Credit

Front 1

Pre-Spanish Time

Back 1

Prior to the arrival of the Spanish colonizers, Filipino traders were famous for their honesty and excellent credit record. Manila was considered as the emporium of oriental trade.

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Spanish Time

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1. Free trade was encouraged during the initial years of the Spanish rule.
2. Galleon Trade was a product of merchantilistic policy (Manila-Acapulco Trade), a government policy where it was confined to governor-general, religious officials, royal officials, soldiers and their relatives and friends.
3. Loans were secured from the obras pias (forerunners of banking institutions).
4. Funds from obras pias were donated by the rich citizens for religious projects managed by religious orders.

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American Era

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1. Agriculture Developed.
2. Better banking and credit system to promote economic development.
3. Organization of the 1st agricultural bank in 1908 for the benefit of farmers.
4. PNB was established in 1916.
5. 7 credit associations and 2 rural banks were organized but were short-lived.

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Factors that caused the failure of the credit program

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1. Farmers did not have the steady income due to destruction of their crops by the natural calamities.
2. They were exploited by the landlords by giving them unfair share in the harvest.
3. Negative attitudes of the borrowers towards their debts influence their refusal to settle their financial obligations.
4. They considered their loans as another form of dole outs; they feel the negligence to pay the government lending institutions.

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Under the Republic

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1. Rehabilitation Finance Corporation was established on October 29, 1946 to provide credit facilities for the rehabilitation of agriculture, commerce and industry.
2. Bangko Sentral ng Pilipinas was known as the Central Bank of the Philippines as established in 1949.
3. In 1952, established Agricultural Credit and Cooperative Financing Administration (ACA or ACCFA) before was taken by Land bank in 1982.
4. In 1958, RFC changes its new name to Development Banking of the Philippines (DBP) as a government banking institution.
5. Rural banks were established for the benefit of the farmers and other low-income groups in the rural areas.
6. Credit facilities were brought closer to those who greatly needed them (farmers, small producers and small merchants).
7. In later years, organization of savings and loan associations was encourage to promote the habit of thrift among the people and to expand the credit facilities for the poor.

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Basic Concepts of Credit

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1. Credit
2. Credit instrument
3. Credit system

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Credit

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Is the ability to acquire something of value like goods, services, money or securities at the present time in return for a promise to pay at a certain future time. Creditors and Debtors involved here as bi-partite. It derives from the word creditum means trust. Payment may take the form of goods, services, securities & money.

Front 8

Debt

Back 8

From the point of view of the person who is obliged to pay in the future.

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Credit Instruments

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The paper which contains in writing the obligation of the debtor and the right of the creditor. It also includes credit, credit instruments, credit institutions and law and customs on credit lending and collection. Its aim is, to maximize the use of productive resources of the economy and to distribute fairly the fruits of production among the members of the society.

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Credit Elements

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1. Trust
2. Time of payment - a certain fixed date is agreed upon for him to pay as promised.
3. Risk

Front 11

Credit Characteristics

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1. It is a bi-partite contract (debtor & creditor)
2. It is elastic (increased, maintained or decreased)
3. The presence of trust of faith (debtors ability & willingness to pay)
4. Involves futurity (maturity date)

Front 12

Credit Bases/8 C's of Credit

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1. Character - personal integrity of the borrower and also includes personal habits, attitudes & activities, social & political associations, lifestyle, etc.
2. Capacity - managerial ability of a borrower.
3. Capital - real & personal assets.
4. Collateral - land title is required as loan security.
5. Conditions - factors that affect the ability of borrowers to pay their financial obligations such as community and industry conditions and the whole economy.
6. Country - sale of goods and services.
7. Currency - risk of exchange must be taken into account.
8 Confidence - the cornerstone of every credit transaction.

Front 13

Credit's Foundation

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1. Confidence - in debtor's ability to pay.
2. Proper facility - credit information & credit document.
3. Stability of monetary standard.
4. Government assistance - debtors do not get imprisoned for non-payment if it is due to insolvency.
5. Credit risk - credit bears the risk.

Front 14

Credit's Uses

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1. For enjoyment - enhance through one's lifestyle through activities & purchases for enjoyment.
2. Utilitarian consumption.
3. Profit & wealth building.

Front 15

Sources of Credit Information

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1. Internal Records - data which are in the files of the bank.
2. Applicant's Information - credit-worthiness of of the applicant can be obtained through personal interviews, direct investigations, FS of the business.
3. Business Reference - bank to bank, suppliers, etc.

