RIZAL TECHNOLOGICAL UNIVERSITY

Cities of Mandaluyong and Pasig

SESSION NO. 4 / WEEK NO. 4

MODULE NO 4: CREDIT EVALUATION

1. DEFINITION OF CREDIT EVALUATION

2. THE 5 C’S APPROACH AND THE CAMPARI
3. THE OTHER 2C’S OF CREDIT
4. THE CREDIT SCORING SYTEM APPROACH
5. THE CREDIT RATING AGENCIES AND CREDIT BUREAUS

Overview

This module presents credit evaluation which will decide whether a

credit application will be approved or not. Different models in evaluating

credit will be discussed. The 5 C’s of credit will be explained further together

with what we call as CAMPARI. Objective approach which is the credit scoring

system will also be discussed. Lastly, we will learn about the Credit rating

agencies, its top 3 agencies and the rating each of these agencies represent.

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Study Guide

The following are the learners’ guide to complete this module:

• Learner should make time to read and understand the given module;
• Video presentation will be uploaded to Facebook Social Learning Unit
and YouTube account, so you will be updated with the discussion of
each topic;
• Some parts of the module is in worksheet type for the learners to
have deep exposure about the given topic;
• Other activities are encourage such as web searching, reading open
journals and other reading materials to generate more idea about
certain topic;
• Don’t hesitate to ask relevant questions for better understanding of
the topics.
• You can find help with your friends, cousins and even your parents
but make sure you are the one who will do this module. One on one
monitoring will be done.
• Monitoring of student’s progress will be implemented through mobile
technology (phone interview and graded recitation over phone calls).

Learning Outcomes

At the end of this module, the students can able to:

1. DESCRIBE THE 5C’S OF CREDIT AND THE CAMPARI MODEL

2. EXPLAIN HOW OBJECTIVE CREDIT SCORING SYSTEMS ARE USED
3. INTERPRET THE CREDIT SCORE AND CREDIT RATING OF BORROWERS
4. EVALUATE CREDIT PROPOSAL AND APPLY CREDIT CRITERIA FOR A CREDIT
APPLICATION.

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Topic Presentation

What is Credit Evaluation?

Credit evaluation is the process a business or an individual must go
through to become eligible for a loan or to pay for goods and services
over an extended period. It also refers to the process businesses or
lenders undertake when evaluating a request for credit. This is where
the decision is made to either approve or reject the credit.

In evaluating and coming to a decision, the bank or financier can rely

on simple models.

We have the 5 C’s Approach and the CAMPARI which are subjective
approaches and the Credit Scoring Models which aim to be objective in
their approaches.

The 5 C’s Approach

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1. Character. To lenders this is the most important requisite and the

most difficult to measure precisely. The bank needs to determine
whether there is a willingness in the character to pay. Even if the
character has the capacity to pay, his/her credit may still be
declined if his willingness to pay is questionable.

Factors to be considered in examining a character

• Past records of the client or credit history;

• Stability and duration of his employment / business
• Experience and qualification
• Reputation in the industry / Community
• Style of living

2. Capacity. Capacity looks into the client’s ability to pay and handle
the financial obligation.

The following are to be considered

• Income
• Ability to repay credit obligations and all other monthly
expenses
• Marketability or ability to change jobs

3. Capital. This is the measure of the net value of a client’s assets

which form back up liquidity to meet repayment.

Client’s capital can be determined by the following

• Current level of liquid assets

• Current level of unsecured borrowings
• List of income sources
• Fixed expenses
• Contingent liabilities

4. Conditions. The lender should examine whether the client’s

employment or business will withstand the unexpected things that
may happen to the economy, social and political, government
regulations, competition or changes in the bank’s policies.

Example: The Forum Institute is an English Language School for

Koreans, based in the Philippines will be closing soon due to Covid

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19 pandemic crisis. The owner of the school has an existing loan to

ABC Bank.

5. Collateral. This is an item of value used to secure a loan. It is

examined on its easy disposability and whether its adequate as
security.

