Creative Capital Microfinance Solutions has been in operation for the last five years. When the company began offering credit facilities in the form of business loans and consumer loans, there were plans for expansion in the first two and a half years. However, the ambitious plans did not take place because of a few complex challenges. The company had not yet started making considerable profits to enable the shareholders to increase their investment for expansion purposes.
The Scope of the Project
There were some discoveries in the analysis of the company’s financial status. The financial documents indicated a decline in profitability each year. Within the first year, the company had received over 1,000 applications and had financed 80% of the applications. The firm received 2589 new applications and 877 repeat applications in the following year. Surprisingly, all the repeat customers got the loan and about 98% of the new applications qualified for their first loans. There was the need to increase the staff by the third and fourth year because of the increase in applications. Twenty-five new staff joined the company as credit officers and ten new recovery officers. The company started experiencing problems in the payment of salaries because the payments were not forthcoming.
The Credit Risk Manager decided to conduct a thorough investigation. The investigation will cover individual staff, group/team functions, applicants and documentation, and the process of loan acquisition from the application to the actual disbursement. The payment process and the recovery analysis were also in the category of the final investigation.
The revelations of the appraisal reports were out in a month’s time. The company had over ten thousand customers. About 2,500 clients were not in the bad debts books and yet they had defaulted on the loans for over a year. 3,700 of the clients were already inactive. They had cleared their loans, and yet they were in the category of active clients. There was no record for 1,850 clients. Therefore, it was not possible to know when they applied for the loan if they had paid or cleared and if they were active or inactive.
There were 5,986 pending applications. The information available in the application forms of credit clients and their appraisal documents revealed that the credit officers did not clearly understand the financing procedures. Some of the application forms were incomplete and hence could not give the credit department all the information needed to make a decision. The clients did not attach the financial records for the previous financial period. The credit officers had even approved some applications with major errors. The paper will discuss the mechanisms available for solving the credit risk problem by creating the Credit Risk Management Manual. It will act as the credit policy and will include all the relevant steps needed for loan applications. It will include the roles that each officer should play.
The Credit Risk Management Manual will be a policy document that covers all the aspects of credit facility. It will be important for giving direction on how each step functions. The document will have the introduction section and illustrate its functions. It also illustrates the functions of every department, branch, and individual role. It has a management structure, and every staff knows who they are answerable to in case they have grievances or for assignment of certain duties.
The document must also give a detailed account of how to solve any arising challenges. There will be a glossary on the last pages that will define words some of the statements and words that may not be common to the users of the document. It will also indicate structured disciplinary actions. It will include the conduct that each staff should have at the place of work. The customer care concerns will also indicate how the staff and the customer can communicate to ensure there is successful customer service.
Creative Capital Microfinance Solutions is a credit facility firm. The company gives loans to applicants who have qualified for the credit appraisal process. Therefore, all its clients are those in need of a credit facility. The development of the Credit Risk Management Manual is essential. The company will train the staff about the company’s credit policy and the consequences of adherence and non-adherence to the policy. It will act as a guide for all the staff on the procedures and requirements for loan application and qualifications. It will also indicate each staff’s role at every stage.
The company already has a very old risk management document. It acquired and adopted the document from another firm that closed down ten years ago. The project will review the risk management template. It is the results of this review that will assist the Credit and Risk Committee on the modalities for improvement. The Credit and Risk Committee has to approve each stage of the investigations.
The literature review will cover the latest developments in the evaluation of applicants’ documents, the financing process, the customer approach, the repayment procedures, and the credit officers’ work. There will be the need to review the performance of individual staff and their intended work scope. The investigation will also cover individual customers and their loan portfolios.
The management will want a review of the current applications to ascertain if there is a link to underperformance. The applicants will also have to verify their applications and their references. The recommendations on how to develop a more comprehensive credit risk manual will be very important. The team will also check the credit application stages. The credit department, the credit supervisors, and the Finance Manager will foresee the project to its completion.
The project will look at the application processes right from the point of inquiry, to the filing of the application forms and the credit officers’ appraisals. There will be an examination on how the credit committee’s reports on the individual and corporate clients correspond with the actual information. The payments must reflect a carefully examined report.
