CREDIT & COLLECTION_BSBA 3_ENDTERM REQUIREMENTS

Venturado, Jose Firmo N. BSBA 3B

Chapter 4: Sources of Credit

1. Enumerate and discuss the different sources of credit
Different Sources of Credit:
 Banks – A bank is a financial institution licensed to receive deposits and make loans.
Banks may also provide financial services such as wealth management, currency
exchange, and safe deposit boxes. There are several different kinds of banks including
retail banks, commercial or corporate banks, and investment banks. In most countries,
banks are regulated by the national government or central bank.

 Credit Unions – is a type of financial cooperative that provides traditional banking

services. Ranging in size from small, volunteer-only operations to large entities with
thousands of participants spanning the country, credit unions can be formed by large
corporations, organizations, and other entities for their employees and members.

 Retail Store – is a business enterprise whose primary source of selling comes from
retailing. Retailing includes all the activities involved in selling of goods or services
directly to final consumer for personal, non-business use.

 Insurance Companies – Are also credit sources for covered people. Such individuals
could borrow a sum equivalent to the cash surrender value of their policy from their
insurance companies. Insurance companies are important participants in the money and
capital markets as they have to accumulate insurance premiums in order to build up
funds to meet policy claims and have to use these funds in loans and investments
meanwhile.
  Sales Finance Companies – One of the biggest sources of credit for consumers. They
often expand credit facilities by either discounting or factoring receivable business
papers or accounts to retail, financial, and agricultural enterprises.
Other Sources:
 Government Service Insurance System (GSIS) – is a social insurance institution that
provides a defined benefit scheme under the law.

 Social Security System (SSS) – Is a government agency offering insurance and health
care to all paid-up Philippine workers. SSS members will make "salary" or "calamity"
loans, too. SSS is also a compulsory service for all employers or contractors who pay for
a contribution, although they are free for voluntary contributions who apply for SSS
benefits and loans for a non-working citizen.

 Pag-ibig Fund – intended to boost housing development in the country.

 Industrial Guarantee Loan Fund/Agricultural Guarantee Loan Fund (IGLF) – provide for
necessary financing small and medium-scale industries throughout the country.

2. Identify and discuss the different types of banks, credit unions, and their functions
BANKS - banks is the most common sources of credit.
Different Types of Banks and their Functions:
Commercial Banks – is a type of financial institution that accepts deposits, offers checking
account services, makes various loans, and offers basic financial products like certificates of
deposit (CDs) and savings accounts to individuals and small businesses. A commercial bank is
where most people do their banking, as opposed to an investment bank.

Commercial banks make money by providing loans and earning interest income from those
loans. The types of loans a commercial bank can issue vary and may include mortgages, auto
loans, business loans, and personal loans. A commercial bank may specialize in just one or a few
types of loans.
  Savings Banks – a financial institution that receives savings accounts and pays interest
to depositors. The accumulated small savings from depositors are in turn invested in
bonds or in loans secured by bonds, real estate, mortages, and other forms of security.

 Investment Banks – is a financial intermediary that performs a variety of services. Most

Investment banks specialize in large and complex financial transactions, such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and other corporate reorganizations and acting as a broker
or financial adviser for institutional clients.

 Development Banks – extend necessary funds for purposes of hastening development.

They have been largely responsible for the birth and development of certain industries.

 Rural Banks – rural banks in towns and communities have greatly minimized the
existence of usurious practices of some money lenders which victimized poor people
who cannot avail themselves of credit facilities which may be offered by commercial and
savings banks due to certain requirements imposed by them.

Other Types of Banks:

 Exchange Banks
 Industrial Banks
 Agricultural Banks
 Utility Banks

Credit Unions – these are cooperative organizations that lend savings of their members to
other members which are in need. This is one of the cheapest sources of credit.

Types of Credit Unions and their Functions:

 Local Credit Unions – Local credit unions also known as community credit unions
operate to support a particular resident of a region, country or state. All that is required
to join is usually residence within a given area.
  College Credit Unions – more than 120 universities and colleges have credit unions for
students, alumni, staff and faculty. Special care is directed toward making services
affordable for students.
 Group Credit Unions – these typically serve churches or other small fraternal
organization. Group credit unions usually limits membership to a specific group, like
those supporting social and environmental causes.
 Employer Credit Unions – The employer credit unions, like group credit unions, serve a
particular company, profession or industry. Teachers, firefighters, postal workers, media
employees, and workers may have their own credit unions for a particular government
agency.
 Military Credit Unions – Some credit unions address unique needs, in particular services
such as inspection, mortgages and loans for veterans and members of the military. The
advantage is that you don't have to join the military.
 Federal Credit Union – These are national credit unions with a few limits on
membership only. In general, they allow a participant to be at least 18 years old and a
resident of the United States.

