Credit And Collection (Midterm Reviewer) PDF

CREDIT AND COLLECTION (Finman 6) 1. Farmers did not have steady income due to the destruction of their Midterm Reviewer crops....

CREDIT AND COLLECTION (Finman 6) 1. Farmers did not have steady income due to the destruction of their Midterm Reviewer crops. 2. They were exploited by the landlords who give them unfair share in THE DEVELOPMENT OF CREDIT the harvest. 3. The negative attitudes of the borrowers toward their debts influenced Pre-Spanish Time - The Philippines had been trading with foreign their refusal to settle their financial obligations. countries such as: 4. They considered loans as another form of dole outs and therefore China they did not feel the responsibility of paying the gov’t lending Japan institutions. Sumatra India UNDER THE REPUBLIC Arabia Philippines became a republic on July 4, 1946. It was a period of Siam reconstruction and rehabilitation. Borneo Java Rehabilitation Finance Corporation Moluccas - Was established on Oct. 29, 1946. East Indian islands - It provided credit facilities for the rehabilitation of agriculture, commerce and industry. Hundreds of years prior to the arrival of the Spanish colonization, what - Also assisted the reconstruction of war-damaged properties. were Filipino traders famous for? - 1958, it became the Dev’t Bank of the Philippines. Honesty and excellent credit record CENTRAL BANK OF THE PHILIPPINES These cultural values came from the Malay culture. - Established in 1949. - After President Manuel Roxas assumed office in 1946, he instructed Dishonesty and non-payment of debt were greatly discouraged by then Finance Secretary Miguel Cuaderno, Sr. to draw up a charter for a punishment which are considered primitive under the present culture. central bank. - The Commission, which studied Philippine financial, monetary and SPANISH TIME fiscal problems in 1947, recommended a shift from the dollar exchange During the initial years of Spanish rule, free trade was encouraged. standard to a managed currency system. The goods of the Far East were marketed to America through Manila - A central bank was necessary to implement the proposed shift to the and then through Acapulco, Mexico. new system. Galleon Trade CENTRAL BANK OF THE PHILIPPINES Is a product of mercantilism in the Philippines The establishment of a monetary authority became imperative Was called the Manila-Acapulco Trade a year later as a result of the findings of the Joint Philippine-American Was called galleon trade because it was carried on by transpacific Finance Commission chaired by Mr. Cuaderno. galleons. 3 January 1949 Galleon Trade The Central Bank of the Philippines (CBP) was inaugurated It was a government monopoly and formally opened with Hon. Miguel Cuaderno, Sr. as the first The privilege of doing business in the galleon trade went to the governor. governor-general, religious officials, royal officials, soldiers, and their relatives and friends. THE BASIC ELEMENTS OF CREDIT 1. Trust and confidence. The essence of credit is confidence on the Obras Pias part of the creditor. Motivated by faith in his fellowmen. A charity foundation by laymen used for charity works and 2. Futurity. There is always a future time involved Regardless of the religious activities. It became a banking institution run by friars. hour, day, month or year Forerunner of the banking institutions in the Philippines. 3. Risk. The uncertainty faced by the creditor, if he gets paid in full, in The funds of the obras pias were donated by rich citizens for part on not at all.The risk is minimized when loan is “Secured.” religious projects and these were managed by the religious orders. America Era FOUNDATION OF CREDIT American government gave priority to agricultural development. What is the basis of credit? Confidence. The American administrators introduced a better banking and credit system to promote economic development, especially in the rural Confidence is 2-fold in character. areas. - The lender must feel morally certain that the borrower will be able to pay his debt; that his affairs are in such that he will be Rural Credit Law able to pay the debt, when it is due. Was enacted in 1915 - The lender must feel certain that the borrower is a man of Used to complement the agricultural cooperatives, particularly integrity. The delay caused by the obligation is vexatious, and credit associations in every town all over the country. men never voluntarily accept a credit instrument which is likely to be contested in the courts. Philippine National Bank Credit Established in 1916 - Credit is based upon confidence in character as well as upon Extended long-term loans to agriculture and industry. confidence in business ability. Has also functioned as de facto Central Bank of the Philippines until 1949. THE CREDIT CONTRACT Credit arise in various ways: Factors in the Failure of the Credit Program 1. Purchase and sale of goods and services. 2. Borrowing money. e. Credit helps expand economic opportunities through education, job 3. Issuance of fiduciary money. training and job creation. f. Credit spreads progress to various sectors of the economy. CHARACTERISTICS OF A CREDIT CONTRACT g. Credit makes possible the birth of new industries. Credit contract is characterized as follows: h. Credit helps buying become more convenient for consumers. 1. It is a bi-partite contract. There are 2 parties involved. DISADVANTAGES OF USING CREDIT 2. It is a pecuniary contract. a.Credit, at times encourages speculations. Pecuniary – in the form of money (it acts as the standard of b. Credit also tends to contribute to extravagance and carelessness on value) the part of people who obtain it. 3. It creates a legal obligation. c. Failure to generate expected income can only cause a collapse The contract creates the right of the creditor to collect from which affects the nation’s economy. the debtor. d. Credit causes one businessman to be dependent upon others. 