The Credit System PDF

THE CREDIT SYSTEM Barter & Trade dates back to pre-colonial times HISTORY and DEVELOPMENT of CREDIT in the PHILIPPINES Credit Institutions established in the Philippines during the 16th century Spanish colonial era HISTORY and DEVELOPMENT of CREDIT in the PHILIPPINES Banking Institutions introduction of modern banking during the early 20th century HISTORY and DEVELOPMENT of CREDIT in the PHILIPPINES Microfinance Institutions have emerged to cater to the needs of small- scale entrepreneurs and individuals who lack access to traditional banking services HISTORY and DEVELOPMENT of CREDIT in the PHILIPPINES CREDIT It is the ability to obtain a thing of value in exchange for a promise to pay definite sum of money, on demand or future determinable time. Basic Concepts of Credit Comes from the latin word credere meaning to trust Ability to acquire something of value like goods/ services, securities or money at the present time to return for a promise to pay at some future time Two parties involved in any credit transaction Creditor provides the thing borrowed Debtor receives it and assumes obligation to pay CREDIT in Lending and Borrowing credit represents an agreement between a creditor (lender) and a borrower (debtor). The debtor promises to repay the lender, often with interest, or risk financial or legal penalties Elements of 01 Ability to obtain a thing of value A thing of value may mean cash form of CREDIT credit or in the form of goods 02 Involves a promise to pay The debtor who makes a promise to pay the creditor 03 Involves a definite sum of money Any kind of credit should clearly state the exact amount of money borrowed together with the corresponding interest during an agreed 04 period Payable on demand or future time The promise of the debtor to pay the creditor involves future time, also known as maturity date Characteristics of Credit Bipartite or 2- Elastic party contract Credit can be restructured either Debtor extended or shorten Creditor Futurity The maturity date Trust and involves the Faith/Confidence estimated future time that the debtor is able to fulfill the promise to pay The 5 Cs of Credit These are the framework used by the creditors to evaluate credit worthiness of borrowers. Comprehending the different C’s is critical to assess one’s ability to access credit The 5 Cs of Credit CHARACTER This refers to the personality or credit worthiness of the debtor. This is sometimes known as Credit History. It is assessed from credentials, references, reputation and interaction with lenders. The 5 Cs of Credit CAPACITY It measures the person’s ability to repay the loan. Most financial institutions can be very helpful when one is in dire need of money. However, before granting the loan, these institutions check the debtors’ capacity by comparing income against recurring debts and assessing debt-to-income (DTI). The 5 Cs of Credit CAPITAL Capital is the amount of money invested by the owner to business. And for those who do not engaged in business, capital refers to the person’s aggregate real and personal property which can be used as foundation for credit approval as chances of default may become very less. The 5 Cs of Credit CONDITIONS Conditions may refer to interest rates, surcharges in cases of default and the amount of the principal. This also include local business conditions or economic conditions during the time of loan applications. Further, this may also include those conditions that are out of hand like the industry trends or pending legislative changes The 5 Cs of Credit COLLATERAL Any kind of asset and security that is used as pledged by the borrower to get the funds swiftly. It acts like a back-up source on instance when a borrower is no longer able to pay its obligation to the creditor CREDIT CONTRACT means a loan agreement, mortgage document, or other agreement to repay a debt over time the agreement arrived at between parties to a credit contract that naturally originates from credit transactions such as - purchase and sale of goods and services - borrowing of money - issuance of fiduciary money Characteristics of a Credit Contract It is a bipartite contract It is pecuniary contract It creates a legal obligation It is based on personal factors Sources Apolo, J.J. (2003) “Credit & Collection Management in the Philippine Setting”. National Book Store Fajardo, F. & Manansala,M. (2008) “Money Credit & Banking”. National Book Store Peralta, H. (2009) “Credit and Collection”. Discussion Paper https://www.vocabulary.com/ Studocu (2023). Chapter 3 Philippine Credit System https://www.studocu.com/ph/document/xavier-university- ateneo-de-cagayan/food-technology/chapter-3-philippine-credit-system/36866573 Apilado, J. (2017). History of Banking in The Philippines. SCRIBD. https://www.scribd.com/presentation/367998787/History-of-Banking-in-the- Philippines?utm_medium=cpc&utm_source=google_pmax&utm_campaign=3Q_Google_Performance- Max_RoW_P3_Low_LTV&utm_term=&utm_device=c&gclid=CjwKCAjwo9unBhBTEiwAipC1168SJDEUFZtX9e6GSlcZpvtl