their credit standing within
the community.
The Board of Directors shall be
responsible for developing sound
credit and collection policies to
provide a solid basis for efficient,
effective and consistent delivery
of services by the cooperative.
The cooperative shall deliver
effective and sustainable
financial services to its members
with the end view of developing
the socio-economic condition of
the community in general.
GUIDING PRINCIPLES
 The security of the cooperative is more
important than the applied or requested credit
needs of any individual member.
 To answer the needs of a borrower-member,
the cooperative needs to evaluate the risk
involved in lending and set the limit that the
cooperative is willing to assume or grant.
 Loans are granted to members based on good
standing and capability of the member to
repay.
GUIDING PRINCIPLES
 Each loan necessitates a thorough credit
investigation.
 The protection of savings deposits and share
capital of all members, and the credibility and
security of the cooperative are more important
than the increase in the volume of transactions
and operations, and growth of assets.
 A loan to a member is a privilege, rather than
a right inherent to membership.
GUIDING PRINCIPLES
 No new loans shall be extended to member-
borrowers with delinquent accounts.
 The cooperative has to prove its financial
soundness, operational security and ensure
balance between risks, diversification and
profitability.
 To limit the risk of lending and to diversify the
loan portfolio, the cooperative has to limit
loans to members who are within the
geographical area stated in the by-laws.
GUIDING PRINCIPLES
 The loan portfolio is limited by type of
loan.
 Commercial, real estate and agricultural
loans have to be covered sufficiently by
collateral.
 The cooperative may finance viable
projects up to 70% only of the total project
cost. The remaining 30% shall constitute
the member’s counterpart.
ELIGIBILITY CRITERIA
 The cooperative shall grant loans
only to members of good standing,
residing or operating within the area
of jurisdiction of the cooperative as
stated in its by-laws, and who satisfy
credit investigation requirements.
ELIGIBILITY CRITERIA
 Themember-borrower with a previous
credit history below standards may be
granted loans only under certain
conditions set by the cooperative. For
member-borrowers with unsatisfactory
credit rating, loans may be granted only
when the loan is fully secured with
savings and share capital and/or with
acceptable joint several
makers/borrowers.
LOAN LIMIT AND
CONCENTRATION OF RISK

 The loan portfolio shall be limited


according to the type of loans to be
granted to reduce the coop’s over-all
risk, hence, will become more
profitable, thereby benefiting the
entire membership.
2 TYPES OF LOAN LIMITS
1) Loan Portfolio Limit
- the over-all limit to which the
cooperative can commit its funds
for loans. This limit indicates the
over-all limit to which the primary
cooperative can extend loans to its
members.
- 70-80% of Total Assets
2 TYPES OF LOAN LIMITS
2) Individual Borrower’s Limit
- the limit to which the cooperative
can extend loans to any single
individual or family up to the second
degree of consanguinity or affinity.
This limit shall be one percent (1%)
and two and a half percent (2.5%)
respectively, of the total equity of the
cooperative.
INTEREST INCOME
RECOGNITION
 Recognition of interest income shall
be on a strictly cash basis. Non-
accrual of interest income on loan
shall be the rule.
 This is to avoid situations where
interest earned but not yet collected
are considered profit and considered
for purposes of dividend declaration
and other benefit/s granted to the
officers of the cooperative.
APPROVAL
MATRIX
LEVELS OF LOAN APPROVAL
1) The Board of Directors
- The corporate power to manage the business affairs of
the cooperative is vested in the Board of Directors,
except, those which are expressly reserved for the
General Assembly
- By the majority vote of the Board of Directors, they
have the power and authority to suspend the credit
privileges of any member-borrower where there is
diversion of loaned funds or similar reasons, followed
by a proper investigation, and to approve or disapprove
loans.
LEVELS OF LOAN APPROVAL
2) Credit Committee
- The Committee which has the delegated
authority to exercise general supervision in
processing, granting, documenting and collecting
of loans, shall exercise the following levels of
credit approval:
 All loans based on the credit policy and rating set by
the Board of Directors except DOSRI accounts;
 Other loans within the authority of the Board of
Directors and confirmation of loans that are granted
by the Manager according to his/her approval
authority limits.
LEVELS OF LOAN APPROVAL
3) Coop Manager
- Having the general responsibility and
accountability of all the phases of the
business operations of the cooperative to
ensure effective and efficient management
of the day-to-day operations, has the
authority to approve or disapprove loans.
The amount of these loans shall be
determined by the Board of Directors.
THE CREDIT CYCLE
PRODUCT
PLANNING

WRITE-OFF

Management
Information
CREDIT INITIATION
COLLECTIONS RISK &
MGMT. APPROVAL

Systems

ACCOUNT
MAINTENANCE
PRODUCT
PLANNING
PRODUCT PLANNING

Thebeginning and end of the


credit cycle.

