Fmpr4 Module

PREFACE
This module is designed to introduce to financial management students the various

principles involved in the process of granting credits and performing the collection function.
The underlying principles for today’s practices are also dealt with considerably. It is also the
main focus of this course to facilitate for the integral understanding of the principles of credit
and collection based on its four major parts, namely, the credit economy, credit management,
credit analysis and credit collection.
Highlighted in this module are the following: discussions on foundations of credit and
collection, different sources and credit, inspection and appraisal process of different lending
institutions, and credit and collection policy were highlighted in this module. Credit is
important to people’s lives mainly to the Philippine economy. Credit transactions are
considered as the “life-blood of business”. Collection process therefore takes place after the
obligation has been made following the terms and condition agreed by both parties-the
creditor and debtor.
The authors would like to acknowledge the various writers cited in the references
section especially the Filipino writers who shared their knowledge through publications, and
the Bangko Sentral ng Pilipinas information and issuances.
The authors created this module in the hope that the students may apply their
learnings of this course in their practical endeavors.
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ABOUT THE AUTHOR
SHAHANI JANE J. CABANTING

The author is a graduate of Masters of Management major in Business
Management at Liceo de Cagayan University, Bachelor of Science in Business
Administration major in Financial Management at Bukidnon State University
(BukSU), and Certificate of Teaching at the same institution. She is currently
designated as the Faculty Associate in the Office of the University President in
BukSU at the same a Business educator in the Business Administration
Department, College of Business in BukSU Main Campus.
ROY E. TAGARAO
The author is currently enrolled at Bukidnon State University (BukSU) with the
Degree of Masters of Management major in Business Management (Cand.), a
graduate of Bachelor of Science in Business Administration major Financial
Management at the same institution and completed his Professional Education
at Valencia Colleges Inc. At present, he is a Part-time instructor in the Business
Administration Department, College of Business in BukSU Main Campus. He is
also inclined into music and currently the musical conductor of Bukidnon State
University Brass Band.
DARWIN I. TABILAS
The author is currently pursuing his degree of Doctor of Management at Capitol
University, a graduate of Masters of Business Management at the same
institution, and Bachelor of Science in Business Administration major in
Financial Management at Bukidnon State University. He is currently the
Campus-In-Charge of BUKSU- Quezon Satellite Campus and at the same time
a business educator.
DARYL M. DE ASIS
The author is currently pursuing his degree in Masters of Management major in
Business Management at Bukidnon State University and a graduate of Bachelor
of Science in Business Administration major in Financial Management at the
same institution. He is currently the Campus-In-Charge of BUKSU- Quezon
Satellite Campus and at the same time business educator.
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Table of Contents
Preface
The Authors
Table of Contents
MODULE I: THE EMERGENCE AND CHALLENGE OF THE CREDIT ECONOMY
The Emergence and Challenge of the Credit Economy 1
History and Foundations of Credit 8
Classes and Kinds of Credit and Its Limitation 14
MODULE 2: SOURCES OF CREDIT
Sources of Credit 30
Other Sources of Credit 38
Advantages and Disadvantages of Credit 42
MODULE 3: INSPECTION AND APPRAISAL
Type of Properties 48
Nature and Purpose of Inspection and Appraisal 54
Guidelines in Conducting Actual Appraisal 57
MODULE 4: FORMULATING CREDIT AND COLLECTION POLICY
Formulating Credit and Collection Policy 75
REFERENCES 90
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College of Business FMPr4 – Credit and Collection
MODULE 1
- Exhibit mastery on the foundations of credit and

Course collection
Outcome
You will be able to…
Learning - Explain the emergence and challenges of the Credit Economy.

Outcome - Trace the history and foundations of Credit.
- Understand the limitations of each kind of credit.
UNIT 1: THE EMERGENCE AND CHALLENGE OF THE

CREDIT ECONOMY
Pre-Assessment 1:
Let’s begin!
Write down your expectations about the topic/s.
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Introduction
As human history moves toward the year 2000,
the challenges and opportunities brought massive
attention to businesses and various industries almost on
a global scale. This had adverse effect to the life and
standard of living of people all over the world.
From the time of simple barter, towards the
stage of money economy to today’s credit economy, remarkable developments have taken
place. With the tremendous growth in the use of credit, during the latter part of the twentieth
century, a number of economists have been quick to coin such terms as “The moneyless
society” or also known as “The Credit Society”.
Transition from Barter Economy to Money Economy
The early stage of human history was marked

by economic self-sufficiency of small family units.
Able-bodied members of the family units were
charged with the task and responsibility of
providing the basic needs of life, such as food,
clothing and shelter. But, as man was equipped with
better tools as well as learning in the production of
goods, surplus goods beyond the immediate needs
of the family became common. Hence, the need for
a system of exchange termed as barter; to perform
insurance and trust functions.
 Barter
• The earliest method of acquiring goods that were owned by someone else;
probably by a simple act of plunder or robbery. Brute force and strength
were the force of authority.
• When primitive society gave way to recognition of private property in any

article, only those things that were already owned by an individual can be
conveyed unto another, either as a gift or in exchange for other articles.
• The practice of exchanging gifts among individuals signified equality

among men. Such direct exchange devoid the use of a medium, came to be
known as a barter.
• Barter became inefficient when economic good being offered in exchange

were of quite different values. Moreso, when they were indivisible.
• A characteristic of exchange through the use of barter, brought about the

development of a common medium of exchange that took in various forms.
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The Need for Money
In the beginning, the use of

money was not intended for
production, rather, for Money was introduced into
consumption, which explains man’s economic life
why the taking of interest on designed purposely to
money lent was not only overcome the shortcomings
looked-upon with disfavor of barter.
but actually forbidden.
MONEY
Money is responsible for

increasing production and
adds to the creation of Money as a multiplier effect.
wealth.
In due time, important modifications appeared in the history of tough governing

interest. Of these exceptions, the most important was the doctrine of “damnum
emergens,” that is, suffering of a loss by the lender. Where a delay (mora) occurred in
the repayment of a loan, the lender was entitled to extract conventional penalty.
Still, more important in helping to break down the original prohibition was the
doctrine relating to “lucrum cessans.” This means, to have lost the chance of gaining
through lending money which becomes a justification for receiving of interest.
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According the Great Philosophers…
Adam Smith, in his book entitled

“Wealth of Nations” entertained the
belief that money originated from
man’s rational effort to meet the
necessity of finding some medium of
exchange.
Aristotle said: “Money is barren. It does

not breed.” As such, he concluded
that it is intended to be used only in
exchange but not to increase at
interest.
 Barrenness was to him an essential
nature of money; usury (interest)
which made money bear fruit, was
unnatural.
The Growing Need and Demand for Money
Many events have contributed to the growing need and demand for money. However,
few stood out prominently because of their importance and far reaching significance.
 The decline in the spiritual power of the church and the eventual recognition of the
institution of private property. This led to the sanction of exchange provided there
was a fair exchange. This brought about the birth of that dictum—“justum pretium”
which in economics means the doctrine of the “just price.”
 The fall of feudalism and the rise of mercantilism. Under mercantilism, gold and
silver were equated with the wealth of nation, so much so that national commercial
policy was aimed and directed towards the acquisition of gold and silver which then
were held synonymous with money.
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 The rise of specialization. Producing goods or services not only for ultimate
consumption but for profit purposes became possible because of the increase of the
need of local markets which resulted to higher demand of money. Those who were
successful at accumulating surplus of their labor, began to exchange goods and
services which led to birth of early capitalism.
 The birth of capitalism. It began during the exercise of economic freedom and the rise
of market system. Increase of privately-owned production available in the free-market
helped the development of financial institutions.
The fact however that the supply of money in many instances could not adequately meet
the increasing volume goods entering the exchange transaction accounted for money being
supplemented by the use of credit.
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Activity 1: How far have you learned on Credit

Economy? Let’s test your knowledge!
Instruction: Based on what you have learned, complete the
following “Facebook Status”. Give your best answers!
Credit is….
Credit is good when…
3 Things not good about Credit….

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Rubric
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UNIT 2: HISTORY AND FOUNDATIONS OF CREDIT

Introduction
One of the unique features of the

business system is that it operates to a
large extent on promises, called credit.
The word credit comes from the

Latin word credere, which means “to
trust.” The widespread use of credit is
a strong evidence to support the belief
that people trust one another.
The emergence of credit might be

helpful to point out that it is not one
design, rather a product of necessity.
Thus, as may be logical to expect, it
passed through a long process of
evolution and development.
Pre-Assessment 2: We need a Label! The Credit Cycle
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Instruction: In the figure on page 8, identify each character in the Credit Cycle using the
paragraph hint stated below. Write your answer legibly inside the box. Enjoy!
Mr. Oscar Gutierrez, who is the 1. _ _ _ _ _ _ _ _, is willing to lend his surplus money
to Ms. Belen Jimenez, known as the 2. _ _ _ _ _ _, who is in need of additional money to be
used for her Auto shop Business expansion. Ms. Jimenez agrees to pay her 3. _ _ _ _ within
12 months with corresponding monthly 4. _ _ _ _ _ _ _ _. The said loan is secured with her
house as 5. _ _ _ _ _ _ _ _ _ _ which is the only 6. _ _ _ _ _ she has.
Nature of Credit
A credit transaction involves two parties—creditor and debtor. In so far as the debtor
is concerned, credit represents power—the ability to obtain goods without on actual tender of
payment. Since the grant of credit by the creditor to the debtor is accompanied by a promise
on the part of the latter to pay at a certain date, an obligation arises which must be discharged
as promised.
The creditor, as a seller of goods or services on credit, has both the moral and legal right
to demand of his debtor to pay the obligations when due.
Thus, credit is essentially a transfer of goods, services, or funds giving rise to obligations
that must be discharged in the future.
Other Meanings of Credit

 In banking, credit is referred to “an entry in the books of a bank showing its obligation
to a customer,” that is, for the deposits made by the latter.
 In bookkeeping, credit is “an entry showing that the person named has a right to
demand something but not necessarily money.”
 In commerce, credit pertains to “an exchange in transaction.”
 Credit may be held synonymously with specific reference to the buyer’s credit
standing, that is, the ability to obtain goods and services, or even money against a
promise to pay for them at a latter date.
 Credit may refer to a credit instrument, that is, a document which serves to evidence
the existence of a business transaction anchored on trust.
The Cost of Using Credit