3. Determine the individual money lenders, insurance and sales finance companies,
and their functions in financial system.

Individual Money Lenders – They are individuals who have surplus funds who typically lend
those funds to those who are in need. An individual money lenders' inclination is to charge
exorbitant interest for using this money because the risk is very high. The money lender may
be constrained to collect very high rates of interest over and above the legal one in
order to protect his/her personal interest, thus become known as "loan shark".

Savings and Loan Association – Corporation engaged in the business of accumulating savings of
their members as stockholders, and using such accumulations together with their capital in the
case of stock corporations, for loans and/or investments in the securities of productive
enterprises or in subdivision, instrumentalities or corporation.
Chapter 5: Credit Risks

1. What are the 5 C’s of credit? Discuss their importance in credit risk management.
Credit risk is understood simply as the risk a bank takes while lending out money to
borrowers. They might default and fail to repay the dues in time and these results in losses to
the bank. Loan portfolio management is very important but most times a bank can’t fully assess
if it will retrieve the money back because even if the borrowers have been paying their dues on
time, the economy might show shift and change the way things have always been. So, what do
banks do then? They need to manage their credit risks.

Credit risk management in banks is to maintain credit risk exposure within proper and
acceptable parameters. It is the practice of mitigating losses by understanding the adequacy of
a bank’s capital and loan loss reserves at any given time. For this, banks not only need to
manage the entire portfolio but also individual credits.

Types of 5 C's of credit and their importance in credit risk management:

 Character – Generated by the three major credit bureaus—Experian, Transunion, and
Equifax—credit reports contain detailed information about how much an applicant has
borrowed in the past and whether they have repaid loans on time. These reports also
contain information on collection accounts and bankruptcies, and they retain most
information for seven to 10 years. (Note: Lenders may also review a lien and judgments
report, such as LexisNexis Risk View, in order to further assess a borrower's risk prior to
issuing a new loan approval.)

 Capacity – Capacity measures the borrower's ability to repay a loan by comparing

income against recurring debts and assessing the borrower's debt-to-income (DTI) ratio.
Lenders calculate DTI by adding together a borrower's total monthly debt payments and
dividing that by the borrower's gross monthly income. The lower an applicant's DTI, the
 better the chance of qualifying for a new loan. Every lender is different, but many
lenders prefer an applicant's DTI to be around 35% or less before approving an
application for new financing.

 Capital – A large contribution by the borrower decreases the chance of default.

Borrowers who can place a down payment on a home, for example, typically find it
easier to receive a mortgage. Even special mortgages designed to make homeownership
accessible to more people, such as loans guaranteed by the Federal Housing
Administration (FHA) and the U.S. Department of Veterans Affairs (VA), require
borrowers to put down between 2% and 3.5% on their homes. Down payments indicate
the borrower's level of seriousness, which can make lenders more comfortable in
extending credit.

 Collateral – Can help a borrower secure loans. It gives the lender the assurance that if
the borrower defaults on the loan, the lender can get something back by repossessing
the collateral. Often, the collateral is the object one is borrowing the money for: Auto
loans, for instance, are secured by cars, and mortgages are secured by homes. For this
reason, collateral-backed loans are sometimes referred to as secured loans or secured
debt. They are generally considered to be less risky for lenders to issue. As a result,
loans that are secured by some form of collateral are commonly offered with lower
interest rates and better terms compared to other unsecured forms of financing.

 Condition – refer to how a borrower intends to use the money. Consider a borrower
who applies for a car loan or a home improvement loan. A lender may be more likely to
approve those loans because of their specific purpose, rather than a signature loan,
which could be used for anything. Additionally, lenders may consider conditions that are
outside of the borrower's control, such as the state of the economy, industry trends, or
pending legislative changes.
 2. What the several hazards in credit use?
Hazards in the Use of Credit
 Overdoing it - borrowing more than one can afford to repay
 If couldn't make payments on time, it will damage the borrower's credit record
 Losing money on late fees
 Having to pay additional interest
 Difficulty getting loans or credit in the future

3. Explain how credit information is necessary in credit investigation.

Credit Information - It is about the ability of a person or company to pay the debt, examined in
particular by banks before they decide to lend money. The lenders check records kept by
consumer credit information agencies when applying for a loan.

