CREDIT AND COLLECTION

Finman 6
 CLASSES AND KINDS OF CREDIT

The classes and kinds of credit according to its purpose are:

a. Commercial credit

Includes the promise to pay off businessmen for the

funds they borrowed in the purchase of goods for
productive or profitable ventures.
These are merchants, distributors and manufacturers.
 CLASSES AND KINDS OF CREDIT

The classes and kinds of credit according to

its purpose are:
b. Agricultural Credit

Includes the promise to pay off farmers and

farm organization for the funds and farm
organization for the funds they borrowed in
the acquisition of farm inputs.
 CLASSES AND KINDS OF CREDIT

c. Investment Credit

Includes the promise to pay off individuals or

business firms for the loans they obtained in
buying capital goods.
This is also called “industrial credit”.
 CLASSES AND KINDS OF CREDIT

d. Consumer Credit

All obligations to pay off people for the

money they borrowed for consumption
purposes.
 CLASSES AND KINDS OF CREDIT

e. Speculative Credit

Used for dealing in securities or goods

with the intention of making a profit
through favorable price changes.
 CLASSES AND KINDS OF CREDIT

f. Export Credit

Involved in all sorts of transactions for which

cash is not paid on or before shipment of
goods out of the country.
 CLASSES AND KINDS OF CREDIT

g. Industrial Credit

Is intended for financing the needs of

industries like logging, fishing, manufacturing,
and others, and which involves big amounts of
money.
 CLASSES AND KINDS OF CREDIT

h. Real Estate Credit

When credit is secured purposely for

construction, acquisition, expansion or
improvement of real estate properties, it is
termed as real estate credit.
Classifications of Credit

1 ACCORDING TO TYPE OF USER

a) Consumer credit
b) Convenient form of payment
c) Aids in financial emergencies
d) Buying durables on installment
 According to Type of User

a Consumer credit

This is a credit used by individuals to help finance or refinance the

purchase of commodities for personal consumption.

This is different from business credit in terms of the borrower’s

purpose, that is, for personal or household use.
 According to Type of User

b Charge accounts

Are for non-durables, payable, within 2 months or 60-day term, in

four payments.
 According to Type of User

c Installment accounts

For durables, payable for more than six months to one or more
years.

Payment is monthly and a down payment is needed before unit on

credit is delivered.
 According to Type of User

d Revolving credit

Is a combination of charge and installment accounts.

The credit period is 90 days.

Under this plan, the debtor can avail of loan renewal after 90 days,
or within 90 days, for the paid portion, provided he had not been
delinquent in payment of the original loan.
Classifications of Credit

2 ACCORDING TO PURPOSE

a) Investment credit
b) Agricultural credit
c) Export credit
d) Real estate loan
e) Industrial credit
 According to Purpose

a Investment credit

Is extended by banks for company who intends to purchase fixed

assets – land, building equipment for business use.
 According to Purpose

b Agricultural credit

Is a loan intended for the acquisition of fertilizers, pesticides,

seedlings, transportation of agricultural products and farm
improvements.

Debtors are farm breeders and creditors are rural banks.

These loans can be on a short-term or long-term maturity.

 According to Purpose

c Export credit

Used of “letter of credit” as a tool for financing international trade.

This letter of credit of LC is issued by the importer’s bank, it
guarantees payment to the exporter up to some specified amount
of money.
 According to Purpose

c Export credit

In LC, the exporter is protected by substitution of the bank’s good

faith and credit for that of the importer.

2 General Types
• The import letter of credit which requires payment be made in
the importer’s currency.
• The export letter of credit which requires that it be made in the
exporter’s currency.
 According to Purpose

c Export credit

PARTIES TO LC

1) Importer
2) Importer’s bank
3) Exporter
4) Exporter’s bank
 According to Purpose

d Real Estate loan

Is intended for the purchase of house and lot, for house

construction, or improvement.
 According to Purpose

d Industrial credit

Is intended to finance industries like logging, fishing, mining,

quarrying and the like.
Classifications of Credit

3 ACCORDING TO MATURITY

1) Short-term loans – are payable within a period of one year.

