The Credit Control System

System- noun – a co-ordinated body of methods or a scheme or plan of procedure; organizational scheme: The Credit Control System.

If a credit union can expect to experience loan delinquency in meeting its members’ needs for credit, it then becomes important to establish a credit control system to monitor, manage and control the amount of delinquency experienced and its impact on the business of the credit union.

A credit control system establishes guidelines and procedures for consistent, fair and useful actions. It needs to follow Board policies and take account of available resources as well as set out what action is to be taken in each circumstance.

Objectives of a Credit Control System

The Board should establish a credit control system to achieve the following three objectives:

• To control loan arrears

A credit control system should limit the amount and hence the impact of bad debts on the profitability of a credit union.

• To obtain prompt loan repayments

The maintenance of regular loan repayments aids the credit union’s management of its income and liquidity, thereby helping the credit union to meet its business planning targets.

• To maintain members’ goodwill

The credit control system should treat members fairly, consistently and professionally. The aim is to recover the debt while maintaining the goodwill and participation of the member in the credit union.

A credit control system utilises the following records:

• A listing of all loans granted in date order
• A listing of all loans granted in member order
• Members’ Share and Loan Ledger
• Credit Control Record – contains the repayment schedule with the columns for the actual payment of principle and interest. It should also document the date and type of contact, whether the member was spoken or written to, the results of the contact, and the next contact date.
• A schedule of delinquent loans – contains the member’s account number, name of borrower, date of loan, original amount of loan, the unpaid balances of loans delinquent and the period outstanding, 3 to less than 6 months, 6 to less than 12 months, 12 months and over, and the date of the last payment, plus a column for comment

Sample credit control system

This sample system covers the whole credit control cycle and includes feedback mechanisms so that the system is improved over time and is designed to be carried out by a credit controller.

Credit Control Action Plan

A system for credit control is made up of a number of parts, each of which should be part of the credit union action plan. It is imperative that every credit union has some machinery for the control of credit and to ensure that all money loaned is repaid with due interest; that members are guided and assisted to keep within their loan agreements, and that members are aware of what action they should take when they are unable to keep to the agreement.

Reporting Responsibilities

If a credit union has allowed its credit control system to slip and needs to start afresh, it is suggested that it build it up in the following priority order:

• All new loans
• Special attention to new borrowers
• Loans granted in the last 2 months
• Loans granted in the last 6 months
• Loans granted in the last 9 months
• Loans granted in the last 12 months
• Loans with no repayments in the last 12 months will need special consideration by the Board

It is essential is that the Directors ensure that a credit control system is in place and it contains the following elements:

• A listing of all loans granted in date order
• A listing of all loans granted in member order
• Members Share and Loan Ledger
• Credit Control Record that contains the repayment schedule with the columns for the actual payment of principle and interest. It should also document the date and type of contact, whether the member was spoken or written to, the results of the contact, and the next contact date
• A schedule of delinquent loans that contains: the members account number, name of borrower, date of loan, original amount of loan, the unpaid balances of loans delinquent and the period outstanding, 2 to less than 6 months, 6 to less than 12 months, 12 months and over, and the date of the last payment, plus a column for comments

Reporting delinquency

Every month delinquency should be reported to the Board on two forms:

1. Schedule of delinquent loans: management or the credit control officer can prepare this schedule. The schedule covers loans that are delinquent for two months or more, so the credit control officer should be prepared to report on the number of borrowers that are currently being pursued. The credit control officer should also be prepared to answer any queries on individual cases, e.g. likelihood of recovery; issues/concerns which arise from the listing; steps which the board could take; updates on cases since the report was written, etc.
2. Statistical Report: This is prepared by the treasurer to give an overall management view of the loan portfolio and the extent of the harm being caused to the credit union’s assets by delinquency. This report should analyse any trends in arrears, for example any problems within certain sectors of the common bond (geographical – an isolated community, industrial – a particular department), and success or otherwise of recovery methods (e.g. do solicitors letters work? How do they compare with collection agencies?).

Consideration should be given to whether the reports can be provided in such a way that they serve both the Board and the Regulator.

Prioritising Recovery Action

If a credit union has allowed its credit control system to slip for some time and needs to start afresh, it is suggested that it prioritises the order in which it tackles the outstanding loan arrears. The following schedule is suggested:

• All new loans
• Special attention to new borrowers
• Loans granted in the last 3 months
• Loans granted in the last 6 months
• Loans granted in the last 9 months
• Loans granted in the last 12 months
• Loans with no repayments in the last 12 months will need special consideration by the board.

By prioritising new loans and new borrowers, the credit union is sending a clear and early warning. This may help to prevent these debts becoming worse and get them back on track at an early date.

A debt that has been outstanding for some considerable time and on which the credit union has failed to take any action previously will be much more difficult to recover for the following reasons: it is likely to be a much larger debt and harder to recover from, the member will already think they have “got away with it”, it will be difficult for the member to take the credit union’s action’s seriously, given the debt has been allowed for so long.

Each credit union will have its own system & actions. Best practice is to chase hard and fast!  A note of all actions taken must be made in a credit control record/diary