Issues of Bad Debts: The Case of Third District Transport Cooperative

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1A case study submitted in partial fulfilment of the requirements in ABE 152: Cooperatives and Self-Managed Business Enterprise under the advisory of Prof. Thaddeus Acuña, CPA, 1st semester, A.Y. 2014-2015

ISSUES OF BAD DEBTS: THE CASE OF THIRD DISTRICT TRANSPORT

COOPERATIVE1

Calinan, Davao City, Philippines

Ruby Grace J. Ricalde | James Dela Cruz | Sitti Hairol | Lorenz Daniel Lumen

University of the Philippines Mindanao

Davao City

02 December 2014

INTRODUCTION

One of the key requirements for a cooperative to be coordinated and to gain

successful feedbacks and good governance is unity among its members. Lack of unity among

members can give rise to larger problems and challenges that may be hard for an organization

to cope up.

Third District Transport Cooperative (TDTC) is the first transport cooperative that

catered the need of commuters of Calinan. Since then, TDTC has also been the sole terminal

of L300 van that operates the Calinan-Davao route, which initially operated with 10 L300

units. As the years progress, number of members also increased, as well as the number of

L300 van operating. Because the cooperative is envisioned to grow each year, and in order to

make the cooperative more successful and to increase revenues, the chairman of the

cooperative introduced some reforms into the system including the vehicles’ affiliation. In

other words, in order for the operator to become a member of the cooperative, the franchise

of the vehicle must be under the name of TDTC. Many members agreed but there are some

who did not. The reason for others to not agree is that they want the franchise of the L300

vans to be under the names of the respective operators because they think that problems may

arise in the future and it may be hard for them if the franchise will not be under their names.

Because of this, the members left and formed another transport associations of their own and

became competitors of TDTC. Unfortunately, most of the members who left TDTC are those

people who have large amounts of credit loans that turned into bad debts. A bad debt is a debt

that is not collectible and therefore worthless to the creditor. This occurs after all attempts are

made to collect on the debt.

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Issues of Bad Debts: The Case of Third District Transport Cooperative

Ricalde | Dela Cruz | Hairol | Lumen

ABE 152 | UP Mindanao | 8 December 2014

It is very important for this issue to be solved to develop proper strategies that can

allow the cooperative to build their strength and bring lasting benefits to their members. A

good framework and an efficient oversight and monitoring structure can help cooperative in

discharging the bad debt issue. Certain solutions including legal process should be done so

that the money borrowed would be returned to the organization and people who were not

good payers should be given specific actions in accordance with the law.

This case study details the issues and challenges that the TDTC is facing. The issue

with regards to bad debts were addressed by the protagonist, who is the Officer-in-charge

(OIC). He must also come up with the decision for the best solution to be made for such

problem.

Data collection, including management and financial aspects, the policies and

practices were gathered through an interview with the TDTC’s OIC, and one of the

cooperative’s pioneer members. The interview was conducted last November 13, 2014 at

Third District Transport Cooperative office, Ramon Magsaysay St., Calinan, Davao City.

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BACKGROUND OF THE ORGANIZATION

The Third District Transport Cooperative (TDTC) is an association of drivers and

operators of van units operating the Davao-Calinan route. TDTC is the first transport

cooperative that catered the need of commuters of Calinan. It is a primary multi-purpose

non-agricultural cooperative. It is the first cooperative that mainly caters the commuters in

Davao-Calinan route by L300 van.

TDTC started as an association under the name DAVCAL. Members of this

association were both with and without franchise on 1997. But due to the unavailability of

terminal to settle their units and the commuting public, they decided to register the

organization into cooperative on September 21, 1999, with the Cooperative Development

Authority and with the Registration Number - 6023-DVO in order to solve the problem. With

a starting capital of P49500, they have started operating a terminal with 10 L300 van units

catering Calinan route. As the years progress, there is also an increase in the numbers of

members of TDTC. From the initial members of 30, it grew into 130 members. Any drivers,

operators, and allied workers of aircon van units in Calinan may be accepted as members of

TDTC.