A sample of how a lender would analyse the 5C’s of his client:

STRENGTHS WEAKNESSES
Character
• Purchasing a house
• 15 years of residence • Current job on probation
• Profession – engineer • Wife only 6 months on job
• Previous job – long term
• Wife standing as surety
• Bills are settled on time

Capacity
Debt to income ratio is 33% of
net salary
Php10,000 mo.exp / Php
30,000 mo income
Capital
Has a property worth P1Million
and a liability of only
P500,000

Condition
The demand for engineers
with his expertise is good
Collateral
Unsecured loan

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Other 2 C’s

Common Sense

➢ While there are concrete and quantifiable measurement which serve as

tools to guide one’s credit decision, arriving at a good credit decision

has a lot to do with common sense and at times even gut feel.

➢ The purpose for granting credit must be clear and acceptable. The

bank should not lend money unless it is clearly understood what it is

for and sometimes depending on the underlying transaction, even how

it is going to be used, when and where.

➢ Be wary of granting credit to support the Borrower’s excessive business

growth. The Borrower’s plans or projections may be too aggressive.

➢ All new ventures or start-up business are risky and thus would require

greater scrutiny and more solid mitigating factors.

➢ The amount of the credit facility should be the (1) consistent with the

purpose; (2) within the capacity of the borrower to fully repay the

credit on due date.

➢ The amount of the credit should not be excessive relative to the

borrower’s asset size, revenue level, and the equity stake.

Credit Reports

A credit report is a detailed summary of your borrowing and repayment

activities. It contains your personal and/or business information, as well as
pertinent details of your loans, credit cards, mortgage, and other financial
transactions.

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• Credit Investigation Report

✓ Loandex Information System
 Relationship with other banks
 Security or Collateral
✓ Negative File Information System
 Mishandled Current Accounts
 Cancelled Credit Cards
✓ Government Agency Verification
 Securities and Exchange
Commission
 Department of Trade and
Industry
✓ Address Verification
 Residence Verification
 Business Verification
 Employment Verification
 Lease Verification
✓ Trade Verification

In a nutshell, here’s how credit reporting works in the Philippines:

1. Banks and other financial institutions submit their clients’ credit

information (both positive and negative) to the Credit Information
Corporation (CIC), the public credit registry and repository of credit
information in the Philippines.

https://www.creditinfo.gov.ph/

Under Republic Act No. 9510, the Credit Information Corporation has the
powers and functions to receive and consolidate basic credit data, to act as a
central registry or central repository of credit information, and to provide
access to reliable, standardized information on credit history and financial
condition of borrowers.

2. The CIC compiles the collected credit information into in-depth credit
reports.
3. The CIC shares credit reports of borrowers to lenders that are official
accessing entities (submitting financial institutions authorized by CIC to
access basic credit data), and to their accredited credit bureaus.
4. Lenders use the information in credit reports to assess whether to lend
money to a borrower or not.

How to get your CIC credit report

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To get a copy of your CIC credit report, you need to first visit the CIC website
and:

1. Click on “Services.”
2. Select the option “Get a CIC Credit Report.”
3. Read the Terms and Conditions carefully before clicking on the “I
agree” button.
4. Select your preferred Date of Appointment.
5. Provide the needed personal information.
6. Download and print your Application Form.

You need to personally visit the CIC office located in Legaspi Village, Makati
City, Philippines to check your credit score through the credit report. To
ensure the safety of your credit data, the CIC conducts a Know Your
Customer (KYC) process

Example (please check Module 4 in google classroom)

The CAMPARI Model

Character Willingness to pay versus ability to

pay
Ability to repay Adequacy of cash to meet repayment

Margin of finance The client must contribute a certain

margin as commitment. The bank
seldom grants 100% financing
Purpose The purpose of the loan must be
defined
Amount The amount the lender is willing to
contribute to the client. This prompts
a question, how much is too much for
a client?
Repayment terms The structure
repayment
and terms of

In the event the borrower dies, the

Insurance loan can be settled from insurance
proceeds

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The credit scoring approach

What is a Credit Score?

A credit score is a three-digit numerical value (ranging from 300 to 850) that
indicates your ability to repay your debts. The higher your score, the more
creditworthy you are.

