Lady Devaras Wag - Chapter 1-7 PDF

LADY DEVARAS WAG - SECURED LOANS- Loans guaranteed by the assignment of tangible assets that can be sold KALIMUTAN SA BALOTA!! by the lender in case the borrower fails to pay....

LADY DEVARAS WAG - SECURED LOANS- Loans guaranteed by the assignment of tangible assets that can be sold KALIMUTAN SA BALOTA!! by the lender in case the borrower fails to pay. - UNSECURED LOANS- Loans backed solely by the borrower's integrity and ability to repay. CHAPTER 1- TRANSITION FROM BARTER ECONOMY TO MONET ECONOMY ACCORDING TO MATURITY - SHORT-TERM LOANS- Loans payable within BARTER SYSTEM- A system of exchange a year or less. where goods or services are directly traded for - MEDIUM-TERM LOANS- Loans payable other goods or services without the use of between one and five years. money. - LONG-TERM LOANS- Loans payable from MONEY- A medium of exchange that is five to ten years or beyond. generally accepted for the purchase of goods ACCORDING TO FORM and services and repayment of debts. - DIRECT LOAN- A loan where the lender KEY POINT- Money serves as a medium of provides the full amount to the borrower, and exchange, legal tender, measure of value, interest is collected at maturity or periodically. means of payment, and standard of value. - DISCOUNT LOAN- A loan where the lender MEDIUM OF EXCHANGE - Money facilitates collects interest in advance and provides the the exchange of goods and services without balance to the borrower. the need for direct barter. - OVERDRAFT- A facility that allows customers LEGAL TENDER - Money that is legally to withdraw money even when their account recognized as a means of payment for debts has insufficient funds. and obligations. ACCORDING TO PURPOSE MEASURE OF VALUE- Money provides a - AGRICULTURAL CREDIT- Credit used to common unit of account for comparing the finance agricultural transactions. value of different goods and services. - INDUSTRIAL CREDIT- Credit used to MEANS OF PAYMENT- Money is used to finance manufacturing, construction, and settle debts and obligations. acquisition of equipment. STANDARD OF VALUE- Money serves as a - EXPORT CREDIT- Credit extended to benchmark for determining the relative value of finance the purchase of goods or services from goods and services. within the creditor country. CREDIT- An agreement to purchase goods or - REAL ESTATE LOANS- Credit granted to services with the promise to pay for it later finance the acquisition or improvement of real DEBTOR- The party who owes money or estate. goods to another party. - COMMERCIAL CREDIT- Credit extended to commercial and trade investors to finance CREDITOR- The party who is owed money or inventory purchases. goods by another party. - AUTO LOAN- A loan taken out to purchase a ACCORDING TO RISK INVOLVED motor vehicle. - CALAMITY LOAN- Credit extended in the - CREDIT UNIONS- Cooperative financial event of a disaster to help individuals or institutions that provide financial services to businesses recover. their members. - MICRO FINANCING- The provision of - RURAL BANKS- Institutions that provide financial services to low-income households credit to farmers, fishermen, and other rural and entrepreneurs. communities. - CONSUMER CREDIT- Credit extended to - OFFSHORE BANKS- Banking units individuals for personal needs, such as authorized to conduct transactions in foreign purchasing merchandise. currencies. - CHARGE ACCOUNT- Open-book credit or - SPECIALIZED GOVERNMENT BANKS- 30-day credit. extended to regular customers Banks established to serve specific purposes, with good credit standing. such as agricultural or industrial development. - INSTALLMENT CREDIT- Credit that allows 2. NON-BANK FINANCIAL INSTITUTIONS customers to purchase goods or services with - INVESTMENT HOUSES- Institutions that a down payment followed by equal monthly underwrite securities and provide investment installments. banking services. - REVOLVING CREDIT- Credit that - FINANCE COMPANIES- Institutions that replenishes up to a credit limit as the customer extend credit to consumers and businesses. pays off debt. - SECURITIES DEALERS AND BROKERS- - LAYAWAY PLAN- A purchasing method Institutions that facilitate the buying and selling where a consumer places a deposit on an item of securities. for later pick-up. - LENDING INVESTORS- Individuals or CHAPTER 2 - SOURCES OF CREDIT: companies that lend money for personal NATURE AND FACILITIES consumption. - PAWNSHOPS- Institutions that lend money  FINANCIAL SYSTEM- A network of against the security of personal property. institutions that facilitate the flow of funds - VENTURE CAPITAL- Institutions that provide from savers to borrowers, including banks, equity financing to start-up companies. non-bank financial institutions, and other financial intermediaries. - INSURANCE COMPANIES- Institutions that  FINANCIAL INSTITUTIONS play a crucial provide financial protection against risks. role in providing credit, acting as - Retail Stores: Establishments that offer intermediaries between savers and merchandise credit to customers. borrowers.  