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
or 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).

Granted Due date

3-17-18 3-31-18 4-30-04 5-17-18
 The calculation of the collection
goal of a bank (term loans) or a supplier
of merchandise credit differs 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.
The collection goals are calculated:

MERCHANDISE CREDIT AS OF APRIL

30, 2004

All the past due accounts P 250,000

Maturing accounts, April 2004 P 1,500,000

Total collection goal for April 2004

P 1,750,000
Thus, for the supplier of merchandise
credit, it must collect the goal of 1,750,000.
If it does, the collection efficiency is 100%.
The formula for calculating the collection
efficiency is:

Actual Collection = P 1,500,000

Collection Goal P 1,750,000

= 85.71%
In the appliance companies, the amounts
used are not the balances of the accounts but
the installments that are due.

APPLIANCE COMPANY AS OF APRIL 2004

Past due installments P 100,000

as of 04-30-04
Installments falling due in April P 250,000

Total collection goal for April 2004 P 350,000

If the actual collections (example) fro April is P
295,000 then collection efficiency is:

Actual Collections = P 295,000

Collection Goal P 350,000

=84.28%
 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 = Past Due Ratio

Total Amount of Loans

If the bank’s past due ratio is over 25%,

some their privileges are suspended by the
Bangko Sentral. Past due accounts are also called
NPL’s or non-perfsorming loans.
 Incentive Program for Collectors

The incentive program that is in place in

many appliance companies use only 2 C’s:
cold cash. Of course, it is prudent
management practice to recognize some
collectors during some annual events; after
all, Maslow’s model on needs states that
employees should be 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. It motivates them to do
things

1. The number of accounts have been

stressed, thus, the bigger the number of
accounts handled by a store, the bigger the
incentives. The management wants to
motivate the branch to sell more, and have
more installment customers.
1. The number of accounts have been
stressed, thus, the bigger the number of
accounts handled by a store, the bigger the
incentives. The management wants to
motivate the branch to sell more, and have
more installment customers.

2. The minimum acceptable aging and

collection efficiency ratios, as could be
seen from the above example, are both
80%. The management wants both the
credit section (or department) to be very
careful in approving credit applications and
also the collection section to be very
effective.
 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 yield on their
loans, without violating interest limits on certain
types of loans.
 Loan interest limits (maximum) are
imposed on loss that will later be rediscounted
with the Bangko Sentral. By rediscounting, a
bank could use the same promissory note
signed by a farmer-borrower, as a collateral for
a fresh loan from the Bangko Sentral.

For example, an agricultural loan has a limit of

24% interest per year. If a rural bank increases
its interest rate to say, 30%, that loan cannot
be used as collateral for a rediscounting loan
with the Bangko Sentral.
 To increase the rural bank’s yield or
income on the loan, without violating the
interest limit, one popular alternative is an
increase in the service fee charged, from the
usual 3% to as much as 10%.

The yield on a P 100,000 agricultural loan,

24% interest not deducted in advance , at 3%
service fee is:
Interest Income = P 27,005 =
27.84%
Net loan Proceeds P 100,000- P 3,000
Effective

By increasing the service fee to 10%, the yield

goes up:

Interest Income= P 34,0006 =

37.77%
Net loan Proceeds P 100,000- P10,00 Effective
THE CASE OF THE “SOLE” HEIR

Jaime Bichavez, widower by 1995,

acquired a 300 sq. m. residential lot at Tiguma,
Pagadian City. Jaime an only child has been a
resident of Molave, Zamboanga del Sur since his
parents migrated there in 1950 and brought him
from Pangasinan at age 2.

Jaime got married and he had 2 children.

In 1998, his eldest an accountant, migrated to
the US. She has not come back since then; she
could not go back until she gets her green card.
At that time, Miguel, the younger one, was about
to graduate at Aim Tech Collages in Pagadian
City.
 In 1990 Jaime sold his house and lot in
Molave and constructed a 3-bedroom house
in Tiguma, Pagadian City. He wanted Miguel,
who seemed unable to complete his BSBA
degree, to enjoy the comforts of a real
home. Miguel has been in and out of many
boarding houses for the past 5 years.
Thereafter, Jaime kept to himself, passing
his days by tending to his small vegetables
plots at the back of his house. His
neighbors just ignored him, but
occasionally they would politely say hello to
him.
 In 2003, Jaime died without a will.
Miguel, unable to graduate and
financially strapped of his drug and
alcohol problems, decide to mortgage
his father’s house and lot. He had a
lawyer draw a document making him the
sole heir of the property. A notice in the
local papers was posted from 3
consecutive weeks.
 Thus, in the credit application, he
stated that he is the sole heir of his
father. He submitted the documents
showing him as the sole heir. The bank’s
credit investigator interviewed the late
Jaime’s neighbors, who could not offer
much information except that Jaime had
a son named Miguel, who appears to be
an only child. Miguel got a loan for
P200,000 on a P700,000 property.
How could this happen. Could this have
been prevented? What problems should
the bank anticipate?