VISION

TDTC’s vision is to be a highly committed, socially developed, economically

productive and spiritually sound transport group that will promote the general well-being and

welfare of its members and the riding public.

MISSION

1. To formulate policies, guidelines and plans geared towards the welfare of the

organization and its clients;

2. To initiate projects that will lift up economic status of every member;

3. To provide seminars and training to upgrade the knowledge, attitude, and skills of the

members;

4. To inculcate values on the love of work and service through spiritual awakening and

treatment programs; and

5. To coordinate closely with transport agencies and other transport groups for social

mobilization.

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MEMBERS

As the years progress, there is also an increase in the numbers of members of TDTC.

From the initial members of 30, it grew into 130 members. Any drivers, operators, and allied

workers of aircon van units in Calinan may be accepted as members of TDTC. There are two

kinds of membership in accordance to Article 26 of RA 9520: Regular and Associate. The

Regular members of TDTC comprise the following:

1. Operators

The operators are the owners of the L300 units. They must be 18-55 years old

and are required to attend an initial seminar. A membership fee of P1000 and a

vehicle application fee of P2000 per unit must also be paid. The operators must also

subscribe P50 000 (P400 monthly) as paid up capital and pay at least P10 000 as

initial capital. OR, CR, and franchise certificates of the vehicle/s must also be

submitted.

2. Drivers

Drivers must hold a professional driver’s license and are appointed by the

BOD. They are also required to pay P1000 as membership fee and subscribe at least

P50 000 (P400 monthly) and pay at least P10 000 as initial capital.

3. Allied Workers

Allied workers consist of the toll cashiers, utility workers and dispatchers.

Like the drivers, they are also required to pay the membership fee of P1000, subscribe

at least P50 000 (P400 monthly) as the paid up capital and at least P10 000 as initial

capital.

Associate members are those interested people who are residents in the area of

operation who are not within the common bond of membership and/or minors below 18 years

of age upon compliance of the P1000.00 membership fee and pre-membership awareness

briefing, seminars and training programs. Associate members should use or anticipate to use

the services of the cooperative. From the 130 members, 71 of them were regular and 59 were

associates.

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OPERATION AND REVENUE GENERATION

Being a multi-purpose cooperative, TDTC’s revenue came from these sources:

1. Terminal Income

10% of the driver’s total daily income from the operation is remitted to the

cooperative, which is a minimum of P500.00 per L300 unit. In estimation, TDTC

receives P 15 000 every day.

2. Service fee from carwash and repair and vulcanizing shop

The carwash and repair and vulcanizing shop is located just in front of the

transport terminal, so it caters mainly the L300 unit of the coop, as well as other

vehicles in the area. Coop members are subsidized by 30% in carwash services.

3. Sales from lubricants

Oils and other lubricants needed by vehicles are also sold in the repair and

vulcanizing shop.

4. Interest income from loans, including service fees, fines, penalties and

surcharges

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ISSUES AND CHALLENGES

TDTC not only provides transport service to commuters, it also extends credit to

members for productive and providential purposes. As one of TDTC’s source of income,

credit services were in various loan windows responsive to the members’ needs at a

reasonable interest rate and form of payment. Granting of loans shall be based on 4Cs:

CHARACTER or the willingness of the borrower to comply with all the terms and conditions

of the loan; CAPACITY or the ability of the borrower to meet his/her obligations from wages

received or from earnings of a well conducted enterprise; CAPITAL or the measure of the

borrower’s ability to meet his obligations from other assets which he/she has in the event that

wages and earnings fall below the expected level; and COLLATERAL or the security with

which the borrower, at the requirement of the cooperative secures his/her obligations.