GOVERNMENT SERVICE INSURANCE 1. BANKING FINANCIAL INSTITUTIONS SYSTEM (GSIS)- A social insurance institution that provides benefits to - COMMERCIAL BANKS- Institutions that government employees. accept deposits, issue loans, and provide other  SOCIAL SECURITY SYSTEM (SSS)- A banking services. social insurance program for employees in - THRIFT BANKS- Institutions that primarily the Philippines. accept deposits and provide mortgage loans.  NON-BANKS WITH QUASI-BANKING SYSTEMS- Institutions that borrow funds  from 20 or more lenders for the purposes of CHAPTER 3 – CREDIT INSTRUMENTS relending or purchasing receivables and other obligations. CREDIT INSTRUMENT - A credit instrument is  SOURCES OF CREDIT a document that evidences a credit obligation, - Private Money Lenders- non-institutional outlining the debtor's responsibility to the (non-bank) Individuals or companies that creditor and the creditor's right to collect. provide loans, often secured by real estate.  AS TO ACCEPTABILITY  THE THREE PRIVATE MONEY LENDER GENERAL ACCEPTABILITY - Instruments CIRCLES widely accepted as a medium of exchange, - PRIMARY CIRCLE: FAMILY AND such as bank notes, treasury bills, or fiduciary FRIENDS-This circle consists of individuals the paper money. borrower personally knows, such as family, LIMITED ACCEPTABILITY - Instruments close friends, and acquaintances. They often accepted within a restricted field, such as provide loans as a personal accommodation promissory notes, bills of exchange, bank and may not charge interest. credit, and open book accounts. - SECONDARY CIRCLE: FRIENDS AND  AS TO FORM COLLEAGUES OF FRIENDS- This circle includes individuals who are connected to the ORDERS TO PAY - Instruments defined as the borrower through their primary circle. They order of one person to another to pay a third may be more receptive to loan proposals if the person money on demand or at a definite borrower has a good reputation within their future time. such as checks, drafts, primary circle. acceptances, and postal money orders. - THIRD-PARTY CIRCLE: INVESTORS THE PROMISES TO PAY - Instruments that vow BORROWER DOES NOT KNOW- This circle one party to pay another, such as open book consists of individuals or institutions that are accounts, promissory notes, collateral not personally known to the borrower. They promissory notes, letters of credit, and bonds. may require more formal documentation and a  AS TO FUNCTION strong business plan before considering a loan. CREDIT MONEY - Instruments used as a  THE FIVE C'S OF CREDIT medium of exchange, such as banknotes and - CHARACTER: The borrower's willingness demand deposits. and integrity to repay debt. COMMERCIAL CREDIT INSTRUMENTS - - Capacity- The borrower's ability to pay when Instruments used for short-term commercial a debt is due. purposes, such as promissory notes, bills of exchange, and open book accounts. - CAPITAL- The borrower's financial resources and assets. INVESTMENT CREDIT INSTRUMENTS - Instruments used for long-term credit - COLLATERAL- Assets pledged as security transactions, such as bonds, stocks, and long- for a loan. term notes. - CONDITIONS- The economic environment  AS TO NEGOTIABILITY and market conditions that can affect the borrower's ability to repay. NEGOTIABLE INSTRUMENTS - Instruments freely transferable from one party to another, giving the holder in due course the right to MANAGER'S/CASHIER'S/TREASURER'S collect the sum due. CHECK - A check drawn by a designated bank officer, guaranteeing payment. NON-NEGOTIABLE INSTRUMENTS - Instruments that cannot be transferred or sold, CERTIFIED CHECK - A check guaranteed by limiting their use and value. the bank, ensuring payment. CREDIT MONEY TRAVELER'S CHECK - A pre-paid check used by travelers as a safe alternative to cash. CREDIT MONEY- Paper money issued by the government as the standard currency, B.) DRAFT - A bill of exchange, an accepted in payment for goods, services, and unconditional order from the drawer to obligations. the drawee to pay the payee.  COMMERCIAL CREDIT INSTRUMENTS MONEY ORDER - is a payment order for a 1.) PROMISES TO PAY INSTRUMENTS pre-specified amount of money PROMISSORY NOTE - A written promise to BANK DRAFT - A check drawn by a bank on pay a specific sum of money on demand or its own account, payable to a third party. at a specified future date. TRADE OR COMMERCIAL DRAFT - A draft COLLATERAL NOTE - A promissory note used by merchants for commercial purposes. secured by collateral, such as shares of SIGHT OR DEMAND DRAFT - A draft payable stocks, bonds, or warehouse receipts. upon presentation. COMMERCIAL LETTER OF CREDIT - A TIME DRAFT - A draft payable at a specified letter from a bank authorizing payment to a future date. beneficiary (seller/exporter) on behalf of a buyer/importer.  