Your credit score tells lenders how likely you’ll pay back the money you will
borrow based on your past financial transactions. Likewise, your credit score
tells you how likely you’ll be approved for a loan or credit card.

Four factors affect your credit score:

• Payment history – Whether you’ve paid your loans and bills on time
• Credit utilization rate – How much you’re using your total available
credit
• Length of history – How long it’s been since your accounts were
opened
• Credit mix – Whether you have different types of credit such as car
loans, personal loans, credit cards, etc.

Click the link below and watch the video.

https://youtu.be/-S91Pe-BjL8

Credit Score Ranges

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Fair Isaac Corporation, or FICO, is a major analytics software company

that provides products and services to both businesses and consumers.

How to Know Your Credit Score in the Philippines

Your credit score is arguably one of the most important pieces of information
about you and about your overall financial standing.

Many Filipinos think that a credit score only matters when you need to be
approved for a loan or a credit card. It can affect many things, from insurance
rates to employment opportunities.

You might be asking yourself now, “How do I check my credit score in the
Philippines?”

One way you can know your credit score in the PH is by requesting for a CIC
credit report.

Credit Report is the Basis for Credit Score Computation

Credit bureaus use the credit report from the CIC as their main source of
credit information for calculating a borrower’s credit score. They then analyze
the data from the credit report to generate a credit score.

This is why the credit score is often referred to as “the snapshot of a credit
report.” There would be no credit scores without credit reports.

How do lenders compute my credit score?

Credit scores are calculated differently by lenders in the Philippines and are
ultimately dependent on their credit scoring models. You may also have
different credit scores depending on the type of loan application. For instance,
a mortgage lender might use one scoring model, while an auto lender uses
another.

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Sample Credit Score

Credit Bureaus
The agencies that gather and distribute information about consumer
creditworthiness are called credit bureaus, or credit reporting agencies.

The credit bureau industry is dominated by three large actors: Experian,

Equifax and TransUnion. In the Philippines we also have three
accredited agencies authorized by the Credit Information Corporation
(CIC) to access credit data.

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Accessing Entities of the CIC may avail the services of the above-named
accredited credit bureaus/ Special Accessing Entities (SAEs) for web portal
access, batch access, and application to application.

One interesting feature about the credit bureau business model is how
information is exchanged. Banks, financing companies, retailers and
landlords send consumer credit information to the credit bureaus for
free, and then the credit bureaus turn around and sell consumer
information right back to them.

Credit Rating Agencies

Credit rating agencies estimate the probability of default for businesses and
entities that issue debt instruments, such as corporate bonds.

The global credit rating industry is highly concentrated, with three agencies—
Moody's, Standard & Poor's and Fitch—controlling nearly the entire market.

1. Fitch. Investment grade ratings from Fitch range from AAA to BBB.
These letter grades indicate no to low potential for default on debt.
Non-investment grade ratings go from BB to D, the latter meaning the
debtor has defaulted.

2. Moody's assigns countries and company debt letter grades, but in a

slightly different way. Investment grade debt goes from Aaa—the

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highest grade that can be assigned—to Baa3, which indicates that

the debtor is able to pay back short-term debt. Below investment
grade is speculative grade debt, which are often referred to as high-
yield or junk. These grades range from Ba1 to C, with the likelihood of
repayment dropping as the letter grade goes down.

3. Standard & Poor's. S&P has a total of 17 ratings it can assign to

corporate and sovereign debt. Anything rated AAA to BBB- is
considered investment grade, meaning it has the ability to repay debt
with no concern. Debt rated BB+ to D is considered speculative, with
an uncertain future. The lower the rating, the more potential it has to
default, with a D-rating being the worst.

Illustration of the 3 Rating

Agencies

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A credit rating is used by sovereign wealth funds, pension funds and

other investors to gauge the credit worthiness of Philippines thus having
a big impact on the country's borrowing costs.

https://tradingeconomics.com/philippines/rating

Credit Rating Agencies versus Credit Bureaus

• Credit Rating Agencies provide credit ratings while Credit Bureaus
provide credit scores
• Credit rating agencies are primarily for investors about companies
and governments while Credit Bureaus are primarily for
governments and lenders about individual borrowers.
• Credit ratings are issued in letters while credit scores are issued
as a number.
• The three largest Credit Rating Agencies are Moody's, Standard &
Poor's and Fitch while the three large actors of Credit Bureaus are
Experian, Equifax and TransUnion.

