CREDIT AND COLLECTION WEEK 2 UNDER THE REPUBLIC

Philippines became a republic on July 4, 1946. It was a

THE DEVELOPMENT OF CREDIT period of reconstruction and rehabilitation.

Pre-Spanish Time Rehabilitation Finance Corporation

The Philippines had been trading with foreign countries - Was established on Oct. 29, 1946.
such as - It provided credit facilities for the rehabilitation of
China Japan Sumatra agriculture, commerce and industry.
India - Also assisted the reconstruction of war-damaged
Arabia Siam Borneo properties.
Java - 1958, it became the Dev’t Bank of the Philippines.
Moluccas East Indian islands
Hundreds of years prior to the arrival of the Spanish CENTRAL BANK OF THE PHILIPPINES
colonization, what were Filipino traders famous for? • Established in 1949.
• Honesty and excellent credit record • After President Manuel Roxas assumed office in
1946, he instructed then Finance Secretary Miguel
These cultural values came from the Malay culture. Cuaderno, Sr. to draw up a charter for a central bank.
• The establishment of a monetary authority became
Dishonesty and non-payment of debt were greatly imperative a year later as a result of the findings of the
discouraged by Joint Philippine- American Finance Commission chaired
punishment which are considered primitive under the by Mr. Cuaderno.
present culture.
3 January 1949
Spanish Time • The Central Bank of the Philippines (CBP) was
•During the initial years of Spanish rule, free trade was inaugurated and formally opened with Hon. Miguel
encouraged. Cuaderno, Sr. as the first governor.
•The goods of the Far East were marketed to America • Since the establishment of the CB, monetary policies
through Manila and then through Acapulco, Mexico. have been fashioned to improve production,
employment, and quality of life of the people, esp. in
Galleon Trade rural sectors where poverty has been more
• Is a product of mercantilism in the Philippines widespread.
• Was called the Manila-Acapulco Trade
• Was called galleon trade because it was carried on by THE BASIC ELEMENTS OF CREDIT
transpacific galleons. 1. Trust and confidence.
• Pacific Ocean to Atlantic Ocean The essence of credit is confidence on the part of the
• It was a government monopoly creditor.
• The privilege of doing business in the galleon trade Motivated by faith in his fellowmen.
went to the governor-general, religious officials, royal 2. Futurity
officials, soldiers, and their relatives and friends. There is always a future time involved Regardless of
the hour, day, month or year
Obras Pias 3. Risk
• A charity foundation by laymen used for charity The uncertainty faced by the creditor, if he gets paid in
works and religious activities. It became a banking full, in part on not at all. The risk is minimized when
institution run by friars. loan is “Secured.”
• Forerunner of the banking institutions in the
Philippines. FOUNDATION OF CREDIT
• The funds of the obras pias were donated by rich What is the basis of credit? Confidence
citizens for religious
projects and these were managed by the religious Confidence is 2-fold in character
orders.  The lender must feel morally certain that the
borrower will be able to pay his debt; that his
America Era affairs are in such that he will be able to pay the
• American government gave priority to agricultural debt, when it is due.
development.  The lender must feel certain that the borrower is a
• The American administrators introduced a better man of integrity. The delay caused by the
banking and credit obligation is vexatious, and men never voluntarily
system to promote economic development, especially accept a credit instrument which is likely to be
in the rural contested in the courts.
areas.
Credit
Rural Credit Law • is based upon confidence in character as well as
• Was enacted in 1915 upon confidence in business ability.
• Used to complement the agricultural cooperatives,
particularly credit THE CREDIT CONTRACT
associations in every town all over the country. Credit arise in various ways:
1. Purchase and sale of goods and services.
Philippine National Bank 2. Borrowing money.
• Established in 1916 3. Issuance of fiduciary money.
• Extended long-term loans to agriculture and industry.
• Has also functioned as de facto Central Bank of the CHARACTERISTICS OF A CREDIT CONTRACT
Philippines until 1949. Credit contract is characterized as follows:
1. It is a bi-partite contract.
Factors in the Failure of the Credit Program There are 2 parties involved.
1. Farmers did not have steady income due to the 2. It is a pecuniary contract.
destruction of their crops. Pecuniary – in the form of money (it acts as the
2. They were exploited by the landlords who give them standard of value)
unfair share in the harvest. 3. It creates a legal obligation.
3. The negative attitudes of the borrowers toward their The contract creates the right of the creditor to collect
debts from the debtor.
influenced their refusal to settle their financial 4. It has the fiduciary element.
obligations. It is based on trust. Faith on the borrower’s ability and
4. They considered loans as another form of dole outs willingness to pay should exist.
and therefore they did not feel the responsibility of 5. It is based on personal factors.
paying the gov’t lending institutions. The contract is perfected based on the person’s degree
of moral as well as business competence.
WEEK 3

THE GREATER THE TEST,

THE GREATER THE CAPACITY.