ACCEPTANCES TRAVELER'S LETTER OF CREDIT - A letter KEY POINT - An acceptance is a time draft of credit used by travelers to draw credit presented to the drawee for acceptance, from correspondent banks abroad. making the drawee liable for payment at maturity. OPEN BOOK ACCOUNT - A record of purchases made by a customer on credit, BANKER'S ACCEPTANCE - A negotiable where the retailer keeps track of the amount instrument guaranteed by a bank, used for owed. large transactions, especially in international trade. 2) ORDERS TO PAY INSTRUMENTS TRADE ACCEPTANCE - A draft accepted by KEY POINT - Orders to pay instruments are the buyer, acknowledging their obligation to used to direct payment from one party to pay the seller. another.  INVESTMENT CREDIT INSTRUMENTS A.) CHECK - A written order from a depositor (drawer) to a bank (drawee) to EVIDENCE OF OWNERSHIP - Instruments pay a specific sum of money to the representing ownership in a corporation, such payee. as stock certificates. PERSONAL CHECK - A check drawn by an EVIDENCE OF INDEBTEDNESS - individual. Instruments representing indebtedness of a corporation to bondholders, such as bonds and long-term promissory notes.  STOCK CERTIFICATES ZERO COUPON BOND - A bond sold at a discount to face value, with no stated interest KEY POINT - Stock certificates represent rate. ownership of shares in a corporation, entitling the holder to certain rights and privileges. VARIABLE RATE BOND - A bond whose interest rate varies based on a baseline COMMON STOCK - A type of stock indicator. representing basic ownership in a corporation, with voting rights. LONG TERM PROMISSORY NOTES - Promissory notes with payment terms of five PREFERRED STOCK - A type of stock with years or more. preferential rights over common stock, such as dividend payments and asset distribution. MONEY MARKET BILLS- Money market bills are negotiable financial instruments traded STOCK RIGHT - A pre-emptive right of existing in the money market, representing short- stockholders to purchase additional shares term debt obligations. before they are offered to the public.  BONDS  NEGOTIABLE INSTRUMENTS LAW KEY POINT - Bonds are evidence of KEY POINT - The Negotiable Instruments Law indebtedness of a corporation to bondholders, (Act No. 2031) governs negotiable instruments representing a loan with a promise to pay in the Philippines, defining their characteristics, principal and interest at maturity. transferability, and legal implications. COLLATERAL TRUST BOND - A bond NEGOTIABILITY - The ability of an instrument secured by a company's security investments. to be freely transferred from one party to another. CONVERTIBLE BOND - A bond that can be converted to stock. NEGOTIATION - The transfer of an instrument to a transferee who becomes the holder. DEBENTURE - A bond not secured by collateral, relying on the issuer's INDORSEMENT - The signature of the payee creditworthiness. or endorsee on the back of the instrument, transferring ownership. DEFERRED INTEREST BOND - A bond that LIABILITY OF INDORSER-An indorser pays interest only at maturity, often with a warrants the genuineness of the instrument higher interest rate. and guarantees payment, unless the FLOORLESS BOND - A bond that can be indorsement is qualified or restrictive. converted to stock, potentially leading to a decline in stock price. CHAPTER 4 – CREDIT MANAGEMENT GUARANTEED BOND - A bond whose CREDIT MANAGEMENT- the process of payments are guaranteed by another party. deciding which customers to extend credit to and evaluating those customers' INCOME BOND - A bond that pays interest creditworthiness over time only if income is earned. CREDIT MANAGER - is responsible for MORTGAGE BOND - A bond secured by real managing a company's credit policies and estate or equipment owned by the company. procedures. They evaluate customer creditworthiness, set credit limits, monitor SERIAL BOND - A bond issuance where a accounts receivable, and collect overdue portion of the bonds are paid off each year. payments.  debts only when specific accounts are determined to be uncollectible, without making CREDIT POLICY- is a Document that provides prior estimates set of rules and guidelines that include the firm's credit period, discounts, credit standards, LATE FEE - It is a charge imposed on a and collection procedures offered. consumer who fails to make the payment on a debt or other financial obligation by the due CREDIT DEPARTMENT- The credit date. department can be organized in three ways: centralized, decentralized, or a combination of OVER-LIMIT FEES - are charged whenever both the balance goes above the threshold, regardless of if the increased amount was due CREDIT RISK - Refers to the probability of the to a purchase, interest charge, late fee, or any loss emanating from the credit extended as a other fee result of the non-fulfilment of contractual obligations arising from unwillingness or ANNUAL PERCENTAGE RATE- Provides a inability of the counterparty or for any other holistic view of total cost of borrowing money reasons MAINTENANCE OF SALES LEDGER - The SYSTEMATIC RISK- It is also referred as sales ledger holds records of