Front 16

Other Sources of Credit Information

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1. Business magazines
2. Trade journals
3. Government business reports & the business sections of the newspapers
4. Credit departments of bank files
5. Newspaper clippings of the pending lawsuits
6. Bankruptcy proceedings

Front 17

Users & Suppliers of Credit

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Users: Consumers, Businessmen & Government
Suppliers: Banks, Credit Cooperatives, Pawnshops, Unlicensed Money Lenders & Other Institutions (investment & insurance companies, GSIS, SSS, etc.)

Front 18

Functions of Credit

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Economic Function:
1. Promotes the production of wealth - borrowed functions can generate more production, employment & income.
2. More goods & services are acquired.
Social Function:
1. Helps individual to gain higher social status.
2. Credit serves as a social equalizer - study now-pay later plan.

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Advantages of Credit

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1. More convenient, economical & effective type of money.

2. Allows business firms to make liquid or spendable non-liquid wealth.

3. Easier for dynamic & enterprising people to put up their enterprises through credit.

4. Provides more security and income to wage earners.

5. Government projects or programs can be funded through bonds or loans.

6. Credit accelerates production, employment, income & consumption.

7. Permits low-income consumers to enjoy the consumption of goods and services sooner, like house and lot, appliances and other consumer products.

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Disadvantages of Credit

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1. Heavy borrowings by the governments may likely lead to inflation.

2. Borrowing by the government may result to extravagance & insufficiency. This has been noted by the development economists on the credit performance of the developing countries.

3. Goods would be repossessed in case of failure to fulfill promise to pay.

4. Business errors in the use of credit funds have unfavorable chain effects in the whole economy. Failure of some firms to settle their debts with other companies affect the latter to pay their bank loans. In turn, the banks cannot pay their depositors.

5. Excessive loans from other countries by the government may likely be a burden to future generation, unless such loans are wisely invested in the economy for benefits of the masses.

6. In some cases, credit reduces future consumption of debtors.

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Classifications of Credit

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According to........

1. Purpose

2. Type of user

3. Security

4. Maturity

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According to Purpose

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1. Consumer Credit

2. Commercial Credit

3. Investment Credit

4. Agricultural Credit

5. Speculative Credit

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Consumer Credit

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Credit used by individuals to help finance or refinance the purchase of commodities for personal consumption. Can be in the form of......

A. Charge accounts - for non-durables payable within 2 months.

B. Installment account - installment for durables, payable within 6 to 12 months.

C. Lay-away plan - full payment within a period is required before delivery of a item is made.

D. Revolving credit - combination of A & B. Its functions are......

I. Convenient form of payment.

II. Aids in financial emergencies.

III. For buying durables on installment basis.

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Commercial Credit

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The promise to pay by businessmen for the funds they borrowed in the purchase of goods for productive or profitable ventures.

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Investment Credit

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Also known as industrial credit where the individual's or business firm's promise to pay for a loan they obtained in buying capital goods such as machineries, land, plant construction, etc.

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Agricultural Credit

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The farmers' and farm organizations' promise to pay the funds that they borrowed for the acquisition of farm inputs and other agricultural operations.

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Speculative Credit

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Is a type of credit which is used for dealing in securities or goods with the intention of making a profit through favorable price changes.

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According to the type of user

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1. Public Credit - includes all grants of credits to governments: national, provincial, municipal and its instrumentalities.2. Private Credit - refers to all grants of credit to non-governments: individuals, partnerships, corporations and other private institution.

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According to Security

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1. Secured - There is presence of assets or security for the loan where land or title is the most acceptable security and other forms of acceptable assets such as stocks, bonds, houses, machines crops and other valuable properties.

2. Unsecured - Loans are granted without security which these are small loans granted to borrowers on the basis of character is also so-called character loans.

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According to time periods or maturity

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1. Short-term credit - loans which are payable in less than 1 year.

2. Intermediate or medium-term credit - loans payable in 1 to 5 years.

3. Long-term credit - loans payable in more than 5 years.

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Long term notes

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It is a promise to pay which is secured by the real estate property of the debtor which is in the form of real estate notes. It is also payable in more than 5 years.

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Subscription Warrant

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A document authorizing the owner to subscribe new stock under certain conditions as indicated therein. It can also be payable in less than 5 years.

Front 33

Credit Instruments

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These are promises or orders to pay, a definite or determinable sum of money to bearer or order, on demand, or future specified time.

Front 34

Credit Instrument's Classifications

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1. According to purpose

2. According to customs

3. According to government laws

4. Promise to pay

5. Order to pay

Front 35

Promise to Pay

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1. Charge accounts - the arrangement between the buyer and the seller.

