CHAPTER 4: Other source of credit
as well as the Savings and Loan Association and others.
Individual Money Lenders
Primitive societies had no need and use for money. Their members
produced what they consumed and consumed what they produce. Later on, whatever
they could not produce, they obtained through barter. But as society became more
complex, barter as a method of exchange became impractical. Instead, the use of a
common medium of exchange found favor among its growing number. Briefly then,
the use of money is a prominent characteristic of more developed economic societies.
History records that the early use of money was for consumption. Thus,
loans that were available then were for sumptuary purposes. Lending money at
interest was frowned upon and forbidden. Expressing the sentiments of the times,
Aristotle, a leading philosopher, said that money is barren. Hence, interest ought not
to be charged on money. The demands of trade, if not to say, the oscillating forces of
capitalism, by and large, accounted for the practice of lending money at interest.
Individual money lenders in this country fall under two types: Those who
grant loans as a personal accommodation to friends and relatives termed in Pilipino
as pakikisama or to reciprocate a debt of gratitude or what is known as "utang a
loob." As such, these individuals do not charge interest for such persona)
accommodations. The other type covers those who make the lending of money a
profitable business. For this reason, being unlicensed by the government, they
generally charge and collect exorbitant or usurious rates of interest a practice aply
pictured by Shakespeare in his book entitled the "Merchant of Venice", wherein
Shylock, for failure of Antonio to pay his obligations, wanted from the latter a pound
of flesh nearest the heart.
Doubtlessly, the practice of usury in this country is deeply rooted through
the years. This has literally resulted in the bleeding to death of the hapless borrows.
So common is this practices that in the words of a member of a law-investigating body
of the government, usury is “one of the commonest crimes among our people.”
“Perhaps, it happens more often than does smuggling or even tax evasion,” he adds,
it is so widespread that it does not choose nor discriminate the places and its victims.
In fact, many times usury takes place in the homes, in the offices, in the business
establishments and even in the streets among neighbors or friends or “compadres.”
Aware of its existence, the government has adopted various measures to
minimize, if not totally root out this evil and pernicious practice made at the expense
of small retailers and consumers. This has resulted in the in the information of the
Filipino Retailers Fund many years back, and the Small Market Vendors’ Loan recently.
Other measures called for the establishment of more rural banks in the countryside,
COMMERCIAL ESTABLISHMENTS
Of significance to the continued functioning of a credit economy are
commercial establishments of rural banks in the countryside, as may be gauged by
the kind and amount of credit that they grant. To mention a few, we have retail stores,
department stores, and supermarkets.
Retail Stores
The disappearance of barter as a method of exchange transaction has made
retail stores very important. They are known to have existed prior to the time of
Christ. Retail Stores flourished in Ancient Rome, so much so, that it was described as
a "city of shops". Early shops were quite small and oftentimes were located either
inside or in front of the home of the owner, who had little, if any, help in operating
them. Indeed, it may be interesting to bring to mind that the word "shop" which
means "to buy or to inspect" was derived from scuppa meaning "room" or "booth"
Oftentimes, manufacturing was carried at the rear of the shop, such that the retailer
often served both as manufacturer and shopkeeper. As town and community life
became well established, retailing became a necessity. Manufacturers began to
specialize and provided needed outlets in the more distant towns and communities.
These retail outlets were secured through wholesalers, who purchased in large
quantities and sold them in small quantities to retail merchants.
As to the birth of retail stores in this country, nobody is sure. However, it can
only be presumed that such outlets appeared when the more pioneering individuals
bought goods from other merchants and had them assembled at a particular place
for resale to consumers within the neighborhood. And since Chinese aliens were a
dominant force in the retail trade in this country until they were eased out through
the enactment by Congress of the Nationalization Retail Law in 1954, it could likewise
be assumed that some early Chinese traders transacting business in this country
aboard sailing vessels must have decided to stay behind in the country and engaged
in this kind of trade. No wonder that Chinese shopkeepers or retailers were found
scattered all over the country, with the exception of Lemery and Taal, two towns in
Batangas where they were not welcome as merchants.
Easily the biggest source of merchandise credit is the retail store, more
popularly known as the "sari-sari" store (the Pilipino word "sari-sari meaning variety).
They cater to the everyday needs of the Filipino family whose patronage makes them
thrive and grow. Although it is quite possible that not all sari-sari stores grant
merchandise credit to their customers, however, in view of the competitive nature of
the retailing business, many of them do.
Grocery and Department Stores
More sophisticated, grocery and department stores are two examples of
retailing establishments. However, grocery stores are essentially food stores. As in
department stores, goods in grocery stores are displayed for the customers to inspect
and pick out whatever they want to buy and have them checked out through the
cashier.
Grocery stores, as well as department stores, generally carry well-known
brands of products they sell to the consumers in efforts to enlist their patronage.
Moreover, as an added inducement, the customers are given the privilege of buying
goods on credit which is generally facilitated by the use of credit cards.
While department stores first came on the American scene in the 1860s, a
decade after they appeared in Europe, they are relatively of late development in this
country. In fact, only a few of them were observed for a fairly long period of time and
the few that were in existence then were concentrated only in the big cities of the
country.
Supermarkets
The more than 10,000 miles which separate the Philippines from the United
States, where a retailing innovation took place in 1930 as well as the appearance of
planned suburban shopping centers in the late 1940s described as “suburban
revolution”, did not prevent witnessing the birth of supermarkets in the country and
the beneficial effect of their existence.
The one major benefit that supermarkets offer to shoppers is that they can
buy almost everything under a single roof. The reason is that they are like a 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. She can examine a brand
without anybody watching her, place it on her shopping basket or pushcart, return it
to the shelf, or, she can examine another brand, choose it or reject it to her heart’s
content.
While a supermarket is largely a brand-new form of retailing, its chief
features consist of assembling all kinds of goods including non-food items, clothing,
shoes, hardware, and countless others. Many goods are placed in neat packages
which make them convenient and appeal to the esthetic sense of the shoppers.
Fundamentally, a supermarket sells goods for their customers on credit who qualify
for the use of such privilege.
The increasing urbanization of many areas of the country and the presence
of transportation facilities have contributed to the mobility of shoppers. Thus, they
have been induced to make their purchases in supermarkets where they are afforded
ample parking spaces and moreover, are located away from traffic congestion that is
characteristic of stores in downtown areas. Not infrequently, customers from as far
as Bulacan and Pampanga in the north and Laguna and Batangas in the south do their
shopping in supermarkets located in San Juan, Metro Manila, Makati and other
suburban districts.
PAWNSHOP
In his book “Money and Credit in China”, Lien Shen Yang, a Harvard professor
of Chinese history has pointed out the observation that pawnshop “is the oldest
credit institution in China”. Its origin has been traced ti as early as the middle of the
Six Dynasties practiced pawnbroking with the large amount of donated wealth in their
treasures. Pledges involved not only precious metals and stones but included grains
and livestock. All that borrower had to do was bring with him something of value
which he pledged in support of the loan. Greece and Rome were familiar with its
operation countries which are credited with having laid the foundations on which
modern statutory regulation is built.
The present-day pawnshops evidently owe their origin from the Montes
Pietatis which were established by Franciscans (FRIAR minor as they invariably called
then) in Italy. The term mons referred to any form of capital accumulation and pietatis
from the Latin “pietas” meaning pious. As such, montes pietatis consisted of
charitable funds from which loans come from, which were exempted from interest
but secured by pledges. Such loans were granted to the poor.
In the Philippines, pawnbroking is one of the oldest credit institutions and
believed to have been introduced in this country by the Spanish friars when we were
under the Crown of Spain. It may be interesting to point out, in this connection, that
the oldest savings bank, the Monte de Piedad referred to in an earlier discussion, was
granted the privilege of lending money against pledges of jewelry.
Under the New Society
In accordance with Presidential Decree No. 114, otherwise known as the
Pawnshop Regulation Act, Bangko Sentral is charged with the task and responsibility
of regulating the operation of pawnshops in this country. All pawnshops, regardless
of form of organization, whether individual, partnership and corporation, are
required to register with the Department of Financial Intermediaries of the Bangko
Sentral before they are allowed to engage in actual operations, the minimum paid in
capital of which shall not be less than 100,000.00. Only Filipino citizens may establish
and own a pawnshop organized in the form of a single proprietorship upon the
effectivity of the Decree. However, in the case of a partnership, at least seventy per
cent (70%) of its capital shall be owned by Filipino citizens. In the case of a
corporation, at least seventy per cent (70%) of the voting capital stock shall be owned
by citizens of the Philippines, or if there be no capital stock, at least seventy per cent
(70%) of the members entitled to vote, shall be citizens of the Philippines.
The percentage of foreign-owned voting stock or non-citizens entitled to
vote in any domestic pawnshop existing prior to the effectivity of Presidential Decree
No. 114, if such percentage is in excess of thirty per cent (30%) of the voting stock or
members entitled to vote of the pawnshop shall not be increased thereafter beyond
thirty per cent (30%) of the voting stock, or number of members entitled to vote, of
the pawnshop.
The percentage of foreign-owned voting stocks in any pawnshop shall be
determined by the citizenship of the individual stockholders in the pawnshop.
In the case of corporations operating shares in a pawnshop, the citizenship of the
individual owners of voting stock in such corporation shall be the basis of computing
the percentage.
The amount of loans which pawnshops may grant is subject to the
agreement of the parties. However, in no instance shall the amount of the loan be
less than thirty per cent (30%) of the appraised value of the security offered for the
loan, unless the pawner manifests in writing the desire to borrow a lesser amount.
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 for such transactions. It shall be unlawful for any pawnshop to divide the pawn
offered by a pawner in order to collect greater interest and/or to require the pawner
to pay an additional charge as insurance premium for the safekeeping and
conservation of the article pawned. In addition to interest charges, pawnshops may
impose a maximum service charge of 5.00, but in no case to exceed one percent (1%)
of the principal loan.
Every pawnbroker shall, at the time of every such loan or pledge, deliver to
each person pawning or pledging any article or thing a memorandum or ticket signed
by the pawnbroker. A record of every transaction shall be kept in the books of the
pawnshop pertaining to the article subject of the pledge but not included the
description of the person pawning or pledging in the article.
Redemption and Disposition
The pawner who fails to pay his obligation on the date it falls due may. within
ninety days from the date of maturity of the obligation, redeem the pawn by paying
the principal as well as the interest corresponding to the obligation. For the purpose
of computing the interest due after maturity of the obligation, the basis shall be the
sum of the principal of the obligation and interest earned from the time the obligation
matured.
In the event the pawner fails to redeem the pawn within ninety days from
the date of maturity of the obligation in accordance with the preceding paragraph,
the pawnbroker may sell or otherwise dispose of any article taken or received by him
in pawn; Provided, however, That the pawner shall be duly notified of such sale on or
before the termination of the ninety-day period, the notice particularly stating the
date, hour, and place of sale.
Supervisory/ Regulatory Body
Before the promulgation of Presidential Decree No. 114, there was no
specific law which governed pawnshops, particularly providing definite and uniform
standards for their operation. In fact, whatever regulations that were existing then
were scattered in various existing statutes. Numerous ordinances were promulgated
by different cities and municipalities tailored to their own ideas and needs.