v6nPFFMTv-YxodtotM_mD5v5hdxfgRoCxegQAvD_BwE Carlo, J. (2023). HISTORY OF CREDIT IN THE PHILIPPINES. Studocu. https://www.studocu.com/ph/messages/question/3252903/history-of-credit-in-the-philippines Consumer Protection (2023 ). https://www.consumerprotection.govt.nz/help-product-service/borrowing- money/credit-contracts-plain-english/#what-common-contract-terms-mean TYPES AND SOURCES OF CREDIT Aparilla, Corias, Madronero, Mamaril, Sabenorio, Villa GROUP 2 REPORTERS MADRONERO, SAIRAH APARILLA, ARIANNE NICOLE CORIAS, KRISHA MARIE C. JANE L. H. VILLA, SHANE ANGEL B. MAMARIL, MARICOR P. SABENORIO, JOSHUA B. REPORT HIGHLIGHTS Introduction Types of Credit Sources of Credit Difference between Formal and Informal Credit Conclusion INTRODUCTION Three common meaning of credit in financial world. Contractual Agreement The amount of money available to borrow accounting term Contractual agreement in which a borrower receives a sum of money or something else of value and commits to repaying the lender later, typically with interest. QUESTIONS: What are the types of credit available? What are some good sources of credit/loan? CREDIT the ability of the consumer to acquire goods or services prior to payment with the faith that the payment will be made in the future TYPES OF CREDIT Open | Service | Open-Ended | Close-Ended GUESS THE PICTURE ____ ______ GUESS THE PICTURE _ _ _ _ C_ R_ E_ D_ _I _T O P E N GUESS THE PICTURE _______ ______ GUESS THE PICTURE _______ ______ S E R V I C E C R E D I T GUESS THE PICTURE _________ ______ GUESS THE PICTURE _________ ______ R E V O L V I N G C R E D I T GUESS THE PICTURE 30 ____ __ ___ _______ GUESS THE PICTURE 30 ____ O P E N _ _- _ _ _ _ _ _ _ _ _ _ 30 D A Y A C C O U N T GUESS THE PICTURE ___________ ____ GUESS THE PICTURE I_ N __________ ____ S T A L L M E N T L O A N Types of Credit 1 2 3 4 Open Service Open-Ended Close-Ended Credit Credit Credit Credit Types of Credit Open Credit Service Credit refers to a type of a type of credit that credit account that allows you to use allows you to borrow services, such as up to a certain limit utilities, cable and cell phones, now and pay for and repay it over them later time. Types of Credit Open-Ended Credit Close-Ended Credit An agreement to lend the Installment loans are borrower an amount up to another type of credit a stated limit and to allow that includes a fixed borrowing up to that limit payment schedule for a again, whenever the specified duration. balance falls below the limit OPEN-ENDED CREDIT An agreement to lend the borrower an amount up to a stated limit and to allow borrowing up to that limit again, whenever the balance falls below the limit. Revolving Credit Consumer has the option each month of paying in full or making the stated minimum payments. Open 30-day Account Consumer promises to pay the full balance owed each month. SOURCES OF CREDIT FORMAL | INFORMAL Sources of Credit FORMAL/ INSTITUTIONAL CREDIT Institutionalized credit involves financial entities that are formally established and regulated, providing credit services to borrowers. BANKS MICROFINANCE PEER-TO-PEER BANKS Traditional banks are prominent sources of credit, offering loans, credit cards, and lines of credit to customers. They operate under rigorous regulatory frameworks and provide a wide range of financial products to cater to diverse requirements. LANDLORDS FRIENDS CREDIT UNION CREDIT UNIONS Similar to banks, credit unions are member- owned financial cooperatives that extend credit services, often at favourable terms, to their members. They prioritize community well-being and typically offer competitive interest rates. GOVERNMENT PROGRAMS FINANCIAL INSTITUTION NEIGHBOR FINANCIAL INSTITUTION This category includes various specialized financial entities such as savings and loan associations, which primarily focus on providing home loans, and investment banks that assist in capital raising through credit instruments like bonds Sources of Credit INFORMAL/ NON-INSTITUTIONAL CREDIT PEER-TO-PEER CREDIT A form of direct lending of money to individuals or businesses without an official financial institution participating as an intermediary in the deal. Generally done through online platforms that match lenders with the potential borrowers. Examples TRADE CREDIT Is a form of Business-to Business financing arrangement to buy goods and/or services on account without making immediate cash or cheque payments. MICROCREDIT common form of microfinance that involves an extremely small loan given to an individualal. RETAIL CREDIT broad term encompassing various credit facilities extended by lenders or companies to customers for purchases. It enables customers who have established a certain level of trust to make purchases on credit, deferring payment for goods or services Examples INFORMAL SOURCES The informal sector credit includes all those credit sources that do not have any organisation to