4. It has the fiduciary element. It is based on trust. Faith on the borrower’s ability and willingness to pay should exist. THE COST OF CREDIT 5. It is based on personal factors. The contract is perfected based on the person’s degree of How much do you pay for your credit? moral as well as business competence. Interest Is usually expressed as per cent THE GREATER THE TEST, THE GREATER THE CAPACITY. it is rent paid for the use of money (Business Mathematics, Altares, Arce) EMERGENCE the fact of something becoming known or starting to exist How much do you pay for your credit? Risk ECONOMY the possibility of something bad happening the system of trade and industry by which the wealth of a country is made and used The classes and kinds of credit according to its purpose are: a. Commercial credit THE BIRTH OF CREDIT Includes the promise to pay off businessmen for the funds Credere (Latin of credit) they borrowed in the purchase of goods for productive or profitable To trust ventures. These are merchants, distributors and manufacturers People have trust in one other. b. Agricultural Credit Credit is a product of necessity.* Includes the promise to pay off farmers and farm organization for the funds and farm organization for the funds they borrowed in the Credit acquisition of farm inputs. the ability to borrow money, goods or service and agrees to c. Investment Credit pay at a specified time Includes the promise to pay off individuals or business firms for the loans they obtained in buying capital goods. This is also called Other meanings of credit “industrial credit”. Credit (in banking) d. Consumer Credit An entry in the books of a bank showing its obligation to a All obligations to pay off people for the money they borrowed customer. Other meanings of credit for consumption purposes. e. Speculative Credit Credit (in bookkeeping) Used for dealing in securities or goods with the intention of An entry showing that the person named has a right to making a profit through favorable price changes demand something but not necessarily money. f. Export Credit Involved in all sorts of transactions for which cash is not paid Credit is the lifeblood of business. on or before shipment of goods out of the country. g. Industrial Credit Purchasing power Is intended for financing the needs of industries like logging, The financial ability to buy products and services Other fishing, manufacturing, and others, and which involves big amounts of meanings of credit money. h. Real Estate Credit What is the importance of credit? When credit is secured purposely for construction, Customers are able to buy and get what they desire even acquisition, expansion or improvement of real estate properties, it is when they don’t have enough cash because of CREDIT. termed as real estate credit. ADVANTAGES OF USING CREDIT Classifications of Credit a. Credit facilitates and contributes to the increase in wealth by making ACCORDING TO TYPE OF USER funds available for productive purposes. a) Consumer credit b. Credit saves time and expense by providing a safer and more b) Convenient form of payment convenient means of completing transactions. c) Aids in financial emergencies d) Buying durables on installment c. Credit helps expand the purchasing power of every member of the business community – from producer to the ultimate consumer. Consumer credit d. Credit enables immediate consumption of goods thereby providing This is a credit used by individuals to help finance or for an increase in material well-being. refinance the purchase of commodities for personal consumption.  This is different from business credit in terms of the ACCORDING TO FORMS OF CREDIT borrower’s purpose, that is, for personal or household use. 1) Cash form of credit – borrowing cash 2) Merchandise form of credit – borrowing goods Charge accounts Are for non-durables, payable, within 2 months or 60-day The following can be used as collateral: land, stocks, bonds, term, in four payments. machines, houses, crops and other valuable properties. Installment accounts The following are considered private sectors of the economy; For durables, payable for more than six months to one or individuals, partnerships, corporations and other private more years. institutions. Payment is monthly and a down payment is needed before A public credit includes all grants of credit to government unit on credit is delivered. whether national, provincial, municipal and its instrumentalities while a private credit refers to all grants of credit to nongovernment. Revolving credit Is a combination of charge and installment accounts. The Banks do not only accept deposits but also extend loans. credit period is 90 days. Under this plan, the debtor can avail of loan renewal after 90 LOANS days, or within 90 days, for the paid portion, provided he had not been They are the most substantial source of credit not only for delinquent in payment of the original loan. individuals and private businesses but also for the government. What is REDISCOUNTING? Classifications of Credit is a standing credit facility provided by the BSP to help banks ACCORDING TO PURPOSE meet temporary liquidity needs by refinancing the loans they extend to a) Investment credit their clients. Is extended by banks for company who intends to purchase is one of the Bangko Sentral ng Pilipinas' (BSP) standing fixed assets – land, building equipment for business use. credit facility and enable banks to liquidate and refinance loans using securities as collaterals. b) Agricultural credit Is a loan intended for the acquisition of fertilizers, pesticides, Types of Loans Granted by Banks seedlings, transportation of agricultural products and farm 1. Demand or callable loan improvements. This loan that does not have a definite maturity and therefore, is Debtors are farm breeders and creditors are rural banks. subject to payment anytime the bank deems it payable. These loans can be on a short-term or long-term maturity. 