1.
CHARACTER •
2.
Probability that borrowers will try to honor their obligation
CAPACITY Borrower’s ability to pay
•
3. CAPITAL •
4.
Financial condition of the barrower
COLLATERAL •
Assets/property the borrower may offer as security to obtain credit
5. CONDITIONS •
conditions that may affect the borrower’s ability to meet its obligation
WHAT IS COLLATERAL? •
• • •
Collateral are assets/properties by a barrower to secure a loan or other credit, and subject to seizure in the event of default of the barrower Lessens risk of the lenders Increase the opportunity of barrowers to obtain funding through loans Loans backed by collateral are referred to as Secured Loans
TYPES OF COLLATERAL 1. Cash 2. Bonds 3. Shares of Stocks 4. Bank Guarantees 5. Real Estate 6. Machinery & Equipment 7. Transportation Equipment & Construction Equipment 8. Merchandise Inventory 9. Receivables
ACCEPTABILITY OF COLLATERAL • LIQUID
can be sold for cash in the open market on short period; ease or quickness with which an asset can be converted to cash marketability
• EASY TO SETTLE transaction will take a very short period transferability
• HIGH QUALITY no credit risk in itself no liens or encumbrance
IS THE MARKET VALUE OF A PROPERTY EQUAL TO ITS VALUE AS A COLLATERAL?
LOAN TO VALUE RATIO • MARKET VALUE per PVS definition; value in exchange
• APPRAISED VALUE value as collateral % of Market Value- ranges from 60% to 100% •
LOAN VALUE risk appetite of lenders % of Appraised Value- ranges from 50% to 80%
IN CASE OF DEFAULT: • FORECLOSURE PROCEEDINGS minimum 6 months
• CONSOLIDATION PROCESS minimum 6 months
• REDEMPTION PERIOD for real estate 1 year after foreclosure
• LOSS PROVISION for real estate 5 years after foreclosure
LIQUIDATION OF FORECLOSED ASSET: OPTIMISTIC SCENARIO
PESO
Market Value
100.00
Appraised Value
100.00
Loan Value
70.00
Foreclosure Expense (6 months)
7.00
Consolidation Expense (6 months)
7.00
Cost of Money (2 years)
8.60
Total Cost
92.60
MARKET OF FORECLOSURE ASSETS/PROPERTIES: •
STIGMA perception of buyers – customs & tradition, cultural
•
BUYER’S POOL dealers developers, built/renovate and sell seldom end-uses
VALUATION AS COLLATERAL •
The estimated or appraised value of a property pledged
•
A property has market value but may not have value as collateral
Land occupied by informal settlers Land with no right-of-way Agricultural land Land located in abandoned subdivisions Land located within danger zones Land located in areas with unstable peace and order situation
VALUATION CONSIDERATION • By design, the value of the collateral must be greater than the value of the loan
property value fluctuate, and collateral must not only provided
surety than the borrower will try to repay but also surety that the value of the loan can be recovered
the valuation of collateral should allow for expected fluctuations in the value of property lenders are considered adequately secured so as the value of the loan is less than the value of the collateral securing that loan
• Types of loan consumer loan – borrower will occupy the property (collateral)
corporate loan
o o
collateral as part of a going concern collateral not part of going concern
•
Standard depreciation over the life of the loan
•
Cost to liquidate the asset if the borrower defaults
•
Liens against the property must also be subtracted before it can be accurately evaluated as collateral
VALUATION CONSIDERATION – PROVISIONS UNDER THE PHILIPPINE VALUATION STANDARDS
In performing valuations of property for lending purposes, appraisers will normally provide the Market Value of such property in accordance with the Philippine Valuation Standards.
At the outset of an assignment, the appraiser must to clearly to identify the property that is to serve as the security.
The manner in which the property would ordinarily trade in the market will determine the applicability of the various approaches to valuing Market Value.
Each relevant valuation method will, if appropriately and correctly applied, lead to a similar result. All valuation methods should be based on market observations.
It is common for a seller of property such as furnishings or equipment.
Market Valuation ignores any price inflated by special considerations or concessions. It may also be appropriate to alert the lender as to affect that may incentives being offered have on the actual selling prices achieved.
Specialized properties by definition may have limited marketability and significant value only as part of a business. For loan security purposes, such properties will normally be valued on a vacant possession basis and a valuation based on the highest and best use alternative use is usually applicable. A valuation may be required of a specialized property where the property is part of a going-concern business.
 The lender should be alerted to the valuation being dependent on the continuing profitability (or otherwise) of the going concern. If the value on a vacant possession is potentially lower, this should be drawn to the attention of the lender. 
Certain classes of property, including but not limited to hotels and other trading businesses, where the property is approved and purposely designed for only that use, are usually valued based on profitability but excluding Personal Goodwill.
 In such cases, the lender should be made aware of the significant differences in value that may exist between an operating concern and a non-operating concern where the business is closed, the inventory is removed, licenses (and other intangible assets such as certificates, franchise agreements, or permits) are removed or are in jeopardy, and any other circumstances exist that may impair future profitability and value.
 Properties held for redevelopment or sites intended for development of building should be valued taking into account existing and potential development entitlements and controls.

Properties rental that exceeds the current marker or economic rent may constitute a wasting asset because any value attributable to this factor diminishes as the term of the lease decreases.
Forced Sales and Limited Marketing or Disposal Period 
Lending institutions may request valuations on a forced, or liquidation, sale basis or impose a time limit for disposal of theďƒźsecurity. the appraiser must have the knowledge of the reasons for the constraint, or the circumstances under which the property might be offered for sale in order to come-up with a reasonable valuation
an alternative valuation may be provided based on defined assumptions, but the appraiser should draw the lender’s attention to the fact that this opinion is valid only at the valuation date, and may not be relied upon in the event of a future default, when both market conditions and the sale circumstances may be different. APPRAISER’S RESPONSIBILITY
The nature and scope of the appraiser’s engagement should be clear to the appraiser and user (lender) of the valuation.
 Appraisers should be aware of the risk associated with valuation for lending purposes where miscommunications, misunderstanding or error may lead to financial losses to the lender.  In undertaking the valuations for lending purposes, it is particularly important that the appraiser (external or internal) be independent.  At the outset of an assignment, the appraiser must to clearly identify the property that is to serve as the security.