To use credit wisely, it is necessary to know how much it costs. But one may ask: What
then determines the cost of credit?
The price of credit, like the price of almost any other good or service, depends upon
the cost of providing it. When you use credit, the price you pay has to cover the lender’s cost
plus a fair profit. The reason why credit charges vary is simple. Some lenders charge higher
rates than others. In general, however, all sellers of goods produced by means of borrowed
funds have the same kinds of costs: interest, operating expense and risk.
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Interest. Anyone who extends credit cannot use the money loaned in some other way
until the debt is paid. Therefore, it has a right to charge for its use. This charge
is called interest. Interest is usually expressed as percent. This is the interest
rate.
- Interest is a price, and like other prices, it may vary from time to time. One
factor that affects interest rates is competition.
Operating expenses. Business enterprises that extend credit shoulder the same
operating expenses as other businesses. They must pay rent, light, telephone
service, water and others just as they must pay their workers for their services
in production.
- In addition, lenders incur the expense of investigating applicants for credit
purposely to find out if they are good risks and therefore worthy of credit.
- Collection is another item which includes sending notices when payments
are due and keeping a record of payments made.
- In this connection, the cost of investigating a borrower’s credit and the cost
of collection do not vary much regardless of the amount of credits involved.
Only the number of payment makes the difference.
Risk. Extending credit always involves a risk for the lender since he can never be
certain that the debt will be paid. When a lender is unable to collect a debt, he
takes a loss. Losses from unpaid debts represent an added cost of doing
business. Needless to say, such losses are highest among lenders who assume
greatest risk.
Impact of Credit upon the Creditor and Debtor
A rise in the value of money (fall in prices) generally speaking harms the debtor.
However, it cannot be assumed that such a circumstance will tend to benefit the creditor for
indeed it could happen that the debtor may become insolvent and the creditor will thus lose
all or a part of his loan.
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In the same manner, a fall in the value of money (rise in prices) may injure the creditor
without in any way helping the debtor. This is because the rate of wages more slowly than the
cost of living during a period of rising prices.
Foundations of Credit
For the credit system to continue in its existence and attain a healthy growth and
development, it is necessary that it should be solidly anchored on strong pillars or foundations
for support. As observed, the foundations of credit are:
 First, creditors must have absolute confidence in the personal character and in the
ability as well as willingness of their debtors to accept honor and settle their
obligations.
 Second, proper facilities must exist for performing credit operations. Sources of credit
information must be available to those granting credit if a correct and proper
evaluation of credit rating is to be made which is the first criterion in the grant of
credit.
 Third, the money standard must be stable
 Fourth, the government must stand ready to assist the creditor in enforcing payment
of loan extended to the debtor. Our laws recognize and protect the enforcement of
valid obligations arising from contracts freely and lawfully entered into by the
contracting parties. While it is true that, as provided in our Constitution, no
individual shall be imprisoned for non-payment of a debt, nevertheless, our courts
can order properties of debtors attached for their refusal to honor and pay their
indebtedness and have them sold at public auction to cover their obligations.
Assessment 1: Reflection Paper!

Based from the concepts presented, express your
thoughts on how important Credit is in the improvement of our
Philippine Economy. Write down your explanation on the space
provided below.
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Rubrics
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Assignment 1: Search for me!
Instruction:
Research about the Cs of Credit with

its descriptions. These are mainly
used in risk assessment whether the
loan applicant is qualified to avail
credit. There are six major Cs of credit,
but if you find more, you may share to
the class for the enhancement of our
discussion.
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UNIT 3: CLASSES AND KINDS OF CREDIT AND ITS

LIMITATIONS
Introduction
In as much as credit is by and large, the
product of necessity, it follows that different
circumstances calling for assistance and remedies
at one time or another h ave been responsible for
the birth of numerous classes and kinds of credit
familiar to the world today. While credit may be
classified in a number of ways, however, the most common basis is according to the
purpose for which credit is to be used. Thus, we have what are known as personal
credit, mercantile credit, bank credit, industrial credit, agricultural credit, investment
credit, export credit and public or government credit. To know whether the applicant
is qualified to be granted with a loan, the 6Cs of credit is generally used in risk
assessment. Base on the information gathered, it will give the creditor the avenue for
a sound decision-making to approve or deny any application.
Pre-Assessment 3: Crisscross Bee-Hive! - The 6 C’s

of Credit
The 6 C’s of credit represents the measures to qualify an individual to be

worthy of credit. Each attribute/element has a big impact on the risk assessment to
whether or not an entity or an individual qualifies to avail credit. Identify these
attributes by answering the crossword puzzle below. Enjoy!
3.
1.
2. 4.
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Across
1. This is something of value, debtor’s assets as pledge.

2. The personality of the debtor determining his credit Rating.
Down
1. This is the ability to obtain a thing of value in exchange of a promise to pay a

definite sum of money on demand or future determinable time.
2. This consists of the person’s real and personal property which can be a strong
foundation for credit approval.
3. This is a measure of his income level as basis of his paying capacity.
4. This may include local business conditions or economic conditions during time
of loan application.
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Classes of Credit
1. Personal Credit.
Most personal credit, by and large, is used by individuals to buy consumer
goods intended to provide immediate satisfaction to their wants and needs. Thus,
invariably, they are also called consumer credit.
Kinds of Consumer Credit
 Charge Account
• It is the oldest form of sales or purchase credit. Other names for this type of credit
are open-book credit, the open charge account, or 30-day credit.
• It is called as the “granddaddy” of consumer credit, and is facilitated by the use of
credit cards
• Under a charge account, a number of purchases may be made from time to time,
which obligations are discharged in one lump sum.
• Payment of such obligations coincide more or less with dates or days when
individual money-earners receive their incomes.
• Charge account has become somewhat a status-symbol representing the
individual’s credit standing rather than his inability to pay cash immediately.
• Advantages of Charge Accounts

o It is a very convenient way of shopping.
o It eliminates the inconvenience as well as the
danger of carrying too much money.
o Enable customers to buy goods only at the time
they want them.
o Charge account enables consumers to obtain goods
even before they have the money.
o Charge accounts provide a valuable means of
reference in many business transactions.
• Disadvantages of Charge Account

o The dangers in charge accounts, unless carefully controlled, are that non-
essentials will be purchased without much consideration, and less care will be
used to get the most value for the money spent when the purchase is made for
cash.
o Danger that the amounts being charged from time to time will not be kept in
mind, so that the total amount which must be paid when the reckoning comes
will not be realized until too late.
• The Use of Credit Cards

o This type of device serves to identify credit customers as those to whom the
store has given a symbol of its confidence in them.
o The tangible evidence of their charge account constitutes also a reminder of the
store and thus increase the buyer’s patronage.
o The identifying device facilitates credit authorization in the sales department.
o They are marked as valid until a stated date, however, many retailers have
eliminated the expiration date on credit cards because of the costs of
maintaining such a system and issuing replacement cards.
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o Credit cards, however, pose problems which are not found in the use of
signature identification. One is the frequent neglect of the customer to carry his
identification card when shopping.
o Loss or theft of credit cards and their subsequent use by unrecognized finders.
o Most credit cards may be used to purchase goods and services at only one or a
limited number of types of retail or service establishment.
 Installment Credit
• The most common type of consumer credit today. A number of individuals term
it as “buying on time.”
• Installment buying makes mass production and low prices possible.
• Through this method, the buyer is often asked to make a partial payment at the
time of purchase, termed as down payment. The balance is expected to be paid
with a series of regular payments
• As a policy and practice, a buyer of goods on installment credit is required by the
selling company to sign a formal agreement known as an installment contract.
Points to Consider on installment buying:

• What are the cost, the carrying charge, and the total cost of the goods?
• What is the amount of each payment; what are the time, the place, and the
conditions under which payment are to be made?
• What is the penalty if the buyer fails to make a payment on schedule? Does he have
any privilege of reinstating the contract if this should happen?
• In the event that the goods are repossessed by the seller, is there any condition by
which the buyer can obtain them back?
• Are there any other fees, such as legal or recording fees, besides the purchasing
price and the carrying charge which the buyer must shoulder?
• Before the regular payments are completed, is the buyer entitled to the privilege of
paying the total amount due and settling the contract at a reduction in cost? If so,
what are these conditions?
• Besides the chattel mortgage or conditional sales contract, is the buyer required to
put up additional security?
• Who shall insure the merchandise: the buyer or the seller? Who shall shoulder the
payment of premiums?
• What happens if the merchandise is destroyed or stolen? Does the buyer stand the
loss or shall it be borne by the seller?
Precautions in Buying on Installment

• Never allow yourself to be rushed or pressured into signing contract until you
became conversant with all the facts.
• Always insist for an extra copy of the contract.
• Never sign any contract before all the blank spaces are filled in.
• Read very carefully what you sign. Read again after signing.
Charge Account and Installment Credit, Compared

• Installment credit is largely confined to durable consumer goods while, generally
speaking of purchases on charge account consist of non-durable consumer items.
• The title to goods purchased on the installment plan does not pass to the buyer
until the last installment has been made. On the other hand, title passes
immediately to the customer covering goods bought on charge account.
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• In the vent that the customer fails to meet his payment on the installment plan, the
seller may take possession or “repossession” of the goods, in which case the buyer
loses whatever amount of money he has already paid.
• Goods on the installment plan are paid for by means of series of equal payments
whereas several purchases of goods bought on charge account are or may be paid
in one lump sum.
• Customers who buy on the installment plan always have to pay a “carrying
charge” which actually includes interest.
• Goods bought on installment basis generally, on account of the considerable
amount involved, are covered by a written contract of sale, which is not so in the
case of charge account. Open charge accounts involve no signed promises on the
part of the buyer.
 Revolving Charge Accounts

In addition to open-charge and installment credit, sellers offer other types of credit plans.
One is the revolving charge account. Revolving credit plans manifest themselves under a
variety of names. However, all operate in much the same way, similar to regular charge
account, new purchases may be added to a revolving account without making new, credit
arrangements. However, unlike a regular charge account, payments may be made in
installments.
The amount a customer can owe the store at any one time on a revolving account is
limited—the limit based on how much the customer earns and what other expenses he has to
meet. Once the imposed limit is reached, new further amounts can be charged against the
account until a payment has been made.
 Personal Loans
• A person may borrow for a number of purposes.
• The lender usually requires the borrower of a personal loan to pay back a certain
portion of the principal and interest each month over a period of time.
• Most lenders ask a borrower to sign a promissory note, commonly called a note.
• The borrower who signs the note is the maker.
• A person with a good credit standing may be able to borrow on his signature alone.
This is called signature or character loan because the borrower’s character is the
important factor in the lender’s decision to make the loan.
• In some instances, the lender may require the signature of a second person on the
note. Anyone who signs a note in addition to the borrower is called a signer. a co-
signer is responsible for paying the debt should the borrower fail to do so.
• Another method of securing loan is to have a friend or relative of the borrower
endorse the note. As endorser, this person becomes responsible for the payment of
the loan if the borrower fails to pay.
• The difference between a co-signer and an endorser is that a co-signer shares the
responsibility for the payment of a loan while an endorser becomes responsible
only after the lender has used all other means of collecting payment and failed.
Economics of Consumer Credit

• When credit is extended, an individual or a business house buys goods in return
for a promise to pay for these goods at some future time. Credit then, as repeatedly
stated before, is based essentially on future promise to pay.
• The promise may either be “implied” or “expressed.”
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• When customers buy goods from a store on the basis of charge account, then, the
form of credit implied.
• When obligations are supported by a written promise, then the form of credit is
expressed.
Sale of Goods on Credit to the Poor

• Only a few years back, the focus was directed towards war against poverty—the
inability of the poor to earn a decent if not just and fair wage.
• As such, the emphasis was laid down on expanding economic opportunities with
the approach ranging from making education within the reach of the masses to
such proposals as job training and job creation.
• With the mass of people as the main target, through the media—messages urging
people to buy now and pay later under the “easy payments” and “no money
down” schemes have become common place. This has lured some of our poor to
buy goods with collection being made on a number of bases—daily, weekly, twice
a month or once a month.
Limitations
• A borrower may be asked to furnish security that will guarantee repayment of his
loan. Anything used as security for loan is called collateral. A loan backed by
security is called a secured loan.
• A borrowers should be aware that getting caught using funds for anything that
falls into a grey area of legality may cause a problem.
2. Mercantile Credit.
Mercantile credit is equally known as commercial credit. Sometimes, it is also
called trade credit. It is granted by manufacturers, wholesalers, and jobbers as incident
of sale. Unlike consumer credit which is intended to facilitate the process of
consumption, this kind of credit is designed to increase the volume of sales.
By its very nature, mercantile credit represents an advance to the dealer to be

paid in whole or part from the funds derived from the sale of goods entrusted to him.
If the credit period is sufficient, the merchant is provided with the opportunity to
repay his obligations on time wholly from the proceeds of the sales.
The use of mercantile or commercial credit depends largely upon the buyer’s
needs and willingness of supply to exceed it. The buyer need trade or commercial
credit if his working capital is insufficient to take care of the current requirements and
if he cannot obtain bank credit or to procure the same from other sources at cheaper
costs and longer maturity dates.
As a general practice, this type of credit is of relatively short duration. If the

contract is evidenced by the presence of some document, it will take the form of
promissory note.
 Mercantile Credit and Retail Credit