4. Enumerate 3 external and 3 internal sources of credit. Briefly describe their functions to
credit report.
Internal Sources of Credit
 Application form/Application – creditors may get information about the client by
analyzing the filled in credit application form. It will be the first source of information for
the potential borrower.
 Interview – creditors can also get information by interviewing or directly contacting
with the client and ask him/her the reasons for seeking credit, review the present
financial position, types, and nature of the collateral, etc. that the clients offer to
propose.
 Financial Statements – if any business firm wants to take a loan from the bank, it has to
submit its financial statements. From the financial statements, banks can get
information regarding the trend of the financial position of the firm.
 Bank's Own Record – if the client had previous transactions with the bank, the bank can
get information about the client from the documents/records. The related information
may be the practice of repaying the loan, the amount of deposit in the bank, the nature
of banking activities, etc.
External Sources of Credit
Government or Regulatory Authorities – the government sets and establishes rules and
regulations for controlling the business activities of the country. Records of such officers
of the Govt. may serve as the source of required credit information.

 Income Tax Office – if the bank wants to know information regarding the tax payment
by the potential borrower, it may seek information from the income tax office. In such
terms amount and sources of income and expenditures are shown in order to assess the
tax liability of the particular assess.
 Government Gazette – bank can get periodic information if had any Government
contact from the published gazette by the government.
 Records from the other Government Office – bank can also get other information
regarding the potential borrower from relevant other government offices with which
the loan applicant had to move around for business connections.
 Registrar of Joint-stock Companies – companies are required to get permission from
the registrar of joint-stock companies in order to commence the business. Apart from
this, public limited companies are also required to submit their annual financial
statements duly audited to the registrar of joint-stock companies. If necessary, the bank
may seek information about the client from the joint-stock registrar's office.

Chapter 6: Credit Instruments

1. Define credit instruments.

Credit instrument is a term used in the banking and finance world to describe any item agreed
upon that can be used as currency. Banks issue credit instruments, in the form of credit cards.
Customers, in turn, use these credit instruments to make purchases 'on credit' and pay the
amount 'borrowed' back to the bank either at the end of the month, quarter, or whatever term
has been agreed upon.
2. Why are checks crossed? Explain its pros and cons.
Most commonly used bills of exchange for satisfying credit obligation; always drawn on a bank
and paid on demand. Defined as an order of a depositor to his bank, requesting it to pay a sum
certain in money to a person name therein, or to his order or the bearer.

Pros:
 Checks can now be processed electronically at the point of purchase much like a credit
card but cost less to process in most cases.
 Some customers prefer to pay with a check instead of carrying cash or using a credit
card.
 You may write a check, but your money stays in your account until the payee present
the check to the bank. This gives you time to stop the payment if there's been a mistake.
Cons:
 Customer can put stop payments on checks, close their account, and even post-date
checks if the cashier is not paying attention. All of these delay payment.
 Many merchants and individuals are reluctant to accept out-of-state checks or those
written on unfamiliar banks.
 Just because you have a check in hand, that doesn't guarantee payment; bounced
checks can even cost you money. Depending on your bank, they may assess fees for
these bounced checks.

3. What is a giro system?

Giro System – Is a technique in credit transaction which is currently being use; features the use
of electronic machines. Operates whereby the creditors such as reputable department stores,
utility companies, credit card organizations, the government and other financial intermediaries
with prior agreement with banks and their customers can request banks to debit customer's
account, and credit such account to his/her bank.

4. Briefly discuss the parties/persons involved in money market.

Parties/Persons involved in Money Market
  Dealer - intermediary in the exchange process actually becomes a party to a money
market transaction.
 Broker - acts an agent for his clients who are either buyers or sellers.
 Underwriter - dealer who handles new lines of securities.
 Primary Market - insurance of a new securities
 Secondary Market - confined to already issued and outstanding securities.

5. Differentiate the 5 kinds of endorsements and its negotiability.

Endorsement based on Negotiable Instruments Act it is "the writing of one's name on the back
of the instrument or any paper attached to it with the intention of transferring the rights
therein". Thus, an endorsement is signing a negotiable intsrument for the purpose of
negotiation.

Kinds of Endorsement
 Special or Full Endorsement – An endorsement “in full” or a special endorsement is one
where the endorser puts his signature on the instrument as well as writes the name of a
person to whom order the payment is to be made.

 Endorsement in Blank or General Endorsement – An endorsement is blank or

general where the endorser signs his name only, and it becomes payable to bearer. We
can convert a blank endorsement into an endorsement in full. We can do so by writing
above the endorser’s signature, a direction to pay the instrument to another person or
his order.

 Conditional or Qualified Endorsement – Where the endorser puts his signature under
such writing which makes the transfer of title subject to fulfilment of some conditions of
the happening of some events, it is a conditional endorsement.

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