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Legal and Ethical Aspects of Credit Investigations

The credit department, owners, officers, sales management and other key management
personnel must have a secure knowledge of their legal right and privilege to gather and
disseminate credit information about mutual business customers to which open account credit
is provided by the company. They must also know, and understand, the ethical implications of
this process.

Exchange of Credit Information—The Legal Perspective The exchange of credit experience

information on a particular customer is legal only if the information exchanged is restricted to
factual, historical data.

The gathering and dissemination of information which will enable sellers to prevent a
perpetration of fraud upon them, which information they are free to act upon or not as they
choose, cannot be held to be an unlawful restraint upon commerce, even though, in the ordinary
course of business, most sellers would act upon the information ...” (Cement Manufacturers
Protective Association vs. United States, 268 US 588, 603–604) In a 1976 case, the U.S. Court
of Appeals for New York commented on the exchange of credit information as follows: “...
Unlike exchanges regarding prices which usually serve no purpose other than to suppress
competition, and hence fall within the ban of the Sherman Act ...

The dissemination of information concerning the creditworthiness of customers aids sellers in

gaining information necessary to protect themselves against fraudulent or insolvent customers.
... Given the legitimate function of such data, it is not a violation of the Sherman Act to
exchange such information, provided that any action taken in reliance upon it is the result of
each firm’s independent judgment, and not of agreement.” (Michelman vs. Clark Schwebel
Fibre Glass Corp., 534 F2d 1036) These cases are the foundation for conducting all business
and trade credit investigations and exchanging business credit information on specific
customers among competitors. These cases, however, do not permit the exchange of credit
information or allow for gathering of credit data on consumers who obtain credit for “personal,
family or household use.” While commercial (business and/or trade) credit is specifically set
up to avoid “personal, family or household use,” there may be cases where under the law special
consideration is needed. Every business to-business credit grantor should recognize the respect
the law itself discerns for business credit grantors and should adhere to those legal and
regulatory parameters as well as to the ethical standards observed in the realm of business
credit.

Antitrust, anti-defamation and confidentiality are the core principles for exchanging
business credit information in industry credit group meetings or any setting—whether among
two or 200, in a formal meeting or office, or in a parking lot or restaurant. These principles
must also be adhered to in conversations among business credit grantors by phone, fax or
electronically.

Antitrust in Credit Investigation

The object of this discussion [in an industry credit group meeting] is the collection and
exchange of credit experience information relevant to the credit of accounts based upon actual
experience or present knowledge as it relates to past and completed transactions only. It does
not imply in any manner that the creditors [party to such exchange] recommend that any credit
relationship be conducted or modified in any way. There should be no agreement or
understanding, express or implied, to fix or determine to whom sales should be made or credit
extended, establish joint or uniform prices, terms or conditions under which sales are made or
credit extended; and creditors may not boycott or blacklist any customers or suppliers.
Creditors may not plan with another, or report, any future actions or policies. Creditors may
not give advice or otherwise attempt to influence the independent judgment of other creditors
in the extension of credit.
The antitrust concerns a credit grantor must consider when inquiring or disseminating
information about a customer’s credit history, payment pattern, etc. In the context of
information exchanged among commercial/business credit grantors, the primary objective is to
avoid violating various antitrust laws. The intent of these antitrust regulations is to avoid any
behavior that could lead to conspiracy, restraint of trade, price setting or fixing, or boycotting
certain customers or suppliers. At the same time, the regulations also attempt to allow for the
free-flow of credit information in a very specific manner so that creditors and competitors can
avoid fraud, including the non-payment of an outstanding debt

Defamation in Credit Investigation

Libelous statements among creditors must be carefully avoided; they may subject all creditors
to major damage suits by persons who consider themselves to have been defamed. Creditors
must also avoid giving opinions or making statements which imply that any individuals are
dishonest, fraudulent or immoral since no specific damages need to be proven in court to
recover for these kinds of statements. Statements which might be considered libelous or
hearsay should not be used unless it can be proved from clear evidence that the statement is
true. People operate businesses. As such, it is common to discuss a business credit transaction
with the owners, partners or principals of the business credit customer.