customer undiversifiable risk or market risk, and transactions, including payments and sometimes also known as macroeconomic risk. adjustments, and needs to be regularly This risk embodies the interest rate, exchange updated to ensure accuracy. rate, and inflation. COUNTERPARTY RISK - refers to the UNSYSTEMATIC RISK- refers to risks that are likelihood that a transactor might default on its not shared with a wider market or industry. contractual obligation. In the case of a lender like a bank, one example of counterparty risk CREDIT INSURANCE is a type of insurance would be the borrower's credit score. policy purchased by a borrower that pays off one or more existing debts in the event of a PROFITABILITY- is measured by a business's death, disability, or in rare cases, ability to generate income and sustain or unemployment. increase the owner's equity over time CREDIT ANALYSIS It is the collection and DIVERSIFICATION is a risk management processing of information, and consideration strategy that mixes a wide variety of and assessment of factors affecting a client's investments within a portfolio. ability to pay loans as a basis for making appropriate lending decisions COVENANT is a promise in any formal debt agreement, that certain activities will or will not CREDIT EVALUATION It refers to the step's be carried out or that certain thresholds will be lenders undertake while examining the request met. for credit. CREDIT PERIOD- It is the length of time BAD DEBTS- are uncollectible accounts buyers are given to pay for their purchases receivable. They are accounted for using the direct write-off method or the allowance DISCOUNT- is also commonly referred to as a method. cash discount or prompt payment discount. ALLOWANCE METHOD - involves estimating RISK-BASED PRICING- This methodology uncollectible receivables at the end of each allows lenders to use credit profile fiscal year and recording them in a provision characteristics to charge borrowers’ interest (or allowance) account rates that vary by credit quality. DIRECT WRITE-OFF METHOD records bad  CONSUMER CREDIT APPLICATION – A IMPLIED CREDIT POLICY- It is not officially formal request made by an individual or stated (or written). It has little or no official consumer to a financial institution or lender for expression of approval and can be difficult to the purpose of obtaining credit or a loan. perceive and, therefore, be left to BUSINESS CREDIT APPLICATION - Serves interpretation. as a form or document utilized by businesses to gather essential information from other CHAPTER 5- CREDIT APPLICATION businesses looking to secure credit. CREDIT – is a contractual agreement in which KEY POINT: The Credit Information System a borrower receives something of value now Act (CISA), the Data Privacy Act of 2012, the and agrees to repay the lender at some date in Securities and Exchange Commission (SEC), the future and the Bangko Sentral ng Pilipinas (BSP) regulate credit investigation in the Philippines. CREDIT APPLICATION is a form that borrowers fill out to request credit from a REPUBLIC ACT NO. 3765 – TRUTH IN lender. It includes information about the LENDING ACT (TILA) - The Truth in Lending borrower's income, employment history, and Act requires creditors to provide borrowers with credit history. clear and accurate information about the terms and costs of credit, including the annual CREDIT INTERVIEW is a meeting between a percentage rate (APR) and other key loan lender and a potential borrower to discuss the terms. borrower's financial situation and their ability to repay a loan. REPUBLIC ACT NO. 9510 - CREDIT INFORMATION SYSTEM ACT (CISA) - CISA CREDIT INVESTIGATION is a process of establishes the Credit Information Corporation gathering and analyzing information about a (CIC) and regulates the collection and use of borrower's credit history, financial situation, and credit information for credit evaluation overall creditworthiness. purposes. It also protects the rights of borrowers with regard to their credit CREDIT QUALITIES refer to the attributes information. employed to evaluate the creditworthiness of ANTI-MONEY LAUNDERING ACT (AMLA) – an individual or entity. These include factors AMLA requires financial institutions, including such as credit history, credit score, credit those involved in lending, to implement anti- utilization, payment history, debt-to-income money laundering and customer due diligence ratio, types of credit accounts, and the duration measures when processing credit applications of credit history. and financial transactions to prevent money laundering and the financing of terrorism. CREDIT HISTORY refers to how you've handled debt in the past and what's going on DATA PRIVACY ACT OF 2012 – This law with your finances right now governs the processing of personal information, including credit-related CREDIT SCORES are numerical information, and imposes requirements on how representations that indicate an individual's organizations handle and protect such data. creditworthiness, calculated based on their CREDIT INVESTIGATION REPORTS are credit history. documents that summarize the findings of a credit investigation. They provide lenders with TYPES OF CREDIT APPLICATION FORMS information about a borrower's credit history, financial situation, and overall creditworthiness. AUTO LOANS- are used to purchase KEY POINT- Payment history, credit utilization, vehicles, with payments made in fixed monthly length of credit history, credit mix, and new installments over a set term, often ranging from credit inquiries affect credit scores. 