The recommendations of the Joint IMF-CBP Banking Survey Commission on
the Philippine Financial System with respect to the enactment of a special law
"To regulate the operation of pawnshops, and all existing laws, rules and regulation
affecting their operations to be consolidated into a law is very important. Thus. in
accordance with such recommendations, Presidential Decree No. 114 was
promulgated covering all aspects of the establishment and operation of pawnshop in
line with the declared policy of the government to place the operation of pawnshops"
on a sound and stable basis to derive the optimum advantages from them as an
additional source of credit and to prevent and mitigate practices prejudicial to public
interest.
In the discharge of its supervisory and regulatory powers, the Bangko Sentral
has issued a number of circulars designed to implement the provision of Presidential
Decree No. 114 which are being distributed among the many pawnshops operating
in this country.
INSURANCE COMPANIES
In the Philippines today, insurance is gaining national importance. Practically
unknown during the early part of the Spanish regime, life insurance was first
introduced in this country when the Sun Life Assurance Company of Canada
established a local branch in Manila in October 1898.
 The growth of the insurance business in the Philippines may be attributed,
during its early ears, to the participation of foreign insurance companies and of course
to the increase in the number of local insurance companies, Insurance is not only
limited to underwriting and protection. It also deals with investment of the funds held
by them in trust for their policyholders.
A life insurance may lend to any of its policyholders upon the security of the
value of its policy such sum as may be determined pursuant to the provision of the
policy.
Loans granted upon the security of real estate for a period longer than five
years shall be amortized in monthly, quarterly, semi-annual or annual installments.
However, no such loans shall have a maturity in excess of twenty years.
No loan by any insurance company on the security of real estate shall be
made unless the title to such real estate shall have first been registered in accordance
with the existing Land Registration Act, or shall be a titulo real duly registered, or have
been previously registered under the provisions of existing Mortgage Law.
SAVINGS AND LOAN ASSOCIATION
As the term indicates, a savings and loan association are any corporation
engaged in the business of accumulating the savings of its members or stockholders,
and using such accumulations, together with its capital in the case of a stock
corporation, for loans and/or for investment in the securities of productive
enterprises or in the securities of the government, or any of its political subdivisions,
instrumentalities or corporations.
A savings and loan association organized as a non-stock corporation shall
confine its membership to a well-defined group of persons and shall not transact
business with the general public. It shall accept deposits from, and grant loans to only
its member-depositors.
Principles Governing Credit Operations
The following principles govern credit operations of savings and loan associations.
1. Stock savings and loan associations shall provide the normal credit needs of the
consuming public and of industry, commerce, and agriculture.
2. Savings and loan association loans shall be for an amount not greater than what is
deserved so as not to impose a repayment burden on the borrower and a collection
problem to the association.
3. Repayment periods should be short. Savings and loan association should confine
business to meeting short-term credit needs which shall be repayable within and not
allowed to go beyond twelve (12) months, except real estate loans Extensions or
renewals of loans may be allowed under the following conditions:
a. For productive loans, the extension shall not exceed one-half of the
original period: Provided, That fifty per cent (50%) of the loan shall have
been paid. A second extension may be allowed. The same however shall not
exceed one-half of the period of the first extension.
b. For consumer loans, the extension shall not exceed one-half of the original
period: Provided, That fifty per cent (50%) of the loan shall have been paid
c. For loans for medical purposes, the extension may be for the same
duration as the original period: Provided, That thirty per cent (30%) of the
loan shall have been paid.
4. The size of the loan should be measured by the borrower's earning capacity
character and ability to repay the obligations, or the fair value of the property offered
as collateral. The term "fair value" shall mean fair market value of the property
offered as collateral.
GOVERNMENT FINANCING INSTITUTIONS
If the tempo of the nation's economic development is to be accelerated al a
pace considered satisfactory, it is essential for the government to provide the
necessary bases for growth. Equally important is that it must have the institutions
which will give meaning and substance to the objectives of the government and thus,
make development a reality.
The progress that this country has attained, which increases in momentum
with the passing of the years, reflects the concerted and dedicated efforts of the
government on practically every aspect of human life, such as on education, health.
housing, and a host of others.
Social Security System
The concept of social security which saw the fruition under the
administration of President Marcos has its beginnings in the Philippines as early as
1846 when many Western countries were still groping on how to cope with the social
problems of the community.
Though the principle of social security started here during the mid-Spanish
regime, it had already the undertones of a compassionate social undertaking to take
care of those who have less in life. As first conceived in this country, it had its
beginnings designed to alleviate the dire situation of government employees of the
colonial era, in time of illness and of their families in case of death. Starting as a
voluntary organization founded on October 17, 1846, by the General "Intendent"
Gervasio Geronilla, the social security program today covers not only unemployment
insurance, old-age insurance, accident and permanent disability insurance, maternity,
insurance, state relief, and labor opportunity, but affords those covered to avail other
services like salary loan, educational loan and housing loan. According to records
available, not a few businessmen have availed of its loan facilities like those granted
to small and medium-scale industries. Other types of loans also granted by the Social
Security System are known under the terms "community hospital loan" and
"investment incentives loan."
Such loans are made possible through the contributions of its members
which are employed in productive activities to earn income as part of its investment
operations.
It may not be amiss to state the fact that many houses and buildings have
been constructed and made possible through the loans granted by the Social Security
System, which makes the system also a financial institution in the broad sense of the
word.
Government Service Insurance System
Like the Social Security System, the Government Service Insurance System
was the product of need - the need to protect employees against unforeseen
contingencies in the future. But unlike the Social Security System, which affords
protection to employees of private industry, that of the Government Service
Insurance System (termed as the GSIS for short, established by virtue of the
enactment of Commonwealth Act No. 186) membership in the GSIS shall be
compulsory upon all appointive officers and employees in the executive, legislative,
and judicial branches of the government, including those whose tenure of office is
fixed or limited by the Constitution or by law; upon all regular employees of the
Philippine Tuberculosis Society and the Philippine National Red Cross, and other
employees of the government-owned or controlled corporations, upon all officers
and enlisted men of the Armed Forces of the Philippines; and upon all elective officials
receiving compensation.
In accordance with its investment operations, the GSIS shall invest such
portions of the moneys as shall not be required to meet the current payments in the
form of life annuities, death claims, or otherwise, and expenses incidental to the
carrying out of the provisions of the law which created the System in any or all of the
following ways:
1. In interest-bearing bonds or securities of the Government of the Philippines, or
bonds or securities of said countries for the payment of the interest and principal of
which the faith and credit of said countries are pledged.
2. In interest-bearing deposits in any bank doing business in the Philippines, having
an unimpaired paid-up capital and surplus equivalent to one million five hundred
thousand pesos or over: Provided, That said bank shall first have been designated as
a depository for this purpose by the President of the Philippines, upon the
recommendation of the Secretary of Finance.
3. In first liens upon improved or unencumbered real estate situated in any chartered
city, municipality or municipal district title to which is duly registered under Act
Numbered Four hundred and ninety-six, as amended: Provided, That no loan shall be
made upon the security of real estate in excess of eighty per centum of the fair
appraised value thereof to be determined in such manner as the Board shall
prescribe: And provided, further, That no more than 70% of the total assets shall be
invested in loans on the security of real estate. Loans granted under this subsection
shall be paid within a period of not exceeding fifteen years unless renewed for
another period of not exceeding fifteen years under such terms and conditions as the
Board may prescribe.
4. In loans to provincial, city and municipal governments for the construction or
acquisition of permanent public improvements, subject to the following conditions:
That loans under this subsection shall be on self-liquidating projects only and shall be
repaid in installments within such period as may be fixed by the Board not exceeding
ten years. In case of default, the Commissioner of Internal Revenue and the Provincial
Treasurer are authorized and directed to withhold from the revenues of the
municipality, city or province concerned such amounts as may be needed to pay the
installments and interest due, and remit the same to the Board. No loan or the
interest thereon shall be remitted under any consideration, and that no loan shall be
granted unless the municipality, city or province concerned shall have first
demonstrated its capacity to pay the same within the time required for such payment.
Loans to local governments as provided herein may be renewed in the
discretion of the Board for a period not exceeding ten years, and in case of renewal,
the amount due at the time of such renewal shall be paid in not more than ten annual
installments under the same conditions specified in the preceding paragraph:
Provided, that such loans shall be granted only under the conditions to be prescribed
by the Board.
5. In loans or advances to the Government of the Philippines or its political
subdivisions for the construction of permanent toll bridges or other permanent self-
liquidating projects in accordance with the conditions prescribed in the law in such
cases made and provided.
6. In loans to members on the security of their policies, However, no loans on the
security of a membership policy shall be granted in excess of 50% of its cash value,
except for the purpose of continuing it in force, whenever necessary.
The Development Bank of the Philippines. In order to provide facilities for
intermediate and long-term credit, Republic Act No. 2081 which actually was an
amendment of Republic Act No. 85 provided for the conversion of the Rehabilitation
Finance Corporation into the Development Bank of the Philippines and authorizing
said Bank to aid in the establishment of provincial and city private development
banks.
In the exercise of its corporate powers, the Development Bank of the Philippines
known as DBP, for short, is authorized
a. To grant loans for home building or home financing projects and for rehabilitation,
the establishment or development of any agricultural and/or industrial enterprise,
including public utilities, mining, livestock industry and fishing, whether offshore or
inland;
b. To purchase preferred redeemable shares of stock, securities other than shares of
stock, and obligations of, and to grant loans to, any agricultural and industrial
enterprises mentioned in paragraph (a) to finance their fixed and operating capital
requirements. All purchases of preferred redeemable shares, securities and
obligations and all loans shall be of such sound value or so secured, as reasonably to
assure retirement of such shares, securities, or obligations or repayment of the loan;
and shall be granted only under such terms, conditions and restrictions as the bank
may determine;
c. To grant loans to provincial, city, and municipal government for the rehabilitation,
construction, or reconstruction of public markets, irrigation, waterworks, toll bridges,
slaughterhouses, for cadastral surveys and other self-acquisition and machineries to
agencies and corporations owned and controlled by the Government of the Republic
of the Philippines for the production and distribution of electrical power, for the
purchase and subdivision of rural and urban estates, for housing projects, for
irrigation and water works system, and for other essential industrial and agricultural
enterprises;
d. To grant loans to cooperative associations to facilitate production, the marketing of
crops, and the acquisition of essential commodities; and
e. To grant loans to individual employees in a government-owned or controlled
corporation or private corporation engaged in the development and/or private
corporation engaged in the development and/or expansion of agriculture or industry,
for the purpose of buying shares of stock directly from such corporation for the
purpose of enabling them to participate in the ownership and the share in the profits
thereof. However, the amortization of such loans shall not exceed 10% of the total
annual salary and wages of the borrower. Such loans shall be payable in full within a
period of not exceeding ten years. If the borrower should sell the share of stock
acquired by him from the proceeds of such loans, the corporation that issued said
share of stock shall have preference to purchase the same.
INTERNATIONAL ORGANIZATIONS
As indicated earlier, one particular class of credit is known as public credit
that is, one government borrowing from another, as for instance, the municipal
government obtaining loans from the national government or from the Bangko
Sentral to finance the construction of a public market or school building. Whenever
revenues of the national government are far from adequate to meet its needs insofar
as prosecuting its projects with vigor and make them a reality, the national
government, at times, either float bonds or borrow from external sources. Ar example
is when the Philippine Government sought and obtained loans from the World Bank
for its many economic development projects, like the harnessing of the Ambuklao
Dam for the generation of power, the construction of Pantabangan Dam in Nueva
Ecija, and others.