Four types of credit loans are offered by TDTC:

a. Regular Loan, which is considered for productive, providential or

commercial need of members;

b. Emergency Loan, which answers for the need of members for

hospitalization or medication or even death within the family members;

c. Petty Cash Loan, which answers the need of members on basic

commodities; and

d. Auto Loan, which is for repair and maintenance of vehicle

Specific loan terms and conditions are the following:

LOANS

Regular Emergency Petty Cash Auto

Max amount times 3 of the capital P20 000.00 P1 000.00 P50 000.00

Interest 3% per month 3% per month

2% per 15

days 3% per month

Service Fee 1% P10.00 1%

Guarantee Fund

P2.00-P1000 per

month P2.00-P1000 per month

Max term 1 year 6 months 15 days 6 months

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LOANS

Regular Emergency Petty Cash Auto

Penalty per month 3% 3% 3% 3%

Payment Daily Daily Daily Daily

Requirements 4Cs

Hospitalization,

death, victims of

calamity 4Cs 4Cs

Approving

authority Loan officer

Not more than

P30 000.00 Credit Committee Credit Committee

Credit Committee

P30 000.00 above Board of Directors Board of Directors

According to the OIC, the 4Cs requirement for granting applications of loan is not

always followed since most of the members who avail credits have social ties (“comare” and

“compare”) with the credit committee. And because the said members were used to be friends

with credit committee, it made their applications of loan easier to be approved, plus their

loans exceeded the credit limit. Interest and penalties for late payments were also not

accounted. When these people left TDTC, they also left these loans unpaid. These unpaid

loans reached up to Php6 000 000.00, resulting for TDTC’s big amount of receivables

remained still receivable for series of years. These receivables turned into bad debt since

large amount of receivables were not yet collected. The next page is the financial statement of

TDTC in January and February 2013, highlighting the receivable of over Php6 000 000.00:

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With this issue faced by TDTC, the most affected ones were the remaining members.

With the huge amount of receivables that comprises more than 97% of their total assets, the

cooperative ceased in releasing the dividend shares. TDTC also stopped giving other

privileges, such as the following:

1. P10 000 as loyalty gift for every straight years of membership, provided that the

minimum subscription of P50 000 has been fully paid;

2. P5 000 as hospital allowance in case of major accident in line of duty; and

3. Medical assistance with a maximum of P1 000 upon discharge in hospital.

One of the loyal members of TDTC for 14 years said that he was one of the members

who had experienced to receive abundant benefits from the cooperative before. He also said

that he started his membership to the cooperative as a driver, but because of the benefits that

he was able to receive, from the dividend share to the bonuses, he was able to purchase an

L300 van and became an operator. But according to him, after the year 2008, he did not

receive even a single cent from the cooperative until now. He also cannot even avail for a

loan. The OIC was asked why the cooperative stopped giving patronage refunds and dividend

shares and he said that TDTC cannot allocate the shares to the members since TDTC still has

a large amount of receivables. However, he added that if TDTC will overcome these

problems, shares will then be distributed back to the members. Meaning, the issue of bad

debts should be solved first before the members could enjoy their benefits and refunds.

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CONCLUSION

Cooperatives are formed with the idea of mutual co-operation. Every cooperative

movement is developed to render service to its members rather than to earn profit. However,

the Third District Transport Cooperative faced many problems and challenges that need to be

addressed by the cooperative themselves.

In the case of TDTC, for many years, the issue of bad debt which is caused by the

conflict among members gave rise to the emergence of a new problem which is the

postponement of the distribution of shares and benefits. This issue is detrimental to the health

of the organization and contributes to the inefficient performance of the cooperative.

When being asked on what are the possible actions to be done regarding the issue of

bad debts, the OIC said that they would just depend and entrust the issue to their lawyer and

wait for updates. He also added that it took time for them to take action because they found it

hard to address such issues against their former members due to the close ties that they had.

One thing also is that, they are living in the same area and they get to know each other’s

families very well. As being implied, it would also mean that the members of the cooperative

will still continuously receive nothing until such time that the issue will be solved.

Issues of Bad Debts: The Case of Third District Transport Cooperative

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