• Mercantile credit and retail credit are alike in some respects but differ in other
characteristics.
• Mercantile credit is involved in the production and transfer of either raw materials,
or finished goods for supplying the wholesaler, or for stocking the shelves of the
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retailer. In other words, mercantile credit is used in financing producers and

dealers rather than in financing the ultimate consumers.
• Mercantile credit is essential to the manufacturer, the jobber, the wholesaler and
the retailer. Such credit is however needed only for the length of time it takes to
make a “turn” of goods purchased, as for instance, 30, 60, 90 or 120 days.
• Retail credit on the other hand, is credit used by a consumer to finance purchases
which he cannot pay for, or does not wish to pay for, until some later date.
• Moreover, to some people, retail credit is a convenient form of savings, for it leaves
invested funds undisturbed.
 Raising Money on Accounts Receivable

It is quite common for houses which sell on open book account to use mercantile and
bank credit for their own needs. There are methods, however, by which accounts receivable
may be used directly as basis of credit accommodation. These methods may be adopted for
any one of the following reasons:
• The company may be in financial difficulties and that it is in urgent for more
money.
• The company may wish to expand its business to a greater extent than its line of
credit permits.
• A new business may find this the most expedient method of obtaining credit.
• An old, established business may borrow in this way its desire to discount its
current purchases.
• For purposes of illustration, suppose that, for some reason, it appears desirable to
borrow using its accounts receivable as collateral. The accounts are assigned to the
finance company.
 Small Market Vendor’s Loans

• The new lending program for the vendors is made available ass additional source
of capital of the market vendors. This loan may be availed of only by legitimate
market vendors and stall holders.
• To qualify, he must have a license to operate a market stall, belong to a market
vendors’ association and be a market vendor stallholder for at least six months
immediately before the filing of application.
• The amount of the loan granted is based on the actual needs of the applicant-
borrower.
• It shall not be less than P1,000 and not more than P2,000. The loan is discounted
for 180 days at 14 per cent per annum.
• Needed for security are joint and several signatures of the applicants or spouses
plus a co-maker who is also a qualified market vendor or stallholder. If no qualified
stallholder could be presented as co-maker, the signature of any of the two solvent
co-makers is sufficient.
 Limitations
• The credit period is considerably short for the need and purpose of the merchant.
• The merchant must have to depend upon other sources of funds to pay his
obligations.
3. Bank Credit
• Notwithstanding the steady growth in the volume of mercantile credit, and its
widespread use at the present time, we are constrained to consider bank credit as
20 | P a g e
the most important. The reason for such regard is due to the volume of bank credit
in use today and partly to its peculiar qualities, apart from the fact that merchants
who extend credit to their customers are often able to do so only because they, in
turn, are in a position to borrow from their banks.
• Bank credit comprises the aggregate of all the funds advanced in various ways by
banks to other members of the community.
• Banks furnish funds to borrowers of every description. Such types of loans vary
from one bank to another which are generally based according to the purposes for
which these banks are established.
• In the particular case of private development banks, the purpose is geared toward
the promotion of agriculture and industry in this country and at the same time,
place within easy reach of the people the medium and long term credit facilities at
reasonable cost.
• Loans granted by savings and commercial banks are governed by the General
Banking Act (Republic Act No. 337) which was approved on July 24, 1948.
• Bank advances to customers are made either by means of loan or by overdraft on
current account.
• In the case of a loan, a separate account is opened in the name of the customer and
debited with the amount advanced, a like amount being credited to his current
account, thus becoming available to draw upon to meet his needs.
 Types of Transactions Commercial Banks Finance

• Commercial Loans
• Agricultural Loans
• Industrial Loans
• Real Estate Loans
• Personal Loans
• Packing Credit Advances
• Trust Receipts
 Limit to Expansion of bank Credit

• Banks cannot expand their loans and investments indefinitely in order to
accommodate the increasing requirements of a business boom, inasmuch as they
acquire these assets, for the most part by increasing their own liabilities in the form
of deposit obligations. Increased bank deposits require at least correspondingly
larger reserves of cash or its equivalent in the banks if they are to remain solvent.
• At the beginning of the boom, the banks must have excess reserves, or they would
not increase their deposit liabilities in order to expand their loans and investments.
It is observed that the larger their excess reserves, the more they can expand
deposits before the excess is exhausted, but exhaustion is nonetheless certain if
expansion is permitted to continue.
4. Agricultural Credit
• In accordance with Presidential Decree No. 717, all banks are required to set aside
10% of their loanable funds to agrarian reform beneficiaries and 15% to other
qualified borrowers.
• Qualified to borrow agrarian reform loans are tillers, tenant-farmers, settlers,
agricultural losses, amortizing-owners, owner-cultivators, farmer’s cooperatives
and compact farms.
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• The loans may be used to buy land under the Agrarian reform Code, work animals,
farm equipment and machinery, seeds, fertilizers, poultry, livestock, feeds, and
other similar terms, and facilities for production, processing, storage and
marketing.
• Qualified to borrow other agricultural loans are corporations, entities and private
individuals engaged in agricultural production, processing, storage, marketing,
exportation, importation, manufacture and distribution of farm machinery and
equipment, fertilizers and other inputs.
• In its memorandum to rural banks, the Central Bank of the Philippines directed
that loans granted for agrarian reforms credits should be secured by or a
combination of real estate property of either borrower or the co-maker, poultry
stored in warehouses, assets acquired with proceeds of the loans, and other
collaterals such as standing crops, livestock and work animals.
 Bank on Wheels
• An innovation in the banking system in this country which helps to implement the
Masagana 99 program.
• Is aimed at reaching out to the farthest barrio in the countryside’s—literally going
to the farmers and delivering to them a package of credit and modern food
production technology right at their very doorstep.
• The “bank on Wheels” is premised on two specific objectives: (1) financing of the
rice and corn production expenses, and (2) education of then target farmers in the
effective use or of more productive rice and corn planting methods.
• It is thereby designed to create a meaningful impact both on the economic and
social development aspects.
• A qualified farmer gets P1,200 loan per hectare or a maximum of P5,000 for all his
tilled lands. At the same time, he gets an additional P150 for every hectare infected
by a new kind of rice disease called the hopper burn. The additional P150 will be
used by the farmer to buy the needed chemicals to combat the infected rice disease.
 Supervised Credit
• Is a combination of production credit with technical help to the farmer using it.
• This term was first coined to describe the imaginative and exciting new program
of the US Department of Agriculture’s Farmers and Home Administration which
began in 1930, when the United States was caught in the throes of a widespread
drought and severe economic depression.
• The program was designed to assist family members who lost their crops year after
year because of lack of rain, or were forced to sell what little they produced at
extremely low prices, by extending credit to these farmers accompanied with
extensive guidance in farm, home and financial management.
 Integrated Agricultural Financing Program

• The aim of this program is to develop a workable and viable lending system which
will provide a credit line to small farmers to finance all economically feasible farm
projects to increase their income by maximizing the utilization of available farm
resources through year-round productive activities.
• This system has added the advantage of reducing default in the farmer’s loan
repayment by spreading the risk of loss among his several farm projects.
22 | P a g e
• Moreover, this lending system aims to integrate all existing Special Financing
Programs for the small farmers under the Supervised Credit Scheme in order to
reduce the cost of credit.
 Limitations
• Increased agricultural production requires positive incentives to farmers and their
positive response to these incentives.
5. Investment Credit
• Investment credit consists of advances that have been made to a business
enterprise to enable it to purchase or construct the necessary plant and equipment.
• As such, it includes almost all of the transactions whereby the capital of modern
corporations, and other large enterprises, is accumulated and placed at the
disposal of the entrepreneur, as well as the numerous transactions by means of
which funds are placed at the disposal of the former for similar purposes.
• The proceeds of such credit transactions are customarily spent on the equipment
which the borrower expects to use continuously until it is worn out or suffer from
obsolescence, for which reason, the credit must of necessity be for a long term.
• Investment credit is required for three purposes:

o In order to meet the needs of the business enterprise
o To meet the needs of national, provincial, and local governments that wish to
undertake projects requiring an expenditure in excess of their current revenue.
o Purchase and improvement of real estate.
 Limitations
• Long term duration, its maturity is, by and large, determined by the life of the
assets.
• It helps to increase the capacity of our economic system to produce through
the installation of permanent assets.
Investment credit is obtained through the issuance of relatively long-term obligations

in the form of promises to pay at a future time in exchange for the money which is borrowed.
These obligations take the form of bonds and promissory notes. While investment credit is
long-term duration, nevertheless, its maturity is, by and large, determined by the life of the
assets. Investment credit helps to increase the capacity of our economic system to produce
through the installation of permanent assets.
6. Export Credit
A business which insists upon transactions that are considered absolutely safe
and secured in every respect is bound to be a small one. This is just as true of foreign
business as it is of domestic business. The ability of man, whether he be an export
executive or a special credit manager, who extends credit to customers in other
countries of the world, depends upon willingness to assume responsibility to a
reasonable extend in extending such credits to enlarge the business of his concern
without unreasonable risk.
Credit risks in international trade, it might be helpful to point out, differ
materially in a number of respects from domestic risks. To begin with, there is the
element of distance. Foreign debtors are, more often than not, located many thousand
miles away. Correspondence is comparatively infrequent and entails long delays, and
23 | P a g e
may in some instances involve misunderstandings not so easily resolved as perhaps

would be with domestic customers.
 Limitations
• The consequent difficulty in controlling credit risks and, perhaps, most
important of all, there must always be considered the differences in laws,
currency systems and others
7. Public or Government Credit

Public credit is just another term for government borrowing. However, public
credit as a means of pledging the good faith and the resources of the whole people for
the repayment of a debt incurred on their behalf did not attain considerable acceptance
till recent times.
 Financing Government Expenditure

• Like taxation, government borrowing is undertaken to finance government
expenditure. Whether the expenditure is for consumption or investment, for
military needs or economic development, every borrowing, government must face
the same set of questions: First, how to borrow the money—from whom, for how
long, and at what interest rate—and second, what effects each borrowing choice
will have upon the economy as a whole and upon particular sectors within it.
• Every government’s decision to borrow represents a political determination that
additional resources are to be diverted to the public sector and allocated to the
fulfilment of particular goals.
• The additional resources will depend upon the kind of borrowing that a
government chooses. It may borrow outside the country. Or, it may borrow
domestically.
 Public Borrowing in Developing Countries

