The Credit System

7/25/2019 The Credit System

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The Credit System

The Need for a system ofcredit:

People buy things thatthey cannot aord to payfor at the moment, butprobably can pay for in thelong run.


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Credit in the Industrial

World

The functioning of our presentindustrial system is entirelyanchored upon the credit

mechanism. By means ofcredit, the productive forces ofthe country are coordinatedand placed in the hands of

ecient enterpreneurs


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!oundations of a System of Credit

Creditors must have absolute confidence in the

character and in the ability, as well aswillingness, of their debtors to accept, honorand settle their obligations. Credit from Latin term "creditum", is founded on

trust.Proper facilities must exist for performing

credit operations.The money standard must be stable.The government must stand ready to assist the

creditor in enforcing payment of loan extendedto the debtors.


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Nature of Credit

Credit is defined as " the ability to obtain athing of value in exchange for a promise to

pay with money or something euallysatisfactory to the seller at some future

time."!t represents both as a power and obligation

on the part of the debtor.

To the creditor, credit signifies the existenceof a legal and moral right as well as anexpectation of the fulfilment of a promise


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Characteristics of Credit

is# is a characteristic inherent to all credittransactions.

The use of trust.

Credit is elastic.Credit gives rise to creditor $ debtor

relationships as evidenced by the use of credit

instruments.The creation of a legal obligation.

Credit involves time or futurity.


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Classes and "inds of Credit

%ccording to Type of &ser

%ccording to 'b(ects of )xchange

%ccording to Purpose

%ccording to *aturity


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%ccording to Type of &ser

Consumer Credit*ercantile Credit

+an# Credit

!nvestment Credit


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Consumer Credit

%lso called as Consumption Credit, is that #ind

of credit extended to consumers in order tofacilitate the process of consumption.

$ exists in those cases where an individualacuires funds intended for personal

consumption or en(oyment in return for apromise to ma#e appropriate payments in thefuture.

)%'N- arises as a result of certain motives,li#e the desire for convenience, desire toimprove ones standard of living or the productof necessity.


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etail Credit is a typical example ofconsumer credit, which is held

synonymous with one another, as with

personal credit, the use of which is

obtained through /charge account and

installment credit. The use of credit cards- it allows the

holder to obtain goods on credit from

affiliate$establishments of creditcompanies li#e restaurants, department

stores and others.


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"Truth in Lending %ct"

provides that any creditor shall furnish toeach person to whom credit is extended, prior

to the consummation of the transaction, a

clear statement in writing setting forth, to theextent applicable and in accordance with rules

and regulations prescribed by the *onetary

+oard./


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*ercantile Credit

sometimes called as Commercial Credit.

type of credit which one businessman may

extend to another when selling goods on time

for resale or commercial use. it is used in an exchange of goods for the

purpose of sale, whether or not the goods will

undergo further processing in the hands ofbuyer.


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Consumer Credit vs. *ercantile Credit

*ercantile Credit is brought about by

transactions involving tranfers of goods

for business purposes, unli#e Consumer

credit which is intended specifically for

consumption purposes.


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Commercial +an# Credit

refers to the credit given by commercialban#s to businessmen intended to assistthem in the operation of their business.

the relationship between mercantilecredit and ban# credit is when the use ofmercantile credit brings about the use of

vast amount of credit instruments whichare documents intended to serve as the

basis for the grant of ban# credits. /


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evolving Credit

% combination of the charge account andthe installment plan.

this type of credit has developed out of

the popular 01$day charge account. an addition of a service charge is made to the

unpaid balance at the end of each month. a fixed limit is placed on the account provided

that the balance does not exceed thestipulated ceiling. 2 the balance may never becleared since credit revolves round and round3


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!nvestment Credit

is utili4ed by a business organi4ation for

the purchase of fixed assets or to carry

minimum business operations.

it consists of advances intended for the

purchase or construction of necessary

plant and euipment.it is evidenced by negotiable bonds or

long$term notes.


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%ccording to 5hether *erchandise or *oney is 6iven

*erchandise Credit the customer obtain goods or merchandise in

exchange for his promise to pay them at later

date.+orrowing *oney consumers are li#ewise confronted with the

need for money they obtain through

borrowing. evidenced by the increase number ofpawnshops in many communities.


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%ccording to Purpose

%gricultural Credit consists of those loans which are intended for

the acuisition of fertili4ers, pesticides,

seedlings, and any instruments, machinery andother movable euipment used in the

production, processing, transformation,handling or transportation of agricultural

products 2loans intended to financeagricultural production3


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Commodity Loans commodity can be defined as any article or

product used in trade or commerce. arise from the fact that some products

involves expenses such as transportation,

storage, financing and mar#eting thus, theneed for commodity loans.