24 to 60 months. CHATTEL: Refers to tangible personal STUDENT LOANS- are used to cover property that is movable, such as mobile education expenses, with payments starting homes, furniture, and automobiles. This after graduation or a grace period. They are category includes personal items like jewelry or furniture. repaid in fixed monthly amounts over a specified term, often 10 to 30 years CHATTEL MORTGAGE: This is a type of mortgage secured by movable property, which is not classified as real estate. The movable CREDIT INFORMATION TO INVESTIGATE property serves as collateral for the loan FOR INDIVIDUAL APPLICANTS Income. References and CHATTEL PAPER: This refers to a written Reputation document that evidences two key elements: a Employment. Reserve Assets monetary obligation and a security interest in, Payment Record Equity in Purchase or lease of, specific goods. An example of chattel paper is an equipment lease Residence Collateral Marital Status Age 5 C’S OF CREDIT ANALYSIS CHAPTER 6- INSPECTION AND APPRAISAL 1.CAPACITY TO PAY BACK THE DEBT 2. CAPITAL IS THE AMOUNT OF MONEY NATURE OF INSPECTION- is the process of YOU HAVE PUT INTO THE COMPANY visually examining a property to look for PERSONALLY AND SERVES AS A GAUGE potential issues or damages. OF YOUR LEVEL OF RISK IN THE EVENT KEY POINT - Inspections include exterior, THAT IT FAILS. interior, system, and safety inspections. 3. COLLATERAL - YOU CAN OFFER THE NATURE OF APPRAISAL- Professional LENDER ADDITIONAL SECURITY IN THE valuation of a property’s market value. FORM OF COLLATERAL OR GUARANTEES. KEY POINT - Appraisal is an impartial and 4. CONDITIONS OUTLINE THE LOAN'S professional evaluation of a property's worth. It INTENDED USE. considers factors like location, size, condition, 5. CHARACTER IS THE OVERALL age, and comparable sales. IMPRESSION YOU GIVE A POTENTIAL INVESTOR OR LENDER SIMILARITIES OF INSPECTION AND APPRAISAL Examples of Installment Credit: KEY POINT - Both are typically conducted by a MORTGAGES- are used to finance the third party (not the buyer or seller), involve purchase of real estate, with borrowers making examining the interior and exterior of the regular monthly payments over a long term, property, and are usually paid for by the buyer. typically 15 to 30 years. PERSONAL LOANS- provide a lump sum of DIFFERENCES OF INSPECTION AND money for various personal expenses, such as APPRAISAL home improvements or medical bills. They are repaid in fixed monthly installments over a set period and can be either secured or unsecured  4. PROTECTS the buyer's investment in foreclosed or distressed properties. 5. Serves as a NEGOTIATING tool for repairs or price adjustments. 6. Helps FORECAST FUTURE COST maintenance or replacement costs. 7. DETERMINE “DEAL-BREAKERS PURPOSE OF INSPECTION Assists in determining if the property is worth purchasing KEY POINT - Inspection helps identify potential problems, negotiate prices, 8. LEARN TO PROTECT YOUR understand maintenance needs, and protect INVESTMENT home inspector is an invaluable investments. source of information. In the end, he or she can PURPOSE OF APPRAISAL save you thousands of dollars by offering specific advice on how to manage the house. MARKET VALUE: Highest price estimated to be offered that reflects its market 9. REVEAL THE BIG PICTURE condition. 10. INSURANCE INSURABLE VALUE: Amount that an insured TYPES OF PROPERTY company will pay out if an asset that it has KEY POINT - Properties can be classified as insured is deemed a constructive or actual agricultural, residential, commercial, industrial, loss. multiuse, special purpose, and vacant land. GOING CONCERN VALUE: Value that assumes the company will remain in business REAL ESTATE is land and permanent indefinitely and continue to be profitable. structures attached to it. It differs from personal property, which is movable (like cars, boats, LIQUIDATION VALUE: Value of the assets that and furniture). remain if the company goes out of business and is no more a going concern. LAND includes everything on the earth's PRICE AND ASSESSED VALUE: Value of a surface (living things, rocks, liquids) and residence for tax purposes and takes cannot be moved or destroyed. Each piece is comparable home sales and inspections into unique. consideration. Agricultural Properties OBJECTIVES/FUNCTIONS OF INSPECTION  Used for farming, livestock raising, and 1. IT PROVIDES AN "OUT" for the buyer related activities. if problems are found.  