supervise them. Examples GOVERNMENT PROGRAMS a source of credit because that provide financial assistance to individuals, businesses, and communities who may not qualify for traditional loans from private lenders. Examples DIFFERENCES Formal Credit Vs Informal Sources of Credit FORMAL INFORMAL typically follow usually referred to as specific rules and “black lenders” regulations, ensuring VS because their products transparency and and services lack the consumer protection. quality and transparency ASPECT FORMAL CREDIT SOURCES INFORMAL CREDIT SOURCE REGULATIONS Highly regulated by government authorities Unregulated, based on personal trust LEGAL PROTECTIONS Strong legal protections for both parties Limited legal recourse in case of disputes TERMS & Structured products with specific terms and Flexible terms tailored to borrower’s needs CONDITIONS schedules INTEREST RATES Generally lower interest rates Typically higher interest rates CONCLUSION TYPES & SOURCES OF CREDIT THANK YOU 06 SEPTEMBER, 2024 Credit and Collection CLASSIFICATION OF CREDIT BSBA Financial Management 3B - GROUP 7 REPORTERS GROUP 7 Fordelon, Nicole Jao, Rosemarie Luna, Wrexx Anndrea Ordoña, Joanne Mae Serrado, Hannah Valenzuela, Sherwin SHORT RECAP GAME TIME! GAULLRCUITAR ONAL AGRICULTURAL LOAN UPML USM LUMP SUM DSREUEC SECURED NUCRSEOM NAOL CONSUMER LOAN RMERHTTSO OANL SHORT-TERM LOAN RTICDE DIRECT AIIUDTSRLN LNOA INDUSTRIAL LOAN EUSCRUDEN UNSECURED LTMSEANITNL INSTALLMENT NCEIRTID INDIRECT Lesson Outline Introduction to Classification Credit as to Security of Credit Credit as to Release of Credit as to Purpose the Loan Credit as to Classification of Credit as to Maturity Bank Loans Learning Outcomes classify various types of credit based on their intended purpose and recognize how the purpose of credit influences its structure and terms. differentiate between credit classifications based on their maturity (short-term vs. long-term) and security (secured vs. unsecured). assess how bank loans are classified according to their release conditions and analyze how these classifications affect the management and operational strategies of banks. Introduction Classification of credits refers to the process of categorizing different types of credit based on their characteristics, such as purpose, release, etc. This system helps in understanding and managing credit more effectively by grouping credits into categories. Each classification provides insights into the credit's potential impact on financial health and helps in making informed decisions about borrowing and lending. AS TO PURPOSE ACCORDING TO PURPOSE: Consumer Credit 1 - Consumer credit, often referred to as consumer debt, is a financial tool that individuals use to make immediate purchases of goods and services. Investment Credit 2 - Extended by banks for company who intends to purchase fixed assets Agricultural credit 3 - Intended for acquisition of fertilizers, pesticides, seedlings, transportation of agricultural products and farm improvements. ACCORDING TO PURPOSE: Export Credits 4 - Uses “letter of credit” – financing international trade - Importer letter of credit – requires payment be made in importer’s currency - Export letter of credit - requires payment be made in exporter’s currency Real estate loan 5 - intended for the purchase of house and lot, for house construction or improvement. Industrial credit 6 - intended to finance industries like logging, fishing, mining, quarrying and the like. AS TO MATURITY AS TO Short Term Loans - are payable MATURITY within a period of one year. Intermediate Term or Medium Term Loans - are payable for a period of five years. Long-term Loans - are payable for more than five years. AS TO SECURITY AS TO SECURITY Secured vs. Unsecured Lines of Credit Secured - The lender has established a lien on the borrower's asset. This asset becomes collateral, and the lender can seize or liquidate it if the loan is not paid. Unsecured - Here, the lender assumes a bigger risk. None of the borrower's assets are liable or subject to seizure in the event of default. SECURED UNSECURED Guaranteed by collateral Not guaranteed by an asset (collateral) Lower interest rates than for Riskier for lenders, so interest unsecured credit rates are higher If a borrower defaults, lender No collateral to seize, so more can seize collateral difficult to get approved by lenders AS TO RELEASE OF THE LOAN LOAN RELEASE the process of disbursing funds to a borrower by a lender as outlined in the loan agreement. PROCESS: 1. Typically starts when the borrower makes the final payment on their loan. 2. The lender will prepare a deed of reconveyance, which will be signed by the lender and recorded with the county recorder's office. 3. Once the deed of reconveyance has been recorded, the borrower will receive a copy for their records, and the lender's lien on the property will be released. TWO TYPES OF LOAN RELEASE: 1. LUMP SUM RELEASE refers to one (1) time giving of the loan proceeds to the debtor or borrower. Characteristics: 1. Borrowers receive the full loan amount upfront. 