Credit & Collection: The Development of Credit PDF

CREDIT & COLLECTION 3. The negative attitudes of the borrowers toward their debts influenced their refusal to settle their financial THE DEVELOPMENT OF CREDIT...

CREDIT & COLLECTION 3. The negative attitudes of the borrowers toward their debts influenced their refusal to settle their financial THE DEVELOPMENT OF CREDIT obligations. 4. They considered loans as another form of dole outs and Hundreds of years prior to the arrival of the Spanish therefore they did not feel the responsibility of paying the colonization, what were Filipino traders famous for? gov’t lending institutions Honesty and excellent credit record UNDER THE REPUBLIC These cultural values came from the Malay culture Philippines became a republic on July 4, 1946.It was a Dishonesty and non-payment of debt were greatly period of reconstruction and rehabilitation. discouraged by punishment which are considered primitive under the present culture. Rehabilitation Finance Corporation - Was established on Oct. 29, 1946. SPANISH TIME - It provided credit facilities for the rehabilitation of During the initial years of Spanish rule, free trade was agriculture, commerce and industry. encouraged - Also assisted the reconstruction of war-damaged The goods of the Far East were marketed to America properties. through Manila and then through Acapulco, Mexico - 1958, it became the Dev’t Bank of the Philippines. GALLEON TRADE Is a product of mercantilism in the Philippines CENTRAL BANK OF THE PHILIPPINES Was called the Manila-Acapulco Trade Established in 1949. Was called galleon trade because it was carried on by After President Manuel Roxas assumed office in 1946, transpacific galleons. he instructed then Finance Secretary Miguel It was a government monopoly Cuaderno, Sr. to draw up a charter for a central bank. The privilege of doing business in the galleon trade The Commission, which studied Philippine financial, went to the governor-general, religious officials, royal monetary and fiscal problems in 1947, recommended officials, soldiers, and their relatives and friends a shift from the dollar exchange standard to a OBRAS PIAS managed currency system. A charity foundation by laymen used for charity works and A central bank was necessary to implement the religious activities. It became a banking institution run by proposed shift to the new system. friars The establishment of a monetary authority became Forerunner of the banking institutions in the imperative a year later as a result of the findings of the Philippines Joint PhilippineAmerican Finance Commission chaired The funds if the obras pias were donated by rich by Mr. Cuaderno. citizens for religious projects and these were managed by the religious orders 3 JANUARY 1949 AMERICAN ERA The Central Bank of the Philippines (CBP) was American government gave priority to agricultural inaugurated and formally opened with Hon. Miguel development. Cuaderno, Sr. as the first governor The American administrators introduced a better Since the establishment of the CB, monetary policies banking and credit system to promote economic have been fashioned to improve production, development, especially in the rural areas. employment, and quality of life of the people, esp. in RURAL CREDIT LAW rural sectors where poverty has been more Was enacted in 1915 widespread. Used to complement the agricultural cooperatives, particularly credit associations in every town all over THE BASIC ELEMENTS OF CREDIT the country 1. Trust and confidence PHILIPPINE NATIONAL BANK The essence of credit is confidence on the part of the Established in 1916 creditor. Motivated by faith in his fellowmen Extended long-term loans to agriculture and industry 2. Futurity Has also functioned as de facto Central Bank of the There is always a future time involved regardless of the Philippines until 1949 hour, day, month or year FACTORS IN THE FAILURE OF THE CREDIT PROGRAM 3. Risk 1. Farmers did not have steady income due to the The uncertainty faced by the creditor, if he gets paid in full, destruction of their crops. in part on not at all.The risk is minimized when loan is 2. They were exploited by the landlords who give them “Secured.” unfair share in the harvest. What is the basis of credit? Confidence CREDIT – the ability to borrow money, goods or service and Confidence is 2-fold in character: agrees to pay at a specified time The lender must feel morally certain that the borrower (in banking) – an entry in the books of a bank will be able to pay his debt; that his affairs are in such showing its obligation to a customer that he will be able to pay the debt, when it is due (in bookkeeping) – an entry showing that the The lender must feel certain that the borrower is a man person named has a right to demand something of integrity. The delay caused by the obligation is but not necessarily money vexatious, and men never voluntarily accept a credit Credit is the lifeblood of business. instrument which is likely to be contested in the courts. ✓ The customers are able to obtain the desired goods CREDIT even at a time when they suffer from lack of cash or is based upon confidence in character as well as upon purchasing power confidence in business ability. CREDIT ARISE IN VARIOUS WAYS: PURCHASING POWER – the financial ability to buy 1. Purchase and sale of goods and services products and services 2. Borrowing money 3. Issuance of fiduciary money What is the importance of credit? CREDIT CONTRACT IS CHARACTERIZED AS FOLLOWS: - Customers are able to buy and get what they desire even 1. It is a bi-partite contract when they don’t have enough cash because of CREDIT. There are 2 parties involved. 