Types: Farmhouses, barns, and 2. Ensures property SAFETY (e.g., livestock shelters. checks for mold, carbon, monoxide and faulty wiring). Residential Properties 3. REVEAL ILLEGAL ADDITIONS OR  Properties for living purposes. Can INSTALLATIONS - Uncovers unpermitted generate passive income (rentals) or modifications or installations. profit from value appreciation.   Types: land that has not been modified or constructed upon. o Single-Family Houses o Apartments LAND IMPROVEMENT refers to any addition or change made to a piece of land that o Condominiums increases its value, usefulness, or appearance o Townhouses CHATTEL o Multi-Family Houses KEY POINT - Chattel refers to movable Commercial Properties personal property, such as vehicles and  Land used for business and revenue furniture. generation. COLLATERAL  Types: KEY POINT - Collateral is an asset offered as o Office Spaces security for a loan. It protects lenders in case of non-payment. o Retail Stores GUIDELINES FOR CONDUCTING o Hotels APPRAISAL o Strip/Retail Centers KEY POINT - Appraisal guidelines include Industrial Real Estate determining the purpose and scope of the appraisal, identifying the property rights,  Properties for production, distribution, classifying the type of property, and collecting and storage. relevant data.  Types: APPRAISAL APPROACHES o Manufacturing KEY POINT - Appraisal approaches include the o Storage and Distribution cost approach, market approach, and income approach. o Flexible Spaces COST APPROACH KEY POINT - is a real estate valuation method MIXED-USE PROPERTY is a real estate that estimates the price a buyer should pay for development that encompasses various uses a piece of property is equal to the cost to build within a single building or agreement, such as an equivalent building residential, commercial, and sometimes MARKET APPROACH industrial spaces. KEY POINT - is frequently used to value financial assets and liabilities. It is based on the premise SPECIAL PURPOSE PROPERTIES are that a property's value should not exceed the uniquely designed for specific uses, such as cost of purchasing a similar property with equal schools, theaters, churches, hospitals, or utility and desirability at the time. service stations. INCOME APPROACH VACANT LAND/RAW LAND is undeveloped KEY POINT - The income approach values a and not currently in use. Raw land refers to property based on the income it generates. IMPORTANCE OF THOROUGH INSPECTION risk, and maintain profitability. AND APPRAISAL PROCESS OF CREDIT EVALUATION KEY POINT - Thorough inspection and appraisal are crucial for making informed IN FINANCIAL INSTITUTIONS decisions in real estate transactions, protecting 1) Gathering Information investments, and ensuring safety. 2) Analyzing Information 3) Making a decision HEAVY EQUIPMENT CREDIT INFORMATION- is data regarding an individual’s or company’s capacity to repay SALES INVOICE - The appraiser will be able debt, which is particularly scrutinized by to determine who the equipment's legitimate financial institutions before making lending owner is and where it was purchased by using decisions. Including their payment history, this document. credit utilization, and credit inquiries. LETTER OF CREDIT/CONSULAR INVOICE - Such a document will easily demonstrate when 1) PERSONAL INFORMATION: This section and from whom such equipment was identifies the borrower with details like name, purchased, especially with reference to the address, and date of birth. letter of credit. 2) ACCOUNTS: This part provides DEED OF ASSIGNMENT - It is also possible comprehensive details on the borrower’s to offer equipment assigned to third parties as current and past credit accounts, including collateral. payment histories for credit cards and loans. CONDITION - By condition, we mean how the equipment functions while it is. 3) PUBLIC RECORDS: This section lists financial-related public records, such as USAGE - In addition to assessing the bankruptcies, legal judgments, and tax liens. machine's physical state, the appraiser should ascertain its intended purpose. - LEGAL JUDGMENT: A court order that VALUATION - The evaluated value is the represents the outcome of a lawsuit. firsthand value less depreciation; 50% of this appraised value will be the loan value. - TAX LIENS: The government’s legal claim on the borrower’s property when he fails to pay a The loan value will be 50% of the second tax debt. This safeguards the government’s value, which is automatically regarded as the interests in assets. appraised value. 4) CREDIT INQUIRIES: This part includes a list of entities that have accessed the borrower’s credit report, distinguishing between hard and soft inquiries. CHAPTER 7 – CREDIT EVALUATION CREDIT EVALUATION- Credit evaluation is SOURCES OF CREDIT INFORMATION the process of assessing a borrower's SALESMAN’S REPORTS: Salesmen serve creditworthiness to determine the likelihood of as the company’s primary point of contact, repayment and the appropriate loan terms. making the information they gather highly IMPORTANCE OF CREDIT EVALUATION valuable. Their frequent visits allow them to gain unique insights into the buyer’s strengths, KEY POINT - Credit evaluation helps lenders weaknesses, and market conditions, which ensure safety and soundness, minimize credit helps assess the moral hazard associated with an account.  