Credit and Collection

Overview

The 21-minute video lecture entitled “What is Credit_ (Credit and Collection)” provided
an overview of what “credit” is all about. The definitions of credit were discussed and the five
(5) Cs that are applied by financial institutions in assessing the creditworthiness of an individual
were enumerated. Moreover, the three (3) common types of loans were differentiated based on
their requirements. From my perspective, I do agree that for a business especially a lending
institution to be successful, it should apply the five (5) Cs namely character, capacity, capital,
collateral, and condition in evaluating its clients’ creditworthiness.

Credit as defined is a contractual agreement between the creditor and borrower that have
promised to receive and pay the amount of money in a specified amount and certain interest.
However, to be eligible to receive the amount of money from the creditor, borrowers must be
assessed to determine their eligibility as potential borrowers. Character is one of the basis in
assessing potential clients; they need to check their attitude, personality, if they have criminal
records, etc. because if they do there is also a chance that they will do the same. We also have
the capacity, to determine if they have the ability to pay, or if their generating income activities
are enough to pay for their obligations. Next, we have the capital, which determines the ability of
the client to pay in terms of his investment in his own business, the higher the amount he
invested a large amount of capital from his own pocket, the higher his level of confidence and
the higher the chance that the bank will lend him money. Then we have the collateral, this will
determine if the property or asset you put as collateral is enough to pay your loan. Last, we have
the condition, determining the external factors within the market such as government regulation,
wages, etc. are very essential to carefully examine the client and determine whether he is able to
meet his obligation. For me, these 5Cs are interrelated in a way that they need to be put into
practice together, because even if you are a good person but you have no capacity to pay the
bank will not lend you money, the same with having a large amount of capital but you have the
criminal record of committing something, still, the bank will not allow you to borrow. In this
sense, these should be properly executed together to effectively produce outcomes.

To conclude, knowing and understanding these 5Cs help me to better prepare myself for
the future if ever I want to establish a business in line with lending transactions so that I can
operate it efficiently and effectively. Moreover, I want to end this with this German proverb, “He
who is quick to borrow, is slow to pay”. I can say that this quotation is a lot more connected to
what the video is trying to imply and I was enlightened. This German proverb is eye opening to
financial institutions to be more careful in lending money to their clients because there is always
a risk specifically a credit risk as stated in the video. If you easily lend money without evaluating
your clients’ status and background there is a high possibility that they may defraud you and
worst they borrowed a large amount of money that cannot be paid back to you, which will lead to
bankruptcy.