• Almost all the governments in developing countries have had to choose some form
of borrowing to supplement their tax revenues.
• Borrowing abroad has been their most frequent choice and foreign debt forms the
major portion of the public debt in most developing countries.
• The contracting of most foreign debts, is now dependent mainly upon a country’s
ability to prepare and carry out investment projects on the maintenance of its
capacity to repay. Sound management of a government’s foreign debt, however,
requires (1) that the particular project generate a sufficient return—either in itself
or to the economy as a whole—to cover the repayment of the loan; (2) that the
volume and maturity structure of the debt be such as to hold the over-all burden
of foreign debt repayment, public and private, to within a reasonable proportion—
often taken as being 20% of foreign exchange earnings; and (3) that the burden of
debt repayment remain sustainable in the light of the economy’s growth and level
of income.
 Philippine Government’s Authority to Borrow
Republic Act No. 245 and 265 are the legal sanctions by which the National
Government borrows from financial institutions during the periods when collections
of revenues are scarce for reason of events beyond the control of the collecting
agencies.
Section 95 of Republic Act No. 265 (Charter of the Central Bank of the
Philippines) provides:
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“The Central Bank may take direct provisional advances to the

government or to any of its political subdivisions to finance expenditures
authorized in the annual appropriations of the borrowing entity: Provided,
That said advances must be repaid before the end of the fiscal year of the
Government or political subdivision and shall not, in their aggregate, exceed
fifteen (15%) per cent of the average annual income of the borrower for the last
three preceding years.”
Each evidence of indebtedness may be of the following types:

• Treasury bills issued on discount basis and payable at maturity without interest;
• Interest-bearing certificates of indebtedness having maturities not exceeding
eighteen months from date of issue;
• Interest-bearing notes having maturities of not less than one or more than five
years from date of issue.
 Limitations
• The amount of bond may be deemed necessarily and issued in the Philippines
or abroad shall not exceed one billion pesos to finance public works project for
economic development which must be self-liquidating in character.
• No single issue of bonds shall exceed two hundred million pesos and no
further issue shall be made if eighty per centum of the immediately preceding
issue has not been sold.
 Floating Bonds
• Republic Act No. 1000, as amended authorizes the President of the Philippines to
issue bonds to finance public works projects for economic development.
• However, the amount of bond which may be deemed necessary and issued in the
Philippines or abroad shall not exceed one billion pesos to finance public works
projects for economic development which must be self-liquidating in character.
• However, no single issue of bonds shall exceed two hundred million pesos and no
further issue shall be made if eighty per centum of the immediately preceding issue
has not been sold,
• Furthermore, not more than twenty centum of any bond is to be spent for non-self-
liquidating and non-revenue producing projects.
• The bonds issued under this authority may be made payable, both as to principal
and interest, in Philippine currency or any readily convertible foreign currency.
• The bonds to be issued under this Act shall be exempt from taxation including the
tax on foreign exchange by the Government of the Philippines or by any political
or municipal subdivision thereof, which fact shall be stated on their face, and shall
likewise be exempt from attachment, execution or seizure.
• A sinking fund shall be provided for the purpose of redeeming bonds issued by
the Philippine Government.
The 6 C’s of Credit:
Ask yourself! Are you qualified for the loan you are applying for?
After getting to know the classes and kinds of credit, let’s examine the attributes in
risk assessment that impacts the decision to be made by the creditor. These are known as the
25 | P a g e
6Cs of credit which are used to identify the overall risk of a loan and the credit worthiness of
a borrower.
We will now know whether you have done your assignment on Unit 2 and was able
to answer the pre-assessment in this Unit. The following definitions are the answers for Pre-
Assessment 3
 Collateral - It refers to the personal assets of the borrower used to secure a loan in case
failure to repay the lender. The latter may sell the items to compensate the outstanding
amount which was not settled.
 Credit Score – It refers to the creditworthiness of the borrower which reflects the like
hood to repay the credit owed. The higher the credit score, the more likely the credit
application will be approved.
 Capacity - It refers to ability of the borrower to pay his debts. The lender evaluates
the cash flow, credit history, and other sources of income of the borrower.
 Capital - It refers to the funds invested by the borrower to a business or any
investment which will be one of the basis on risk assessment of the lender
 Character - It refers to the personal background of the borrower, example. Credit
history, educational attainment, workplace, et.al. The lender may assign a personnel
to conduct credit investigation to the borrower.
 Condition - It refers to the purpose of the loan application where the borrower intends
to use the amount to be borrowed. On the other hand, it refers to the interest to paid,
other charges, and terms and conditions of the loan.
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Assessment 3: Let’s be Creative!
Instruction: Draw a Mind Map showing the unique features

of each kind of credit with its corresponding limitations. Refer to the
sample concept map given below. Use the next page for your output.
27 | P a g e
Rubrics for Concept Map
Exemplary Exceeds Standard Adequately Meets Below Standard

10points 8points Standard 4points
6points
- Well organized - Thoughtfully - Somewhat - Choppy and
organized organized confusing
- Logical format
- Easy to follow most - Somewhat - Contains a
- Contains main concepts of the time incoherent limited number of
concepts
Organization
- All key words and - Contains most of the - Contains only a few
10points
concepts necessary to main concepts of the main concepts - Many key words
promote an overview of the and concepts from
unit are used give added - Most key words and - Many key words the unit are missing
meaning. concepts from covered and concepts from the
in a meaningful way unit are covered and
and are thoughtfully are somewhat
organized organized.
-Shows an understanding - Makes some mistakes - Makes many - Shows no

of the topic’s concepts andin terminology or mistakes in understanding of
Content, Concept and
principles and uses shows a few terminology and the topic’s concepts
Terminology
appropriate terminology misunderstandings of shows a lack of and principles.

10points
and notations concepts understanding of

many concepts. - Many
-No misconceptions/ errors - Few misconceptions misconceptions are
evident. are evident. - Some evident.
misconceptions are
evident.
-All words are accurately -All words are -Most words -Some words
connected. accurately connected. accurately connected. accurately
connected.
- Connections indicate - Connections are clear - Connections are
Connections and knowledge of the
superior and logical. somewhat clear and -Connections aren’t

relationships among concepts.
organization/understandin convey some clear, they convey

g and enhance meaning. - They connect meaning. little meaning and
concepts to promote do not promote
- Arrows easily connect clarity and convey -Makes some clarity.
10points
concepts in an informative meaning. incorrect connections.

manner. -Fails to use any
- Identifies important appropriate
- Identifies all the important concepts but makes concepts or
concepts and shows an some incorrect appropriate.
understanding of the connections.
relationships among them.
- Some meaningful
- Meaningful and original connections made
insights demonstrated.
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Assessment 3: Fill in the blanks
Instructions: Fill in the blanks. Put your answer on the space provided.
1. ________________________________ are the legal sanctions by which the National

Government borrows from financial institutions during the periods when collections
of revenues are scarce for reason of events beyond the control of the collecting
agencies.
2. ________________________ consists of advances that have been made to a business
enterprise to enable it to purchase or construct the necessary plant and equipment.
3. ________________________ is just another term for government borrowing.
4. The _________________________ is premised on two specific objectives: (1) financing
of the rice and corn production expenses, and (2) education of then target farmers in
the effective use or of more productive rice and corn planting methods.
5. Loans granted by savings and commercial banks are governed by the
______________________________________ which was approved on July 24, 1948.
6. A loan backed by security is called a ___________________.
7. _________________ issued on discount basis and payable at maturity without interest.
8. Anything used as security for loan is called _________________.
9. _________________________ represents an advance to the dealer to be paid in whole
or part from the funds derived from the sale of goods entrusted to him.
10. _______________ was introduced into man’s economic life designed purposely to
overcome the shortcomings of barter.
11. _____________________ became inefficient when economic good being offered in
exchange were of quite different values.
12. This brought about the birth of that dictum—“justum pretium” which in economics
means the _______________________________.
13. Mercantile credit and ___________________________ are alike in some respects but
differ in other characteristics.
14. ___________________________ is obtained through the issuance of relatively long-
term obligations in the form of promises to pay at a future time in exchange for the
money which is borrowed.
15. _____________________________, as amended authorizes the President of the
Philippines to issue bonds to finance public works projects for economic development.
29 | P a g e
MODULE 2
Course Outcomes:
1. Compare and contrast the different sources of credit.
Learning Outcomes:
1. Identify the important Sources of Credit
2. Cite the advantages and disadvantages of credit
3. Examine the different features of the sources of credit
UNIT 1: SOURCES OF CREDIT
Pre-Assessment: The “ KNOWbody’s Perfect Game”
Instruction: Based on your KNOWledge, write down all the sources of credit and a brief
description of it below without looking at the next pages of this module.
Let’s get it started!
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
____________________________________.
30 | P a g e
Introduction
In this lesson, students will identify the sources
of credit, classify the advantages and disadvantages of
credit, and examine the different features of the sources
of credit.
After having considered the various classes and kinds

of credit, it may perhaps be correctly asked: What are
the main sources of credits?
The answer to this question would apparently need some qualifications. In the first
place, the availability of credit desired may depend upon the purposes for which they are to
be used. Still, in a number of instances, they are subject to certain conditions and requirements
which need compliance if such credit are to obtained or secured.
Credit which is made available through the savings of the various sectors of the
economy, in essence, helps its allocation to its best uses. However, for a credit economy to
thrive and attain healthy growth and development, it is necessary that, not only should
adequate safeguards be instituted for the wise and proper use of credit, but equally important
is that it should be made available at the time a need for it arises, in amount needed, and of
course, at a cost considered reasonable.
Financial Intermediaries
While lenders and borrowers may be

brought together through credit instruments
and credit markets, in many instances credit
transactions are consummated through credit
institutions which serve as intermediaries
between lenders and borrowers in these
markets.
Credit institutions, in general, perform the following functions:

• To pool the savings of the lending customers;
• To invest these funds financially on the basis of careful investigation and analysis of
credit;
• To diversify risk to a degree unattainable for individual investors
• To transform short term into long term funds through an expedient and careful
staggering of maturity dates; and
• To perform insurance and trust functions.
However, not all credit institutions perform all the above-enumerated functions. Savings
banks and commercial banks, for instance, are often limited by legal restrictions from buying
industrial stock.
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Important sources of credit:

• Financial Institutions
• Investment Houses
• Commercial Banking
• Savings and Mortgage Bank
• Rural Bank
• Financial Institutions
Financing Companies
As defined under the “Financing Company Act,”
(Republic Act No. 5980), financing companies are
corporations or partnerships, (except those regulated by
the Central Bank of the Philippines, the Insurance
Commissioner and the Cooperatives Administration
Office, now the Bureau of Cooperatives and Community
Development), which are primarily organized for the
purpose of extending credit facilities to consumers and
to industrial, commercial, or agricultural enterprises, either by discounting or factoring
commercial papers or accounts receivable, or by buying and selling contracts, leases, chattel
mortgages, or other evidences of indebtedness, or by leasing motor vehicles, heavy equipment
and industrial machinery, business and office machines and equipment, appliances and other
movable property
• Assignment of Credit
o Financing Companies
• the purchase discount, exclusive of interest and other charges,
shall be limited to fourteen per cent (14%) of the value of the credit
assigned
• the value of the installment papers, accounts receivable and other
evidences of indebtedness purchased based on a period of twelve
(12) months or less
• one and one-sixth per cent (1-1/6%) for additional month of
fraction therefore in excess of twelve months, regardless of the
terms and conditions of assignment or purchase.
o Appliances, Furniture and Office Equipment
• shall be limited to eighteen per cent (18%) of the value of maturity
of the credit assigned
• receivables purchased, based on a period of twelve months or less
• one and one-half per cent (1-1/2%) for each additional month or
fraction thereof in excess of twelve months, regardless of the terms
and conditions of the assignment or purchase.
o In the case of factoring accounts receivable or other evidences of
32 | P a g e
indebtedness, the discounting rate that can be charged, exclusive interest

and other charges, shall not exceed two per cent (2%) of the value of the
credit assigned or receivable purchased for every thirty days, regardless of
the terms and conditions of the assignment of the factoring companies.
 Investment Houses
• Invariably termed as investment banks, are