Mention may also be made briefly of the assistance extended by the
International Monetary Fund designed to promote exchange stability and assist in the
establishment of multilateral system of payments in respect to current transactions,
among others; the loans extended also by the Asian Development Bank intended
purposely to generate growth and cooperation in Asia; and that of the Export-Import
Bank of the United States which acts as its principal lending arm with respect to its
foreign trade. However, as may be noted, such sources of funds, while not intended
for mercantile or business purposes have their important contributions in the field of
economics.
OTHERS
The picture depicting sources of funds would not be complete without
mention of those relatively smaller organizations engaged in supplying the credit
needs of a varied group of borrowers. Though of less importance by comparison with
millions of pesos of credit extended by the larger institutions, they nevertheless
perform a vital role within their limited spheres.
This wide and varied group of lenders, not mentioned previously, includes
credit, trust companies, and savings and loan associations.
Credit unions extend credit only to its members out of the funds that have
been accumulated by them through their contributions. Such loans are intended to
help the members and bail them out of their predicament and may partake of
sumptuary, providential, and productive types. Trust companies as may be logical to
expect invest and lend their funds for the benefit of the trustees, thus providing a
source of funds. Savings and loan associations extend loans to their members. And,
of course, not to be overlooked, is the poor and oftentimes hapless seller of food she
rations among employees of the government and private enterprises on credit which
sad to say- causes her no little-problem, with respect to collections, from people who
have lost their proper sense of values.
FILIPINIZATION OF CREDIT
As far as Filipinization of credit is concerned, two schools of thought are at
variance with one another. One contends that, since businessmen irrespective of their
nationality contribute in their own way to the task of nation-building, they should be
entitled to the use of whatever credits are available locally. On the other hand, the
other school of thought contends that foreigners should not contribute to the already
acute shortage of credit in the country, ie. they should make use of their own
resources.
As early as in 1966, the Manila Bulletin, in its editorial on the subject, had
this to say, which is quoted in part:
"There are open moves, in and out of government circles, aimed at limiting
the right to obtain loans and other credit facilities from banking and
financing institutions exclusively to Filipino citizens and entities wholly
owned by Filipinos."
"This is reported as part and parcel of the econemic protectionism
movement. It is being presented as essential if we are to be true to our
resurgent nationalism. It is held important if we are to safeguard our own
interests and those of our generations yet unborn, before pleasing foreigners
and foreign interests."
"Regulation of credit is held as proper under the police power of the state.
It is supposed to be all the more necessary in the light of the participation of
government entities, like the Government Service Insurance System, the
Social Security System, and the Development Bank of the Philippines in
banking and financing operations servicing the private sector.”
“It is now reported that the government financial institutions have been
extending credit to foreigners to the prejudice of Filipinos and the
developments of our trade and industries by Filipinos. It is suggested that,
while such foreigners have been borrowing from our institutions, depriving
our countrymen of credit facilities, they have been remitting to their parent
companies abroad."
Continuing further, the editorial stated:
"This presentation provides food for serious thought. It is well that
it appears to have stirred reaction in some sectors of Congress As
the policy making branch of our government, Congress is best
qualified to give this matter serious study and consideration before
fixing guidelines for our banking and financing institutions,
government and private, to follow."
“This is necessary because there are some sectors who view
Filipinization of credit in the light of its effects on foreign
investments and the creation of a favorable climate for further
inflow of foreign capital, These groups feel that Filipinism and
nationalism could be viewed with misgivings abroad and
conceivably scare prospective investors away."
The observations made by Eugene R. Black, former President of the
International Bank for Reconstruction and Development, is indeed very
significant.
He said in part:
"No free country in history has been able to develop a healthy
economy without the foreigner's help While perhaps no foreigner
can, by himself, make business respectable in an alien culture, he
 can by his actions and attitudes make it possible for others to do
so."
Such a message should help illumine the path of those who, obsessed with
nationalism, oftentimes see only one side of the picture. In fact, it cannot be denied
that this country needs external sources of credit as it continues to avail of their
facilities through the years.
CHAPTER 5: MAJOR DOCUMENTS USED IN CREDIT TRANSACTIONS
1. Borrowers can receive long-term credit made possible by the durable
character of capital goods.
2. The creditor is under no obligations to extend relationship with any given
debtor for any definite period of time. He can sell the credit instrument and
regain liquidity.
3. The marketability of credit instruments allows a diversification of risk
through a wide variety of credit instruments held by individual creditors.

Credit Instrument
From the foregoing discussions, it is now evident that credit instruments may
be described simply as documents which evidence the existence of credit
transactions. It is an oral agreement to settle an obligation that can be drawn into a
written contract known as the "credit instrument". A credit instrument gives property
rights to a creditor chargeable against the debtor, embodying all conditions to be
mutually agreed upon by both parties.
4. Potential liquidity and diversification of risk induce many persons with
disposable capital to supply loanable funds for long-term purposes that
would otherwise remain idle or limit such loanable fund to the short-term
market.
5. Negotiable credit instruments are also useful in short-term credit because
they expand markets aside from reducing risk and increasing liquidity on the
part of the creditor.

Nature and Importance CLASSIFICATION

A credit instrument has two specific characteristics, namely: (1) The
presence of risk involved in that payment is deferred to a later date, and (2) The Credit instruments are classified according to the acceptability of the parties
debtor-creditor relationship is stressed. instrument, the form it takes, its functions and even perhaps its source and the parties
There are obvious advantages attached to a credit instrument. The involved, as well as its negotiable character.
obligations of the debtor and rights of the creditor are set in clear and definite terms.
As to Acceptability
The rate of the interest charged is fixed in the contract. Should any dispute or
An instrument may either be of limited or unlimited acceptance.
misunderstanding occur, the parties merely have to produce the written instrument
Instruments that pass from hand-to-hand without question as to its source, and
and a settlement could be reached on the basis of set terms and conditions.
which in effect possess the characteristics of money, are considered of unlimited
Credit instruments may be transferred to third parties through negotiation.
acceptability. Government credit money and private bank notes are examples of this
In industrial production processes, capital equipment is obtained through long- term
type. In times of war or fiscal indiscretion, people may lose trust in government credit
credit. Most creditors cannot wait long for the repayment of debt. Thus, credit
money, causing them to exercise caution in accepting the money. Unlimited
instruments should permit creditors to maintain some degree of liquidity. The sale or
acceptance is somewhat affected.
assignment of credit instruments allows the individual creditor to obtain funds
The acceptability of private bank notes depend largely on the issuing bank
without necessarily waiting for the maturity of the credit contract. Furthermore,
and when rumors of unsound banking practice exist, these instruments, too, may not
credit instruments help to reduce the creditor's risk because he can diversify his
enjoy general acceptance. Therefore, before the bank is sanctioned to issue notes,
financial investments by buying claims on a variety of debtors. On the other hand, the
the state must see to it that its financial standing is such that public confidence is
debtor or borrower can sell his notes to hundreds of potential creditors and thus be
maintained.
able to raise funds for the purchase of equipment needed.
All other instruments are of limited acceptability as their acceptance is
The chief advantages of transferable credit instruments therefore are:
predicated on the credit standing of the issuer. Corresponding credit worthiness could
be gauged through credit investigations and analysis. These are other factors that may
influence the recipient to accept or reject the instrument: the length of payment time,
amount involved, and aspects that restrict acceptability. Some creditors such as
commercial banks prefer short-term maturity in as much as substantial amounts pose
greater risk. Or, it may be that the instrument could be endorsed only thrice. In the
case of government bank checks and postal money orders, these could only be
endorsed once.
As to Form
The credit instrument may either be orders or promises to pay. An order to
pay is generally defined as the order of one person to another to pay a third person
money on demand or at a definite future time. On the other hand, a promise to pay
is a vow of one person to pay another money on demand or at a definite future time.
There are three parties to an order to pay, namely, the drawer who gives the
order; the drawee who is ordered to pay and the payee who is to receive payment.
There are only two parties in a promise to pay, namely, the person promising to pay
known as the maker and the one to receive payment who is the payee.
Orders to pay or promises to pay are payable either on demand or at a future
determinable time. The orders to pay may be in the form of checks, drafts,
acceptances, or postal money orders. Promises to pay may be open book accounts,
promissory notes, collateral promissory notes, letters of credit and bonds.
As to Function
Credit instruments are classified into credit money, commercial credit
instruments and investment credit instruments. The first is used as a medium of
exchange. The second facilitates the use of credit in short-term commercial pursuits.
The third is used for long-term credit. This classification further entails subclasses of
orders to pay and the promises to pay.
As to Negotiability
Credit Instruments are either negotiable or non-negotiable. The
negotiability of an instrument is important to credit, enhances it, and has the
following positive results.
The transferee obtains legal title and can sue in his own name.
If the transferee is a holder for value; without notice, he is free from defense
that could be posed against the transferor, except those which nullify the contract
altogether. This makes the transferee obtain in a better title than original holder, per
provisions of law. Hence, he is not subject to personal defenses like fraud, duress, etc.,
and those that render the contract void like forgery, lack of legal capacity to contract,
alteration or similar causes.
COMMERCIAL CREDIT INSTRUMENTS
Commercial credit instruments are subdivided into promises to pay and
orders to pay.
Promises to Pay
1. Open book account. One of the most common forms of credit
instruments, this constitutes the implied verbal promise of the debtor when he buys
consumable goods on credit. The creditor enters this in the ledger to show the
existence of the credit transaction. The listing may not be as formal as in bookkeeping,
but one that is simply noted and kept by a storeowner. In other establishments, this
is entered as accounts receivable in the books of accounts.
2. Promissory note. A promissory note is an unconditional written promise
of the maker to pay a sum certain in money to the bearer on order or demand at a
future determinable time.
This type of credit instrument is utilized either by commercial enterprises or
banks. It is decided improvement over the open book as it is in writing and, in most
cases, contains the essentials of negotiability. However, not all promissory notes are
negotiable. A promissory note evidences the purchase of goods or services on credit
as well as the advance of capital. The creditor uses this account upon appraising the
credit worthiness of the debtor. Promissory notes may appear on financial statements
either as assets or liabilities.
The open book account still predominates in businesses, where credit
transactions on smaller scale are concerned. Neither retailers nor wholesalers would
require the signing of notes by their customers unless the latter's credit standing were
below par. Furthermore, the debtor may either take advantage of the cash discount
or not; with promissory notes, he has no such choice. The inflexibility and
inconvenience of the promissory note inhibit its use. They are more prevalent in the
field of banking.
3. Collateral promissory note. This is just like the ordinary promissory note,
except that the collateral is indicated on the surface or on a separate document. The
collateral usually has values over and above the loan granted. Such may be in the form
of shares of stocks and bonds, as evidenced by warehouse receipts, or those pledged
under chattel mortgage or trust receipts.
This type of credit instrument has the same advantages as the promissory
note and also the same disadvantages of inflexibility and inconvenience.
However, it is more secure than an ordinary promissory note in that there is
some property held on deposit to assure payment of the debt.
Nevertheless, in the case of promissory notes of all kinds, the credit
worthiness of the borrower must be subjected to thorough investigation as the
settlement of such notes depend largely on the willingness and ality of the borrower
to pay. And while these notes do contain an unconditional promise to pay, lax
investigative procedures may lead to unnecessary court action or delayed settlement,
not to mention probable losses from bad debts.