ACONTINUING process where


we validate and adjust to market
needs and environment.
PRODUCT PLANNING
2 aspects:
 Target Market
 Needs
 Behaviors

 Values

 Beliefs

 Product Design
 Pricing
 Acquisition Expenses

 Operating Expenses

 Collection Expenses

 Terms & Conditions


CREDIT
INITIATION
&
APPROVAL
4 STEPS IN CREDIT
APPROVAL
1) Obtain

2) Evaluate

3) Verify

4) Decide
EVALUATING CREDIT
WORTHINESS

 Utilizethe 5 C’s of credit to evaluate


credit worthiness.

 Why do we care about the C’s?


 Why be so selective in who we
approve?
 Why do we establish credit criteria
and policy?
CRITICAL QUESTIONS TO
DETERMINE CREDIT
WORTHINESS

 Will the person pay ?

 Can the person pay?

 Is
there enough equity to ensure
payment?
THE FIVE C’S
OF CREDIT
Capital Character

Capacity

Conditions Collateral
# 1 - CHARACTER
 The member’s reputation.
 Isthe borrower of good character?
 Do they have a proven habit of repaying
their loans?
 Length of time on the job?
 Length of time in the community?
 Use all available information to
determine this, such as, the loan
application, coop’s account history,
references, personal knowledge, and
information from other coops.
# 2 - CAPACITY
 Capacity to pay debt on schedule and
in cash.
 Payment schedule fit the borrower’s
cash flow.
 Extent of the borrower’s disposable
income.
 Type and terms of outstanding
obligation
 Number of dependents that live on the
disposable income
# 3 - COLLATERAL
 Support for loan approval if the other C’s are
weak.
 Savings, personal property and real property
are all forms of security.
 Ensure that the collateral is acceptable.
 Needs to be verified and valued.
 The loan term should never exceed the useful
life of the collateral.
 Loan amount should not exceed the value of
the collateral.
 Real estate mortgages shall not exceed 70% of
the appraised value.
 Chattels shall not exceed 50% of the appraised
value.
# 4 - CAPITAL
 Asset Growth
 Has the member made steady, even if
slow growth in assets or is every penny
earned immediately spent?

 Savings Growth
 Does the member save consistently in
the cooperative?
 Are members there just to get a loan?
 Does the member live beyond his
means?
# 5 - CONDITIONS

 Circumstances of the economy,


industry, and cooperative
environment in which the credit is
granted.
ACCOUNT
MAINTENANCE
Account maintenance
begins once an account
is booked and part of
the portfolio.
 Expand Client Relationships

 Optimize Quality of Portfolio

 Account Review & Monitoring

 Collection Strategies

 Customer Service
COLLECTION
WHY DO WE NEED TO COLLECT
LOANS?
10
370
340
310# 50
280o
250
f
220 70
190 80
160d 89
95
130a 365
100y
240
70 120
s 90
40 60
30
10
# of days past due Recovery rates
GOALS OF THE COLLECTIONS
PROCESS
100% 0%

Emphasis: Emphasis:
Maintaining Protecting
Relationship the Asset

0% 100%
Time (# of Days Delinquent)
COLLECTION IS A “BALANCING ACT”

Credit Credit
Credit
Expenses Losses
Expense
Customer &
Relationship Credit Losses

We must understand
Strategy and Process…..
COLLECTION STRATEGY

 Who to contact
 How to contact
COLLECTION  When to contact
STRATEGIES
 Who are the collectors
 How do we manage
collectors
 How many collectors are
required
HOW CAN THE COOPS
IMPROVE COLLECTION?

 Using the basic tools:

 Acceptable policies and procedures

 Know some habits and characteristics of the


borrowers

 Timely management and information


system
WRITE-
OFF
WRITE-OFFS
A result of the areas or an area of
the credit cycle that was not properly
executed.

 Function of the risk the business


takes.
 Too few may mean too conservative
policies
 Too high would mean too lax
WRITE-OFF OF LOANS AS
BAD DEBTS
Shall be made in accordance with
the coop’s written policy.
Shall be charged against
Allowance for Probable Loan Loss
(APLL).
No loans shall be written-off unless
the same can be justified as
uncollectible.
WRITE-OFF OF LOANS AS
BAD DEBTS

 Conditionsfor uncollectibility
 Death of borrower
 Incapacity to pay or insolvency of the
borrower
 Unknown whereabouts
 Exhaustion of all administrative and
legal remedies
LOAN PROCESS

THE CYCLE
Loan
PMES Application
CI/BI & Collateral
Appraisal

Credit Committee
Documentation Approval Process Credit & Repayment
& Registration Capacity Analysis;
Credit Scoring

Monitoring &
Loan Release
Collection
PRE-
MEMBERSHIP
EDUCATION
SEMINAR
PRE-MEMBERSHIP EDUCATION
SEMINAR
 Discuss credit policies
(procedures, fees, interest
rates, etc.)