2. It is pecuniary contract ADVANTAGES OF USING CREDIT Pecuniary – in the form of money (it acts as the a. Credit facilities and contributes to the increase in wealth standard of value) by making funds available for productive purposes 3. It creates a legal obligation b. Credit saves time and expense by providing a safer and The contract creates the right of the creditor to more convenient means of completing transactions collect from the debtor c. Credit helps expand the purchasing power of every 4. It has the fiduciary element. member of the business community – from producer to the It is based on trust. Faith on the borrower’s ability ultimate consumer. and willingness to pay should exist d. Credit enables immediate consumption of goods 5. it is based on personal factors thereby providing for an increase in material well-being The contract is perfected based on the person’s e. Credit helps expand economic opportunities through degree of moral as well as business competence. education, job training and job creation. f. Credit spreads progress to various sectors of the The Greater the Test, economy. The Greater the Capacity. g. Credit makes possible the birth of new industries. h. Credit helps buying become more convenient for EMERGENCE consumers. The fact of something becoming known or starting to exist DISADVANTAGES OF USING CREDIT ECONOMY a. Credit, at times encourages speculations The system of trade and industry by which the wealth of a b. Credit also tends to contribute to extravagance and country is made and used carelessness on the part of people who obtain it. c. Failure to generate expected income can only cause a In the days before civilization, collapse which affects the nation’s economy. What was the earliest method of acquiring goods that were d. Credit causes one businessman to be dependent upon owned by someone else? others. It’s probably by a simple act of plunder or robbery where THE COST OF CREDIT brute force and strength had the force of authority How much do you pay for your credit? INTEREST Is usually expressed as percent The stronger party almost always took possession of the it is rent paid for the use of money property of the weaker one through force or stealth How much do you pay for your credit? RISK the possibility of something bad happening THE BIRTH OF CREDIT CREDERE (LATIN OF CREDIT) To trust People have trust in one other. Credit is a product of necessity  Under this plan, the debtor can avail of loan CLASSES AND KINDS OF CREDIT renewal after 90 days, or within 90 days, for the paid portion, provided he had not been delinquent in 1. The classes and kinds of credit according to its payment of the original loan. purpose are: 2. ACCORDING TO PURPOSE a. Commercial credit – includes the promise to pay off a. Investment credit businessmen for the funds they borrowed in the purchase b. Agricultural credit of goods for productive or profitable ventures. These are c. Export credit merchants, distributors and manufacturers. d. Real estate loan b. Agricultural Credit - Includes the promise to pay off e. Industrial credit farmers and farm organization for the funds and farm a. Investment credit organization for the funds they borrowed in the acquisition Is extended by banks for company who intends to of farm inputs. purchase fixed assets – land, building equipment c. Investment Credit - Includes the promise to pay off for business use. individuals or business firms for the loans they obtained in b. Agricultural credit buying capital goods. This is also called “industrial credit” Is a loan intended for the acquisition of fertilizers, d. Consumer Credit - All obligations to pay off people for pesticides, seedlings, transportation of agricultural the money they borrowed for consumption purposes products and farm improvements. e. Speculative Credit - Used for dealing in securities or Debtors are farm breeders and creditors are rural goods with the intention of making a profit through banks. favorable price changes. These loans can be on a short-term or long-term f. Export Credit - Involved in all sorts of transactions for maturity. which cash is not paid on or before shipment of goods out c. Export credit of the country Used of “letter of credit” as a tool for financing g. Industrial Credit - Is intended for financing the needs of international trade.This letter of credit of LC is industries like logging, fishing, manufacturing, and others, issued by the importer’s bank, it guarantees and which involves big amounts of money. payment to the exporter up to some specified h. Real Estate Credit - When credit is secured purposely amount of money. for construction, acquisition, expansion or improvement of In LC, the exporter is protected by substitution of real estate properties, it is termed as real estate credit. the bank’s good faith and credit for that of the importer. CLASSIFICATIONS OF CREDIT 2 General Types 1. ACCORDING TO TYPE OF USER ▪ The import letter of credit which requires payment a. Consumer Credit be made in the importer’s currency. b. Convenient form of payment ▪ The export letter of credit which requires that it be c. Aids in financial emergencies made in the exporter’s currency. d. Buying