4. Commercial Letters of Credit. A commercial letter of credit is a written
promise on the part of the bank to honor drafts drawn against it or for its account,
bya specified beneficiary or his order, under the specifications contained in the letter
of credit. In effect, the bank is substituting its credit for that of the applicants of the
letter of credit. This instrument is used widely in financing foreign trade. The letter of
credit usually contains, among other details, the following:
a. The maximum amount covered.
b. The length of time it will be in force, which usually takes into account the
period of shipment and drawing of drafts.
c. Documents that must be attached as well as manner of disposal so that
payment could be made.
d. Quantity and quality of the merchandise to be shipped.
e. Instruction on how the drafts are to be drawn.
Letters of Credit
According to mode of transmission, the circular and the specially advised.
1. Circular. A letter of credit is called a circular when the opening bank issues
a letter addressed generally to persons or companies indicating its intention to honor
the drafts of beneficiaries under specified terms.
2. Specially advised. When the opening bank notifies the beneficiary directly
or through a notifying bank (usually a correspondent bank), the letter of credit is
known as specially advised.
According to duration of the substitution of credit, revocable or irrevocable letter of
credit.
1. Revocable. Whenever the bank withdraws or modifies the credit substituted for
the buyer by using such phrases as "good until cancelled" or "good until (a certain
period of time), is known as a revocable letter of credit.
2. Irrevocable. When the bank waives its right to cancel the credit or revoke the same
prior to the date specified, this is known as an irrevocable letter of credit.
According to obligations assumed by the bank, there are confirmed and unconfirmed
letters of credit.
1. Confirmed. When the advising bank, upon instructions of the opening bank,
assumes the obligation to perform the undertaking stipulated in the letter of credit,
it is considered confirmed.
2. Unconfirmed, When the advising bank does not assume any other obligation
except that of notifying the beneficiary, then it is an unconfirmed letter of credit.
According to method of reimbursement, there is what is known as the simple method
and the reimbursement method.
1. Simple. When the opening bank carries an account in the currency to be paid with
the paying bank, the reimbursement is simply accomplished by book entries that
include the service charge.
2. Reimbursement. When the paying bank prefers to receive the reimbursement
by draft, or when the two banks have no interbank accounts, the method is called
reimbursement. The amount reimbursed shall include commissions and interest, as
the case may be.
According to the method of payment, a letter of credit may be classed as negotiation,
straight, sight, acceptance, local currency or foreign currency, indicating how payment
is going to be effected.
1. Negotiation. It is a circular letter of credit, payment is termed as negotiation
2. Straight. If it is specially advised, payment is straight.
3. Acceptance. If payments are to be effected with time drafts subject to acceptance.
4. Local currency. If stipulation directs that the drafts be paid in the currency of
5. Foreign currency. If the payment should be made in foreign currency, whether that
of the buyer's or not.
6. Other classification include assignment, back-to-back, red cause and revolving
letters of credit. Their descriptions are:
• Assignable. Since the exporter may not necessarily be the manufacturer,
the letter of credit should be assignable. For this reason, the importer may
request a letter of credit that the exporter could transfer by assignment to a
third party. Hence, the manufacturer (other than the exporter) avails of the
letters of credit to finance the production of the goods involved.
• Back-to-Back. When the original letter of credit contains no provision for
assignment, the back-to-back letter of credit becomes useful. The exporters
bank issues a domestic letter of credit in favor of the company supplying the
goods. The original letter of credit and the secondary domestic letter of
credit will cancel out - "back-to-back" - the credit. The bank issuing the back-
to-back letter of credit may require from the exporter some security or a
signed undertaking.
• Red-clause. When the importer has complete confidence in the exporter, the
latter may be allowed to withdraw funds to purchase the goods under the
terms of an irrevocable confirmed letter of credit. However, the beneficiary
undertakes to deliver the shipping documents on or before the expiration of
the date of credit.
• Revolving. In order to effect control in the use of credit, a revolving letter of
credit is used. A certain limitation in the amount of credit is placed. For
example, a letter of credit worth $50,000.00 is established to favor of an
exporter. He will then make the necessary shipment as specified within a
certain period of time. When the amount is exhausted it is automatically
replaced by the same amount that goes on until negotiations are
terminated.
It is possible for a letter of credit to be all the same time irrevocable, confirmed,
local currency, back-to-back, revolving. The different classification spell out the
conditions attached to it or the tenor of the letter of credit. It should be borne in mind
that not all banks use the same classification uniformly. As a matter of fact, a bank
may deviate from the common usage and may adopt a system of its own in setting
apart one letter of credit from
The parties involved in a letter of credit are the importer, the exporter, and the
banks. The banks may either be the issuer of the letter of credit, the confirming bank,
paying bank or negotiating bank. Such distinctions will depend upon the role played
by each in letter of credit financing.
The principle underlying the letter of credit is substitution of credit. This is
evident not only between the buyer and the issuing bank, but also between he banks
involved in negotiation. The buyer, in the final analyst. will have to reimburse the bank
for whatever advances it may have made.
The issuing bank will likewise reimburse the banks involved in the financing
process. For example, the bank that confirms the letter of credit will be eventually
paid through interbank settlement.
• Traveler's letter of credit. A traveler's letter of credit is similar in intent
to the commercial letter of credit. The bank's credit standing is likewise
substituted for that of the traveler. However, its use is to provide the
traveler with funds enroute. It is a circular letter of credit in the sense
that it is addressed to a number of correspondent banks.
It is usually issued together with a letter identifying the traveler. A list of
correspondent banks is also furnished the traveler along with a cable code. As he
reaches a port of call, the traveler presents the letter of credit to the correspondent
bank and the identification letter. He then draws a draft for the amount needed, not
to exceed the amount on the letter of credit. Banks make notations on the letter of
credit upon honoring the draft. The last bank that honor's the drafts shall be
reimbursed the respective amount paid by them. The issuing bank, upon receiving
the reimbursement from the traveler, cancels the letter of credit to relieve borrowers
from further liability. Sometimes, however, the traveler may have already paid the
bank the necessary amount and charges imposed. In which case, only the interbank
settlements will be made.
ORDERS TO PAY
Orders to pay used in commercial activities may come in the form of checks,
drafts or acceptance.
Checks
Generally, a check is an order of a depositor to his bank to pay a sum certain in
money to a third person or himself on demand. Checks are further classified into: (1)
personal (2) cashier's/manager /treasurer's, (3) certified and (4) travelers.
Sometimes, bank drafts are also checks.
 A personal check, sometimes known as a business check, has the same definition
as the general check. This is the most widely used by both private individuals and
businessmen. It is distinct in that its drawer is an individual.
A cashier s/manager's/treasurer's check is also an order to pay. When the cashier
of a bank, in his official capacity, draws the order against the bank's fund, it is called
a cashier's check. It may be used to pay the bank's obligation or provide the customer
with a more acceptable form of credit instrument, since a bank enjoys more
confidence than an individual.
A certified check is originally a personal check. However, to enhance its
acceptability in case of doubt, bank certification is required by the recipient of the
check. The check is then brought to the bank and the bank representative, after
checking depositor ledger and debiting the amount of the check, stamps the word
"Certified" followed by his signature and the date of certification across the face of
the check. Thus, when presented for payment even at a much later date, the bank
cannot reject payment for reasons of insufficient funds, forgery, material alteration
or stop payment order, or other defects. This is so because the check shall have been
considered processed for payment. Drawer liability is thus taken over by the bank by
virtue of its certification.
A traveler's check is a variation of the traveler's letter of credit. The form differs
in that it comes in convenient sizes and dollar denominations. It is also an order by
the bank president to pay the holder of the check. The checks are enchased together
with a record slip. There are two signature spaces on the check surface. A blank is
reserved for the traveler to sign with each use while a pre-existing signature serves
as his identification. Traveler's checks are not legal tender.
Some aspects related to checks. One may have come across other check
classifications such as a crossed checks post-dated checks, stale checks, rubber or
bouncing checks, cancelled checks and others. They were so-called because of the
peculiarity attached to them. A crossed check is meant for deposit or for a specified
purpose only. The crossing of a check is done to limit further negotiation. This check
bears to parallel lines on the left upper corner. Sometimes, there are specific
instructions written or none at all.
A post-dated check is dated beyond the date of deposit or actual issuance. For
example, ia check were brought for deposit on December 29, 2022 or earlier than
January 2, 2023, then it would be a post-dated check as far as the bank is concerned,
if it were sued in payment for something delivered earlier than January 2, 2023, say
December 29 2022, then it would be considered a post-dated check by the recipient:
it could then be deposited (if crossed) only on January 2, 2023 or a few days late
presented for encashment if not crossed also on January 2, 2023 or thereafter.
On the other hand, if the check in the example were to be deposited or presented
for payment six months after January 2, 2023, it will be considered a stale check. The
law states that checks should be presented for payment within a reasonable period
of time, depending on circumstances. Banking practice allows for six months before
a check is declared stale. The safest thing is to present the check for payment soonest
after receipt.
Rubber or bouncing checks are those returned to the drawer because they are
not sufficiently covered with funds.
When the depositor's check is finally cleared and paid by the bank, these checks
are marked "cancelled". Usually, the bank returns these checks to the depositor (for
record purposes) together with the reconciliation statement.
Drafts
Drafts are orders to pay and are likewise drawn against a drawee to pay a third
person a sum certain in money on demand at a future determinable time. The
different types of drafts are the money order, bank draft, trade or commercial draft,
sight or demand draft and time draft, which may either be time date or time sight.
A money order may either be a bank money order or postal money order. When
the order is drawn by a bank on another bank or its branch to pay a specified payee,
this is a bank money order. When the order is from one post office to another, it is a
postal money order. Usually, the buyer of the money order receives the draft in
exchange of cash. He also pays a nominal service charge. The money order is
presented for payment at the post office of the payee or at a commercial bank in the
payee's town or province, (or even country in case of international money orders).
It can only be endorsed once, and its term is limited. If not paid within said period,
the buyer should make representations with the post office or bank where it was
purchased, so that necessary steps could be taken to settle the matter.
A bank draft is an order of a bank to another bank, or that of the depositor to his
bank, to pay a third person a definite sum of money. The bank draft may either be
payable on demand or at a future determinable time.
A trade or commercial draft is an order to pay used by merchants. It may also be
a demand or time draft.
A sight or demand draft is payable on sight upon presentation to the drawer.
Usually, no future determinable time appears on its face except the date of issue.
 Hence, after its issuance, it could be presented for payment anytime at the option
of the holder. Time drafts that reach maturity automatically become demand drafts.
When the order to pay sets a definite future time for payment, it is called a time
draft. The distinction between a time date and time sight draft lies in the reckoning of
maturity. In the time date, maturity is counted from the date of issue of the draft. In
the time sight, maturity is counted from the date of acceptance. Both, however, are
first presented for acceptance and then for payment at maturity. This assures
payment upon maturity that enhances its acceptability in credit transactions.,
Acceptance
An acceptance is originally an order to pay. It is a time draft. However, to ensure
payment at maturity, the draft is presented for acceptance to the drawee. If the
drawee accepts, he becomes liable and in effect assumes the burden of payment at
maturity. This makes acceptance also a promise to pay. Acceptances may either be
classified as trade or banker's acceptance.
Trade acceptance is an order of the seller to the purchaser to pay a certain sum
of money at a stipulated future time. If the purchaser accepts the terms, he writes
"Accepted" across its face together with his signature and the date of acceptance.
