MALIGAYANG ARAW PO!

CREDIT AND
COLLECTION
CHAPTER 3
SOURCES OF
CREDIT
 "... though credit is but a transfer of capital from hand to hand, it is
generally and naturally, a transfer to hands more competent to employ the
capital more effectively in production. If there was no such thing as credit,
as if from general insecurity or want of confidence, it were scantily
practiced, many persons who possess more or less capital, but who from
their occupations, or from want of the necessary skills and knowledge,
cannot personally supervise its employment, would derive no benefit from
it: their funds would either be idle, or would be, perhaps, wasted and
annihilated in unskilled attempts to make them yield a profit. All this capital
is now lent at interest, and made available for production."
JHON STUART MILL
FINANCIAL INTERMEDIARIES While lenders and borrowers
may be brought together through credit instruments and credit
markets, in many instances credit transactions are consummated
through credit institutions which serve as intermediaries between
lenders and borrowers in these markets. Credit institutions, in
general, perform the following functions:
1. to pool the savings of the lending customers,
2. to invest these funds financially based on careful investigation
and analysis of credit,
3. to diversify risk to a degree unattainable for individual
investors,

4. to transform short-term into long-term funds through an

expedient and careful staggering of maturity dates, and

5. to perform insurance and trust functions.

FINANCIAL INSTITUTIONS The number
of financial institutions is numerous just as
they are varied in kind and scope ranging from
pawnshops to such credit institutions as
investment houses..
Financing Companies Under the "Financing Company
Act" (RA No. 5980) financing companies are corporations or
partnerships, (except those regulated by the Bangko Sentral
ng Pilipinas, the Insurance Commissioner, and the
Cooperatives Administration Office, which are primarily
organized to extend credit facilities to consumers and
industrial, commercial, or enterprises,
either by discounting or factoring commercial
papers or accounts receivable, or by buying and
selling contracts, leases, chattel mortgages, or other
evidence of indebtedness, or by leasing motor
vehicles, heavy equipment and agricultural
industrial machinery, business and office machines
and equipment, appliances, and other movable
property
 Assignment of Credit
In the case of assignments of credit or the buying of
installment papers, accounts receivable, and other evidence of
indebtedness by financing companies, the purchase discount,
exclusive of interest and other charges, shall be limited to fourteen
percent (14%) of the value of the credit assigned or the value of the
installment papers, accounts receivable and other evidence of
indebtedness purchased based on a period of twelve (12) months or
less, and to one and one-sixth percent (1-1/6%) for each additional
month or fraction, therefore over twelve months, regardless of the
terms and conditions of the assignment or purchase.
PHILIPPINE FINANCE COMPANIES

In response to the needs of business and industry in particular and of some

individuals in general, several corporations have been organized in this country
aimed purposely to provide a wide complement of corporate financing services,
such as: machinery and equipment financing and leasing; accounts receivable
and inventory financing; land development and real estate financing;
commercial, industrial, and agricultural loans; motor vehicle financing; sales
and installment financing; small and medium business financing; import-export
financing; money market placements and many others.
INVESTMENT HOUSES

invariably termed as investment banks, are concerned

chiefly with the transfer of capital from those who have more
funds than they actually could use to those who need them for
utilization in long-term projects or activities Investment banking
is a recent addition to the financing network. It belongs to the
non-bank sector of the system and gathers funds for its
lending operations from sources other than deposits. Not
being a bank in the real sense of the term, it is not allowed to
collect deposits.
 Investment Houses in the
Philippines
in the financial system ushered in a new era in capital
resources intermediation. Investment houses added new dimensions
to the already growing sophistication of capital mobilization. The
appearance of investment houses or quasi-banks in the funds market
indicates that the country is indeed on the march to progress. As may
be gleaned from previous discussions, they are what are termed as
money middlemen since they act as middlemen between individuals
or institutions with money to invest and people or institutions who
need funds to put up a business enterprise or to expand an existing
industry
 Underwriting
• On a best-effort basis, an investment house sells corporate securities
up to a volume that is sold publicly. After a certain time, securities
that remain unsold are returned to the issuing company and the
investment house pays the commission for selling the shares of
stocks.
• On a firm basis, however, the issuing company is assured that all
shares it is offering for sale will be bought. This is because the
investment house guarantees a share of the total number of stocks
being offered and for which it has contracted to sell. If any of the
shares offered for sale are not bought, the investment house will have
to buy them.
 MONEY MARKET
• To enhance its fund resources, investment houses engage in money
market operations. It acts as a dealer or broker who may directly buy
short-term financial notes or securities for the account of a client or act
as an intermediary between the buyer and seller of money market
instruments.
• Through this service, an investment house performs a very important
money market function: it establishes a purchase price and an offering
price. This assures a buyer that he is buying a money market
instrument at the lowest price obtainable and the seller that he is selling
at the best price available.
 COMMERCIAL BANKING