durables on installment Parties to LC 1. Importer a. Consumer Credit 2. Importer’s bank This is a credit used by individuals to help finance or 3. Exporter refinance the purchase of commodities for personal 4. Exporter’s bank consumption. d. Real Estate loan This is different from business credit in terms of the Is intended for the purchase of house and lot, for borrower’s purpose, that is, for personal or household house construction, or improvement. use. f. Industrial credit b. Charge accounts Is intended to finance industries like logging, fishing, Are for non-durables, payable, within 2 months or mining, quarrying and the like. 60-day term, in four payments. c. Installment accounts 3. ACCORDING TO MATURITY For durables, payable for more than six months to 1. Short-term loans – are payable within a period of one or more years. one year Payment is monthly and a down payment is needed 2. Intermediate loans or medium-term – payable for before unit on credit is delivered. a period of one to five years d. Revolving credit 3. Long-term loans – are payable for more than five Is a combination of charge and installment years accounts. The credit period is 90 days. 4. ACCORDING TO FORMS OF CREDIT liquidate and refinance loans using securities as 1. Cash form of credit – borrowing cash collaterals. 2. Merchandise form of credit – borrowing goods Through the facility, the BSP also makes possible the timely delivery of credit to all productive The following can be used as collateral: sectors of the economy. Land, stocks, bonds, machines, houses, crops and other Moreover, rediscounting is one of the monetary valuable properties tools of the BSP to regulate the level of liquidity in the financial system. The BSP’s rediscounting is Loans, whether secured or unsecured, are risk-inherent administered by the Department of Loans and although the former is less risky. Credit. Although secured loans are backed by collateral, creditors prefer to have cash rather than a property or asset which TYPES OF LOANS GRANTED BY BANKS still needs to be converted into cash. 1. DEMAND OR CALLABLE LOAN The following are considered private sectors of the This loan that does not have a definite maturity and economy; individuals, partnerships, corporations and therefore, is subject to payment anytime the bank deems it other private institutions. payable. A public credit includes all grants of credit to government whether national, provincial, municipal 2. TIME LOAN and its instrumentalities while a private credit refers This type of loan may be a short-term, medium-term or to all grants of credit to non-government. long-term which payable at a specified future time. Banks may extend loans against the general credit ✓ Banks do not only accept deposits but also extend standing of the borrower. LOANS Character Loan - Is usually short-term. For loans They are the most substantial source of credit not only whose payment is longer than one year, the bank for individuals and private businesses but also for requires collateral. – called “Collateralized Loan or government Secured loan” The commercial banks stand ready to help our Collateralized Loan – is a loan which is secured businessmen in their need for credit. loan. Foreclosure proceeding may be imposed by It is important that a bank will be able to accumulate the court in the even of failure to pay or default in the necessary amount to pay the interest to their the payment of the obligation. depositor. FORECLOSURE - In this case of a commercial bank, most of their Is the process of enforcing the lien on the property pledges customers are businessmen and their needs for funds are by selling the property in an auction in order to recover the mostly short-term in nature. money lent and all the expenses incurred in the process. - For instance, A manufacturer sells his goods on credit to In tagalog = rematahin a wholesaler and a commercial paper evidences the sale. - If the manufacturer is in need of funds, he can discount What is LIEN? the commercial paper with the bank and the bank in turn is the legal right of a creditor to sell the collateral property rediscounts the same commercial paper with the Central of a debtor who fails to meet the obligations of a loan Bank to replenish its funds. contract. - Banks profit on the difference between interest paid to MORTGAGE CONTRACT depositors and interest received from borrowers. is a debt instrument, secured by the collateral of 1. Banks extends loan to borrower creating loans specified real estate property, that the borrower is obliged receivable account to pay back with a predetermined set of payments. 