The Emergence and Challenge of the Credit

Economy

EMERGENCE
the fact of something becoming known or starting to
exist

ECONOMY
the system of trade and industry by which the wealth
of a country is made and used

In the days before civilization,

What was the earliest method of acquiring goods that

were owned by someone else?
 It’s probably by a simple act of plunder or
robbery where brute force and strength had the
force of authority
 The stronger party almost always took
possession of the weaker one trough force or
stealth

THE BIRTH OF CREDIT

Credere (Latin of Credit)

 To trust

People have trust in one other.

Credit is a product of necessity

Other meanings of credit

 Credit
the ability to borrow money, goods or service and
agrees to pay at a specified time
 Credit (in banking)
An entry in the books of a bank showing its obligation
to a customer.
 Credit (in bookkeeping)
An entry showing that the person named has a right to
demand something but not necessarily money.
 Credit is the lifeblood of business.
 The customers are able to obtain the desired goods ADVANTAGES OF USING CREDIT
even at a time when they suffer from lack of a. Credit facilitates and contributes to the increase in
cash or purchasing power. wealth by making funds available for productive
 Purchasing power purposes.
The financial ability to buy products and services b. Credit saves time and expense by providing a safer
 What is the importance of credit? and more convenient means of completing
WHOLESALE VS RETAIL transactions.
Customers are able to buy and get what they desire c. Credit helps expand the purchasing power of every
even when they don’t have enough cash because of member of the business community – from producer to
CREDIT the ultimate consumer.
d. Credit enables immediate consumption of goods
Customers are able to buy and get what they desire thereby providing for an increase in material well-
even when they don’t have enough cash because of being.
CREDIT.9% of personal consumption expenditures were e. Credit helps expand economic opportunities through
done through credit compared to 50% in Singapore and education, job training and job creation.
30% in Malaysia and 16% in Thailand f. Credit spreads progress to various sectors of the
economy.
g. Credit makes possible the birth of new industries.
h. Credit helps buying become more convenient for
consumers.

DISADVANTAGES OF USING CREDIT

a. Credit, at times encourages speculations.
b. Credit also tends to contribute to extravagance and
carelessness on the part of people who obtain it.
c. Failure to generate expected income can only cause
a collapse which affects the nation’s economy.
d. Credit causes one businessman to be dependent
upon others.

The Cost of Credit

How much do you pay for your credit?
 Interest
• Is usually expressed as per cent
• it is rent paid for the use of money (Business
Mathematics, Altares, Arce)
 Risk
• the possibility of something bad happening
  These loans can be on a short-term or long-term
WEEK 4 maturity.
c) Export credit
CLASSES AND KINDS OF CREDIT  Used of “letter of credit” as a tool for financing
1.The classes and kinds of credit according to its international trade. This letter of credit of LC is
purpose are: issued by the importer’s bank, it guarantees
a. Commercial credit payment to the exporter up to some specified
Includes the promise to pay off businessmen for the amount of money.
funds they borrowed in the purchase of goods for  In LC, the exporter is protected by substitution of
productive or profitable ventures. These are the bank’s good faith and credit for that of the
merchants, distributors and manufacturers. importer.
b. Agricultural Credit  2 General Types
Includes the promise to pay off farmers and farm o The import letter of credit which requires payment
organization for the funds and farm organization for be made in the importer’s currency.
the funds they borrowed in the acquisition of farm o The export letter of credit which requires that it be
inputs. made in the exporter’s currency.
c. Investment Credit
Includes the promise to pay off individuals or business PARTIES TO LC
firms for the loans they obtained in buying capital 1) Importer
goods. This is also called “industrial credit”. 2) Importer’s bank
3) Exporter
4) Exporter’s bank
d. Consumer Credit
All obligations to pay off people for the money they d) Real estate loan
borrowed for consumption purposes.  Is intended for the purchase of house and lot, for
e. Speculative Credit house construction, or improvement.
Used for dealing in securities or goods with the e) Industrial credit
intention of making a profit through favorable price  Is intended to finance industries like logging,
changes. fishing, mining, quarrying and the like.
f. Export Credit
Involved in all sorts of transactions for which cash is 3. ACCORDING TO MATURITY
not paid on or before shipment of goods out of the 1) Short-term loans – are payable within a period of
country. one year.
g. Industrial Credit 2) Intermediate loans or medium-term – payable for a
Is intended for financing the needs of industries like period of one to five years.
logging, fishing, manufacturing, and others, and which 3) Long-term loans – are payable for more than five
involves big amounts of money. years.
h. Real Estate Credit
When credit is secured purposely for construction, 4. ACCORDING TO FORMS OF CREDIT
acquisition, expansion or improvement of real estate 1) Cash form of credit – borrowing cash
properties, it is termed as real estate credit. 2) Merchandise form of credit – borrowing goods

