What are the essential factors which led to the deterioration of the account? 2. How would you have strengthened the credit? 3. If you were the Account Officer, what would you now do under the present circumstances 

In June of 1972, T.C., Account Officer of AFC, was approached by Dr. M.R. who wanted financing for the purchase of two trucks costing P78 million. The trucks would be used for delivery and hauling of building material in the subdivision as well as for A Enterprises. Dr. M.R. was agreeable to putting up 30% of the cost of P23 million. An analysis of VDC's 1971 financial statements showed a net worth of P143 million in 1972 (P97 million in 1970), a sales growth rate of 32.8%, a return on revenue of 59.7% and net worth of 32.3%, an NOCG of P82 million versus of negative NOCG in 1970, a current ratio of 5.4:1, leverage of 1.3:1 and days receivable of 150 days. Checking conducted had favorable results. Based on the aforementioned and adequate collateral, a 3-year installment paper purchased traction was approved by the Credit Committee on July 1972, thereby commencing relationship with VDC. A review of the account was conducted six months later. A review noted a slight deterioration in the financial statement with profits declining and cash generation being squeezed by increasing needs. Monthly payment, however, were up-to-date and the loan was fully paid at maturity on July 12, 1975 without having any delinquency. A one-year personal loan of P20 million was also granted to Dr. M.R. in 1972 and was liquidated at maturity. Thereafter, five-year monthly commercial loans were booked in 1974 via pink offering tickets due to satisfactory experience with the account coupled with a high yield of 28% p.a. to be generated. The loans are broken down as follows: P50 million for the acquisition of a new truck. P25 million to build a shower room with 18 baths for M Hot Springs Resort, P40 million for landscaping and construction of sheds around the pool area; P23.5 million for the purchase of one share of stock at Q.G. Hospital valued at P20 million. No additional collateral was given for these loans. Another review of the account was conducted in December 1974 by S.G., an executive trainee and account officer. This was prompted when Dr. M.R. once again requested for another credit facility. This time, Dr. M.R. wanted AFC to purchase a caterpillar tractor from Big E, which he would in turn lease and use for his subdivision. In addition, he intended to sublease the tractor if subcontractors could be obtained. Dr. M.R. was confident on this matter inasmuch as Big E and R Builders' contacts, cultivated through the years, would help secure contracts for him since both firms had long been involved in the construction. industry. A P430 million leasing facility was approved on Jul 10, 1975. Four months after the approval of the leasing facility, another P500 million 3-year amortized loan was approved for the purpose of defraying expenses being incurred in the construction of an additional 20 cottages in M Hot Springs Resort. The loan was secured by a real estate mortgage for P500 million. On August 19, 1975, Dr. M.R. approached G.S., SAM, for another P450 million 3-year IPP loan which was subsequently granted. As in the previous loans, justification for approval was profitable operations, potential of the resort in view of the tourist boom, satisfactory trade and bank checkings, excellent relationship with AFC and the attractive

yield of 20% to be generated from the account. Proceeds of the loan would be used to purchase an adjacent 20,000 sq.m. lot having a cost of P15/sq.m. Acquisition of the lot would enable him to build an additional 10 cottages which would be rented out for P70 for the first four hours and P5/succeeding hour. As collateral, Dr. M.R. was willing to mortgage the piece of land he was going to buy. By the end of the year, the account started incurring past due obligations (PDO). Due to the reorganization in the NIA, Dr. M.R. could not collect receivables from the subcontractors H Construction Corp. and M Construction Corp. as they were not paid by the government. Moreover, funds were tied up in the expansion of the resort. The IPP-RE transaction was restructured in August 1976 with no single amortization met. In addition, title of the property that was to be mortgaged to AFC was instead given to the Development Bank of the Philippines to complete the documentation required on the P4 million loan being requested by Dr. M.R. According to Dr. M.R., proceeds of the P4 million loan which has been approved would liquidate AFC outstandings. However, as of June 1977, there has been no release of the funds from the Development Bank of the Philippines. Collateral/securities were valued at P290 million versus an outstanding of P1.3 million. In any case, because of its serious delinquency status, the account is now being considered for legal action. Meanwhile, checkings were made for the purpose of looking into other properties/assets of VDC. The corresponding credit report showed the following under the name of Dr. M.R.: TCT No. 70777 covering a parcel of land with an area of 1,300 sq.m. situated at San Andres, Manila. Appraised value P418,000.00 Encumbrance 120,000.00 TCT No. 80888 covering a parcel of land with an area of 960 sq.m. improvement thereon consisting of a duplex residential house situated at Paraaque, Rizal. Appraised value P178,000.00