This is the issue referred to in Defamation. Even though the customer is the business entity
itself, the principal of the entity is looked to for management decisions such as payment of
invoices. It is impractical to consider the business without considering the management of the
business. Whoever makes management decisions, that person’s track record, previous business
experience and knowledge have an impact on current and future business credit decisions.
Credit grantors who are party to any such objectionable or disparaging remark or writing about
the character or personal conduct of an owner or principal of a common customer can be sued
by that customer. Defending the remark or writing is solely the legal burden of the parties
involved in making the writing or remark. The only legal defense to the claim is “fact” or
“truth.” The injurious claim made by a customer is called defamation.

Direct Credit Investigations

Direct investigation occurs when the creditor collects credit information either through direct
contact with the customer or through direct contact with noncommercial sources of information
such as competitors, banks and other trade references that may have relevant details to share.

Sources of direct investigation include customer supplied trade references, bank references
and financial statements; information obtained from a Secretary of State’s office; information
found in public records; details collected through personal or telephone interviews with
principals; and material found in search engines such as Google, Yahoo and others, as well as
the customer’s, or potential customer’s, website.

Direct investigations were once the norm, but given the incredible amount of information
online today, their frequency and value has diminished. However, they are still useful when
information is not readily available or if the investigating company does not use commercial
information services.

Direct investigations can also be used to verify information obtained on a credit report or other
online source, especially when a current or potential customer is high risk, a new business or
has a high exposure.

Direct investigations can be labor intensive and should be conducted with a certain knowledge
and understanding of the process. For instance, specific questions other than those relating to
facts and completed transaction experience are inadvisable. Also, making an inquiry to a
competitor without disclosing that the subject is a prospect is unethical, and when this
information is properly disclosed, the reply is at the discretion of the account holder
(respondent)

Statement of Principles for the Exchange of Credit Information

1. Confidentiality is the cardinal principle in the exchange of credit information. The identity
of inquirers and sources should not be disclosed without their permission.

2. All parties involved in the exchange of credit information must base inquiries and replies on
fact.

3. The purpose of the inquiry and the amount involved should be clearly stated.

4. If the purpose of an inquiry involves actual or contemplated litigation, the inquirer should
clearly disclose this fact.

5. The inquirer should make every effort to determine the subject’s bank(s) of account before
placing an inquiry, and indicate the extent of information already in the file.

6. Proper identification should be provided in all credit communications.

7. Replies should be prompt, containing sufficient facts which are commensurate with the
purpose and amount of the inquiry. If specific questions cannot be answered, the reasons should
be clearly stated.

The Credit Information Corporation (CIC

The country’s public credit registry and repository of credit information, directs digital
banks accredited by the Bangko Sentral ng Pilipinas (BSP) to register as a Submitting
Entity (SE) to the CIC, pursuant to Republic Act No. 9510 or the Credit Information
System Act (CISA).

SE refers to any entity that provides credit facilities such as, but not limited to, banks,
quasi-banks, trust entities, investment houses, financing companies, cooperatives,
non-governmental, micro-financing organizations, credit card companies, insurance
companies, government lending institutions.

“The registration of digital banks as SEs is a valuable addition to the CIC database,
especially as digital banks have the potential of penetrating the unbanked sectors.
Being a key driver of the country’s digital transformation, their participation in the Credit
Information System can serve as a catalyst for broad-based financial inclusion and
improved access to credit,” CIC President and CEO Ben Joshua Baltazar said.

Aid in the financial recovery of the MSME sector

Compliance among digital banks should also support the offering of cost-effective
financial products tailored to the needs of the micro, small and medium enterprise
(MSME) sector that make up 99.6 percent of firms. Through the CIC Credit Report,
businesses can make use of their good payment behavior as proof of creditworthiness
to have access to a wider-array of formal financial services.