2. Time Loan c) Export credit This type of loan may be a short-term, medium-term or long-term Used of “letter of credit” as a tool for financing international which payable at a specified future time. trade.This letter of credit of LC is issued by the importer’s bank, it guarantees payment to the exporter up to some specified amount of Character Loan money. Is usually short-term. For loans whose payment is longer than one year, the bank requires collateral. – called “Collateralized Loan or In LC, the exporter is protected by substitution of the bank’s Secured loan” good faith and credit for that of the importer. Character Loan Is a loan which is a secured loan. Foreclosure proceeding 2 General Types may be imposed by the court in the even of failure to pay or default in The import letter of credit which requires payment be made in the the payment of the obligation. importer’s currency. The export letter of credit which requires that it be made in the Foreclosure exporter’s currency. Is the process of enforcing the lien on the property pledges by selling the property in an auction in order to recover the money lent and PARTIES TO LC all the expenses incurred in the process. 1) Importer 3) Exporter In tagalog = rematahin 2) Importer’s bank 4) Exporter’s bank Types of Loans Granted by Banks d) Real Estate loan Is intended for the purchase of house and lot, for house What is Lien? construction, or improvement. is the legal right of a creditor to sell the collateral property of a debtor who fails to meet the obligations of a loan contract. e) Industrial credit Is intended to finance industries like logging, fishing, mining, Mortgage Contract quarrying and the like. is a debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined Classifications of Credit set of payments ACCORDING TO MATURITY 1) Short-term loans – are payable within a period of one year. 2 Parties: 2) Intermediate loans or medium-term – payable for a period of one The mortgagee – the bank to five years. The mortgagor – the borrower 3) Long-term loans – are payable for more than five years. Credit According to the Allocation of Risk  This is the possibility that the debtor may not fulfill his promise Secured Credit for payment. Credit risk shall be borne by the creditors. Credit of this depends on some specific thing, legally set aside to guarantee its payment. SOURCES OF CREDIT Banks require collaterals like real estate titles to assure payments of 1. PRIVATE INDIVIDUALS debt. The great majority of loans, about 66% granted by commercial They usually do not require collateral but charge higher banks, are secured loans. interest rates. They are sometimes called “loan sharks” or “usurers” because they prescribe rate of 5/6 or over and above what the law Unsecured Credit provides. This is the type of credit where the debtor assured payment without a particular asset pledged to secure the debt. 2. RETAIL STORES These outlets offer merchandise form of consumer credit. It offers a Credit book account “palista” for customers of the store and collection period - Is the ability to obtain a thing of value in exchange for a promise to is during paydays of the month. pay definite sum of money, on demand or future determinable time. 3. PAWNSHOPS Nature of Credit Pawnbrokers extend loans in exchange for a collateral, a 1. It is the ability to obtain a thing of value. pawn. Pawns are personal property of movable assets. Thing of value may mean cash form of credit or merchandise Pawners are given 90 days grace period from the date of form of credit maturity of the loan 2. A promise to pay The pawnbroker shall duly notify the pawner in writing that The promise should specify the the pawn shall be sold or otherwise disposed of through auction 1) Principal amount A pawnshop is a store or form of business that lends money 2) Interest 3) Maturity date to consumers who carry valuable items to be pawned. These valuables are referred to as “collateral.” The precious 3. Definite sum of money asset will only be returned from the pawnbroker after the loaned money Credit involves exact amount of money loaned, or money and interest have been repaid. S value for non-cash form of credit. 4. Payable on demand or future time There are also three types of people who usually transact at A promise by the debtor for the settlement of obligation may pawnshops, including the following: involve a future date as loan maturity, or anytime the creditor demands 1. People who need quick cash and are willing to pawn their payment. precious item as collateral 2. People who are trading their used items 3. People who buy Characteristics of Credit new or used merchandise. 1. It is a bi-partite or a two-party contract. 