concerned chiefly with the transfer of capital from
those that have more funds that they can actually
could use to those who need them for utilization in
long-term projects or activities
• Investment banking is a recent addition to the
financing network. It belongs to the non-bank
sector of the system and gathers funds for its
lending operations from sources other than
deposits.
• Not being a bank in the real sense of the term, it
is not allowed to collect deposits.
• The establishment of investment houses in this
country are governed by Presidential Decree No.
129, as amended by Presidential Decree no. 590,
otherwise known as the Investment House Law.
• Investment houses shall be organized in the form
of stock corporation and shall have a minimum
paid-in capital of twenty million (P20, 000,000) pesos.
• They shall coordinate their credit policies with the general credit policies of the
Monetary Board of the Central Bank of the Philippines.
• Investment Houses in the Philippines

o The emergence of investment houses in the financial system ushered in a
new era in capital resources intermediation.
o Investment houses added new dimensions to the already growing
sophistication of capital mobilization.
o Investment houses are termed as money middlemen between individuals
or institutions with money to invest and people or institutions who needs
funds to put up a business enterprise or to expand an existing industry.
o Investment houses do this by underwriting, investing in loans and equity,
engaging in money market operations, and issuing its own promissory
notes.
o Investment houses convert available savings from investments and
facilitate the flow of needed capital. The generated funds are directed to
corporate expansion and growth and consequently to productive projects
contributory to economic developments.
33 | P a g e
• Commercial Banking
• The establishment of the “Obras
Pias” during the period of Spanish
rule is not without significance.
• It could be considered as the
precursor of the banking system of
this country.
• Obras Pias were the first credit
institutions which were organized in
this country as early as the latter part
of the 16th century.
• Pious Catholics, obsessed with
the desire to gain indulgence by way of doing charitable work, furnished the
capital of the Obras Pias.
• The year 1851 marked an important event in our economic history since it
was in that year that the first commercial bank was established—the “Banco
Español-Filipino” which has evolved to the present Bank of the Philippines
Islands.
• This was followed by the establishment of the Chartered Bank of India,
Australia and China in 1873 and the Hong Kong Shanghai Banking
Corporation in 1875
Commercial Banking Corporation

o Shall be any corporation which
accepts or creates demand deposits
subject to withdrawal by check.
o Shall have all such powers as
shall be necessary to carry out on the
business of commercial banking by
accepting drafts and issuing letters of
credit, by discounting and negotiating
promissory notes, drafts, bills of exchange, and other evidences of
debts; by receiving deposits; by buying and selling foreign exchange
and gold or silver bullion, and by lending money against personal
security or against securities consisting of personal property or first
mortgages on improved real estate and the insured improvements
thereon.
o No loan on the security of real estate shall have a maturity in excess of
fifteen years, except loans from home building or home development
which may have maturities up to twenty years. Loans on real estate
security of over one year maturity for real estate, personal and
commercial purposes, or for the refinancing of similar loans, shall not
exceed fifty per cent (50%) of the total savings and time deposits of the
34 | P a g e
bank.
• Commercial banks are institutions which extend credit out of funds which
they own, borrow, or create. The most characteristic feature of commercial
banks, which distinguishes them from other private credit institutions, is their
ability to create money.
Savings and Mortgage Bank
• Since savings bank accumulate the small savings
of depositors, such accumulated funds are in turn
invested in bonds or loans secured by bonds, real
estate mortgages, and other forms of security.
• The term savings banks include mortgage banks
as well as savings and loans associations.
 Rural Banks
• Provide the chief source of credit especially for

those engaged in agriculture who need these
facilities badly.
• The growth and development of these banks
attest to the pressing need of the people in the rural
areas for loanable funds.
• The existence of rural banks in the towns and
communities has greatly minimized the existence
of usurious practices of some money lenders which
has victimized our poor people who cannot avail themselves of the credit
facilities which may be offered by commercial and savings banks because of
certain requirements imposed by them.
35 | P a g e
Activity 1
Instruction: Answer the following questions.
1. Explain the 3 sources of credit.

__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
________________________________.
2. In your own opinion, what would be the outcome or consequences if a debtor failed
to settle their account?
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
___________________________________.
36 | P a g e
Rubrics
37 | P a g e
OTHER SOURCES OF CREDIT
 Individual Money Lenders

• One of the sources of credit is the
individual money lender who may lend his
surplus to those in need, so that it will bring some
income to him. However, since in many cases no
collateral is required on the part of the borrowers
to secure the loan of whatever sum of money; this
money lender may be constrained to collect a very
high rate of interest over and above the legal one
in order to protect his personal interest and thus
become what is known as a “loan shark.” Neither are borrowers required to
execute promissory notes.
 Commercial Establishments
Retail Stores
o The biggest source of merchandise credit
in the Philippines, also known as “sari-sari”
store.
o These stores cater to the everyday needs
of the consumers.
o In accordance with the provisions of the
Retail Trade Nationalization Law on May 15,
1954, no alien is permitted to engage in this type
of business.
Grocery and Department Stores

o More sophisticated
o Grocery stores are essentially food stores.
o Department stores, displays goods for
the customer to inspect and pick out whatever
they want to buy and have them checked out
through the cashier.
o Generally carry well-known brands of
products they sell to consumers in efforts to enlist
their patronage.
o The customers are given the privilege of buying goods on credit
which is generally facilitated by the use of credit cards.
38 | P a g e
Supermarkets
o You can buy
almost everything
under a single roof.
o They are like one
big catalog where
the shopper can
inspect and study
any of the thousands of items on display and budget her buying
as she goes through the store.
o You can examine a brand without anybody watching, place it
on a shopping basket or push cart, return it to the shelf, or, you
can examine another brand, choose it or reject it to your heart’s
content.
o Its chief features consist of assembling all kinds of goods
including non-food items, clothing, shoes, hardware and
countless others.
o Sells good to their customers on credit who qualify for the use
of such privilege.
 Pawnshops
• The present-day pawnshops owe their origin from the Montes
Pietatis which were established by Franciscans (Friar Minor as
they were invariably called) in Italy.
• The terms mons referred to any form of capital accumulation,
and pietatis from the Latin “pietas” meaning pious.
• montes pietatis consisted of charitable funds from which loans
came from, which were exempted from interest, but secured by
pledges. Such loans were granted to the poor.
• Considered as the oldest credit institution in China, according
to a Harvard professor of Chinese history.
• In the Philippines, pawn broking is also one of the oldest credit
institution and is believed to have been introduced by the Spanish
friars.
• In this connection, the oldest savings bank, the Monte de
Piedad, was granted the privilege of lending money against
pledges of jewelry.
• The rate of interest that any pawnshop shall collect shall not be
any higher or greater sum or value for any loan or forbearance
than the rate allowed by the Usury Law as amended
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 Insurance Companies
• The business of insurance companies is to enter
into insurance contracts with those who wish to
provide for such contingencies as death or fire.
• Insurance companies must accumulate
premiums to build up funds to meet policy claims,
and they must meanwhile employ these funds in
loans and investments.
 Savings and Loan Associations

• described as “that corporation engaged in the business of accumulating 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 enterprise or in securities of the Government, or any of
its political subdivisions, instrumentalities or corporations.
 Government Financing Institutions
Government Services Insurance System (GSIS)

– is a social insurance institution that provides a
defined benefit scheme under the law. It insures its
members against the occurrence of certain
contingencies in exchange for their monthly
premium contributions.
Social Security System (SSS)
- is a state run, social insurance program in the

Philippines to workers in the private, professional
and informal sectors.
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 International Organizations
• World Bank - is an international organization
dedicated to providing financing, advice, and
research to developing nations to aid their
economic advancement.
• International Monetary Fund - is designed to
promote exchange stability and assist in the
establishment of multilateral system of payments
in respect to current transactions
• Asian Development Bank - intended purposely
to generate growth and cooperation in Asia
• Export-Import Bank of the United States - acts
as its principal lending arm with respect to its
foreign trade.
 Others
• Credit Unions
o corporate organizations which lend savings of members to some of the
members of the group.
o in order that credit unions can be successfully operated, they should
consist of closely knit, cohesive, natural group of employees with low
labor turnover
o must be confined to a limited group of employees of a particular factory
or industrialized establishment.
• Trust Companies
o may be logical to expect invest and lend their funds for the benefit of the
trustees, thus, providing a source of funds.
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Advantages of Credit
• Credit facilitates and contributes to the increase
in wealth by making funds available for productive
purposes.
• Credit saves time and expense by providing a
safer and more convenient means of completing
transactions.
• Credit help expands the purchasing power of every member of
the business community—from producer to ultimate consumer.
• Credit enables immediate consumption of goods thereby providing for an
increase in material well-being.
• Credit help expand economic opportunities through education, job training and
job creation.
• Credit spreads progress to various sectors of the economy.
• Credit makes possible the birth of new industries.
• Credit helps buying become more convenient for customers.
Disadvantages of Credit
• Credit, at times, encourages speculation. This
happens when those in charge of the savings of other
people throw caution to the winds and thereby become
careless and unscrupulous in their eagerness and
desire to expand credit and make huge profits.
• Credit also tends to contribute to extravagance
and carelessness on the part of the people who obtain
them.
• Because of credit, many entrepreneurs resort to
over-expansion.
• Credit causes one businessmen to be dependent upon others.
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Activity 2: “Finding the Perfect Match”
Instruction: Match each Picture in Column A with the description in Column B. Draw the
same symbols (example: ▲, ♦ , ☺ , ♥ ) in the box beside the picture and the
description when you find its “perfect match”.
COLUMN A COLUMN B
A financial institution which

UNDERWRITES the risk of loss of,
or damage to, personal and business
assets and life and limb (life and
accident).
Large retail store operated on a self-

service basis, selling groceries, fresh
produce, meat, bakery and dairy
products, and sometimes an
assortment of nonfood goods.
A store that lends money in

exchange for a valuable thing that
they can sell if the person leaving it
does not pay an agreed amount of
Small retail outlets that can be found

in almost all neighborhoods,
sometimes even in every street corner
in the Philippines
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Assessment 1: Compare and Contrast!
Instructions: Fill in the Venn diagram below. Identify their similarities and
differences.
BANKS CREDIT UNIONS
INSURANCE COMPANIES
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Rubric for Venn Diagram
10 points 8 points 6 points 4 points
Each section of Each section of

Each section of Each section of
the diagram the diagram
Concept the diagram the diagram
contains two contains very
Arrangement contains four contains three
facts that are few facts that are
10 points facts easily facts easily
somewhat not easily
identified. identified.
identified. identified.
Student
Student exhibits illustrates a Student displays
Student shows
mastery of the firmer a limited
Primary Source little or no
material as understanding of understanding
Content understanding
evidenced by most of the with some details
10 points of topic. There
attention to similarities and pertinent to the
are few details.
detail. differences subject matter.
brainstormed.
Most of the Contains
Reflects some
Reflects factual information is nonfactual
factual
Linking Content information that factual and
information and
information that
together corresponds seemingly does not
attempts to put it
10 points with appropriate corresponds correspond to
in corresponding
section of with appropriate the appropriate
section of
diagram. section of section of
diagram.
diagram. diagram
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Assessment 2
Instruction: Answer the following questions below:
1. Explain the other sources of credit.
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3. Identify 2 features each sources of credit. Explain briefly.
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Rubrics for Assessment 2
No Needs
Adequate Quality Exemplary
Answer Improvement
6 points 8 points 10 points
0 points 4 points
Did not Answers are Answers are Answers are Answers are
answer partial or not accurate and complete,
the incomplete. comprehensive complete. comprehensive
question The key or ultimately Key points and accurate.
Content
points are not stated. Key are stated Key ideas are
10 pts
clear. points are not and clearly stated,
Answers not well supported supported. explained and
adequately but addressed well supported.
answered. properly.
Did not Organization Inadequate The The content is
answer and structure organization or organization well organized,
the detract from development. is mostly coherently
Organization
question the answer. The structure of clear and developed, and
10 pts
the answer is easy to easy to follow.
not easy to follow
follow
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MODULE 3
Course Outcomes:
1. Evaluate the Inspection and Appraisal process of different lending institutions.
Learning Outcomes
1. Identify the properties qualified as mortgage/chattel
2. Explain the nature and purpose of Inspection and Appraisal
3. Discuss the guidelines for conducting appraisal
UNIT I: INSPECTION AND APPRAISAL