2. Interest is calculated on the entire loan balance from the start. 3. Common for personal loans, some types of business loans, and certain types of mortgages. Examples: 1. Personal loans for immediate expenses. 2. Business loans for one-time investments. 3. Traditional fixed-rate mortgages where the entire amount is given at closing TWO TYPES OF LOAN RELEASE: 2. INSTALLMENT RELEASE refers to periodic giving out of loans dependent on the pre-agreed basis (based on project progress can be one of them) Characteristics: 1. Borrowers receive funds in increments rather than all at once. 2. Interest is usually calculated on the outstanding balance after each installment. 3. Repayment is structured into regular payments over a predetermined period. Examples: 1. Auto loans where the loan is repaid in monthly installments. 2. Student loans disbursed per semester. COMPARISON 1. FLEXIBILITY 2. INTEREST COST AS TO CLASSIFICATION OF BANK LOANS BANK LOAN it is when a business/ company borrows a sum of money and pays it back with interest over an agreed period of time Long Term Finance External Finance Used by New/ Start-up Businesses (SMEs) FEATURES DIRECT LOANS INDIRECT LOANS Third-party intermediary (e.g., Lender Bank leasing company, factoring firm) Typically secured by May be unsecured or secured by Collateral property or assets assets other than real estate Personal, business, Purpose Equipment leasing, factoring mortgage, auto, etc Direct application to the Involves a third-party Process bank intermediary CONCLUSION CONCLUSION Purpose-Based Classification provides information about the intended use of credit, which ranges from consumer and investment credits to agricultural and industrial loans. Each type serves a specific purpose, whether for personal consumption, business expansion, or specialized industries such as agriculture. Loan Release Methods (lump sum and installment) highlight various disbursement strategies. Lump sum loans provide immediate access to the entire amount but may have higher interest costs, whereas installment loans provide a structured approach with potentially lower overall interest but necessitate careful management of monthly payments. CONCLUSION Maturity-Based Classification further defines loan terms, with short-term, intermediate-term, and long- term loans designed to meet different financial needs and planning horizons. Security-Based Classification distinguishes between secured and unsecured loans, based on the level of risk assumed by lenders and the collateral required from borrowers. Finally, understanding bank loans in the context of long-term and external finance for businesses, particularly startups, emphasizes the significance of aligning financing strategies with business objectives and financial stability. References County Clerk-Recorder. (n.d.). San Mateo County Assessor-County Clerk-Recorder & Elections - ACRE. https://smcacre.gov/county-clerk-recorder Kopp, C. M. (2023, April 7). Deed of Reconveyance: How it Works, Examples and FAQ. Investopedia. https://www.investopedia.com/terms/d/deed-of- reconveyance.asp#:~:text=The%20Bottom%20Line-,A%20deed%20of%20reconveyance%20is%20a%20document%20that%20tr ansfers%20the,a%20mortgage%20has%20been%20satisfied Studocu. (n.d.). Classification of credit - Classification of credit according to category user consumer credit. - Studocu. https://www.studocu.com/ph/document/pangasinan-state-university/business-administration/classification-of-credit/33381798 Understanding the Loan Release Process. (n.d.). https://fastercapital.com/topics/understanding-the-loan-release-process.html https://www.investopedia.com/terms/c/consumercredit.asp#:~:text=Consumer%20credit%20can%20be%20a,you%20establish %20good%20credit%20history..https://www.kbcbrussels.be/business/en/products/credit/investment- credit.html#:~:text=An%20investment%20credit%20is%20a,to%20further%20grow%20your%20business. https://www.investopedia.com/terms/a/agricultural-credit.asp https://dictionary.cambridge.org/dictionary/english/export-credit https://dictionary.cambridge.org/us/dictionary/english/real-estate-loan Navarro, Freddy. “Philippine Credit and Banking.” Www.academia.edu, www.academia.edu/33619372/Philippine_Credit_and_Banking. References Secured vs. Unsecured Lines of Credit: What’s the Difference? (2020). Investopedia. https://www.investopedia.com/ask/answers/110614/whats-difference-between-secured-line-credit-and-unsecured-line- credit.asp https://morb.bsp.gov.ph/343-direct-or-indirect-borrowings/ THANK YOU ! CREDIT INSTRUMENTS These are promises or orders to pay, a deﬁnite or determinable sum of money to bearer or order, on demand or at a future speciﬁed time. CREDIT INSTRUMENTS This document gives evidence to a credit obligation resulting from the past transaction which sets forth the responsibility of the debtor to his creditor. Characteristics of a Credit