2 parties are involved in the agreement: 1. Debtor 4. SAVINGS AND MORTGAGE BANKS 2. Creditor Any corporation organized for the purpose of accumulating 2. It is elastic. the savings of depositors and investing them, together with its capital, It can be increased or decreased by the creditor. in readily marketable bonds and debt securities; commercial papers 3. The presence of trust and faith. and accounts receivables; drafts, bills of exchange, acceptances, or The basic element of credit is the creditor’s reliance on both notes arising out of commercial transaction or in loans secured by the debtor’s ability and willingness to pay his debt. bonds, mortgages on real estate and insured 4. It involves futurity. Maturity date for settlement of obligation is a future time. 5. MUTUAL SAVINGS BANKS These are mutually owned by their depositors and either pay Foundations of Credit out their profit to savers in interest dividends or retail them as a reserve 1. Confidence cushion against loss Creditor must trust the debtor’s personal character as a They sell interest-bearing savings deposits to the public and measure of his capacity to pay. acquire assets largely in the form of urban residential mortgage. The creditor’s confidence on the debtor’s willingness and capacity to settle obligation is based on trust. 6. SAVINGS AND LOAN ASSOCIATIONS 2. Proper facilities These are organized to obtain funds for home construction, Legal facilities must exist to make the agreement valid. These and majority of their savings are placed in home mortgages. There are are the credit information and credit document. stockholders in these organizations who receive dividends over and Credit information includes data about the debtor as a above what is paid out to savers. gauge of his paying capacit which can be gathered out of a credit These are sometimes called building and loan associations investigation. which sell financial service to the public and invest funds acquired. 3. Stability of monetary standard Purchasing power of money is considered when extending 7. CREDIT UNIONS credit. The more stable value of money, the greater is the possibility for These are mutual institutions whose membership have some approving credit. Creditors may be reluctant in parting with excess common bond, such as employment in lending institutions organized income during wide fluctuations of money value. around some common bond of membership, typically a common 4. Government Assistance employer. Regulations protecting both parties are highly considered for credit transactions. 8. INSURANCE COMPANIES 5. Credit risk These companies are both mutual and stockholderowned. They receive funds from policy holders and place the funds in loans, both individually to home buyers and other small borrowers and also P = I / rt through security purchases in the organized money and capital t = I / Pr markets. Service offered to the public is financial protection against Maturity Value life’s various misfortunes. To build up huge amounts of funds, they F=P+I have to place part of their assets in investments. Also, F = P + Prt F = P (1 + rt) 9. PENSION FUNDS Ordinary & Exact Interest The procedure for pension funds is the reverse of that for I = Pr (D/360) insurance companies. The person who lives the longest beyond I = Pr (D/365) retirement receives the highest return in the investment, through the periodic pension checks he receives. I=interest P=principal 10. BOND AND MONEY MARKET FUNDS D=days These are companies which accept savings and place them in a pool for investments that allows diversification of assets. APPROXIMATE Time & Exact Time There are two ways of finding time between the two dates 11. SALES FINANCE COMPANIES given. These include sales and personal finance companies which One method is to find approximate time and the other is to make loans to individuals for the purpose of buying automobiles. They find actual time. obtain working capital from their own stockholders, loans from commercial banks and those obtained in sales-of securities on the 1) Approximate = estimate organized money and capital markets. 2) Actual = verifiable, realistic, literal They do not lend directly to consumer or companies but they buy the sales contracts, or installment contracts from the retailer or Compound Interest dealer. Interest you earn on Interest 12. BANKS Conversion Period These are commercial banks, savings banks, rural, Time between the successive interest computations. development and investment banks. They approve loans based on collateral presented. Conversion Periods: They are major sources of credit particularly for businessmen Annually: m=1 Quarterly: m=4 and for the development of certain industries. Semi Annually: m=2 Monthly: m=12 Commercial bank is any corporation which accepts or creates demand deposits subject to withdrawal by check. Formula for Compound Interest: Commercial banks F=P(1+j/m)^mt I=F-P F=P(1+r)^n These institutions also accept drafts and issues letters of credit, by discounting and negotiating promissory notes, drafts, bills of P= original principal exchange, and other evidences of debts. F= compound amount or final to which P will accumulate I= compound interest Lending Act i/r= j/m Is an act designed to protect consumers against unfair billing n= number of conversion periods for the whole term (n=mt) practices of people who extend credit to a purchaser of goods on m= number of conversion periods installment basis. t= time or term of investment which is expected in years j= nominal rate of interest per year. Lending Act 1. The cash price of the property to be serviced or acquired. 2. The down payment if any, or the trade-in price. 3. The difference between the amounts under 1 and 2. Lending Act 4. The charges individually itemized, which are paid or to be paid in connection with the transaction and which are not incidental to the extension of credit. 5. The total amount to be financed. Lending Act 6. The finance charged expressed in terms of pesos. 7. The percentage that the finance charge bears to the total amount to be financed which is expressed as a simple annual rate on the outstanding unpaid balance of the obligation. Simple Interest I = Prt Is interest on the amount invested or borrowed at a given rate and for a given time. Simple Interest (interpolation) I = Prt r = I / Pt