2) Intermediate loans or medium-term – payable for a period of
one to five years.
3) Long-term loans – are payable for more than five years.
Classifications of Credit

4 ACCORDING TO FORMS OF CREDIT

1) Cash form of credit – borrowing cash

2) Merchandise form of credit – borrowing goods
The following can be used as collateral:
land, stocks, bonds, machines, houses, crops and
other valuable properties.
Loans, whether secured or unsecured, are risk-inherent
although the former is less risky.
Although secured loans are backed by collateral, creditors
prefer to have cash rather than a property or asset which
still needs to be converted into cash.
The following are considered private sectors of the
economy; individuals, partnerships, corporations and other
private institutions.

A public credit includes all grants of credit to government

whether national, provincial, municipal and its
instrumentalities while a
private credit refers to all grants of credit to non-
government.
 LOANS AND DISCOUNT FUNCTION

Banks do not only accept deposits

but also extend loans.
 LOANS AND DISCOUNT FUNCTION

LOANS
They are the most substantial source of
credit not only for individuals and private
businesses but also for the government.
 LOANS AND DISCOUNT FUNCTION

LOANS
The commercial banks stand ready to help our
businessmen in their need for credit.

It is important that a bank will be able to

accumulate the necessary amount to pay the
interest to their depositor.
In the case of a
commercial bank,
most of their
customers are
businessmen and
their needs for funds
are mostly short-term
in nature.
For instance,
A manufacturer sells his goods on
credit to a wholesaler and a
commercial paper evidences the
sale.
If the manufacturer is in need of
funds, he can discount the
commercial paper with the bank
and the bank in turn rediscounts
the same commercial paper with
the Central Bank to replenish its
funds.
What is REDISCOUNTING?

is a standing credit facility

provided by the BSP to help
banks meet temporary liquidity
needs by refinancing the loans
they extend to their clients.
What is REDISCOUNTING?

is one of the Bangko Sentral ng

Pilipinas' (BSP) standing credit
facility and enable banks to
liquidate and refinance loans
using securities as collaterals.
What is REDISCOUNTING?
Through the facility, the BSP also makes possible
the timely delivery of credit to all productive
sectors of the economy.

Moreover, rediscounting is one of the monetary

tools of the BSP to regulate the level of liquidity in
the financial system. The BSP’s rediscounting is
administered by the Department of Loans and
Credit.
 Types of Loans Granted by Banks

1. Demand or callable loan

This loan that does not have a definite maturity and therefore, is
subject to payment anytime the bank deems it payable.

2. Time Loan

This type of loan may be a short-term, medium-term or long-term

which payable at a specified future time.
Banks may extend loans against the general credit standing of the
borrower.
 TIME LOAN
Character Loan

Is usually short-term. For loans whose payment is

longer than one year, the bank requires collateral. –
called “Collateralized Loan or Secured loan”

Collateralized Loan

Is a loan which is a secured loan.

Foreclosure proceeding may be imposed by the court
in the even of failure to pay or default in the payment
of the obligation.
 Types of Loans Granted by Banks

Foreclosure
Is the process of enforcing the
lien on the property pledges by
selling the property in an
auction in order to recover the
money lent and all the
expenses incurred in the
process.
In tagalog = rematahin
 Types of Loans Granted by Banks

What is Lien?

is the legal right of a creditor to

sell the collateral property of a
debtor who fails to meet the
obligations of a loan contract.
Mortgage Contract

is a debt instrument, secured by the

collateral of specified real estate
property, that the borrower is obliged to
pay back with a predetermined set of
payments.
Mortgage Contract

2 Parties

The mortgagee – The mortgagor –

the bank the borrower
Credit According to the Allocation of Risk

Credit of this depends on some specific

thing, legally set aside to guarantee its
payment.
Banks require collaterals like real estate
titles to assure payments of debt.
The great majority of loans, about 66%
granted by commercial banks, are secured
loans.
Credit According to the Allocation of Risk

This is the type of credit where the debtor

assured payment without a particular asset
pledged to secure the debt.