Banker’s acceptance is when the bank accepts an order to pay that is presented
to it and accepts the terms thereon. The bank's representative stamps the word
"Accepted" on the face of the instrument, signs and dates it. At times, a bank may
accept the draft drawn against it on a time basis and this constitutes a bank's
promissory note. In such a case, the bank itself is the primary debtor. Ordinarily, a
bank is only the secondary debtor that assumes liability for a customer upon
arrangement. The customer is then obligated to pay the bank.
INVESTMENT CREDIT
In the realm of investment credit, the instruments used are promises to pay,
which are in the form of bonds, long-term notes and evidence of ownership in a
corporation.
Bonds and Long Term Notes
Bonds are long-term promissory notes issued under a corporate seal, usually in
large sums and in a series. The principal is paid at maturity and interest is paid on the
bond at evenly spaced intervals such as quarterly, semi-annually or annually. Bonds
are used to raise funds for a corporation that needs expansion or reorganization.
Bonds are generally classified according to security, purpose, amount or interest the
bondholder will receive, manner of interest payment, and manner of principal
payment. Investors are thus guided to buy bonds on the basis of such classifications.
As in promissory notes, bonds are also given specific maturities.
Long-term promissory notes. The only distinction between a promissory note
and long-term promissory note is the length of payment. Between bonds and long
term notes, it would also be a matter of time and the intent of the corporation issuing
them. It may be said that bonds are special types of long term notes for basically, both
are promises to pay with payment terms of five years or more.
EVIDENCE OF OWNERSHIP
Stock Certificate
This instrument evidences part ownership of a corporation's capital through
purchase of a share of stocks. It is not, however, a promise to pay. The corporation is
not even under obligation to declare dividends even if earned. If dividends are
declared, the stockholder shares according to the type of stock he owns. In the event
of liquidation, he is paid his commensurate claim only after bondholders and other
creditor claims are settled.
The two principle types of stocks are common and preferred. The first simply
indicates part ownership in the corporation and the second, besides evidencing part
ownership, gives the stockholder added privileges of control, income or risk.
Stock Right
This refers to the pre-emptive right attached to ownership of a share of stock.
The original stockholder is given the option to purchase additional shares of
stocks at the new issue price before such stocks are offered to the public. The principle
underlying this is for the original owners to maintain their proportionate control and
income in the business. The issue of additional stocks happens when a corporation
amends its articles of incorporation to increase its authorized capital stock.
CHAPTER 6: TERMS AND DATINGS
The time element, which involves the determination as to when payment shall
be made is generally governed by the terms of sale, commonly referred to and
indicated on bills or invoices as "terms". The terms measure or specify the credit
period.
In the course of business operations and development, the adjectival term
"dating" came into wide and popular use to express a modification of the usual terms,
by which the time of payment is extended on account of certain circumstances or
contingencies. Obviously, the dating becomes part and parcel of the terms of the
credit period.
Lack of Uniformity in Terms
As a matter of business practice, however, one is constrained to note very little
uniformity in the use of terms. While in some trades, the cooperation of some groups
of grantors of credit has made it possible to establish and accordingly enforce uniform
terms, nevertheless, in order trades where such cooperation is non-existent, terms
are frequently modified, not to say at times, even disregarded.
As a general observation, terms vary in different trades. In fact, at times, even
within the same trade, business houses sometimes differ in the terms granted.
Furthermore, it is possible that the same seller may differ in the terms granted to
customers, and sometimes in the terms granted to the same customer. This is
frequently practiced as borne by a desire to gain a competitive advantage: sometimes
though, this is the result of pressure from the same buyers who do business on a
large-scale basis.
FACTORS IN FIXING TERMS
Generally speaking, there are several factors that come into consideration in
the fixing of terms. Among such factors are the following: the nature and use of the
commodity; the location; the circumstances of the customer; the purpose behind the
purchase; the credit standing of the buyer; and the regulations enumerated in codes
of fair practices.
The Commodity as a Factor
The nature of the commodity generally circumscribes the terms of sales.
Perishable products, like fish, vegetables and poultry are generally sold on the cash
basis, or close to cash terms. In the case of the latter, they are subject to very short
terms.
Construction materials are generally obtained by well-known manufacturing
firms engaged in housing projects and/or in the construction of buildings on deferred
payment. This is quite understandable since they do not only extend a large volume
of business to suppliers of construction materials but moreover on a year-long basis.
Transactions that largely involve labor which is paid in cash by the seller are
usually kept on cash or very short terms. Charges for the performance of labor on the
material of the customer may vary from net cash to net 60 days.
Some heavy agricultural equipment such as harvesters, threshers, are sold
on the installment basis, the seller receiving cash through the finance company and
the purchaser enjoying ample time with which to pay. So are bulldozers and road
graders and other heavy equipment.
Geographic Considerations
In a number of instances, the seller recognizes the distant location of the
buyer, and accordingly make a concession in the matter of terms. This may be
represented by an extra 30 days time in which to pay the bill, or by allowing a longer
period for the taking of the discount. Thus, where the discount would ordinarily be
deductible only if the bill is paid 15 days from its date, the seller may allow the buyer
cash discount upon making payment 15 days after receipt of the goods. In such cases,
the terms are sometimes expressed as "15 days, R.O.G," that is, 15 days from receipt
of goods.
Seasonal Dating
The "regular terms" of trade usually apply to shipments of orders received
for delivery at once. Like, for instance, pulp and paper for use in printing or newspaper
publications. However, in many lines of a seasonal nature, it is necessary to place so-
called "advance" orders, that is, orders for later delivery, to coincide with the market
demand for such goods like raincoats and umbrellas. Or school bags to use during the
opening of school. And, of course, school uniforms for boys and girls.
Terms in Retail Trade
Most retailers, if not all, grant credit to their buyers who continue to extend
their patronage through the years. The terms of retail credit may vary from one
retailer to another. As a common practice, though, such buyers are required to make
monthly payments to cover part of their outstanding obligations.
Standing of the Customer
It need not be stressed herein that the exists a correlation between the grant
of credit and the time payment. Until such time as payment is made, credit risk is ever
present. For this reason, some conservative businessmen refuse to sell goods on
credit to those customers with doubtful character- and, certainly, with unknown
capacity pay. In some case, the seller may opt to sell to him a very limited quantity of
goods on credit terms. Sometimes, the credit period may be reduced, that is from 45
days to 15 days or so.
Cash Terms
This practice is in accord with "Cash before Delivery". Or the abbreviated
term, C.B.D. This applies specifically to transactions in which the seller receives the
cash payment as a condition to delivery of goods, an ironclad protection to the seller's
interest.
The most common practice in business transactions is known popularly
under the abbreviated term C.O.D, which stands for its equivalent, "Cash on Delivery".
For their protection, not a few businessmen insist that cash payments be tendered by
buyers or by a corresponding certified check issued by the buyer. Where buyers and
sellers have established long years of satisfactory relationship, this practice is done
away. Some businessmen are more than willing to transport their goods to their
valuable customers even in the absence of a promise to pay.
maturity when cash discounts may be taken. In fact, as observed, there appears
considerable misunderstanding in respect to the subject of discounts.
Succinctly stated, the cash discount refers to the amount allowed for
payment prior to the maturity of the bill. Such payment reduces the credit risk of the
seller and enables him to have earlier possession of funds. For this, he allows a
discount, which is usually in excess of the bank interest.
CASH AND TRADE DISCOUNTS
A cash discount, strictly speaking, is the price paid for the earlier payment of
funds. It arises where the terms allow the buyer to pay on a certain date, net, or prior
thereto, less a discount. The discount is the bonus offered to induce the earlier
payment of the bill.
A trade discount, on the other hand, is intended as an allowance from the
price. When published price lists are issued, the discounts render the price greater
flexibility in relation to varying quantities purchased to changing market conditions.
Furthermore, the discount may be an allowance offered at the end of a given period
for purchases in excess of its stipulated amounts. As a marketing strategy, it is
intended for the development of strong business ties between the seller and buyer.
It helps build long and lasting relationships between them.
A trade discount is distinctly an element of price.

OTHER TERMS

End of Month
Frequency of purchase or other circumstances may make it necessary for
certain special treatment of individual cases. One such special arrangement is the
"E.O.M." or "End of Month".
This arrangement springs from the need of the active buyer for convenience in
making payments, and from the desire of sellers to encourage the concentration of
business. E.O.M. makes it necessary for the buyers to issue checks to the seller
throughout the month in order to earn discounts. It also help facilitate the seller's
bookkeeping. In many lines, this arrangement is no longer confined to the active
accounts, but is allowed, generally speaking.

Discounts
An integral part of the terms is the discount. Apart from determining the
maturity of the bills, the terms may also provide insights into the periods prior to
CHAPTER 7: CREDIT MANAGEMENT
The Credit Department
The credit department does not grant or extend credits. Its task and
responsibility revolve around the gathering of all credit information about the
applicant and assembling them in such a way that they could be help in properly
guiding the loan officers in their assessment and analysis for purposes of establishing
correct credit ratings.
Credit and sales departments must cooperate closely with each other. A
sales executive who does not support the efforts and policies of the credit
department can do much harm to his company. The same holds true for a credit
executive who is not sales oriented. The effective use of credit and the proper
application of credit management help develop business operate on a sound basis.
In the particular case of banks, the credit department collects and files every
available bit of information concerning people or firms that borrow money. In a
detailed manner, its main work consists of investigating, assembling, analyzing and
recording credit information for the guidance of the loan officers of the bank. The
officers use the information in processing loan applications and moreover by and
large in reaching decisions with respect to actions it will choose to take.
The functions of a credit department of a bank may be briefly stated as
consisting of a systematic and judicious collection of data respecting the financial
responsibility, character, antecedents, and business qualifications and abilities of the
bank's customers, the classification of the data on each customer in chronological
order, and their systematic preservation for future reference and comparison. Thus,
needless to point out, an orderly and well-arranged credit file will immediately
disclose at a glance the entire career and present business standing of any customer.
Not infrequently, the credit departments of banks furnish a valuable if not
main able serve to gone ape iren stance. To one me
not indispensable service for customers and friends of the bank by making crecit of
value to non-borrowing customers, to other banks, and also to business concerns.
The Credit Manager
The credit manager, paradoxical as it may seem, is a man who occupies a
very important position in the structure of credit economy and yet is little known and
least talked about outside the world in which he lives. Upon his decision rests the
success or failure of a credit granting organization. In small concerns, he is the credit
investigator, credit appraiser, credit supervisor, and credit manager (if not a loaning
officer at the same time) all rolled into one.
A real good and capable credit manager, in a very correct sense,
owes his position to himself. For, while he was appointed by someone at the top of
the organization to his position, such is due in large measure to his proven ability as
demonstrated in every position he has held before in the past. Moreover, his
appointment is a tribute to the organization he represents for having chosen the right
man for the right position.
CREDIT INVESTIGATION AND APPRAISAL
Credit Investigation
This task is performed by the bank's credit investigator who has, as his main
objective, the verification as well as evaluation of the applicant's character, credit
standing and integrity through the process of data-gathering of all essential facts.
Generally speaking, the elaborateness of a credit investigation as a practical matter
depends upon its cost relative to the magnitude of the principal and interest involved
and the security being offered by the applicant. The results obtained from credit
investigation is an essential part of credit analysis for the proper evaluation of credit
risks which necessarily cannot be any better than the facts assembled.