Pre-Assessment:
Let’s begin!
Write down your expectations about the topic/s.
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
_________________________________________________________________________________________.
Introduction
In this lesson, students will learn the properties
qualified as mortgage/chattel, the nature and purpose of
inspection and appraisal and the guidelines for
conducting appraisals.
One of the bases for the grant of bank loans or
credits is collateral. Such a loan is supported by security
for which reason it is sometimes called a secured loan is supported by security, the most
common is real estate property.
TYPE OF PROPERTIES
• Real Estate
• Chattel
A. Real Estate – consist of fixed and immovable properties;

known under the generic term land.
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• Classification of land
a. Commercial d. Agricultural
b. Residential e. Raw Land
c. Industrial
Commercial land is situated along the busiest

commercial sections of a town, district or city.
Examples are those land that are used by
Gaisano Malaybalay, Bukidnon State University,
Robinsons Valencia, etc.
Residential land, unlike commercial land is

situated in purely or exclusively residential
districts, subdivisions, towns or cities. Examples
are those located in Greenfields subdivision in
Casisang, Capitol Village in Barangay 9, VCDU
at Barangay San Jose and many more.
Industrial land is situated in areas that are

exclusively reserved and used for industrial
purposes. Thus, factories, plants and mills are
heavily concentrated in such places. Examples
are: Lapanday manufacturing in Aglayan, Del
Monte manufacturing in San Miguel Manolo
Fortich and others.
Agricultural lands are planted to agricultural

crops and intended for agricultural production
such as those planted to coconuts, rice, corn,
citrus, tobacco, garlic, onions, sugar, pineapple
and others. This type of land is widely scattered
over the span and breadth of the nation: Luzon,
Visayas, and Mindanao Islands.
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a. Raw land appears in its natural state

which remains idle and undeveloped. This type
of land is still a plentiful in Mindanao and mostly
are near the peripheries of mountains and forests.
 Land improvements
Improvements are placed there on such as fence,

planting fruit-bearing tress, installation of water
pumps and construction of buildings.
Based on their use, buildings may either be

residential, commercial or industrial. Such
buildings may be constructed or reinforced
concrete, semi concrete or light materials and
may consist of one storey.
B. Chattels – a type of movable property

(chattel, old French, “chatel” from latin word
capitalae)
Chattel mortgage is a conditional transfer of

rights in movable property as security for a debt
or obligation, insuring the debtor reversion of
ownership upon payment of the obligation.
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 Chattels include the following:
• Machinery and Equipment.
• Motor Vehicles
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Activity 1
Identification. Identify the following picture according to its classification.
1.
2.
3.
4.
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5.
6.
7.
8.
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NATURE AND PURPOSE OF

INSPECTION AND APPRAISAL
Inspections and appraisal of real estate property are conducted by the bank through
its credit investigators and appraisers whose main tasks revolve around inspection of
property and its evaluation and appraisal where credit is requested by a prospective borrower
from the bank.
Appraisal
• Evaluate the property subject to
inspection and appraisement to arrive
at its fair market value based on
existing conditions in the locality and
general economic conditions.
• To be able to strike closest to the target
and thereby be able to assist the bank is
to establish the correct value, in cash, of
the property being offered as a
collateral security for the loan sought.
In so doing, the appraiser could prove to all

that honesty is still a virtue and that there are still people today who will not sacrifice
principles at whatever cost. He is thereby an invaluable asset and a credit to the organization
he is connected with.
Inspection.
• To ascertain the actual existence of the
property, determine its exact location, and to
look into its actual condition.
• Reveal whether the statements furnished
to the bank by the prospective borrower of funds
are in consonance with the actual conditions of
the property.
All observations noted during the

inspection should be incorporated in the appraisal report. When only an inspection is
requested, the investigator should refrain from making any appraisal of the property.
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Assessment 1
Answer the following questions. Write your answer on the space provided.
1. Why is an inspection and appraisal needed?
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2. How is COVID-19 changing appraisal?

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3. If you are the inspector, how would you handle home inspections in this trying
time of pandemic (COVID 19)?
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Rubric
No Needs
Adequate Quality Exemplary
Answer Improvement
6 points 8 points 10 points
0 points 4 points
Did not Answers are Answers are Answers are Answers are
answer partial or not accurate and complete,
the incomplete. comprehensive complete. comprehensive
question The key or ultimately Key points and accurate.
Content
points are not stated. Key are stated Key ideas are
10 pts
clear. points are not and clearly stated,
Answers not well supported supported. explained and
adequately but addressed well supported.
answered. properly.
Did not Organization Inadequate The The content is
answer and structure organization or organization well organized,
the detract from development. is mostly coherently
Organization
question the answer. The structure of clear and developed, and
10 pts
the answer is easy to easy to follow.
not easy to follow
follow
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GUIDELINES IN CONDUCTING ACTUAL APPRAISAL

• Look into the credit files to determine if there is an existing or previous report
on the title and also to ascertain whether such title is included in the bank’s list
of blacklisted titles
• The appraiser will plot the property taking special attention on its area,
location, distance from landmarks or important centers as well as identity of
surrounding properties
o Inquire or investigate from the Land Registration Commission or the
Bureau of Lands taking note if the land in question is agricultural,
commercial, industrial, residential or raw lands
o Agricultural and raw lands should always be appraised by the hectares
while commercial, industrial, and residential lands by the square
meters
o The appraiser should take note of the productivity of agricultural lands
as well as existing facilities, proximity to highways, mills, centrals,
types of crops planted, number of harvest seasons, soil analysis, etc…
o The appraiser should study the possibility of transforming raw lands
into a subdivision or agricultural lands
o Improvements on real estate are valued on the basis of their
reproduction cost minus depreciation for the number years out of
estimated economic life
Methods in appraising chattels:

• Market Value Approach.
Entails the gathering of current sales prices or market values of the chattel being
appraised.
• Cost approach.
The cost of the chattel is used as it is nearest the objective value.
General approaches used in estimating the value of properties:

• Cost Approach
• Income Approach
• Market Data Approach
Cost approach.
The method is based on the principle that no prudent
purchaser will pay more than what it will cost him to acquire an
equally desirable substitute site, and to build a similar
improvement of equal desirability and utility.
Income approach.
The method is based on the principle that value tends to be
set by the present worth of the rights to future net benefits that may
be derived from ownership.
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Market Data Approach.

The method is based on the principle that no property is
worth more at a given date than the amount of money necessary
to purchase a similar property of like kind with equal utility and
desirability. It essential in almost every appraisal of real estate,
especially when market value is sought.
 Factors affecting land valuation

• Size
o Residential lot should not be lower than 200 sq.m but 1000 sq. m would be
most ideal
o Commercial lot 300 sq. m
o Agricultural lot minimum of 1 hectare
• Location
o Proximity to the main thoroughfare and its immediate accessibility to all
types of facilities (transportation, public market, church, government
centers, presence of electricity, etc…)
o Possibility of conversion from residential to commercial district
 Appraisal of chattels
• Motor vehicles. Entails road testing in both good and bad road
• Heavy equipment. Procedures and techniques in appraising motor vehicles
can also be applicable in the appraisement of machineries and equipment with
emphasis on the following
o Type/model
o Identity (brand of equipment, motor number/chassis number, serial
number, horsepower)
o documents
Sales invoice. To check the legal owner of the equipment and from whom
the equipment is bought and whether it is brand new, second hand or
fabricated
o Letter of credit/consular invoice. Shows when the equipment was
purchased and from whom.
o Deed of assignment. Equipment is assigned to third parties may also be
offered as collateral
• Condition. Refers to the performance of the equipment when put into use
• Usage. Not determine the actual condition of the machine but also its use
• Valuation. It may be based on whether it has firsthand value or second value
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Assessment 2
Instructions: Fill in the following forms. Use land title and Tax declaration.
Name of
: Score :
Student
Section Code : Date :
Name of
:
Borrower
Address of the
:
Borrower
Title No. :
Issued by :
Date of Issue :
Registered
:
Owner
Address :
Land Area :
Land Location :
Tax
Declaration :
No.
Area Market Assessment Assessed

Classification Area Actual Use
Type Value Level Value
Subtotal
Total Markey Total Assessed

Value: Value
Summary of Valuation
Appraised value: Agricultural 200,000.00 / hectare

Residential: P1, 500.00 / square meter
COLLATERAL TYPE APPRAISED VALUE LOAN VALUE
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TOTAL SAY:
NOTES TO THE REPORTS:
Prepared by: _________________________ Reviewed by: ________________________
_____________________________________ _____________________________________
Appraiser Loan Officer
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Reflection:
What are your insights on the lessons?
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MODULE 4
Course Outcome:
1. Create credit and collection policy.
Learning Outcomes
16. Examine the collection process/ procedures of various Financial Intermediaries
17. Describe the qualities of a good collector
18. Create a credit and collection policy
UNIT I: FORMULATING CREDIT AND COLLECTION

POLICY
Pre-Assessment
Let’s begin!
Instruction: Based from the previous lessons, create a Concept Map on Credit and Collection,
then discuss.
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Rubrics for Concept Map
Exemplary Exceeds Standard Adequately Meets Below Standard

Standard
10points 8points 4points
6points
- Well organized - Thoughtfully - Somewhat - Choppy and

organized organized confusing
- Logical format
- Easy to follow most - Somewhat - Contains a
- Contains main concepts of the time incoherent limited number of
concepts
Organization
- All key words and concepts - Contains most of the - Contains only a few
10points
necessary to promote an main concepts of the main concepts - Many key words
overview of the unit are used and concepts from
give added meaning. - Most key words and - Many key words the unit are missing
concepts from covered and concepts from the
in a meaningful way unit are covered and
and are thoughtfully are somewhat
organized organized.
-Shows an understanding of - Makes some mistakes - Makes many - Shows no

the topic’s concepts and in terminology or mistakes in understanding of
Content, Concept and
principles and uses shows a few terminology and the topic’s concepts
appropriate terminology and misunderstandings of shows a lack of and principles.
Terminology
10points
notations concepts understanding of

many concepts. - Many
-No misconceptions/ errors - Few misconceptions misconceptions are
evident. are evident. - Some evident.
misconceptions are
evident.
-All words are accurately -All words are -Most words -Some words
Connections and knowledge of the relationships among
connected. accurately connected. accurately connected. accurately

connected.
- Connections indicate - Connections are clear - Connections are
superior and logical. somewhat clear and -Connections aren’t
organization/understanding convey some clear, they convey
and enhance meaning. - They connect meaning. little meaning and
concepts to promote do not promote
- Arrows easily connect clarity and convey -Makes some clarity.
concepts.
10points
concepts in an informative meaning. incorrect connections.