CUSTOMER SUPPLIED INFORMATION: Association (RMA) promotes responsible Information provided by customers is crucial for information exchange in credit-based systems understanding a business’s operations and through its Practices for the Exchange of financial health, as company principals offer Commercial Credit Information, aiding insights that may not be accessible otherwise. decision-making and reducing fraud. BANK INFORMATION: Banks possess valuable insights about marginal companies, ARTICLES - Two important elements in the especially larger banks in metropolitan areas exchange of credit information are with extensive records. confidentiality and accuracy of inquiries and replies. TRADE INFORMATION: Collaborating with other credit professionals in the same or TRADITIONAL BASIS OF CREDIT related industries can significantly ease various credit-related challenges. KEY POINT - The 5 Cs of Credit are widely used to evaluate creditworthiness. These MERCANTILE/COMMERCIAL CREDIT: include character, capacity, capital, collateral, Reports from mercantile agencies, along with and condition. supplementary information, are essential tools for credit professionals. CREDIT WORTHINESS - A borrower’s history CODE OF ETHICS FOR CREDIT of being trustworthy and responsible, along INFORMATION EXCHANGE with their strong moral character and expectations of continuing to perform well KEY POINT - The Code of Ethics for credit financially, shows that they can pay back their information exchange promotes trust, debts. transparency, and accountability among financial institutions. It emphasizes privacy SIZE OF DEBT BURDEN - Creditors want to protection, informed consent, and the lend money to borrowers who earn enough responsible use of accurate data. money to easily cover their loan payments. The NATIONAL ASSOCIATION OF CREDIT LOAN SIZE - Creditors often like to give out MANAGEMENT (NACM) establishes ethics larger loans because the costs associated with and standards for credit professionals, processing and managing these loans are emphasizing integrity, fairness, and trust in lower per dollar compared to smaller loans. credit evaluations and negotiations while protecting confidential information. FREQUENCY OF BORROWING - Customers who borrow money often build a reputation RISK MANAGEMENT ASSOCIATION based on their borrowing habits. If they PRACTICES consistently pay back their loans on time and manage their debts well, lenders will see them Improper management of credit information as reliable borrowers. can harm the reputations of individuals and organizations, prompting the Credit LENGTH OF COMMITMENT - As the time Management Association of the Philippines period for a loan gets longer, lenders take on (CMAP) to establish a Code of Ethics for credit more risk. professionals, which is recommended for non- SOCIAL AND COMMUNITY members as well. CHAIRMAN LEE CONSIDERATIONS - Lenders sometimes take MURPHEY on higher risks when they believe the loan will lead to positive outcomes for the community. PREAMBLE The Risk Management CREDIT SCORE -is a three-digit number that CREDIT RATING is a corporation or reflects how trustworthy someone is when it organization that assigns a score or grade to a comes to borrowing money. borrower indicating the probability of repaying the loan. This SCORE IS CALCULATED based on several factors, including the person's payment 1. INVESTMENT GRADE These ratings are history, how much debt they have, the length of given to businesses or financial instruments their credit history, types of credit used, and that are expected to have a low risk of default. new credit inquiries. 2. SPECULATIVE GRADE - credit ratings are FICO MODEL- FICO score is a widely used also known as "junk" or "non-investment credit score ranging from 300 to 850, which grade". helps lenders assess how likely a borrower is to repay a loan. USER OF CREDIT RATING FACTORS AFFECTING CREDIT SCORE Investors: Credit ratings are commonly (FICO MODEL) used by investors to measure credit risk, Payment History: 35%- m o s t important compare issuers, and manage portfolios. factor affecting their credit score because it Intermediaries: Investment bankers shows how reliably they have repaid debts in facilitate the flow of funds from investors to the past. issuers. Credit ratings may be used to compare Amounts Owed: 30%- Lender want to know the credit risk of various debt situations. how much of the person available credit they Issuers: Credit ratings assess the are using creditworthiness and quality of debt issued by Length of Credit History: 15%- how long a issuers such