2. Promissory notes - written promise to pay a sum of money on demand or on a future date to a designated person or to bearer.

3. Maker - the one who makes the promise to pay.

4. Payee - the one who is to receive the payment.

5. Bonds - written or printed acknowledgement of debt.

Front 36

Orders to Pay

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1. Check - is a written and signed order of a depositor upon a bank to pay on demand the order of a bearer or designated person a specified sum of money.

A. Drawer - a person who draws issues a check.

B. Drawee - bank where the check is drawn.

C. Payee - person whom payment is to be made.

2. Bill of exchange - an unconditional order issued by a person or business which directs the recipient to pay a fixed sum of money to a 3rd party at a future time.

A. Trade drafts - are orders to pay drawn by the sellers of the goods on the buyers which may be demand or time and secured or unsecured.

B. Trade acceptance - draft is accepted by the buyer.

3. Bank acceptance - a short term credit investment created by a non-financial firm & guaranteed by a bank.

4. Bank money order - process of making the payment is like sending a postal money order or order is drawn by the bank on the other bank to pay a specified payee.

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Types of Checks

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1. Personal check - the drawer is an individual which is the most commonly used by businessmen & individuals.

2. Crossed check - 2 parallel lines were drawn on the top left portion or across the face of the check.

3. Traveler's check - functions as cash but it is protected against loss or theft.

4. Post-dated check - check delivered now with a written future date so it cannot be cashed until that date.

5. Overdraft check - with negative balance account due to payment of checks drawn against insufficient funds.

6. Stale check - presented at the paying bank due after 6 months of its payment date.

7. Certified check - payment to the payee is especially guaranteed by the drawee bank.

8. Cashier's check - check written by a financial institution on its own funds.

9. Bouncing check - is a check drawn against no fund which the depositor can be charge with an estafa case.

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Advantages of Checking Deposits

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1. They are not liable to loss or theft.

2. Easily carried from place to place and from payee to payee.

3. Exact amount of money for payment can be written on the checks, thus facilitating exchange.

4. Checks can serve as convenient receipts for payments.

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Disadvantages of Checks

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1. Checks may be rejected from an unknown person.

2. Signatures may be forged and the amount may be changed.

3. Inconvenient to cash checks in banks.

4. Bouncing checks may happen.

Front 40

Bank draft

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It is drawn by a bank upon another bank upon another bank where it maintains an account. Also known as banker's demand draft which is drawn by a domestic bank upon its foreign corresponding bank to pay a bearer or designated payee a specific sum of money.

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Trust Receipt Transaction

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Any transaction by and between the entruster/bank (who owns or holds absolute titles or security over certain specified goods, documents or instruments, releases them to the possession to the importers) and the entrustee/importer.

Front 42

Trust Receipt

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Importer signs this document wherein his promises to hold the designated goods, documents or instruments in trust for the bank and to sell or dispose of them with the obligation to turn over to the bank the proceeds.

Front 43

Negotiable Instruments

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Document guaranteeing the payment of a specific amount of money, either on demand, or at the set time, with a payer named on the document.

Front 44

Requirements of Negotiable Instruments

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1. It is in writing & signed by the drawer or maker.

2. It contains an unconditional promise or order to pay a certain sum of money.

3. It is payable on demand or at definite future time.

4. It is payable to bearer or order.

5. It names the drawee with the reasonable certainty.

Front 45

Endorsements

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Refers to the transfer of bill to the 3rd party.

A. Endorser - a person who endorses the bill.

B. Endorsee - a person to whom it is endorsed.

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Requisites of Endorsement

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1. Has legitimate title to the check.

2. Authorized to obtain payment in behalf of one who has a good title to a check.

3. It is a valid transfer.

4. It is not a fake credit instrument.

5. He is not aware of any insolvency proceedings against the drawer of the check.

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Types of Endorsement

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1. Special Endorsement - specifies the name of the person to be paid.

2. Endorsement in blank - indicates no name or endorsee.

3. Restricted Endorsement - confines the endorsement to a specific purpose where it limits further negotiation.

4. Conditional Endorsement - requires the payment of check under specified conditions.

5. Qualified Endorsement - limits the liability of the endorser by writing the words without recourse.

6. Facultative Endorsement - uses discretion to forego certain rights guaranteed by law but are waivable.

Front 48

Presentment

Back 48

Refers to the credit instrument holder who hands or presents the said instrument to the bank or drawee for payment of acceptance at the place and time indicated therein.