When a consumer buys an appliance on credit

or a farmer gets a loan, say for Masagana ’99,
they obtain credit without collateral to back up.

About 34% of total loans granted by commercial

banks are on this category. Micro credit also
belongs to this category.
NATURE OF CREDIT
 NATURE OF CREDIT
Credit - Is the ability to obtain a thing of
value in exchange for a promise to
pay definite sum of money, on
demand or future determinable
time.
 NATURE OF CREDIT

Credit - This creates obligations and rights

to both debtor and creditor.
- There is the obligation of the
debtor to pay his debt and the
right of the creditor to collect
payment.
 NATURE OF CREDIT

Nature of Credit

1 It is the ability to obtain a thing of value.

Thing of value may mean cash form of credit or merchandise

form of credit.
Debtor can apply for cash credit from several sources like
banks, private individuals or other financial intermediaries.
Merchandise form of creit is non-cash form, where sources
are retail outlets and the like.
 NATURE OF CREDIT

Nature of Credit

2 A promise to pay

The debtor makes a promise to pay the creditor.

A promise to pay, to be valid should be in writing
acknowledged by both the debtor and the creditor.
 NATURE OF CREDIT

Nature of Credit

2 A promise to pay

The promise should specify the

1) Principal amount
2) Interest
3) Maturity date
 NATURE OF CREDIT

Nature of Credit

3 Definite sum of money

Credit involves exact amount of money loaned, or money

value for non-cash form of credit.
The contract must identify the principal value of loan and the
corresponding interest for the credit period.
 NATURE OF CREDIT

Nature of Credit

4 Payable on demand or future time

A promise by the debtor for the settlement of obligation may

involve a future date as loan maturity, or anytime the creditor
demands payment.
CHARACTERISTICS
OF CREDIT
Characteristics of Credit

1 It is a bi-partite or a two-party contract.

2 parties are involved in the agreement:

1. Debtor
2. Creditor
Characteristics of Credit

2 It is elastic.

It can be increased or decreased by the creditor.

The loan limit or elasticity depends upon the capacity of the

debtor and appraised value of his collateral.
Characteristics of Credit

3 The presence of trust and faith.

The basic element of credit is the creditor’s reliance on both

the debtor’s ability and willingness to pay his debt.

This is also the risk factor in credit, esp. when obligations

remains unpaid on the maturity date.
Characteristics of Credit

3 The presence of trust and faith.

The debtor’s ability to pay is dependent on his asset and will

to pay on time, which is the measure of his willingness to pay
the obligations.
Characteristics of Credit

4 It involves futurity.

Maturity date for settlement of obligation is a future time.

The creditor trusts on the debtor’s ability and willingness to

fulfill obligation when it falls due.
FOUNDATIONS
OF CREDIT
Foundations of Credit

1 Confidence

Creditor must trust the debtor’s personal character as a

measure of his capacity to pay.

The creditor’s confidence on the debtor’s willingness and

capacity to settle obligation is based on trust.
Foundations of Credit

2 Proper facilities

Legal facilities must exist to make the agreement valid.

These are the credit information and credit document.

Credit information includes data about the debtor as a gauge

of his paying capacity which can be gathered out of a credit
investigation.
Foundations of Credit

2 Proper facilities

Credit document is the written agreement signed by both

parties identifying principal loan, interest and maturity date or
other supporting papers to determine his credit rating such as
copy of income tax return/ withheld or employment certificate
for personal loans and financial statements for business loans.
Foundations of Credit

3 Stability of monetary standard

Purchasing power of money is considered when extending

credit. The more stable value of money, the greater is the
possibility for approving credit. Creditors may be reluctant in
parting with excess income during wide fluctuations of money
value.
Foundations of Credit

4 Government Assistance

Regulations protecting both parties are highly considered for

credit transactions.
To evaluate, debtors are given more protection since they
cannot be imprisoned for non-performance of obligation, that
is, if they are insolvent or do not have any assets or property.
In this case, the creditors take the risk.
Foundations of Credit

5 Credit risk

This is the possibility that the debtor may not fulfill his
promise for payment.
Credit risk shall be borne by the creditors.