Credit Risk Management Practices of Small Financing Companies in Metro Manila

Abstract

This study aimed to determine the effectiveness of credit risk management practices of small financing companies in Metro Manila. The descriptive method of research was employed. The respondents composed of 254 selected employees of small financing companies in Metro Manila. Data were gathered through the use of questionnaire personally distributed to the respondents while some were sent thru electronic mailing. The statistical tools used were Frequency Distribution, Percentage, Ranking, Weighted Mean and f-Test. The respondents were mostly corporation between 16 to 20 years in operation with capitalization of more than 35 million. The respondents assessed that the credit risk management practices were very effective and properly observed in the business by means of consistently evaluating the capacity of the borrower. There was enough evidence to conclude that the group of respondents did not significantly differ in the extent of their assessment on the effectiveness of credit risk management of small financing companies in Metro Manila. The researcher recommends the following: Improve the policy on credit evaluation with regard to the educational background of the borrower. Tighten the process of evaluating the cash flows of the borrower. The company may ask for budgeted financial statements aside from the actual financial statements to ensure that cash is available when the obligation is due. Scrutinize the analysis of financial ratios of the borrower especially the debt-to-equity ratio by analyzing the percentage of capital over the assets of the borrower. The company may also take a look on the percentage of debt over the total assets. Strictly monitor the assets pledged to the loan by doing an audit on irregular interval. Make a policy on how to determine the nature and extent of relationship of the borrower to its customer. The company may require the borrowers to submit customers list as part of loan requirements. Improve the policy on the assessment of loan impairment by having different criteria and provisions for individual loans and collective loans. Provide a restructuring loan agreement for all overdue and defaulted loans by offering condonation of penalties and reduction of interest rates. Further studies should be undertaken to determine the validity of this present study. The researcher also suggests that future researchers should evaluate the impact of internal control as one of the aspects.