manner. -Fails to use any
- Identifies important appropriate
- Identifies all the important concepts but makes concepts or
concepts and shows an some incorrect appropriate.
understanding of the connections.
relationships among them.
- Some meaningful
- Meaningful and original connections made
insights demonstrated.
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Introduction
credit collections policy is a document that includes “clear,
written guidelines that set the terms and conditions for
supplying goods on credit, customer qualification criteria,
procedure for making collections, and steps to be taken in case of customer delinquency”.
In fewer words, it is a guide offering an organized and repeatable philosophy
on selling on the rules, regulations and procedures to manage daily operations. The goal for
a credit collections plan is to clearly define these elements so that sales and collections
employees conform to documented steps and procedures designed to optimize your
resources, reduce credit risk, and improve overall cash flow.
Along with cash and inventory, accounts receivable is one of the most
important short-term assets a company has. The more predictably and effectively you can
convert your A/R, the healthier your cash flow will be. One of the most important factors in
effectively collecting the money owed to you is through consistency. By having a formalized
plan that your employees follow and by documenting all steps and communications along the
way, you’re team will be much more consistent, effective, and efficient in collecting
outstanding A/R.
Objectives of Establishing Credit Policies
A credit and collections policy ensures that every collector is making the same
decisions when it comes to managing accounts. If one collector is allowing customers to go
further past due than another, your accounts receivable department will suffer. If difficult
accounts aren’t being escalated to a credit manager, you have no transparency into why you
aren’t collecting on all your invoices. A credit and collections policy keeps everyone on the
same page, which is vital to an accounts receivable department working at top performance.
The following are the objectives of establishing Credit Policies:
• To maximize sales.
• To minimize costs and bad debt losses.
• To attain profit or income objectives.
• For control/incentive.
Factors to Consider in Formulating Credit and Collection Policies
A well written and comprehensive credit collection policy will ensure continuity in
the department in the event that key personnel leave the credit department. It will help make
sure all customers are treated fairly. It also ensures consistent credit decisions are being made.
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It can be used as a training tool for new sales associates and the credit and collections team.
And can also be used to ensure consistency of procedure and execution between the credit
department, sales, and management. Also in formulating credit collection policy, the
following must be considered:
 Capital
• Up to what extent can the capital of a company service or support the
receivables?
 Competition
• Up to what extent or period does the players in the market give to the
customers?
 Product or service
• Does your product or service lead in its market? Give you sufficient market
leverage against your competitors?
 Kinds of customers or target market
• The class of customers or the market for your product or service influence the
collection policies you will adopt and endorse.
Planning and Preparation of Credit Policies
In planning and preparation of credit and collection policies, it is essential that
management has to review where in the specific framework is needed to adjust or reiterated.
To keep good and sound financial returns, the planning process should be meticulously
understood. Thus,
 The effective credit man should view his responsibility from the broader perspective
of the key objectives of the company.
 The concept of sound financial management incorporates the broad aspects of credit
management.
 The credit man cannot “insulate” himself from the problems of marketing and sales.
 The credit man who has direct contact with the market must consider a PR sales.
Keeping Your Credit Collections Policy Up To Date
Once you’ve developed your collections policy, it is important to update it regularly
and make sure it is still relevant and effective. It is recommended that this be done once every
year, but a recent survey from Credit Today revealed that nearly 50% of companies are
reviewing their policy far less frequently. Some of the major points from the study include:
 19% said they review and adjust their policy every 2 years.
 13% said they review and adjust their policy every 3 years.
 15% reported they only review and adjust their policy when they need to.
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 12% said “other” which really makes you wonder the last update took place.
SMB businesses are by far the worst offenders of neglect when it comes to their
collections policy, and these are the companies who should be the most invested in
formulating an A/R strategy that brings in the cash flow they need to grow their businesses.
Value of a Credit and Collections Policy

If you don't have a credit and collections policy, or if you haven’t reviewed your policy
in a while, it’s time to get started. Effectively managing accounts receivable is about ensuring
consistency in your credit and collection processes. The secret to this consistency is designing
and actively implementing a credit and collection policy. Properly constructed and applied,
this policy has the power to breathe new life into your entire credit-to-cash process. An old
policy, however, that hasn’t been reviewed under the current conditions may be doing your
company more harm than good.
Credit Business is Good Business

 Credit customers ordinarily do most of their trading with the store where they have
an account.
 Credit customers are not as price-conscious as cash customers.
 Credit customers can be sold more than cash customers. It is so easy to say “charge it.”
 Credit customers (if selected well) are among the best people town, and have more
money to spend.
 Credit business is not so competitive from a price viewpoint and stores don’t need so
many special and price-cutting events, but advertise merchandise, service and quality
instead.
 Credit customers stay with a store for a longer period of time, for years, if they are
treated well.
 Credit customers all have an ascertainable credit limit, and if kept within it, their
accounts are practically as “good as gold.”
 Credit customers who fail to pay will be billed a small percentage of the total good
business produced as outlined above, that the merchant could lose more than that
amount and still do a profitable credit business.
Qualities of a Good Collector

We all want solid, stable collection agents. One way to ensure your success is by hiring
the type of people that are suited to this type of work. Although we have a stereotype in our
minds about collectors—that they are annoying, hard-nosed, ruthless, heartless, and overall
scrooge-type individuals—these are not the traits that make a collector successful.
When you think about it, collectors are masters of critical thinking and fixing bad or
uncomfortable situations. They must have the traits of a salesperson, customer service
representative, financial strategist, and so much more.
If you become a provider of outsourced collection services, you should know a thing
or two about hiring collectors. To help you get the right people on your collections team, here
is a list of the top eight characteristics of successful collection agents.
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The Top 8 Characteristics of Successful Collection Agents
Here are the most characteristics of a successful collector:

Great Listener
• This holds true for most successful people. Listening in collections helps
identify specific reasons for delinquency and will help your agents craft more
debtor-specific solutions to resolve delinquency.
Understands How to Overcome Objections
• When debtors are delinquent it is only human for them to have a ton of excuses.
The successful collector works to overcome the debtor’s objections by utilizing
specific and directive rebuttals.
Gets past the Gatekeeper
• Unfortunately, some debtors use others within their homes to screen calls. A
great collector reads these situations and works to get to the bill paying
decision maker.
Closes the Deal
• Successful collectors know that they must repeat the arrangement with the
debtor. An even better solution is for the collector to get the debtor to repeat
the arrangements. This makes it more tangible to them.
Comfortable Communicator
• One thing is for sure, successful collectors aren’t afraid to ask for money and
information necessary to remain in contact with the debtor. Good collectors
also know that they have to sometimes tolerate debtors who are frustrated with
their situation and take it out on the collector. The good ones know how to let
these things go.
Creative Problem Solver
• Great collectors find ways to be creative problem solvers. Through
recommendations for alternative money sources, breaking up payments into
bite size pieces or the offer of a program that will help the debtor get on their
feet. Thinking on their feet and being creative is definitely the mark of a great
collector.
Balances Empathy with Collections
• Most debtors who fall behind have had an event of some kind that has caused
them to be delinquent. Many of these events can be quite traumatic, i.e.,
divorce, death, job loss, etc. Successful collectors know how to empathize with
the debtor but also keep them focused on the peace of mind that they will enjoy
once they have resolved their delinquency.
Competitive
• Successful collectors are very competitive. They do not like to lose so they work
diligently to collect more than their peers, overcome the objections of the
debtor and simply find ways to be successful in a difficult situation.
A Sample Credit and Collection Policy
ABOUT DUN & BRADSTREET Dun & Bradstreet (NYSE: DNB) grows the most valuable
relationships in business. By uncovering truth and meaning from data, we connect our customers with
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the prospects, suppliers, clients and partners that matter most, and have since 1841. Nearly ninety
percent of the Fortune 500, and companies of every size around the world, rely on our data, insights
and analytics. For more about Dun & Bradstreet, visit DNB.com. Twitter: @DnBUS © Dun &
Bradstreet, Inc. 2019. All rights reserved. (CREATIVEUX-1273 3/19).
A company’s credit policy can vary in length, from a couple of pages to hundreds of pages.
Below is an example of a sample business credit policy that can be adapted to fit the needs of
any company. Refer to How To Write a Business Credit Policy for a more in-depth look at
what goes into a business credit policy.
 MISSION
• The credit department defines the requirements for establishing trade credit
for new customers and maintaining credit lines and limits for active accounts
and returning customers with appropriate payment terms. The credit
department also strives to offer optional payment methods to facilitate sales to
customers with sub-optimal credit histories.
 GOALS
• Each year, the credit department works with executive management to
establish new goals for the coming year. These goals are based on many factors
– including the company’s credit policy, sales and financial requirements,
competition, our desire to move into new markets, and the condition of the
domestic and global economy. The credit department’s main goal is to
maintain a Days Sales Outstanding (DSO) of 60 days or less, however, that is
dependent upon programs established in conjunction with the sales
department. Receivables should remain at least 75% in the current category
and less than 5% in the over 60 days category, with bad debt write offs not to
exceed .5% of annual sales. All past due customers should be contacted when
invoices are 15 days past due. All customer credit lines should also be reviewed
every two years; however, all customer credit lines exceeding x amount shall
be reviewed semi-annually. Any order flagged will not be shipped until the
order is reviewed by the credit department.
 ROLES AND RESPONSIBILITIES

• VP Credit (Leader) – The Credit Leader has overall credit and collections
responsibility for the credit department. Employees in these roles have
authority to approve credit lines up to x amount. Anything exceeding this
amount needs approval from the Finance Director.
• Credit Manager – The Credit Managers are responsible for managing the credit
evaluation, review, and approval process, as well as managing overall risk to
the portfolio. Only credit managers and leaders are authorized to issue
communications with customers concerning credit-related issues.
• Accounts Receivable – This position/team reports to the Credit Manager(s)
and is responsible for daily accounts receivable activity, including invoicing
and cash posting.
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• Collections Manager – This position/team oversees collections and works

with contracted collections agencies.
 CREDIT EVALUATION POLICY

• The credit department establishes and maintains credit lines and payment
terms for all new and existing customers. Credit is extended to customers who
can demonstrate their ability to repay a debt. Creditworthiness is determined
via third-party credit information from Dun & Bradstreet, trade references, and
the customer’s financial information (when required).
• Our company uses credit scorecards to determine creditworthiness and assign
credit limits. The credit department evaluates the scorecard result alongside
other information provided in the online credit application and will determine
if the customer has the ability and willingness to pay at the required level. In
the absence of any red flags, such as bankruptcy or a documented case of fraud,
appropriate credit limits will be set
 CREDIT REVIEW POLICY

• For existing customers, the credit department reviews credit limits as needed.
All limits may be subject to change based on changes in customer
creditworthiness. Individual orders are referred to the credit department when
an account is over their credit limit, and/or the customer is past due and every
attempt has been made to seek payment. If satisfactory arrangements can’t be
made, the account is placed on a credit hold and the order will be held or
cancelled.
 TERMS OF SALE POLICY

• Terms of sale are determined based on current sales programs and promotions.
The credit department works closely with sales to institute and modify
appropriate terms that maximize sales outcomes. Advance payment discounts
may be used to close new business, if needed. Standard payment terms are net
30; net 45 for sales over x amount, or four equal quarterly equal payments due
on days 1, 90, 180, and 270.
• Terms for orders already shipped cannot be altered or modified without
approval from the credit department. Any changes from standard payment
terms requires a variance request form. Variances are the rare exception, as
non-standard terms have a negative impact on cash flow and DSO; they also
increase the cost of carrying the accounts receivable.
 CREDIT CARD POLICY