The request for Credit Investigation Report (CIS) may come from any officers/
departments of the bank for any of the following purposes:
a. On clients seeking loan accommodations or credit line with the Loans
Administration Department through Marketing Management Department;
b. On clients applying with the International Banking Department to secure
availment in the form of Letters of Credit, Import/Export Bills, Trust Receipts,
and other forms of accommodations;
c. On clients opening current/savings accounts with the Cash Administration
for the first time (which, of course, is no longer common nowadays in view
of the competitive nature of the banking business);
d. On clients transferring business with the Treasury Department through the
money desk;
e. On co-makers and guarantors for credit;
f. On old clients for updating client information; -
g. On insurance companies requesting accreditation or offering to act as surety;
h. On beneficiaries named in the Letter of Credit;
i. On prospective buyers of assets acquired by the bank;
j. On prospective suppliers of office equipment and supplies and contractors
of services; and
k. Others, subject of special cases.
 Upon receipt of a request or Credit Investigation Report and supporting papers,
an investigator is assigned to handle the case and to conduct a proper study of
the applicant's background. The assigned credit investigator initially checks the
subject with bank's credit files and prepares a tickler where he notes down
initials which he thinks will require some degree of emphasis during the conduct
of his investigation. Within a specified period of time, usually three days, the
credit investigator is expected to come out with a Credit Investigation Report.
The Scope of Credit Investigation.
The scope of credit investigation depends, to a large degree, upon the following
factors:
1. Purposes and types of investigation. Whether the investigation is a routine matter
or a special case and the purpose is general or specific.
2. Company credit policy. Whether the policy is a conservative or liberal one, and
whether it requires a comprehensive investigation of cases, or a representative
sampling would suffice.
3. Client classification. Whether the client is new or an established one; a past-due
account or a valued one.
4. Amount involved. Whether the amount involved is big or small. If it is a small one,
chances are a limited type of investigation will suffice. If it involves a fairly large sum,
investigation may be rigid and thorough relative to the risks involved And, of course,
with respect to the amount of income to be derived measure of profitability.
5. Time and resource constraint. The scope depends on such factors (time and
resource constraint) since the report must be finished on the date it is needed by the
requesting officer/department of the bank and also, on the availability of the credit
investigator who will conduct the investigation.
Generally, the scope of credit investigation covers and includes the following:
I. Company's background/history
This covers the complete business record, such as the date of incorporation, the type
of business organization, record of registration with the proper authorities, the names
of incorporators, and the summary of operating records. In the case of an individual,
his personal background, business, identity, and membership in organizations will be
necessary together with bank and trade references.
The investigator also takes into account the requirements common in following types
of business organization:
a. Single proprietorship. He sees to it that the owner has the capacity to enter into a
lawful contract. If the owner is a married woman, she must possess the legal right to
transact business as required under the Civil Code of the Philippines.
b. Partnership. The first fact to be ascertained is whether it is a general or a limited
partnership. This is important and essential since under a general partnership, all the
members are general partners.
Secondly, whether the contract of partnership is registered or not with the Securities
and Exchange Commission. However, registration with the Securities and Exchange
Commission is not a pre-requisite for the acquisition of juridical personality of a
partnership since the juridical personality begins from the moment of the perfection
of the contract.
The credit investigator should also take into account and consider the following
characteristics of a partnership such as:
• There must be a contract;
• The partners must have legal capacity to enter into the contract;
• There must be mutual contribution of money, property or industry for a common
fund;
• The purpose must be to obtain pecuniary profits and to share the same;
• The purpose for which the partnership is formed must be lawful; and
• Moreover, the Articles of Co-partnership must not be kept secret.
c. Corporation. The reader need not be reminded that a corporation is the most
complicated form of business organization and moreover is classifiable into various
types. However, the most common classes are: public and private corporations, sub-
divided into stock and non-stock, and as to place of incorporation, sub-divided into
domestic and foreign.
The legal existence of a corporation begins from the date of the issuance of
the certificate of its incorporation by the Securities and Exchange Commission.
Important matters which a credit investigator should carefully consider in the Articles
of Incorporation are the following:
• Name of the corporation. This is essential inasmuch as its name helps to establish
its identity and distinguishes it from the others. The Securities and Exchange
Commission in its recent ruling prohibits the use of the words "Maharlika", "State",
etc.
• Its purposes, objectives, nature, and powers. Although a corporation may be formed
for as many lawful purposes as the incorporators may desire, nevertheless, the
corporation law and other pertinent special laws, expressive or impliedly, prohibit
certain corporations from having more than one purpose. They are corporations
“formed” for the “purpose of engaging in the business of transportation by land or
water, or of maintaining a telephone, telegraph, or wireless communication system"
and corporations for which special provisions are established by law, such as railroad
companies, building and loan associations, religious corporations, trust corporations,
colleges and other institutions of learning. Banking corporations and insurance
companies are governed by the General Banking Act (Republic Act No. 337) and the
Insurance Act, respectively.
• The location or place of business.
• The term of duration of corporate existence. Such term is not to exceed 50 years.
While a term may be decreased, however, it cannot be increased by subsequent
amendments of the articles of incorporation.
• The names and residences of the incorporators. This determines whether the
statutory requirements that the majority of the incorporators must be residents of
the Philippines has been fully met and complied with.
• Names of incorporating officers.
• The capital stock and the number of shares into which it is divided.
• The names and citizenship of the stockholders and the amount or number of shares
they have actually subscribed to and the amount paid on subscriptions. In cases
where capital is divided into par value shares, at least 20% of the capital stock should
be subscribed. Where the entire capital stock is divided into no-par value shares the
20% requirement shall be computed on the basis of number of shares.
As to corporations granted franchises for operations of public utilities,
mining and agricultural corporations and other corporations organized for the
disposition, exploitation, development or utilization of the natural resources of the
country, at least 60% of the capital stock of such corporations must be owned by
citizens of the Philippines
• The acknowledgment of the duly executed Articles of Incorporations before a notary
public.
The company's history also covers the complete record of the men who
comprise the operating management of the business, their respective ages, whether
they are married or not, and if they have children, the number, sex, and age of the
children. It also includes information on their educational attainment, their previous
employment, if any, and their particular experience in their respective lines of
business.
II. Financial Conditions
Herein is represented in summary form a breakdown of the financial statement of the
company reflecting its latest financial condition and the financial operation for the
past three or five years.
Aside from the balance sheets and income statements, it may include schedules,
explanations or extraordinary items, breakdown of merchandise and receivables and
full explanations of all inter-company loans and merchandise transactions.
Il. Dealings with Government Lending Agencies
a. With lending agencies of the government. The credit investigator concentrates on
the size and degree of fluctuations on borrowings as well as the nature of the security
pledged to secure the loan. In case of long-term loans, the yearly, semi-annual,
quarterly or monthly installment payments to maturity must also be ascertained,
(including arrearages, if any).
b. A multitude of facts that could be obtained from merchandise suppliers. They may
be very useful in matters pertaining to incidence of credit, amount owing, amount
past due, if any, terms and payment performance of the subject of inquiry.
c. Other banking institutions. The investigator should focus his inquiries on such
matters as the following:
• Nature of the credit accommodation granted.
• Whether borrowings are on secured or on clean basis.
• If secured, whether the security consists of real estate mortgage, shares of stock,
warehouse receipts, chattels, assigned receivables, discounted notes receivables,
assignment of claims under a government contract or some other forms of security.
IV. Bank's Experience with the Subject
Has there been any previous relationship established in the past?
V. Court Cases
From the Credit Management Association of the Philippines data on court cases could
be gathered information about the subject's involvement in, not only collection and
oath civil cases, but also criminal cases, as well, if any.
It is important as well as necessary do point out the fact that when a close
study is being made, if it is essential to check with trade competitors on the subject
(if it is a business concern). In such "competitive checking", the following information
must be sought:
a. The importance of the subject in its particular line of business, the general
reputation, the ability of the management and the quality of the products
and/ or services being offered.
b. The general outlook as to the conditions in the subjects line of business and
whether the operating methods used are considered sound.
c. Whether the subject resorts to unfair method of competition.
d. Names of either, concerns to whom the subject may be known.
THE CREDIT WORK
The efficient performance of the credit work revolves around the presence
and cooperation of a staff of trained, experienced and capable personnel whose task
and responsibilities are delineated by the kind of positions they hold in the
department, such as credit supervisor, credit analysis, credit appraiser, and credit
investigator. The job description of each is presented in summary form in the
following paragraphs.
A. Supervisor
1. Handles the overall supervision of his section or department.
2. Receives request for Credit Investigation Report/Appraisal Report and
assigns them to senior credit investigators/appraisers for completion and
submission on a certain date.
3. Reviews, edits and makes necessary corrections on the Credit Investigation
Report/Appraisal Report submitted by senior credit investigators/appraisers.
4. Answers credit inquiries from banks, trade firms, bank clients and other
financial institutions.
5. Implements procedures and ascertains that all matters as well as inquiries
importance are given top priority.
6. Undertakes to maintain or improve existing relations with other banking
institutions and other sources of credit information.
7. Supervises the preparation of monthly reports on output.
8. Performs other related functions from time to time, such as:
a. Trains the new associates of the Section and counsels and guides
them in the performance of their jobs.
b. Prepares a list of assignments for each analyst. This includes
gathering of all data required.
c. Recommends to the department head, acquisition of financial
books, journals, magazines, and periodicals relevant to the
improvement of analysis preparation.
B. Senior Credit Analyst
1. Assumes responsibility of the supervisor in his/her absence.
2. Concentrates on evaluation of Cash flow Projections based on the projected
Income Statement and Balance Sheet and Feasibility Studies of various
companies.
3. Conducts an intensive research on the business prospects of industries for a
more effective financial and credit evaluation of Cash Flow Projections and
feasibility study reports, submitted to the bank.
4. Works continuously on the revision of present and future credit rating sheets
of credit evaluation reports to cope up with the changing economic/financial
situations.
5. Assists supervisor in discharging his/her duty in time of heavy work load.
C. Junior Credit Analyst
1. Assist senior credit analyst.
2. Studies financial statements and other documents submitted by the client
and prepare the following reports:
a. Credit Analysis and Rating. An evaluation of the financial status of
the client/company, industry standing, availability of collaterals for
 evaluating credit worthiness of the client and/or to pinpoint other
bank services which can be offered.
b. Financial Analysis. An analysis of the post-operating rating
performance of the client and may include a projection of future
performance.
c. Cash Flow Evaluation. An analysis and projection of cash generation
capacity and future cash requirement of the client.
d. Project Evaluation. A complete study of technical, financial,
marketing, and management aspects of a clients project proposal,
including effects of the project on the economy as a whole.
D. Senior Appraiser
1. Receives and assigns request for Appraisal Report to appraiser(s).
2. Edits Appraisal Reports prepared by appraiser(s):
3. Assists the appraiser(s) in carrying out their functions.
4. Conducts inquiries/surveys on the current market value of real and other
properties acceptable to the bank as collateral.
5. Performs such other functions as may be found necessary from time to time.
E. Appraiser
1. Conducts ocular inspection of properties offered as collaterals.
2. Sketches the vicinity and location of the property under appraisal.
3. Verifies the authenticity of original/transfer certificates of titles with the
Register of Deeds.
4. Summarizes in a report form findings on the ocular inspection made on the
properties offered as collateral.
5. Entertains inquiries/checking of appraisers of other banks.
6. Conducts inquiries/surveys on the prevailing market values of real and other
properties acceptable to the bank as collaterals.
7. Performs other functions that may be assigned from time to time.
F. Senior Credit Investigator
1. Receives and assigns request for CIR to credit investigator and sets date of
completion.
