CREDIT

FUNCTION
WHAT IS CREDIT?
Credit is defined as the power or ability to obtain money,
goods, and services at the present time in exchange for a
promise to pay with money upon demand or at a future
determinable time.
BASIC ELEMENTS OF CREDIT
1. Trust and Confidence

2. Futurity

3. Risk
 5 C’s of credit (BASES OF
CREDIT)
Character – is the sum total of his mental and moral qualities. It is
also a quality inherent in an individual, making him conscientiously
concerned about his obligations.
Capacity – signifies the ability of a debtor to pay his obligations.
Capital – the financial strength of a business
Collateral – are properties pledged to secure a loan.
Condition – refers to the environment in the customer’s industry,
economically, legally, political in relation to growth
 “Truth In Lending Act”
An act designed to protect consumers against unfair billing practices of people who extend
credit to a purchaser of goods on installment basis. Through it, the citizens become aware of
the real cost of credit.
The law requires creditors to furnish each customer the following information before
transaction is consummated:
1.The cash price of the property to be serviced or acquired;
2.The down payment if any
3.The difference between the amounts under 1 and 2
4.The charges individually itemized
5.Total amount to be financed
6.The finance charge expressed in terms of pesos
7.The percentage of the finance charge
 KINDS OF CREDIT
1.PERSONAL CREDIT – credits obtained for one’s use.
2.COMMERCIAL or MERCANTILE CREDIT – credits extended by one businessman to
another businessman in the form of goods.
3.BANK CREDIT or BANK LOANS – credit granted by banks to businessmen to finance their
short term credit needs.
4.IMPORT AND EXPORT CREDIT – Export credits are obtained to finance the selling of
goods outside the country while import credits are obtained to finance the buying of
goods from other countries.
5.INVESTMENT CREDIT – acquisition of fund through long term borrowing arrangements.
6. AGRICULTURAL CREDIT – credits given to farmers for the
development, improvement and cultivation of their lands
7. INDUSTRIAL CREDIT – loans granted to industries to finance the
acquisition of equipment and machineries for the construction of
a plant or factory.
8. REAL ESTATE CREDIT – loans to finance the purchase and
improvement of real properties like house or building.
9. GOVERNMENT or PUBLIC CREDIT – credits obtained from any of
the government institutions or their instrumentalities.
 TYPES OF LOANS
1. AS TO SECURITY
SECURED LOANS – covered by
properties of value called collaterals to
guarantee loans.
UNSECURED LOANS (also called
character loan or clean loan)– is where
the borrower has merited the full trust
and confidence of the creditor
2. AS TO MATURITY
SHORT TERM LOANS – payable within
1 year
MEDIUM TERM LOANS – payable from
1 year to 5 years
LONG TERM LOANS - payable from 5
years to 20 years or more.
DEMAND LOAN / CALLABLE LOAN –
does not have fixed maturity date.
INSPECTION and APPRAISAL
Inspection is important to ascertain
the actual existence of the property,
determine its exact location and to
look its actual condition while
appraisal helps to establish the
correct value in cash of the property
being offered as a collateral security
for the loan sought.
 TYPES OF PROPERTIES
1. REAL ESTATE – CONSISTS OF FIXED OR 2. CHATTELS – MOVABLE PROPERTIES (MACHINERY,
IMMOVABLE PROPERTIES HEAVY EQUIPMENT AND MOTOR VEHICLES)
 GUIDELINES IN CONDUCTING
ACTUAL APPRAISAL OF REAL
ESTATE
RAWLAND AND AGRICULTURAL LANDS – APPRAISED BY HECTARES
COMMERCIAL, INDUSTRIAL AND RESIDENTIAL LANDS – APPRAISED BY SQUARE METERS
IMPROVEMENTS (COMMERCIAL, INDUSTRIAL
AGRICULTURAL LANDS AND RESIDENTIAL LANDS )
Productivity Reproduction cost minus depreciation
Agricultural facilities Insurance hazards
Proximity to highways,mills,centrals etc
Type of construction
Type of crops planted
Types of materials
Number of harvest seasons and soil analysis
Uses and floor area
Rawland - Study the possibility of the property of
being transformed into a subdivision or agricultural
land.
 VALUATION PROCEDURES
1. COST APPROACH – a method based on the principle that no prudent purchaser will pay
more than what it will cost him to acquire an equally desirable substitute site.
2. INCOME APPROACH – method based on the principle that value tends to be set by the
present worth of the rights to future net benefits that may be derived from ownership.
3. MARKET DATA APPROACH – method based on the principle that no property is worth
more at a given date than the amount of money necessary to purchase a similar
property of like kind with equal utility and desirability.