 Orient prospective members


on the mode of payments
(amortization, due date),
effects and disadvantages of
mispayments to the members
and the coop.
PRE-MEMBERSHIP
EDUCATION SEMINAR

 Inform prospective
borrowers that loan is
granted only to members
after evaluation of his/her
capacity to pay.

 Remind prospective
members that loan is a
privilege, not a right.
LOAN
APPLICATION
LOAN APPLICATION
 Check Loan Application
Form (LAF) if it is
completely filled-up.

 Review LAF to determine


whether the applicant has
met the minimum borrower
eligibility criteria.
LOAN APPLICATION
 Interviewloan applicant for
consistency of member’s
information and cash flows.

 Inform loan applicant that


credit investigation is still
to be done.
CREDIT
INVESTIGATION
CREDIT INVESTIGATION

 Visit member’s residence.

 Gather information from


neighbors and creditors to
verify data provided.
CREDIT INVESTIGATION

 Check existence and


condition of collaterals
offered.

 If
employed, verify
employment/employer
status, income and mode.
CREDIT INVESTIGATION
 Conduct on-site visit and
observation of the business
place and its condition.

 Conduct checking of credits


with other financial
institutions.
CREDIT INVESTIGATION
 Verify
consent, willingness
and capacity to pay of the
co-makers.

 Verifyconsent of the spouse,


if married.
CREDIT AND
REPAYMENT
ANALYSIS
CREDIT AND REPAYMENT
CAPACITY ANALYSIS
 Conduct Cash Flow Analysis
of the borrower.

 Check member-borrower’s
character history in terms of
savings and loan repayments
in the coop.
CREDIT AND REPAYMENT
CAPACITY ANALYSIS
 Review Credit Investigation
Report.

 Conduct Credit Scoring.


APPROVAL
APPROVAL

 Analyze repayment
capacity.

 Re-verify supporting
documents.
APPROVAL
 Loan Officer recommends
the approval of the loan.

 Authorities at appropriate
levels
(Manager/CRECOM/BOD)
approves the loan.
DOCUMENTATION
AND
REGISTRATION
DOCUMENTATION &
REGISTRATION
o Execute legal forms (Chattel
Mortgage, Real Estate
Mortgage, etc.).

o Attach the Minutes of


Meeting or Board Resolution
if the loan is approved by the
Board due to special cases.
DOCUMENTATION &
REGISTRATION

o Register all loan applications


in the logbook with reasons
of denial, in case of
disapproved loans.

o File all disapproved loans.


LOAN
RELEASES
LOAN RELEASES

• Inform immediately the


borrower if the loan is
approved.

• Register mortgages with


the Register of Deeds.
LOAN RELEASES
• Conduct loan counseling.

• Orient the borrower on


the benefits of on-time
payments, the penalties
of late payments, and its
effect to the borrower and
the coop.
LOAN RELEASES
• Prepare Promissory Note,
Disclosure Statement and
other supporting documents.

• Have the Promissory Note,


Disclosure Statement and
supporting documents signed
by the borrower, his/her
spouse and co-makers.
LOAN RELEASES
• Print-out 2 copies of the
amortization schedule. Give
one copy to the borrower.
Coop’s copy should be received
by the borrower.

• Borrower receives the loaned


amount.

• File loan documents in the


individual folder.
MONITORING
AND
COLLECTION
MONITORING AND
COLLECTION
 Conduct Loan Utilization
Check.

 Ensure clear assignment of


accounts to the Account
Officers.

 Heldthe Account Officers


accountable of their handled
accounts.
MONITORING AND
COLLECTION

 Settarget delinquency
reduction per Account
Officer.

 Print
weekly the Installment
Due Report.
MONITORING AND
COLLECTION
Loans Department to
conduct at least once a
week meeting to:
 Analyze the reasons of the
increase/decrease of the
delinquency rate; and
 To strategize on how to
collect the delinquent
accounts.
MONITORING AND
COLLECTION

 Visit
and follow-up
delinquent borrowers.

 SendCollection Notices and


Demand Letters to
delinquent borrowers.