BAFI
for industry. State owned Development
CHAPTER 5 – The Philippine Financial System
and the Debt Crisis
(this chapter examines the financial system meron
ang Philippines, considering na nagkaroon ng
foreign indebtedness and macroeconomics
difficulties dati in the 1980s)
So these are the important players in the debt story
ng Philippines:
I.FINANCIAL INSTITUTIONS AND MARKETS
Capital Market
- Capital market is not well developed in the
Ph and has an almost insignificant share of
total funds for private investment
- There were 184 companies listed on the
Manila and Makati stock exchange in 1983
but all of these have been insignificant in
the capital market
- There was a larger volumes of public
securities while the privates were only
limited and almost no secondary trading
- Lack of government support for secondary
trading in public securities also affect the
growth of the capital market
- The stunted development of security
markets in the Ph resulted in a very high
debt / equity ratios
Financial Institutions in the Loans Market
- 1985 – there were 30 commercial banks
operating in the country
- Government owned Philippine National
Bank (PNB) was the largest, holding 30%
bank asset, and the four other big banks
were foreign owned, holding 15% bank
asset
- What is unusual about Ph is that
napakaraming commercial banks but small
size of many of them, because during that
time, Central Bank allows the entry of new
banking firm having a minimal capital
requirement
- After 1965, central bank policy changed,
raise their capital requirement and
effectively denying new banking firm
applications
- Commercial Banks: for lending and
consumer finance. There are several
categories (thrift bank, savings bank, loan
associations, mortgage bank, rural bank)
- Development Banks: for longer term credit
Bank of the Philippines (DBP) was the
largest development bank, holding 14%
asset
- Funding the DBP is galing rin naman sa
utang either from Asian Development Bank
or the World Bank, or from foreign loans, or
from the deposits of the gov
- The Ph economy crisis have forced DBP to
honor many of its guarantee, resulting to
major drain in fiscal resources
- Private Development Banks: same role of
extending long term credit but are much
smaller than Development Banks
- Two social security institutions: Government
Insurance system (GSIS) – for equity
investment, and Social Security System
(SSS) – for private workers
- GSIS and SSS are important in our story,
because of them, house investments were
established to provide long term funds and
underwriting services to industry and in
effect, finance companies started to extend
credit to consumers and have been active
participants in the money market
Money Market
- In opposite of inactive capital market,
money market provided investors with
profitable opportunities for short term funds
and the money market became the major
source of finance / funds for corporations in
Ph
- Money market grow rapidly in the late 1960s
and early 1970s
- Deposit Substitutes: these are the
promissory notes, repurchase agreements,
certificates of assignment and participation
involving asstes
- Commercial banks, investment houses, and
finance companies have used the money
market as a source of funds for their
operations
Foreign Exchange Market
- 1976 – central bank encourages offshore
banking in foreign currencies within the
Philippines. The motives are: (1) the
apparent success that Singapore achieved
in offshore banking, (2) the desire to send
more foreign exchange through official
channels within the Ph and (3) to mobilize
foreign exchange resources for Ph economy
 - The assets of Offshore Banking Units
(OBUs) and Foreign Currency Deposits
Units (FCDUs) grew rapidly in the last years
of 1970s. These units were made to
borrowers within the Philippines
II. POLICY AND FINANCIAL MARKETS
Interest Rate Controls
- Interest rate controls have been in place for
loan, deposit, and rediscount rates
- The motivation in setting interest rate is to
encourage the investment and channelling
of funds to priority sectors
- As a result, substantial excess demands for
credit have been recurring feature of the
Philippines
Credit Allocation
- Credit allocation policy was approached in
three ways: (1) through priority
rediscounting windows with the central
bank, (2) through explicit requirements for
the allocation of bank funds, (3) through the
establishment of specialized financial
institutions
Financial Performance
- The ability of the financial system to
mobilize domestic savings and make them
available to investors, both over time and in
comparison to other countries of similar
income levels
- Philippine financial mobilization is
somewhat low for countries with similar
capita income levels
III. FINANCIAL MARKETS
Financial Market Liberalization
- Philippines undertook a major financial
reform that freed interest rates from
administrative control
- The reforms were the outgrowth of two
studies commissioned by the central bank:
(1) by a joint World Bank and IMF mission,