The primary data sources will include interviews. The interviewers will get information from the credit department managers. They will also interview at least ten members of the department. The finance department officers will also have to answer questions concerning the process of financing and repayments. The management staff will be answerable for their oversight roles. A survey of performance measures will also be useful. The survey will involve 100 clients and fifty applicants. The secondary sources will be the credit committee reports and the individual staff performance files. Other secondary data will be the available credit policy manual and the national credit reference bureau. The publications on credit management by the Treasury and the federal government will be very resourceful. The financial and credit industry reports will assist the committee to review the project in an in-depth manner.
The significance of this research is that it will set the standard for credit management in the firm. There will be a guiding principle for every process the individuals and the departments will seek to undertake. It will improve on the discipline aspect of all the staffs. It will prevent staff turnover and provide means of resolving any conflict in the processes. Previously, there had been a duplication of duties. The departments will have distinct roles. For instance, the finance department will only examine the client’s financial capability and repayment of the loan processes.
The credit committee will have the task of carefully analyzing the credit officer’s reports and ensuring that the officer understands his or her role. The recovery officers have to start with classifying the clients into three categories. The first category is the clients who have just entered the bad debts list. The second category will be the clients who have had myriads of problems in repayment. The last group will involve the clients who are not appearing in any of the documents in the files.
The problems involve the lack of payment, delayed payments, lack of proper analysis of the client, and the ignorance of the staff. The research will help to close these gaps. The development of new loan applications with updated information for the credit officer responsible for signing the form will make the officer accountable for the work he or she performs. Such a task will cause the officer to analyze his or her report carefully so that the applicant gets the correct rating mark. The officer will also have to ensure that all the applicant’s documents are available so that the credit committee can use them to analyze the report.
There will be a direct follow-up of the client’s loan security to ensure that the client does not get away with the debt. The credit committee will adopt a system that allows the officers to post all the applicants and show gradual movement from application to dismissal or acceptability. The record will be the best reference for the approving managers to know the status of all the clients and applicants. The company will embark on its plan for expansion after ensuring that there are checks and balances.
The report will enable the management to develop the new business structure. After the Chief Executive Officer, there will be four directors. The Sales and Marketing Director will be responsible for the products development. The Chief Financing Director will supervise all the company’s finances. The Credit and Risk Director will undertake to oversee all the affairs of the credit. The Operations Director will coordinate all the firm’s activities. The Director will also supervise the Human Resources department. The four directors will be the ones directly responsible for approving loans that are above $ 200,000. They will have to meet in consultation with the Credit and Risk Director, who will be submitting such applications to the meeting.
The Credit and Risk Director will receive all applications from the Credit Manager after holding a credit committee concerning the client’s approval. There will be two to three meetings to approve clients who apply for amounts ranging from $80,000 to $200,000. The first meeting will be to update the committee on the applications available and discuss how to analyze them. The second meeting will be to analyze their financial records and business worthiness. The last meeting will examine the agreed payment period, the amount of finance and approval or dismissal for the next stage. The credit officers submitting the applications will sit in all the meetings. The finance department will sit in the second and third meetings. The recovery officers will have their separate recovery meetings with the credit manager, the recovery manager, and the finance manager.
The project will use the aspects of the core courses in accounting, finance, and economics. The accounting methods and international standards will guide the finance department to analyze the customer’s financial records. The timetable and the main materials will be available before the program begins.
It would be advisable for the company to adopt the policy manual after organizing or the staff training. All the staff should understand their roles in the departments they serve. The training should also award them with a certificate of training so that they can know the value the organization attaches to the seriousness of their work. The workshop training should incorporate all the staff in the general knowledge and then divide them into groups. The credit department, the recovery department, and the finance operations category will be the groups to consider.
The solutions from the research will assist the staff to understand their roles. It is important that the organization takes the results very seriously so that there is growth. The company should also motivate the staff by offering attractive incentives. Every year there should be an award for best performers. The Credit Risk Management Manual should always be the guide that every credit team officer should adopt. There is the need for the company to revise the document after every year so that all the credit team members can acquaint themselves with it. All new staff that joins the company should also undergo the same training. After the training and additional input, the executive committee should forward the manual to the directors for approval. It is important to note that when the top decision-making organ adopts the manual then it becomes part of the organization’s policy.