2. Bank borrowers from the BSP with the loans receivable as collateral (loan rediscounting) 2 Parties 3. Cash is provided to bank by the BSP The morgagee – the bank The mortgagor – the borrower What is REDISCOUNTING? is a standing credit facility provided by the BSP to CREDIT ACCORDING TO THE ALLOCATION OF RISK help banks meet temporary liquidity needs by 1. SECURED CREDIT refinancing the loans they extend to their clients. Credit of this depends on some specific thing, Is one of the Bankyo Sentral ng Pilipinas’ (BSP) legally set aside to guarantee its payment. standing credit facility and enable banks to Banks require collaterals like real estate titles to assure payments of debt. The great majority of  loans, about 66% granted by commercial banks, – This is also the risk factor in credit, esp. when obligations are secured loans. remains unpaid on the maturity date. 2. UNSECURED CREDIT - The debtor’s ability to pay is dependent on his asset and This is the type of credit where the debtor assured will to pay on time, which is the measure of his willingness payment without a particular asset pledged to to pay the obligations. secure the debt. 4. It involves furturity When a consumer buys an appliance on credit or - Maturity date for settlement of obligation is a future a farmer gets a loan, say for Masagana ’99, they time obtain credit without collateral to back up. - The creditor trusts on the debtor’s ability and willingness About 34% of total loans granted by commercial to fulfill obligation when it falls due banks are on this category. Micro credit also belongs to this category. FOUNDATIONS OF CREDIT 1. Confidence NATURE OF CREDIT Creditor must trust the debtor’s personal Is the ability to obtain a thing of value in exchange character as a measure of his capacity to pay for a promise to pay definite sum of money, on The creditor’s confidence on the debtor’s demand or future determinable time. willingness and capacity to settle obligation is This creates obligations and rights to both debtor based on trust. and creditor. 2. Proper facilities There is the obligation of the debtor to pay his debt Legal facilities must exist to make the agreement and the right of the creditor to collect payment. valid. These are the credit information and credit 1. It is the ability to obtain a thing of value document. - Thing of value may mean cash form of credit or Credit information includes data about the merchandise form of credit. debtor as a gauge of his paying capacity which can - Debtor can apply for cash credit from several sources like be gathered out of a credit investigation. banks, private individuals or other financial intermediaries. Credit document is the written agreement signed Merchandise form of credit is non-cash form, where by both parties identifying principal loan, interest sources are retail outlets and the like. and maturity date or other supporting papers to 2. A promise to pay determine his credit rating such as copy of income - The debtor makes a promise to pay the creditor. A tax return/ withheld or employment certificate for promise to pay, to be valid should be in writing personal loans and financial statements for acknowledged by both the debtor and the creditor. business loans. > The promise should specify the 3. Stability of monetary standard 1) Principal amount Purchasing power of money is considered when 2) Interest extending credit. The more stable value of money, 3) Maturity date the greater is the possibility for approving credit. 3. Definite sum of money Creditors may be reluctant in parting with excess - Credit involves exact amount of money loaned, or money income during wide fluctuations of money value. value for non-cash form of credit. 4. Government Assistance - The contract must identify the principal value of loan and Regulations protecting both parties are highly the corresponding interest for the credit period. considered for credit transactions. 4. Payable on demand or future time To evaluate, debtors are given more protection - A promise by the debtor for the settlement of obligation since they cannot be imprisoned for non- may involve a future date as loan maturity, or anytime the performance of obligation, that is, if they are creditor demands payment. insolvent or do not have any assets or property. In this case, the creditors take the risk. CHARACTERISTICS OF CREDIT 5. Credit Risk 1. It is a bi-partite or a two-party contract This is the possibility that the debtor may not fulfill 2 parties are involve in the agreement his promise for payment. 1. Debtor Credit risk shall be borne by the creditors. 2. Creditor 2. It is elastic SOURCES OF CREDIT - It can be increased or decreased by the creditor. - The loan limit or elasticity depends upon the capacity of 1. PRIVATE INDIVIDUALS the debtor and appraised value of his collateral. There are the individual money lenders who loan 3. The presence of trust and faith surplus income to those in immediate need of - The basic element of credit is the creditor’s reliance on cash. both the debtor’s ability and willingness to pay his debt.  They usually do not require collateral but charge They sell interest-bearing savings deposits to the higher interest rates. They are sometimes called public and acquire assets largely in the form of “loan sharks” or “usurers” because they prescribe urban residential mortgage. rate of 5/6 or over and above what the law 6. SAVINGS AND LOAN ASSOCIATIONS provides. These are organized to obtain funds for home 2. RETAIL STORES construction, and majority of their savings are These outlets offer merchandise form of placed in home mortgages. consumer credit. There are stockholders in these organizations who It offers a book account “palista” for customers of receive dividends over and above what is paid out the store and collection period is during paydays to savers. of the month. These are sometimes called building and loan 3. PAWNSHOPS associations which sell financial service to the Pawnbrokers extend loans in exchange for a public and invest funds acquired. collateral, a pawn. 7. CREDIT UNIONS Pawns are personal property of movable assets These are mutual institutions whose membership Pawners are given 90 days grace period from the have some