and (2) by a former official of the Mexican
central bank
The Dewey Dee Crisis and Aftermath
- First economic shock of Ph was the rise in
oil prices and real interest rates that sharply
reduced the real income of the country.
- Second shock, failures of financial
institutions and liquidity crises
- The next crisis that followed was in January
1981 Dewey Dee, a Ph-Chinese
entrepreneur disappeared from the Ph
leaving P 635M unpaid debts by his textile
company
- Dee and his company borrowed from
several Ph banks, including DBP, but had
also run up debt in money market
- The response of the gov was to undertake
reorganization plans for the largest financial
and nonfinancial corporations affected
IV. PORTFOLIO DETERIORATION OF
GOVERNMENT FINANCIAL INSTITUTIONS
- 2 major public financial institutions with
deteriorated portfolios were PNB (including
its subsidiary: NIDC) and DBP
- Weak or insolvent assets characterized the
investment portfolios of the two social
insurance institutions: GSIS and SSS
- The remaining institution was the Philippine
Export and Foreign Loan Guarantee
Corporation (PhilGuarantee), which
primarily guaranteed loans made by foreign
banks, but also extend guarantees to loans
made by Philippine institutions
CHAPTER 6 – Commercial and Industrial Loans
(this chapter deals with commercial and industrial
loans and the process of lending)
I.THE ROLE OF ASYMMETRIC INFORMATION IN
LENDING
Asymmetric Information
- Means that the borrowers have more
information about themselves than is
available to the bank. Because of it, banks
tend to charge an interest rate that reflects
the average rate of risk of all borrowers
Adverse Selection
- Means that high risk borrowers try to get
loans from banks because they are willing
to pay the average rate of interest, which is
less than they would have pay if their true
condition were known to the bank.
Moral Hazard
- Is the risk that the borrower might use the
funds to engage in higher risk activities in
expectation of earning higher returns
II. THE COMPETITIVE ENVIRONMENT
The Business of Lending
- Lending money can be profitable, but is
risky
- Lenders charge high risk borrowers a higher
interest rate than the lower risk borrowers
- Credit Risk: the risk to earnings and capital
that a borrower may not meet the terms of
the loan contract, resulting in losses to the
lender
Increasing Competition
- Economic theory tells us that the
expectation of high returns attracts
competition
- Banks were special because they had
expertise in making, monitoring, and
collecting loans, but they are not
competitive advantage, and today they are
facing competition from nonbank lenders
such as credit unions, hedge funds, and
shadow banks
Changes in Technology
- Developments in financial technology
changed how banks operate their lending
activities such as securitization of loans,
credit scoring, and electronic banking
Securitization
- Is packaging and selling unmarketable
loans to other financial institutions and
investors
Unbundling of Loans
- Growth of securitization has contributed to
the unbundling of loans. Today, the lending
process can be divided into four activities:
1. Originating loans
2. Packaging loans for sale to others
3. Servicing loan portfolios
4. Investing in loan-backed credit instruments
Credit Scoring
- Is the use of statistical models to determine
the likelihood that a borrower will default on
a loan
- Nationwide Financing Services:
1. New Business Loans
2. Acquisition Financing
3. Business Lines of Credit
4. Working Capital Loans
5. Loan Restructuring
II. THE BOARD OF DIRECTORS’ WRITTEN
LOAN POLICY
The Role of Directors
- They have the ultimate responsibility for all
of the loans made by their bank because
they are the one who delegates the task of
making loans to others
- Loan Authority: who has the authority to
make loans
- Loan Portfolio: the types of loans the bank
wants to make (consumer loans, farm loans,
international loans, etc.)
Reducing Credit Risk
- Collateral is a secondary source of
repayment in the event of loan default
- Diversification means making investments
or loans to a variety of borrowers
- Documentation refers to all documents
needed to legally enforce a loan contract
and protect a bank’s interest
- Documents include promissory notes,
guarantees, financial statements, and notes
about meetings with the customers
III. SEVEN WAYS TO MAKE LOANS
Bank Solicit Loans
- Solicit loans in person, by mail, and on the
internet by offering loans and other services
they provide
Buying Loans
- Participations: where banks buy parts of
loans from other banks
- Secondary Market for Small Business
Loans: existing market for conventional
small business loans
- Commitments: an agreement between a
bank and a firm to lend funds
Customers Request Loans
- Where a customer asks for a commercial
loan because they do not know what type of
loan will meet their financial needs
Loan Brokers
loans up to the maximum amount of the
loan
Term Loan
- A singe loan for a stated period of time or a
series of loans on specified dates