2. Initially reviews and edits CIR prepared by credit investigator.
3. Entertains credit inquiries from other banks and commercial houses.
4. Occasionally assists credit investigators in carrying out their functions.
5. Assist in the development of efficient and comprehensive credit files.
6. Gathers information concerning other banks’ credir procedures.
7. Performs such other functions as may be assigned from time to time
G. Credit Investigator
1. Conducts checking and evaluation of applicants for credit accommodation
as well as of existing clients.
2. Interviews co-makers and employers of applicants/clients to verify data
gathered.
3. Undertakers bank, trade, government and court checking regarding credit
dealings of the applicant/s.
4. Prepares Credit Investigation Report, memos, letters, and other
correspondence.
5. Assists collection group in locating the whereabouts of clients with past-due
obligations and real estate properties registered in their names.
6. Conducts special investigations, surveys as per requests of other department
heads.
7. Performs other functions as may be assigned to him from time to time.
Necessity for Close Supervision
The necessity for a considerable amount of supervision on the part of the
credit manager over his staff is quite apparent. Credit men operate during much of
the working time away from the home office removed from definite and direct
executive control. However, one method which could make the credit men do their
job, as expected of them, is to give them a "deadline" for the case they have under
investigation and study.
Psychologists suggest three important appeals for use in attacking the
problem of supervision, such as:
a. Pride in accomplishment.
b. Monetary reward for a difficult job done, like collection of a bill that is about
to be written off, and
c. Commendation and praises. This may be done through letters of
commendation is not through the awarding of plaque or certificate of merit.
Bank Appraisal Report
Generally speaking a bank appraisal report contains, among others, the following
information:
A. Subject of Appraisal
 1. Name of registered owner CREDIT POLICY
2. Location of the property A policy has been described as a "decision in advance". Owing to the fact
that the entire range of loan function of a commercial bank is basically interwoven
B. Land Identity with the decision can but result in the elimination of flexibility and could work against
1. TCT number the interests of the bank. A sound credit policy with sufficient degree of flexibility
2. Technical description could help contribute to the successful operation of commercial banks insofar as loan
3. Lot number functions are concerned.
4. Block number
5. Land area How Bank Loan Policy is Formulated
Any loan policy that may be formulated by a bank reflects but one phase of
C. Description of Land the over-all policy program of the institution. Such a policy must obtain the stamp of
1. Shape imprimatur of the board of directors.
2. Frontage As in generally observed, as a common practice among banking institutions,
the actual preparation of policy statements is usually carried out by the president or
D. Neighborhood Data
senior loan and credit officer, depending in large measure upon the size of the bank
1. Commercial
and the staff available.
2. Semi-commercial
A statement of loan policy, among others, includes reference to types of
3. Residential
loans and the basis upon which loan applications may be considered. Such, however,
4. Industrial
are circumscribed by the provisions of the General Banking Act which governs the
5. Raw land
operations of commercial banks.
6. Others
Also, the kinds of securities that are considered acceptable by the credit-
granting institution are also the subject of loan policy. And, so with amounts involved.
E. Public Utilities
In fact, when a certain amount involved in a loan application does not exceed a certain
1. Electricity, water, telephone, gas, etc.
ceiling imposed by the board of directors, it is subject to the approval of the loan
2. Kind of transportation facilities available
committee. Beyond such ceiling, approval is lodged as the exclusive prerogative of the
F. Improvements board.
1. Full description of improvements Briefly noted, in the formulation of a loan policy, the officers are guided by
two primordial considerations: First, the protection of the depositors' funds. Second,
G. Valuation the production of a fair return for its lending and investment activities. The activities
1. Market and appraisal values of land of the credit department contribute a major portion of a bank's income. In fact, they
2. Net value of improvements represent one of the major areas of top management concern and attention.
3. Total appraised value
4. Recommended loan value Setting a Standard for Control Purposes
The loan policy should be stated in clear and unmistakable terms so that its
H. Encumbrances implementation by the officers of the bank charged with such function will be easy.
1. Names of mortgages and amount Moreover, such bank charged with such function will be easy. Moreover, such loan
2. others that might be annotated in the Original or Transfer Certificate of Title policy should provide specific guidelines for particular types of categories of bank
credits, such as the following:
 1. Agricultural credits
2. Commercial loans
3. Industrial loans
4. Real estate loans
5. Consumer or personal loans
6. Term loans
Dissemination of Loan Policy
The importance of effective communication to the success of any
undertaking has been stressed time and again. Its validity is not in any way diminished
regardless of whether the organization is small or considerably huge. Without it, the
organization would be engulfed in an ocean gap that would act as a monkey wrench
that will ruin the entire machinery of the business organization.
In the particular case of commercial banks, its policies should be
disseminated thoroughly and well understood by all who are concerned with their
implementation. Since a loan policy is but one facet of the over-all policy of the bank,
it follows that an internal information drive should be launched from time to time, it's
the occasion demands, with the objective of inculcating upon all those concerned the
need, as well as the importance, of giving meaning the substance to such policy
through its effective implementation.
To ascertain the effectiveness of such a policy, it is essential that a review of
is effects upon the organization be made as well as its impact upon the bank’s
customers in the light of existing business conditions. Only then can it be determined
whether the policy is sound and judiciously necessary or not.
THE CREDIT FILE
So important is the credit file to any firm extending credit that it behooves
upon it to adopt a system of gathering and putting every information about customers
and applicants into a folder which is filed in proper order. Hence, the term credit file.
As credit information is received by the credit man, he goes over it carefully
to make sure it is as complete as possible. Then he puts it into the credit folder (a
large envelope) bearing the customer's name and address. Necessarily, one folder is
assigned to each customer or applicant for credit.
In this manner, through the course of time, there is accumulated eventually
a complete credit history of each customer, to which immediate reference may be
made at any time when the need arises. Arranging the folders in alphabetical order
enjoys the advantage of providing easy location.
Experienced credit managers also keep a card record on which are noted the
different kinds of information. Two distinct advantages are obtained from this
method. One, a card record could be examined quickly without taking the time to go
through the papers in the folder. Second, in the event that some records are found
missing from the folder for whatever reason or reasons, the company will not be left
in the dark, since it has another means which could help serve its purpose.
It is important that credit files be kept up to date. In some banks, the
responsibility for constant revision of such file as needed by circumstances falls upon
the credit department. Others place it under the charge of the loaning officer.
Regardless of where the responsibility falls, it is good policy to revise such
files not more than once a year unless unusual circumstances prevail. Since credit files
tend to get big and bulky, it is necessary that those with inactive status be transferred
to other folders.
A major problem common among credit-granting institutions pertains to
keeping track of credit folders when they are removed from the credit file - especially
so when time is of the essence and there is immediate need for a particular credit
folder.
A very practical method, if not to say the best method, to solve such problem
and thus serve the interest of that company is by inserting a board the same size as
the credit folder in its place with the following information: name of the folder, date
it was removed from the file, and the person who has the folder.
Maintenance of credit files with utmost confidentiality should be the
overriding concern of the officials charged with this responsibility. Because of the
confidential nature of the information contained in the credit files, folders can only
be withdrawn upon prior authority granted by the responsible official.
Credit files give historical account of transactions and are generally-observed
subdivided into a number of sections. For instance, the first section is used for
statements. As may thus be logical to expect, the latest financial statement of the
company is found with the bank's comparative statement form. The second section
contains a compilation of reports on interviews conducted by the loaning officer of
the bank and his staff. Correspondence and other related matters with banks and
business firms are contained in the third section. The fourth section contains an up to
date file record of borrowers as well as prospective ones. In the case of the former,
also their latest balance is included. The fifth section contains reports from credit
agencies whose services and assistance have been sought by the bank.
CREDIT POLICIES OF COMMERCIAL HOUSES
 To say that a credit department is essential in every organization engaged in
the grant of credit is to elaborate on the obvious. On the part of small concerns, a
credit department may exist merely as a section. Or it may seem not to exist at all. At
any rate, even in the absence of any, credit functions are discharged by a responsible
official in the organization. In fact, in the particular case of sari-sari store which sells
goods on credit, owing to its size and the close contact between the owner and his
customers, the existence of a credit department appears superfluous. However, the
owner himself performs the credit investigation and evaluation of his customers.
Credit policies may vary from one business enterprise to another. One
relates to the type of customers who are to be granted credit. One firm may be
primarily interested in increasing the volume of sales. It therefore grants credit to all
applicants and runs the risk of some losses. Others take extraordinary precautions in
granting credit that could reduce their sales volume.
It could be stated categorically that there is no simple yardstick or criterion
that could be used to guide the business enterprises in the formulation of their
respective credit policies. Be that as it may, certain fundamental principles could
prove helpful when taken into account and applied accordingly. Their observance
operates as an instrument of control.
Scope of Credit Policy
By credit terms, is meant the terms or conditions under which the credit is
granted. It includes the time, when payments must be made and the discounts, if any,
that will be allowed for prompt payment, in other words, credit terms pertain to the
period when credit obligations will remain subsisting.
By credit period is meant the length of time within which the customer is
expected to remit in past or in full. If this period expires before such payment has
been made, the account becomes delinquent.
If a long term of payment is allowed, a greater number of prospects can be
appealed to, but more capital will be required and tied up for quite sometimes. On
the other hand, if a short term of credit is made, the number of customers is reduced,
but less capital is needed.
Some credit-granting companies impose a limit with respect to the amount
or value that a customer can obtain from the firm. This is known as credit limit. In
other words, a seller places upon a customer's credit standing an indicated limit
insofar as it relates to his own firm. Expressed in another way, it indicates the seller's
judgment of the amount of debt that a customer can incur and pay his firm.
As a sound practice, the credit limit of every customer is recorded in the
ledger card. This eliminates the necessity of reviewing the customer's file each time
an order of goods is placed (or a loan is sought). In the particular case of a loan, many
important considerations exert profound bearing on the amount that may be granted
by the creditor company.
Doubtlessly as conditions are constantly changing, it would be unwise for
any company selling goods on credit to establish too definite limits as to the amount
of credit which will ordinarily be extended to a customer. The capacity to make money
and promptness in paying one's obligations will, by and large, be significant factors in
deciding the matter. Obviously, the customer who can sell the goods which are
shipped to him, and can promptly make payment therefore, is a very safe credit
At this point, it should be pointed out that the problem of mercantile credit
is somewhat different from that of bank credit. This is so, since under mercantile
credit, each transaction may be self-liquidating:
On the other hand, loans obtained from bank are liquidated out of a longer
composite or series of individual transactions. Thus, bank loans generally cover a
longer period of time than those of mercantile credit.
Purpose and Advantages of Credit Limits
As aptly pointed out by Theodore N. Beckman and Ronald S. Foster in
"Credit and Collections", although limits are sometimes used as absolute maxims
credit, nevertheless their general use is in the nature of danger signals, just like the
warnings posted at approaches to railroad crossings.
By and large, the principal purpose of credit limits is to serve as guides to
credit management and control. In fact, through its use, before the determination of
credit limits, there is a need for careful investigation and comprehensive analysis of
the elements composing a given risk. In a nutshell, then, this is conducive to improved
credit granting.
From the foregoing, it appears quite evident that credit limits operate as an
overall device for the control of credit extensions. More specifically, credit limits aid
in reducing the cost, of credit management and in enhancing its efficiency. Limits also
work to the advantage of debtors. It serves as a check against reckless buying spree
which if unchecked could ruin the lives of debtors and as such suffer the disgrace of
being labelled as poor debtors.