common bond, such as employment date of maturity of the loan within which to in lending institutions organized around some redeem the pawn by paying the principal amount common bond of membership, typically a of the loan plus interest that accrued thereon. common employer. The pawnbroker shall duly notify the pawner in They accept deposits, on which they pay interest writing that the pawn shall be sold or otherwise or dividends only from their membership and disposed of through auction. small loans only to their members, usually for the A pawnshop is a store or form of business that purpose of buying consumer-durable goods. lends money to consumers who carry valuable 8. INSURANCE COMPANIES items to be pawned. Thee companies are both mutual and These valuables are referred to as “collateral.” The stockholder-owned precious asset will only be returned from the They receive funds from policy holders and place pawnbroker after the loaned money and interest the funds in loans, both individually to home have been repaid. buyers and other small borrowers and also There are also three types of people who usually through security purchases in the organized transact at pawnshops, including the following: money and capital markets 1. People who need quick cash and are willing to Service offered to the public is financial protection pawn their precious item as collateral against life’s various misfortunes. To build up huge 2. People who are trading their used items amounts of funds, they have to place part of their 3. People who buy new or used merchandise assets in investments. 4. SAVINGS AND MORTGAGE BANKS 9. PENSION FUNDS Any corporation organized for the purpose of The procedure for pension funds is the reverse of accumulating the savings of depositors and that for insurance companies. The person who investing them, together with its capital, in readily lives the longest beyond retirement receives the marketable bonds and debt securities; highest return in the investment, through the commercial papers and accounts receivables; periodic pension checks he receives. drafts, bills of exchange, acceptances, or notes Most corporation of any size offer their employees arising out of commercial transaction or in loans a retirement plan as a benefit of employment. The secured by bonds, mortgages on real estate and financial service offered the public is, of course, insured the accumulation the investment of employer an Improvements thereon, and other forms of employee contributions of these funds. security or unsecured, and financing for home Pension funds can b e insured or non-insured. building and home development; and such other Insured pension funds are managed by insurance investments and loans which the Monetary Board companies, and the investment of these funds is may determine as necessary in the furtherance of frequently subject to the same governmental the national economic objectives restrictions like insurance contracts. Non-insured 5. MUTUAL SAVINGS BANKS funds have wider range in the types of assets they These are mutually owned by their depositors and may acquire. either pay out their profit to savers in interest 10. BOND AND MONEY MARKET FUNDS dividends or retail them as a reserve cushion These are companies which accept savings and against loss place them in a pool for investments that allows diversification of assets. 11. SALES FINANCE COMPANIES These include sales and personal finance R= I/PT P= I/RT T= I/PR companies which make loans to individuals for the purpose of buying automobiles. MATURITY VALUE They obtain working capital from their own F= P + I stockholders, loans from commercial banks and Also… those obtained in sales-of securities on the F = P + PRT organized money and capital markets. F = P (1+RT) They do not lend directly to consumer or companies but they buy the sales contracts, or ORDINARY & EXACT INTEREST installment contracts from the retailer or dealer. 12. BANKS I = PR (D/360) These are commercial banks, savings banks, rural, I = PR (D/365) development and investment banks. They approve loans based on collateral presented. I= INTEREST Collaterals are title for real property or securities. P= PRINCIPAL In the absence of available pledge, a comaker is D= DAYS required, serving as guarantor for the loans. They are major sources of credit particularly for APPROXIMATE Time & Exact Time businessmen and for the development of certain industries. There are two ways of finding time between the two dates given. Commercial bank is any corporation which accepts or One method is to find approximate time and the other creates demand deposits subject to withdrawal by check. is to find actual time. COMMERCIAL BANKS - These institutions also accept drafts and issues letters of credit, by discounting and 2 Methods of Finding Time negotiating promissory notes, drafts, bills of exchange, and other evidences of debts; by receiving deposits by buying 1) Approximate = estimate and selling foreign exchange and gold and silver bullion, 2) Actual = verifiable, realistic, literal and by lending money against personal security or against securities consisting of personal property or mortgages on improved real estate and the insured improvements thereon. LENDING ACT Is an act designed to protect consumers against unfair billing practices of people who extend credit to a purchaser of goods on installment basis. 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.