- Are individuals or firms who act as agents Bridge Loan

between the borrower and the lender
- Bridge a gap in a borrower’s financing until
Overdrafts some specific event occur

- It occurs when a customer writes a check Asset-Based Lending

on uncollected funds or when there are
insufficient funds in the account to cover the
withdrawal
Refinancing
- Where you can make a new loan at the
lower rate and pay off the high rate loan
IV. COLLECTING LOANS
- Making loans is the easy part of the lending
process and collecting the loans is the hard
part.
- Two primary sources of repayment: (1) from
the borrower’s cash, and (2) from the sale of
the asset being financed
- Secondary source: from the collateral
V. PRINCIPAL LENDING ACTIVITIES
- are loans and leases
- Types of Loans: lines of credit, revolving loans,
term loans, bridge loans
- Is a form of commercial lending where the
assets of a company are used to secure the
company’s obligation to the lender
Leasing
- Lease is a contracts that enables a user to
secure the use of tangible asset over a
specified period of time by making
payments to the owner
- 2 types of leases: Operating leases (short
term) and Financial leases (long term)
VI. COLLATERAL
Characteristics of Good Collateral
- Durability
- Identification
- Marketability
- Stability of Value
- Standardization
Types of Collateral

- Permanent Assets: plant and equipment as well - Accounts Receivable

as the working capital that will be sustained over - Pledging
time - Factoring

- Temporary Assets: portion of working capital that VII. THE LENDING PROCESS
fluctuates with periodic changes in sales and
revenues Evaluating a Loan Request

Line of Credit - Character

- Capacity
- Agreement between a customer and a bank - Capital
that the bank will entertain requests from a - Collateral
customer for a loan up to a predetermined - Compliance
amount - Conditions

Revolving Loan

- Same with the line of credit. One difference

is that the bank is obligated to make the
Structuring Commercial Loan Agreements
- Type of credit
- Term of the loan
- Method and timing of repayment
- Interest rates and fees
- Collateral
- Covenants
ADDITIONAL (yung dalawang material: for your
reference keme sa gclass)
Commercial and Industrial Loan
What is a Commercial Loan?
A commercial loan is a form of credit that is
extended to support business activity.
Understanding Commercial Loan Structure
Most lenders don’t extend credit in perpetuity or
without some very specific purpose for the funds
being advanced. This is what bankers often refer to
as loan structure (or credit structure).
Types of Commercial Loans
1. Lines of Credit
An LOC (often referred to as a “revolver”) supports
the working capital cycle for firms that sell on credit
terms.
2. Term Loans
Term loans are used to acquire non-current assets,
which include things like equipment, vehicles, and
furniture.
3. Capital Leases
Capital leases – sometimes referred to as “finance
leases” – serve a similar purpose to term loans
(meaning they’re used to finance non-current,
capital assets like equipment).
4. Commercial Mortgages
Commercial mortgages are another type of term
lending but they’re used exclusively to finance (or
refinance) commercial real estate.
5. Acquisition Loans
These are used by businesses that are buying
other businesses (or other business divisions) as
opposed to physical assets like property or
equipment.
The Commercial Loan Process
 Loan origination
 Client discovery and credit
 Analysis and underwriting 
 Documentation and perfecting security
 Loan is advanced 
Debt Crisis
The origins of the 1980s Debt Crisis can be traced back to the
acute shocks to the international monetary system in the
1970s, including the collapse of the Bretton Wood system,
major oil price hikes, and substantial liberalization of
international finance.  The associated build-up of imbalances
and vulnerabilities during this period ended abruptly in the
early 1980s, and the crisis began. The crisis was caused by a
combination of factors, including high interest rates, low
commodity prices, and poor economic policies
The worst financial crisis in history is a matter of debate, but
some of the most severe financial disasters include the Great
Depression, the Economic crisis of the 1970s, and the Great
Recession of 2008. The Great Depression was triggered by the
Wall Street crash of 1929 and later exacerbated by poor
policy decisions of the U.S. government. The Economic crisis
of the 1970s was caused by a combination of factors,
including high inflation, high unemployment, and low
economic growth.  The Great Recession of 2008 was triggered
primarily by the collapse of the U.S. Housing Market
Loans
A commercial and industrial (C&I) loan is a loan made to a
business or corporation Typically, C&l loans are short-term
loans with variable interest rates backed by collateral
Commercial and industrial loans provide companies with
funds that can be used for various purposes, including
working capital or to finance capital expenditures such as
purchasing machinery
There are different types of commercial loans that businesses
can apply for depending on their needs. Some of these types
include: 
• Commercial and Industrial loans
• Loan term
• Credit loans
• Capital Lease
• Mortgages
• Acquisition