The establishment of the "Obras Pias" during the period of

Spanish is not without significance. It could be rightly considered as the
precursor of banking system of this country. Obras Pias were the first
credit institutions which were organized in this country as early as the
latter part of the 16th century. Pious Catholics, obsessed with the desire
to gain indulgence by way of doing charitable work, furnished the capital
of the Obras Pias.
 COMERCIAL BANKING
CORPORRATION
in addition to the general powers incident to corporations, shall have all
such powers as shall be necessary to carry on the business of commercial
banking, by accepting drafts and issuing letters of credit, by discounting
and negotiating promissory notes, drafts, bills of exchange, and other
evidences of dept; by receiving deposits; by buying and selling foreign
exchange and gold or silver bullion, and by lending money against
personal security or securities consisting of personal property or first
mortgages on improved real estate and the insured improvements thereon.
 TOTAL LIABILITIES
Except when the Monetary Board may otherwise prescribe, the total liabilities
of any person, company, corporation or firm, to a commercial banking corporation, for
money borrowed, excluding
a) loans secured by obligations of the Bangko Sentral ng Pilipinas,
b) loans fully guaranteed by the government as to the payment of principal and
interest,
c) loans to the extent covered by hold-out on, or assignment of, deposits maintained
in the lending bank and held in the Philippines,
d) loans and acceptances under letter of credit to the extent covered by marginal
deposits, and
e) other loans or credits which the Monetary Board may, from time to time, specify
as non-risk assets, shall at no time exceed fifteen percent (15%) of the unimpaired
capital and surplus of such bank.
 LINE OF CREDIT
Not infrequently, businessmen, in anticipation of a need for
funds in the future, may apply with their banks for a line of credit.
With the approval of such a request, businessmen can know in
advance how much they can borrow, should the need arise from a
particular bank with the support of collateral.
As a policy, the bank will approve a line of credit only to the
amount it feels it can safely extend to the applicant based on its
knowledge of the firm's business and size and strength such as the size
of the company its past and anticipated business conditions and other
important related factors in the grant of credits
 LOAN OF AGREEMENT
It is quite a common practice among big business concerns to enter
into formal loan agreements with their banks.
The loan needs of some business entities are so uncertain, not to
say at the same time very irregular, that the use of line of credit is deemed
impractical. Hence the need for loan agreements. As in line-of-credit
customer, the business firm must maintain a deposit balance with its bank.
Loan agreements may provide for
a) revolving credit
b) a term loan or
c) a stand by commitment
 SAVING AND MORTGAGE
BANKING
A savings and mortgage bank shall be any
corporation organized to accumulate the savings of
depositors and invest them, together with its capital,
in bonds or loans secured by bonds, real estate
mortgages, and other forms of security, or in loans for
personal finance and long-term financing for home
building and home development.
 LOANS AND INVESTMENTS
A. Loans in the Philippines can be secured by personal savings deposits,
mortgage bonds, or chattel mortgage bonds. Clean loans for personal
and household finance are allowed, not exceeding the borrower's deposit
plus four months of salary or regular income, subject to Monetary Board
regulations.

B. Medium-term loans of the following types:

•The loan program encourages livestock breeding, offering maturities up to
three years. Livestock serves as the primary security, but real estate may
be required. Borrowers can opt for real estate collateral instead of
livestock, provided it's valued at least 70% of the loan amount. The loan
amount is capped at 50% of the animals' commercial value initially, with
potential additional loans as the livestock's value increases.
•Equipment loans with up to five-year maturities are available
for acquiring fertilizers, machinery, and movable equipment
related to agricultural and industrial production. The loans
create a first lien on the acquired assets, but the bank may
request additional security, such as a lien on other
properties. However, if the borrower mortgages real estate
valued at 70% or more of the loan amount, the equipment
lien may not be necessary.