as corporations, financial person has been using credit institutions, national governments, cities, and municipalities. Businesses and Financial Institutions: Credit ratings may be used to measure New Credit: 10%- recent application for credit counterparty risk in credit-sensitive and when the last new account was opened, transactions for businesses and financial they will check the credit report as part of their institutions. decision-making process INTERNATIONAL CREDIT RATING Types of Credit in Use: 10% AGENCIES IMPROVING CREDIT SCORE MOODY'S CORPORATION (MCO) is a New 1.Pay Credit Balances Strategically York-based corporation that owns Moody's Investors Service, which ratings the 2.Make On-Time Payments creditworthiness of companies, governments, 3.Do Not close Your Oldest Account and fixed income debt securities, as well as Moody's Analytics, which provides tools and 4.Become an Authorized User research for economic analysis and risk 5.Aim for a Longer Credit History management. 6.Check Credit Report Regularly STANDARD & POOR'S (S&P) is a global firm recognized for creating financial market indices, which are extensively used as 3. Issuers-Pays Model investment benchmarks, as well as serving as This arrangement requires the issuer of a data source and issuing credit ratings for the rated securities to compensate the companies and debt obligations The CRA for its services. This model has company's origins trace back to the 1860s. been standard practice, although it Since 2016, its official corporate name has raises questions about potential conflicts been S&P Globa of interest. 4. Investors-Pay Model FITCH RATINGS is a company that assesses The investor-pays model allows the integrity of debt instruments such as bonds investors (such as asset managers or based on the financial stability of the issuing institutional buyers) to cover the cost of company or government entity. credit ratings. CREDIT RATING AGENCIES IN THE CREDIT ASSESSMENT- Credit assessment is PHILIPPINES a process used by lenders to evaluate a borrower's ability to repay a loan or meet a The PHILIPPINE RATING SERVICES credit obligation. CORPORATION was the first local credit rating TYPES OF CREDIT ASSESSMENT organization in the Philippines KEY POINT - Types of credit assessment CREDIT RATING AND INVESTORS include TRADITIONAL CREDIT SERVICES PHILIPPINES, INC. is an ASSESSMENT - Typically rely on structured independent credit rating service that offers an and standardized systems such as credit alternative for evaluating investment risks in scores (e.g., FICO or Vantage Score), which the Philippine debt market. give insight into a borrower’s payment patterns, credit utilization, and past borrowing behavior. CREDIT RATING PROCESS- involves BEHAVIORAL CREDIT ASSESSMENT- Is a gathering data, analyzing financial modern approach to evaluating a borrower's performance, conducting interviews, and creditworthiness by assessing not only their assigning a credit rating. financial data but also their behavior, lifestyle, CREDIT RATING FEES- are charged by credit and habits. rating agencies for their services. These fees ALTERNATIVE CREDIT ASSESSMENT- cover the cost of initial rating, annual Refers to the use of non-traditional sources of surveillance, and other services. information to evaluate a borrower's creditworthiness. Components of Credit Rating Fee MANAGING CREDIT RISK- 1. Initial Rating Fee When an issuer (such as a firm issuing ASSESSMENT OF CREDITWORTHINESS - bonds) seeks a credit rating for the first Evaluate customers' credit risk using balance time, they must pay an initial charge. sheets, credit records, and debt payment history. 2. Annual Surveillance Fee Beyond the initial rating, issuers pay an ESTABLISHING CREDIT POLICIES- Develop annual fee for ongoing monitoring clear policies to define credit terms, limits, and risk exposure. Who Pays for the Credit Rating Fee? CREDIT SCORING AND RATING- Utilize credit scoring and rating techniques to assess credit risk and guide approval decisions. MONITORING AND SURVEILLANCE- Conduct periodic reviews of customer accounts to identify potential defaults or credit issues. RISK MITIGATION TECHNIQUES- Implement strategies to minimize risks, such as accepting guarantees or purchasing credit insurance. COLLECTION STRATEGIES- Enhance accounts receivable efficiency by identifying effective methods for collecting overdue amounts. USE OF TECHNOLOGY- Leverage technology and big data to automate and improve credit risk management processes. CREDIT RISK LIMITS AND POLICIES 1. OPENING NEW ACCOUNTS Procedures for approving new credit accounts. 2. CREDIT INVESTIGATION Methods to assess potential customers' credit history and reliability. 3. SETTING CREDIT LIMITS Guidelines for determining the maximum credit extended to customers. 4. HANDLING OVERDUE ACCOUNTS Strategies for managing accounts that have not been paid on time. 5. WRITING OFF BAD DEBTS Criteria and processes for removing uncollectible debts from financial records