• Our company accepts credit cards as a method of payment for all customer
purchases and open cash invoice customers who want to pay the remaining
balance by credit card. American Express, Discover, MasterCard, Visa,
corporate cards, purchasing cards and debit cards are accepted.
• Credit cards can be charged for any monetary amount – it’s not restricted to
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sales and/or orders under or over a certain amount, nor limited to customers
with certain payment terms. Customers paying by credit card will not incur
any additional fees, such as merchant fees, nor will they receive a discount.
When a charge is disputed by the customer, our company policy is to
individually review and then issue a chargeback or refuse the refund if the
dispute is found to be invalid. Our company currently does not use mobile
payment systems or contactless payment systems such as NFC for credit card
purchases.
 DELINQUENT ACCOUNTS POLICY

• This policy establishes the procedures to be followed should an account have
an open receivables balance more than 90 days past due. In congruence with
the D&B Paydex, at that time, it’s labeled as “severely delinquent.” The credit
team alerts the sales team to the outstanding balance, and the credit team will
send a letter marked Final Notice to the customer. The account is placed on a
credit hold; barring future orders from being processed or shipped. The sales
and credit team will work with the customer to resolve the issue. If the
outstanding balance is not resolved with payment, the revenue is cancelled,
and the account now must be treated in adherence with the company’s Bad
Debt Policy.
 BAD DEBT/COLLECTIONS POLICY

• When a severely delinquent account (91+ days past due) is not resolved with a
good faith effort of payment, the expense may be written off to bad debt. Our
company’s definition of bad debt is an uncollectible balance owed from a
customer experiencing financial hardship such as bankruptcy. Non-paying
accounts can be written off to bad debt only after the customer has gone out of
business, has filed for bankruptcy, or has been placed for collections and
payment has not been secured after six months (180 days). Financial hardship
can include, but is not limited to: a company that shows a D&B Delinquency
Score of less than 20, a D&B Paydex of less than 20, and a D&B Failure Score of
less than 20 in D&B Credit. If every attempt at collection fails, otherwise
outstanding balances are turned over to our company’s collections agency (a
third party) if approved by both the Finance Director and the Sales Director.
 MERGERS & ACQUISITIONS POLICY

• When one customer buys another customer’s business, the acquired business
is transferred to the account of the acquiring or surviving entity. The surviving
entity’s Dun & Bradstreet D-U-N-S Number is established as the master. It is
the responsibility of the acquired business’s sales and credit representative to
ensure the acquired account is in good standing. Issues such as bad debt,
outstanding balances, purchase orders, etc. must be completed prior to
transfer. These issues should be documented, and a treatment determined
and/or resolved during planning between the two teams.
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 TAX EXEMPTION POLICY

• The following organizations are exempt from state sales tax: federal
government, state and local government, and nonprofit/ not-for-profit
organizations. A representative from the credit and/or sales team must obtain
a properly executed exemption certificate from customers who claim this
exemption. The following are not acceptable forms of documentation for tax-
free purchases: business license, sales tax permit, sales tax registration, federal
tax certificate, or IRS letter stating tax-exempt status.
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Assessment 1: Questions for Discussion
Instruction: Answer the following questions.
1. Why there is a need to formulate credit and collection policy?

__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
_________________________________________________________________________________.
2. How does this policy mitigate debtor’s delinquency?

__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
_________________________________________________________________________________.
3. Aside from the characteristics of a good collector enumerated in the discussion,

provide at least 3 traits of a successful collector.
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
_________________________________________________________________________________.
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Rubric
Criteria Outstanding Needs Improvement Unsatisfactory
5 Points 3 Points 1 Point
Content and - Major points are - Major points are - Major points are
development stated clearly addressed not clear.
- Responses are
- Responses are
excellent, timely
inadequate or do not
and address topic.
address topic.
- Content is clear
Organization & -Structure of the - Structure of the paper - Organization and

Structure paper is clear and is not easy to follow. structure detract
easy to follow. - Transitions need from the message.
- Transitions are improvement. - Writing is
logical and disjointed and lacks
maintain the flow transition of
of thought thoughts.
throughout the
paper.
Grammar, - Rules of - Paper contains few - Paper contains

Punctuation & grammar, usage, grammatical, numerous
Spelling and punctuation punctuation and grammatical,
are followed; spelling errors. punctuation, and
spelling is correct. spelling errors.
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Assessment 2: Let’s test your knowledge!
Instruction: Read the following scenario of Sky Incorporated and provide an effective credit
and collection policy to mitigate the circumstances mentioned.
Sky Incorporated is a financing company providing salary and bonuses loans for both
private and public sector personnel and has been operating for almost 10 years since 2011. The
company has seen good performance for the past years not later than 2018, where several
delinquent debtors started to increase due to the shutting down of a Steel Corporation in 2017–
a big company in the area used to produce and manufacture steel. More of its clients are from
Steel Company and had been a partner of the financing already in its success since its building
up.
The past due accounts started to rise from Php500,000 in the year 2017 to Php1,000,000
in the year 2018. The collector can no longer collect from these people because of unstable
employment.
Required:
1. Provide a Mission Statement of the company.
2. Company’s goals and objectives
3. Formulate a credit and collection policy on past due accounts.
4. Describe the special features of your formulated policies.
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Rubric
Outstanding Needs Improvement Unsatisfactory

Criteria
5 Points 3 Points 1 Point
Focus/Clarity -The paper is -The paper addressed -The paper did not
clearly addressed in a sufficient manner. addressed and
in a highly Clarity is sufficient. No unclear or
articulate manner more than one unfocused manner.
comment is not directly
related to the
question(s).
Organization -Constructed in an -Adequately organized - Organization

organized, concise, although paragraphs detract from the
logical manner. could have been better message.
Transition constructed or - Writing is
sentences between developed. May exhibit disjointed
paragraphs are one of the following
used. Essay problems: problems
consists of more with flow of sentences
than one within paragraph, use
paragraph. of transition sentences
Paragraphs build between paragraphs,
on and support the paragraph breaks may
thesis statement. not correspond to shifts
in topic.
Content -Answered with -Depth of thought is -Content lack depth

superior depth of adequate although of thought.
reasoning and could have been further
thought. developed.
Grammar -Free from -More than two errors -Significant Number

grammatical and in spelling or grammar. of errors in spelling
spelling errors. or grammar.
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References
Apolo, J., (2003) Credit and Collection Management in the Philippine Setting. Chapter1-Pages 5,
Chapter 2-Pages 9-13, Chapter 3- Pages 14-19
De Leon, H. (2016). Comments and Cases on Credit Transactions. Pages 1-7
Koulafetis, P. (2017) Modern Credit Risk Management. Chapter 1-Pages 3-9, 10-20,
GREGORIOU, G., HOPPE, C. (2009). The Handbook of Credit Portfolio Management. E-book.
Pages 101-120
Roles of the BSP in Payment and Settlement Systems. Retrieved from

http://www.bsp.gov.ph/payments/payment_roles.asp
A complete guide to writing a reflective essay

https://www.oxbridgeessays.com/blog/complete-guide-to-writing-a-reflective-essay/
Apolo, J., (2003) Credit and Collection Management in the Philippine Setting. Chapter 7-Page 193
Koulafetis, P. (2017) Modern Credit Risk Management. Chapter 1-Pages 3-9, 10-20
Manual of Regulations for Banks

https://morb.bsp.gov.ph/
Sections: 001-003
De Leon, H. (2016). Comments and Cases on Credit Transactions. Pages 8-15
A complete guide to writing a comparative matrix

https://www.crayon.co/blog/competitive-matrix-examples
Apolo, J. (2003). Credit and Collection Management in the Philippine Setting. Part II Chapter 6,
Pages 73-84
C2C Resources. (2015) Credit and Collection Handbook. Pages 5-24. Retrieved from
http://c2cresourcesblog.com/wp-content/uploads/2012/03/Credit-and-Collection-Handbook-
1.pdf
De Leon, H. (2016). Comments and Cases on Credit Transactions. Pages 473-483, 608-611
Hatch, S. (2019). Three Appraisal Approaches to Value. Retrieved from

https://www.datamasterusa.com/three-appraisal-approaches-to-value/
Apolo, J. (2003). Credit and Collection Management in the Philippine Setting. Part IV Chapter 4,
Pages 151-153.
Debt Recoveries Australia. (2017) Characteristics of A Great Debt Collector. Retrieved from
https://debtrecoveries.com.au/characteristics-of-a-great-debt-collector/
90 | P a g e
Hilton-Baird, A. (2017). Your Essential Credit Management Handbook. Page 9. Retrieved from
https://www.hiltonbairdcollections.co.uk/wp-content/uploads/2017/03/Credit-
Management-Handbook.pdf
Roles of the BSP in Payment and Settlement Systems. Retrieved from

http://www.bsp.gov.ph/payments/payment_roles.asp
The Kaplan Group B2B Collection Experts (2014). How To Make Receivables Harder To
Collect. Version 1. Pages 1-17. Retrieved from https://www.kaplancollectionagency.com/
how-to-make-receivables-harder-to-collect/
How to create credit and collection policies: http://c2cresourcesblog.com/wp-

content/uploads/2012/03/Credit-and-Collection-Handbook-1.pdf
91 | P a g e

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PREFACE

This module is designed to introduce to financial management students the various

SHAHANI JANE J. CABANTING

MODULE I: THE EMERGENCE AND CHALLENGE OF THE CREDIT ECONOMY

The Emergence and Challenge of the Credit Economy 1

History and Foundations of Credit 8

Classes and Kinds of Credit and Its Limitation 14

MODULE 2: SOURCES OF CREDIT

Other Sources of Credit 38

Advantages and Disadvantages of Credit 42

MODULE 3: INSPECTION AND APPRAISAL

Nature and Purpose of Inspection and Appraisal 54

Guidelines in Conducting Actual Appraisal 57

MODULE 4: FORMULATING CREDIT AND COLLECTION POLICY

Formulating Credit and Collection Policy 75

- Exhibit mastery on the foundations of credit and

You will be able to…

Learning - Explain the emergence and challenges of the Credit Economy.

UNIT 1: THE EMERGENCE AND CHALLENGE OF THE

Transition from Barter Economy to Money Economy

The early stage of human history was marked

• When primitive society gave way to recognition of private property in any

• The practice of exchanging gifts among individuals signified equality

• Barter became inefficient when economic good being offered in exchange

• A characteristic of exchange through the use of barter, brought about the

The Need for Money

In the beginning, the use of

Money is responsible for

In due time, important modifications appeared in the history of tough governing

According the Great Philosophers…

Adam Smith, in his book entitled

Aristotle said: “Money is barren. It does

The Growing Need and Demand for Money

Activity 1: How far have you learned on Credit

Credit is good when…

3 Things not good about Credit….

UNIT 2: HISTORY AND FOUNDATIONS OF CREDIT

One of the unique features of the

The word credit comes from the

The emergence of credit might be

Pre-Assessment 2: We need a Label! The Credit Cycle

Other Meanings of Credit

The Cost of Using Credit

Impact of Credit upon the Creditor and Debtor

Assessment 1: Reflection Paper!

Assignment 1: Search for me!

Research about the Cs of Credit with

UNIT 3: CLASSES AND KINDS OF CREDIT AND ITS

Pre-Assessment 3: Crisscross Bee-Hive! - The 6 C’s

The 6 C’s of credit represents the measures to qualify an individual to be

1. This is something of value, debtor’s assets as pledge.

1. This is the ability to obtain a thing of value in exchange of a promise to pay a

Kinds of Consumer Credit

• Advantages of Charge Accounts

• Disadvantages of Charge Account

• The Use of Credit Cards

Points to Consider on installment buying:

Precautions in Buying on Installment

Charge Account and Installment Credit, Compared

 Revolving Charge Accounts

Economics of Consumer Credit

Sale of Goods on Credit to the Poor

By its very nature, mercantile credit represents an advance to the dealer to be

As a general practice, this type of credit is of relatively short duration. If the