C.Mortgage loans, with up to a ten-year maturity, are available

for the preservation, expansion, and improvement of
productive properties or other fixed installations. These loans
require security in the form of a first mortgage.
D. Real estate mortgage loans with maturities of not more
than twenty years, for the following purposes only:
● For the construction, acquisition, expansion or
improvement of rural and urban properties;
● For the refinancing of similar loans and mortgages; and
● For such other purposes as may be authorized by the
Monetary Board.

E. High-grade bonds and other evidences of indebtedness, and loans

against such obligations
F. Solvent banks in the Philippines can endorse or accept drafts,
bills of exchange, acceptances, or notes related to current
commercial transactions. However, their total investments in this
category should not exceed 10% of the bank's total assets

G. It stipulates that banks can invest in collateral trust bonds

secured by first mortgages on real estate, with a limit of 15% of the
bank's net worth. Additionally, the bank's equity investment in a
single enterprise should be a minority holding, except for non-
financial intermediaries. Investment in other banks is allowed with
limitations set by the Monetary Board, and such investments
impact the bank's net worth ratio. Notably, equity investments in
non-related activities are not permitted.
 RURAL BANKS
Established under the Rural Bank's Act, aim to address
credit needs in rural areas, offering accessibility and
reasonable terms. Their inception marked a crucial
development in the banking system, providing an alternative
to the limited options in earlier years. These banks serve a
dual purpose: meeting rural borrowers' credit needs and
protecting them from usurious money lenders. Additionally,
they contribute to enhancing productive activities in rural
communities and promoting cooperatives.
 FINANCIAL ASSISTANCE
Rural banks, subject to Monetary Board limits, can
allocate a portion of their funds to support small
businesses and essential rural enterprises. They provide
medium to long-term loans for small farmers, cooperatives,
and merchants. Loans can be secured by lands without
Torrens title, based on five years of peaceful possession,
or on lands covered by sales contracts with at least five
years of installment payments. This includes portions of
lands administered by government agencies and
homesteads or free patent lands awaiting title issuance.
 RURAL BANKS IN ECONOMIC
DEVELOPMENT
Rural banks contribute significantly to
economic development by providing timely credit
support for government initiatives such as
agrarian reform, food production, and small-
scale industries. Their integrated approach helps
maximize wealth dispersion from urban to rural
areas, fostering agro-industrial development and
sustaining economic expansion in the
countryside.
 OTHER SOURCES
Private development banks, established under Republic Act No.
4093, play a crucial role in supporting economic growth in line with
Congress's policy. With a structured stock corporation setup and
specified capital requirements, these banks focus on medium and
long-term loans for economic development, with a limit on short-
term loans. The Development Bank of the Philippines is authorized to
match the capital of private development banks and extend repayable
loans to them, reinforcing their role in development financing.
 VETERANS BANK
Has the authority to provide loans for the
establishment, rehabilitation, expansion, or development
of commercial, industrial, or personal service enterprises,
including public utilities. Additionally, the bank can grant
short-term loans, not exceeding one year, with the option
for extension, secured by harvested and stored crops, not
exceeding 89% of their market value. The crops must be
insured for their entire market value at the discretion of
the Board of Directors.
 LAND BANK
Established under Republic Act No. 3844, aims to finance
the government's acquisition of landed estates for division and
resale to small landholders. It also facilitates the purchase of
landholdings by agricultural lessees from landowners. The
Bank, governed by a Board of Trustees with approval from the
Monetary Board, can issue bonds, debentures, and other
indebtedness up to five times its unimpaired capital and
surplus. These securities are fully tax-exempt, secured by the
Bank's assets, and guaranteed by the Philippine government.
Bonds are redeemable at the Bank's option before a maximum
maturity of 25 years, with bondholder payments every six
months.
1. Payment for agricultural lands or other real properties
purchased from the Government.

2. Payment for the purchase of shares of stock of all or

substantially all of the assets of government-owned or
controlled corporations.

3. Surety or performance bonds in all cases the government

may require or accept real property as bonds; and

4. Payment of reparation goods.

 SALES FINANCE COMPANIES
Sales finance companies are private
corporations involved in financing distribution
through the purchase of vendors' installment sales
contracts. While they are commonly associated
with financing automobile purchases, they also
extend their services to various goods sold on
installment. These companies operate as general
business corporations, relying on private capital
and do not possess special state-granted
privileges.
THANK YOU!
MALIGAYANG ARAW ☺
ANGELES, ANGEL KHYTE
GUTIERREZ, CHYNNA
PASIA, KING ALBERT