Principles of Controlled Credit
The following fundamental credit principles could serve as the cornerstone of a
controlled credit policy. They are:
 1. Only after a thorough investigation of the credit worthiness of the customer
seeking credit may credit be granted.
2. Each new customer should be made acquainted with the terms and
conditions as promulgated and implemented by the business firm with
respect to terms of payment; discounts, if any; credit period; and credit limit.
3. It is necessary that the first reminder be sent immediately, i.e., the next day
after bills become past due.
4. Continued use of the credit privilege should be suspended in respect to
slowly have paid their existing indebtedness.
5. Decisions and actions should be characterized by firmness but short of being
rude and arrogant.
6. When it becomes absolutely necessary, the services of collection agencies
must be sought or legal services enlisted as the case may be.
The Problem of Credit Extension
Few merchants ever escape the problem involving the extension of credit to
customers. As previously pointed out, some use credit to increase profitable sales.
Others, however, incur losses due to unwise credit extensions. incur losses due to
unwise credit extensions. Thus, due caution and extreme care should be exercised in
granting extension of the credit period to customers. The longer the credit period is,
the greater is the incidence of delinquencies. The credit extension problem is by far
one of the most difficult phases that confront many a businessman.
GRANTING CREDIT
Aptly observed, granting credit to the individual is one thing and to a
business firm is entirely a different matter. Since, like most anything, credit could
either be misused or abused, it behooves upon everyone who extends credit to
exercise proper care and caution and thereby be able to prevent their ill effects not
only to the parties concerned but to the nation's economy as a whole.
Careless and unjustified granting of credit merely serves to fan the strong
desire to buy goods in amounts one does not need nor could well afford to pay. In
fact, while delinquent debtors are largely to blame for their wrong doings, however
the creditors are not entirely without fault. At times, they are the culprits for making
credit both easy and quite cheap.
The procedure by which a credit manager handles an order from an old
customer of the firm appears quite clear. However, it may be asked: What is his
procedure with respect to a new customer whose first order involves purchases on
credit
Three major considerations immediately come into the picture all of which
merit attention. The first relates to the size of the order. Not infrequently, a number
of business firms may be willing to take certain risk, that is readily allow a small first
order without a thorough and complete credit checking than they will in the case of
large order. However, small losses may be due to non-payment of obligations by
debtors when accumulated together could turn out to be a staggering sum. It must
exercise caution and providence.
The second refers to the identity of the applicant for credit and his
references. The business firm should be sure of the reputation and integrity of the
applicant as well as the references which accompany the order. The seller must have
some strong and intelligent basis for granting the credit. Perhaps, a sound basis is -
the experiences of other firms in their relationship with the new customer.
If a prospective customer is unable or does not provide the necessary trade
references requested of him, such a circumstance could be valid reason to deny the
grant of credit which must be clearly understood as a privilege conferred and never a
right.
The third is the customer's rating appears in the register of some mercantile
agencies. This is not always possible especially so when the customer is new in the
business and therefore has not yet established a name or reputation for himself.
If the applicant is an individual, the credit manager can look into the stability
of employment of the applicant and the length of time he has been residing in his
present residence. Frequent change of residence could be a cue as to the true
character of the prospective debtor. When coupled with other factors the request for
purchase on credit may be turned down.
Wholesale and Retail Credit
Essentially, a big difference lies between wholesale and retail credit.
Wholesale customers usually buy for resale to others while retail customers buy for
their own consumption.
Wholesale customers are able to realize income from the resale another
purchases which will serve as major source in the settlement of their obligations.
Retail customers, on the other hand, must pay for their purchases out of their income
which generally consists only of salaries or wages. Inasmuch as retail customers buy
for their own consumption and not for resale, it follows therefore that the credit
manager should exercise effort and caution to protect his store from being imposed
upon by unscrupulous customers.
The Principal Objectives of Credit Management take corrective action before they become critical; and conserve time and
As pointed out in earlier discussions, credit is not only very important but effort on the part of all concerned.
moreover a scarce resource. This fact underscores the need for this judicious and wise
A primary problem of establishing effective controls in the credit department is to
use. Hence, credit management becomes very compelling indeed. Aptly said, credit
determine what is significant. Hence, there is the need for periodic appraisal. This is
management is not unlike the management of any major business function which
particularly so since the economic climate in which a business operates is fluid and
seeks the attainment of its laudable objectives, such as:
complex. It is almost in a state of change or subject to change.
a. Maximizing sales. For a firm not only to continue its operations but
moreover have a strong toothold in the business, it must be able to maximize
c. Controlling costs of credit and collection. Every company incurs expenses
its sales. More and more sales assure the company with increasing volume
in the extension of credit and in the collection of accounts receivables. These
of business and the continuous flow of income and consequent receipt of
expenses include (1) bad debt losses; (2) wages and salaries of employees
profits.
charged with credit and collection functions; (3) cost of funds tied up in
When a business firm sells on credit, the important role of credit management
receivables; (4) cost of fees and dues for credit information; (5) charges
becomes altogether very apparent. The level of management required for the
incurred for outside assistance in making collections; (6) rent or space
administration of credit in any business firm is determined in no small degree by the
occupied by credit and collection personnel. And, of course, depreciation of
concept of the function prevailing there. In some instances, credit is viewed narrowly
credit and collection equipment and fixtures.
as a simple function of approving credit transactions and making the corresponding
Control of credit and collection expenses does not necessarily, however, mean
collections. Relatively little real management activity may be involved there. But as
minimizing expenses. Rather, it refers to cost per unit, that is, decreased cost per unit
the concept broadens, the credit phase of the business embraces sales and finance
of work, which results from improved planning, direction and supervision.
policy and other top management strategy and, consequently, becomes a
The collection man's job is to keep his ear close enough to the ground to detect
management responsibility of a much higher order and of substantial magnitude.
every indication of lapses from satisfactory standards and to act accordingly.
There are a number of expenses that are unavoidable in credit and collection
b. Controlling the amount of receivables. The basis of effective control is a plan
work. One pertains to the cost of traveling. Some credit men however do not do
for control based upon some realistic set of standards. As pointed out in"
enough traveling for one reason or another. Where such is the case, they deny
Credit Management Handbook", a publication of the National Association of
themselves of opportunities of gathering useful information that could guide
Credit Men (USA), the best statement of the purpose of control is the simple
themselves and their company in respect to their credit work. Credit men who spend
definition: "To assure performance in accordance with plans." The price of
considerable time in the field are able to establish in most instances contacts with
performance is everlasting follow-through. One of the skills of leadership is
prospective clients that could prove beneficial.
the art of getting desirable responses and results for individuals and groups
One other expenses that is unavoidable in credit and collection work pertains to
in conformity with the established goals and objectives. Hence, a necessary
legal fees. Legal services are needed principally in connection with collections and
qualification of a credit manager is the ability to review and appraise the
protection of accounts receivable.
operations of his department and the performance of his staff in terms of
desired results. Also, to maintain conditions which encourage his staff to
Importance of Credit Limits
produce results to the best of their abilities. Toward the achievement of
It cannot be stressed too strongly, that one pressing problem which taxes the minds
these ends, it is necessary to develop, interpret and maintain effective
of credit managers is not only the decision when to extend credit but a
controls and standards which will assist all concerned to: (1) project desired
complementary problem of how much credit must be extended. Inasmuch the very
results more accurately, (2) identify and forecast major trends that effect
nature of credit gives rise to corresponding risk, it follows that utmost care and
significant credit activities; (3) determine the need for changes in policies
prudence be exercised in order to determine the proper credit limits that must be
and/or practices; (4) detect credit problems, insofar as possible, in time to
for the benefit of economic society as well.
imposed by prospective creditors as a tool of protection not only on his part but also
Imposing credit limits could be a service to buyers on credit since it could
prevent them from falling hopelessly into huge debts that they may not be able to
pay regardless of the means they employ to weed themselves out of such a precarious
predicament. In other words, the creditors may be doing them a favor which at the
moment they do not realize. As one businessmen sadly remarked, it is oftentimes
difficulties if not ruin the liberality with which companies grant credit that pushed
them into economic.
In a number of cases, the liberal treatment accorded them by grantors credit
have worked against their interest because of its undue influence on over expansion
of business. Credit limits work as bars to over expansion of business. Hence, their
importance and necessity.
Types of Credit Limit
In studying credit management, two types of credit limits may be noted:
quantitative credit limit and temporal credit limits. Both have their importance in
granting credit.
By quantitative credit limits is meant the maximum amount of credit which
may be permitted to remain outstanding on account. The amount is determined by a
proper analysis of the C's of credit which is not be exceeded.
On the other hand, instead of imposing a maximum ceiling on the amount
of credit which a debtor may be able to obtain and use, temporal credit limits impose
retain requirements which is a borrower or prospective debtor must comply before
he could be granted credit. This temporal credit which does not indicate the
maximum amount that an individual or business firm can obtain from the creditor-
granting company as long as the debtor is able to fully comply with conditions set."
SOUND CREDIT MANAGEMENT
Sound credit management principles revolve around three E's, such as:
A. Estimation
1. All available sources of credit information must be tapped and utilized so that a
proper estimation of the credit risk can be obtained.
2. For individuals who buy for consumption, character and their ability to pay sere as
important bases of credit; for business concerns, it is the net worth and condition of
the business as well as reputation for paying their bills.
3. All credit information gathered and received must be kept in strict confidence.
Only those who are authorized must have access to it.
B. Enforcement
1. Granting credit is but one phase of the credit function, collection is another.
Collection of accounts should start from the moment they become due. There should
be no room for vacillation insofar as collection is concerned.
2. The task and responsibility of every collection department is to get the money due
the company. If the money can be collected without offending customer, doubtless,
this should be done.
3. Collection records must be kept and me maintained and should indicate when
notices were sent; dates when calls were made by collectors; payments made;
balances due; and action taken, if any.
C. Evaluation
1. Sound credit management principles dictate that results must be evaluated against
company policies and procedures.
2. If a situation should arise in the future which preclude good-paying customers to
discharge their obligations on time, policies and procedures may be modified without
losing sight of company goals and objectives.
3. Records must be periodically reviewed and kept up to date.
CREDIT FRAUDS
If only all individuals are honest, then no credit manager would develop
wrinkles or grow gray hairs prematurely. But that is perhaps wishful thinking While it
is true that most credit manager's relations are those with business firms and
individuals who operate above board, nevertheless, there are a few who do not.
These dishonest firms and individuals are known by various names and
employ various tricks. Some of them become successful in their "line of trade" while
others fall by the wayside and become apprehended even in their first try. Some of
them appear decent enough. Some of them in fact are married to men who are in the
top rung of the organization to which they belong just as others are wives of
prominent government officials. They appear' in expensive clothes and ride in swanky
automobiles and, as such, create the impression of their respectability as well as
decency. Others are just plain Miss, and Mrs So and So. The men in the same group
are not different. They appear honest and reliable.
Some of these crooks operate alone because of the belief that it is much
difficult to cover the tracks of one man and thus escape apprehension. Others, on the
other hand, operate in a ring - a big time syndicate - who victimize business firms
involving large sums of money. As to so-called business establishments - they operate
through "fly-by-night' schemes. After obtaining the loot (goods sold) on credit), they
disappear into thin air until they make their re-appearance - trying to for crime does
victimize another business firm. And this goes on and on, until the law catches them
not pay.