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MANAGEMENT
WHAT IS RISK?
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Thepossibility of loss, damage or any
other undesirable event arising from
uncertainty about a situation.
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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.
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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
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Credit Risk
obligor’s failure to meet the terms of
any contract with the cooperative as
agreed upon.
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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.
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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
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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
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
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
Decision-Making
Implementation
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
WRITE-OFF
Management
Information
CREDIT INITIATION
COLLECTIONS RISK &
MGMT. APPROVAL
Systems
ACCOUNT
MAINTENANCE
PRODUCT
PLANNING
PRODUCT PLANNING
Values
Beliefs
Product Design
Pricing
Acquisition Expenses
Operating Expenses
Collection Expenses
2) Evaluate
3) Verify
4) Decide
EVALUATING CREDIT
WORTHINESS
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
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?
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.)
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.
If
employed, verify
employment/employer
status, income and mode.
CREDIT INVESTIGATION
Conduct on-site visit and
observation of the business
place and its condition.
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.
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.).
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.