)xport Credit export trade may be pushed by means of

extension of credit to buyers, or on the basis ofarrival of the goods but before the buyer ta#es

possession of them.


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!ndustrial Credit

intended for financing the needs of industries

li#e logging, fishing, manufacturing etc. that

involves big amounts of money

Commercial Credit

sometimes termed as mercantile credit

eal )state Credit

secured purposely for construction, acuisition,expansion or improvement of real estate

properties.


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%ccording to *aturity

hort$term Credit$ payable within 7 yr

from the date of acuisition.

$usually covers the purchase of consumers

goods.

*edium or intermediate term credit

ranges from 7 yr$ 8 yrs.in maturity

for financing improvements on a firm or

industry.


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Long$term Credit $ credits which are

intended from five years up

covers those loans intended for investment

purposes such as acuisition of plant,

machinery, euipment, buildings and the li#e.


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6overnment or Public Credit

Public credit is a branch or a form of

credit in general and sub(ect to rules and

principles that govern the use of all

credit.

means a pledging of the good faith and the

resources of the nation for the repayment of a

debt incurred on behalf of the people


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*oney Laundering

epublic %ct 0791 or the %nti$*oney

Laundering %ct of :117


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Chapter ;

'&C) %N< +%)

'= C)


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!mportant ources 'f Credit

7. !ndividual *oney Lenders/ #nown as a "loan$shar#s" because once they

get hold of a borrower, they rarely let him go.

these usurious money$lenders are notinterested in the repayment of the loan but in#eeping the borrower continually in debt.

charge their borrowers 71> a month and up2 "five$six"3


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The Law on &sury

regulate the rates of interest withincertain prescribed limits.

&nder a Presidential


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:. etail tore "ari$sari tore"/

the biggest source of merchandise credit in the

Philippines

@. Pawnshops/

origin$Montes Pietatis established by

=ranciscans in !taly

Presidential


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B. Commercial +an#s

engaged in the grant of loans not only to

businessman, but also to individuals for personalpurposes

8. Commercial Paper Douse

financial institution that brings together thebuyer and seller of short$term commercial paper,

that is, the lending institution and borrowing

business enterprise. Commercial paper includes notes, ban#ers

acceptances, E foreign exchange bills


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9. avings +an#

accumulate the small savings of depositors,

such accumulated funds are in turn invested in

bonds, real estate mortgages and other forms

of security.

;. ural +an#sprovide chief sources credit especially for

those engaged in agriculture

it minimi4ed the existence of usuriouspractices of some money lenders./


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F.


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F. avings and Loan %ssociations that "corporation engaged in the business of

accumulating the savings of their members asstoc#holders, E using such accumulations, together

with their capital in the case of stoc# corporation, for

loans andor investments in the securities of

productive enterprises or in securities of the

6overnment, or any of its political subdivisions,

instrumentalities or corporations."


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0. =inance Companies

may be divided into @ categories- 7. the instalment sales finance companies, which

discount consumer instalment notes arising through

the sale of merchandise

:. the consumer finance companies, engaged inlending cash directly to the consumer

@. commercial finance companies, which through

various types of loans serve business and industry


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71. Credit &nions

are corporate organi4ations which lend savings

of members to some members of the group. %dvantages of credit union plan of saving and lending 7. There is low cost of operation since, ordinarily, the office

space used for such purpose is donated by the management. :. Losses are very small in view of the fact that there exists an

intimate relationship among all the members of the credit union.

@. ates charged for interest by credit unions are very much

lower than those charged on similar loans by commercial lenders.

B. *embers$borrowers also become entitled to the receipt of

patronage dividends when the same is distributed by the credit

union.


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77. !nsurance Companies

enter into insurance contracts with those who

wish to provide for such contingencies asdeath or fire.

receive premiums and pay out money on the

occurence of the particular contingenciescovered by the contracts


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'ther ources

6!

%gricultural Credit %dministration


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%ssessing and %ppraising Credit ating

7. Can the customer pay his bill when itbecomes dueG

:. 5ill he pay when it becomes dueG


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Cs of Credit/

CharacterCapacity

Capital

Collateral

Conditions

CountryCurrency

Confidence


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Credit Policy

vary from one business enterprise toanother

it may decide what are its credit terms and

what credit periods it will adopt as well as asits credit limits.