Instrument when the instrument does not specify the payee’s Payable to Bearer name Payable to Order when the instrument speciﬁes the payee’s name Payable on instruments with the current dates, like open check Demand Payable at a an instrument with a future time Future Time Classiﬁcations of Credit Instruments Investment Credit Instruments are those which earn income in the form of dividends or interest, such as stocks and bonds Commercial Credit Instruments are substitutes for money on a business transaction; these are promissory notes and bills of exchange Investment Credit Instruments BONDS - Promises to pay the principal as well as the interest to the holder at a certain speciﬁed time indicated on the face of the instrument. - They represent indebtedness on the part of the government or issuing corporation. The government or corporation is called the bond issuer or the debtor; the bond holder is the creditor. - The government or the corporation has the obligation to honor its commitment to the bond holder redeeming the bond. Investment Credit Instruments BONDS - It represents a safe form of investment. The company must honor its obligation of paying its indebtedness to the bondholder upon maturity regardless of whether it is losing or making proﬁts. - It can be used as a collateral to support loans sought by the bondholder from ﬁnancial institutions. - Transfer to another holder is easily done by mere endorsement and delivery of the instrument. Investment Credit Instruments STOCKS - are permanent invested capital of a corporation contributed by the owners (stockholders) which are evidenced by certiﬁcates - represents the stockholder’s right to a certain portion of the assets of a corporation upon liquidation and certain shares of the proﬁts after prior claims have been paid - transferable to third parties; holder, may in normal times, obtain immediate cash through the sale of said stock Commercial Credit Instruments PROMISSORY NOTE - is a written promise by a person, called the maker, to another party, the payee, to pay a deﬁnite sum of money at a certain future time. - a note can be single-named or two-named instrument Commercial Credit Instruments BILL OF EXCHANGE - an unconditional signed written order addressed by one person to another to pay on demand or at a speciﬁed future date a certain sum of money to order - a bill of exchange often includes three parties—the drawee is the party that pays the sum, the payee receives that sum, and the drawer is the one that obliges the drawee to pay the payee or bearer Commercial Credit Instruments Check - a written, dated, and signed draft that directs a bank to pay a speciﬁc sum of money to the bearer. The person or entity writing the check is known as the payor or drawer , while the person to whom the check is written is the payee. The drawee , on the other hand, is the bank on which the check is drawn Kinds of Check Open Check - either payable to order or bearer - has a current date on its face and can be encashed on demand Crossed Check - determined by the presence of two parallel lines on the left corner - must be presented through a payee’s bank account for deposit Kinds of Check Personal Check - a kind of check in which the drawer is an individual - commonly used by individuals and businessman Manager’s Check - check issued by the bank manager, payable to a payee as indicated by the person who buys the MC - often used in situations when the beneﬁciary does not accept cash or personal checks Kinds of Check Bounced Check - check that cannot be processed because the account holder has insufficient funds - banks do not honor these checks, thus return or bounce them charging additional fees to the check writers or account holders Kinds of Check Stale Check - also called stale-dated check - check presented at the paying bank after a certain period (typically six months) of its payment date - a stale check is not an invalid check, but it may be deemed an “irregular” bill of exchange Post-dated Check - an instrument where the date on the face is a future date considering the day of encashment or payment Advantages of Checks Checks are not prone to being lost or stolen compared to other types of money Checks can be easily carried from place to place regardless of the sum of money The exact amount of money for payment can be written on the checks, thus, facilitating exchange Checks can serve as convenient receipts for payments Disadvantages of Checks Checks may not be accepted from an unknown person Signature may be forged or the amount may be changed It is sometimes inconvenient to encash checks in bank The possibility of bouncing checks may happen Sources Lustan, J.A ( ). Prof 6 Credit and Collection Module Hargrave, M. (2023) Bill of Exchange Deﬁnition: Examples and How It Works. Investopedia. https://www.investopedia.com/terms/b/billofexchange.asp https://www.ﬂickr.com/photos/11948885@N04/9462550507

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