FACTORS AFFECTING LAND VALUATION

4. SIZE
5. LOCATION
APPRAISAL OF CHATTELS: MOTOR
VEHICLES AND HEAVY EQUIPMENTS
Must be driven for road testing
Determine the origin
Identify the type/model and identity
Documents
Usage
Valuation
 SOURCES OF CREDIT
INFORMATION
1. Application Form – the best source of data which initiates the relationship
between a debtor and the creditor.
2. Personal Interview – a direct contact with the customer that enables you to
assess the customer personally.
3. General Mercantile Agency – provides credit information it has assembled
from all parts of its business field of operation.
4. Special Mercantile Agency – also known as trade agency, with only limited
scope of coverage. Limited to single trade or a number of allied trades.
5. Personal Investigations
 GENERAL PROCESS ON CREDIT

3. Verification,
1. Acceptance 2. Evaluation of 5.Releasing of
Inspection, and 4. Approval.
of application. borrower. Loan Proceeds.
Appraisal.
 GENERAL PROCESS ON CREDIT
STEP 1: Acceptance of application.
Borrower inquires about the loans offered by the bank. Borrower then fills up the application form and
submit pertinent documents.
STEP 2: Evaluation of borrower.
With the submitted documents, the credit officer evaluates the papers and the data therein. He checks and
reviews the completeness of the documents as well as the relevant information if it was provided.
STEP 3: Verification, Inspection and Appraisal.
Once documents are evaluated, the credit officer will assign a credit investigator to double check and
investigate the existence of the borrower’s business, as well as residence. Credit officer will also verify the
documents of its authenticity and then call the character references. He will also inspect the property (if
secured loan) and appraise based on its condition.
GENERAL PROCESS ON CREDIT
STEP 4: Approval.
After a thorough verification, the credit officer will now forward the paper to the
credit manager, branch manager or any person with authority for approval of his
loan amount.
STEP 5: Releasing of Loan Proceeds.
Once approved, the branch (loan officer/credit officer) will now release the loan
amount to the borrower through cash or check. The borrower will have to sign
the necessary documents prior to the releasing of the loan proceeds.
DOCUMENTS FOR SIGNING
DURING RELEASE OF LOAN
PROCEEDS:
1. LOAN AGREEMENT – a contract entered into by and between a lender and a borrower.
2. PROMISSORY NOTE – details the principal and interest amounts owed, when payments are due,
and it outlines the events that would allow the bank to declare your loan default.
3. GUARANTEE AND SURETY AGREEMENT – a borrower’s promise to the bank that, if the borrower
is unable to repay the money, they will personally repay it from their personal belongings.
4. DEMAND LETTER – a letter stating a legal claim which makes a demand for restitution or
performance of some obligation, owing to the recipients’ alleged breach of contract, or for a legal
wrong.
5. (AUAL) AFFIDAVIT OF UNDERTAKING OF ASSUMPTION OF LIABILITIES – during the death of the
borrower of a secured loan, the family is obliged to assume the payment of the remaining
balance.
DOCUMENTS FOR SIGNING
DURING RELEASE OF LOAN
PROCEEDS:
6. DACION EN PAGO – a document which involves the procedure of handing the keys
back to the lender.
7. RELEASE OF CHATTEL MORTGAGE – a document issued to the borrower if he/she
has already fully paid of his/her chattel mortgage loan and release it from
encumberance.
8. AUTHORIZATION LETTER – letter authorizing the bank to any process with regards
to your credit concerns.
9. VOLUNTARY SURRENDER – letter indicating that the borrower have voluntarily
surrendered his/her properties to the creditor in case of payment default.
10. DEED OF ASSIGNMENT – a legal document that records the transfer of ownership
of a property from one party to another.