$ quantitative credit limit and temporal credit limits


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Chapter F - =inancial tatement

any presentation of date from accountingrecords

balance sheet shows the financial

condition of the business as of a certain

date


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'b(ective of +alance heet %nalysis

7.5hat is the businessmans position in

respect to meeting his financial obligationsG

:.Dow would the creditor fare in the event of

liuidationG

@.!s he progressingG Is his volume going

forwardG Das he increased his net worthG

B. 5hat is the trend of his financial affairsG

Das his financial position become easier ormore involvedG


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*ethods )mployed in the %nalysis

Haluation *ethod involves "trimming down" of various items to

more reasonable and conservative methods

atio %nalysis involves comparison of items in the financial

statements that have a bearing in the financial

soundness and strength of the businessenterprise and the expression of the

comparison in terms of percentage or ratios./


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CD%PT) 0

C)


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Credit !nstrument

refers to a promise, or order, to pay a definite ordeterminable sum of money to bearer, or to a

specified person or his order.

a document which gives evidence of a creditobligation resulting from a past transaction

which sets forth the responsibility of the debtor

to his creditor.


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Classes of Credit !nstruments

%. !nvestment Credit !nstruments +onds

hort$term Notes

toc#s+. Commercial Credit !nstruments

Promises to Pay

'rders to Pay


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+onds

are promises to pay the principal as well asinterest to its holder at a certain specified time

indicated in the instrument.

it represent certificates of indebtedness on thepart of the corporation which issued them.

maybe issued by governments and business

corporations for a number of purposes which aregenerally indicated on the face of the certificates


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CL%) '= +'N


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+'N


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etirement of +onds

Corporate bonds may be retired throughconversion(exchanging a new security usually a

preferred stoc#, for the outstanding issue,

through redemption(repayment of cash3, throughrefunding2replacing the outstanding bonds with

another issue of later maturity, with perhaps

some alterations in the provisions and rate of

interest.


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hort$term Notes

"notes" has always signified obligationmaturing within comparatively short period of

time28yrs3 having a limited number of holders.

issued purposely in order to retire a bond issuepending a more permanent solution to the

financial problems of the corporation.

may be used to pay off ban# loans that havebecome due at a time when an adeuate amount

of cash in the corporation is not available.


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toc#s

represent permanently invested capital of acorporation contributed by the owners termed as

stoc#holders which are evidenced by

certificates.% share of stoc# represents the owners right to

a certain portion of the assets of corporation

upon liuidation and to certain shares of the

profits after prior claims have been paid

Common and Preferred 2types of stoc#s3


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C'**)C!%L C)

Promises to Pay2involve ma#er and payee3 +oo# %ccounts$ "open boo# account", one of the

oldest forms of credit instrument whereby an entry onthe retailers boo# is made, debiting the customer

with the amount involved. +an#


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Promissory Notes $ defined as a written promise of

one person to pay another a definite sum of money ata certain future time. *aybe negotiable or non$

negotiable. //


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'rders to Pay

involves the drawer, drawee and the payee include a variety of instruments #nown by

many names and include chec#s and all #inds of

drafts.


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Chec# $ a written order drawn by a depositor

upon a ban# directing it to pay on demand a

specified sum of money to the bearer or to theorder of some person or corporation named on

the face of the chec# the amount against his

deposit account.

a "ban# note" of an individual

Iinds of chec#s- open check, crossed check, certified

check, cashier's check, post-dated check, stale check,

traveler's check


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'pen Chec# $ one without a crossing

payable to the order of a specified individual or

company order or bearer chec# 2payable to "cash" or bearer of

the instrument3

Crossed Chec# caanot be presented to the ban# for cash payment

such chec# has to be deposited to the account of the

payee in his ban#


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Certified Chec# $ is a chec# which has been

certified by the ban# official with respect to the

sufficiency of funds covering the amountindicated on the face of the instrument

the word "certified" or its euivalent is stamped on

the face of the chec# with the accompanying

signature of the ban# official ma#ing the certification

Cashiers Chec# is the ban#s order to pay

drawn upon itself and signed by the cashiers,

payable to the person or firm designated by thedepositor


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Post$dated Chec#$ a chec# issued by the drawer

showing a future date. !t cannot be paid beforethe date it bears nor will be acceptable for

deposit.

tale Chec# $ a chec# which is not presentedto the ban# for cash payment nor deposited to

the payees account after six months from the

date it bears.


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Travelers Chec#$ is a form of chec# that is not

drawn on any particular ban# but is payable

anywhere throughout the world.

+ouncing Chec#s


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Documents

The Credit System