Classifications of Credit The following can be used as collateral: land, stocks,

1. ACCORDING TO TYPE OF USER bonds, machines, houses, crops and other
a) Consumer credit valuable properties.
b) Convenient form of payment
c) Aids in financial emergencies -Loans, whether secured or unsecured, are risk-
d) Buying durables on installment inherent although the former is less risky. Although
secured loans are backed by collateral, creditors prefer
a) Consumer credit to have cash rather than a property or asset which still
 This is a credit used by individuals to help finance needs to be converted into cash.
or refinance the purchase of commodities for
personal consumption. -The following are considered private sectors of the
 This is different from business credit in terms of the economy; individuals, partnerships, corporations
borrower’s purpose, that is, for personal or and other private institutions.
household use. A public credit includes all grants of credit to
b) Charge accounts government whether national, provincial, municipal
 Are for non-durables, payable, within 2 months or and its instrumentalities while a
60-day term, in four payments. Private credit refers to all grants of credit to non-
c) Installment accounts government.
 For durables, payable for more than six months to
one or more LOANS AND DISCOUNT FUNCTION
years. Banks do not only accept deposits but also extend
 Payment is monthly and a down payment is loans.
needed before unit on credit is delivered
d) Revolving credit LOANS
 Is a combination of charge and installment -They are the most substantial source of credit not only
accounts. for individuals and private businesses but also for the
 The credit period is 90 days. government.
 Under this plan, the debtor can avail of loan -The commercial banks stand ready to help our
renewal after 90 days, or within 90 days, for the businessmen in their need for credit.
paid portion, provided he had not been delinquent -It is important that a bank will be able to accumulate
in payment of the original loan. the necessary amount to pay the interest to their
depositor.
2. ACCORDING TO PURPOSE
a) Investment credit In the case of a commercial bank, most of their
 Is extended by banks for company who intends to customers are businessmen and their needs for funds
purchase fixed assets – land, building equipment are mostly short-term in nature.
for business use.
b) Agricultural credit For instance, A manufacturer sells his goods on credit
 Is a loan intended for the acquisition of fertilizers, to a wholesaler and a commercial paper evidences the
pesticides, seedlings, transportation of agricultural sale. If the manufacturer is in need of funds, he can
products and farm improvements. discount the commercial paper with the bank and the
 Debtors are farm breeders and creditors are rural bank in turn rediscounts the same commercial paper
banks. with the Central Bank to replenish its funds.
 The mortgagee –the bank The
mortgagor –the borrower

Credit According to the Allocation of Risk

1. Secured Credit
Credit of this depends on some specific thing, legally
set aside to guarantee its payment.
Banks require collaterals like real estate titles to assure
payments of debt.
The great majority of loans, about 66% granted by
commercial banks, are secured loans.
2. Unsecured Credit
This is the type of credit where the debtor assured
payment without a particular asset pledged to secure
the debt.
When a consumer buys an appliance on credit or a
farmer gets a loan, say for Masagana ’99, they obtain
credit without collateral to back up.
About 34% of total loans granted by commercial banks
are on this category. Micro credit also belongs to this
category.

NATURE OF CREDIT
Credit
 Is the ability to obtain a thing of value in exchange
for a promise to pay definite sum of money, on
demand or future determinable time.
 This creates obligations and rights to both debtor
and creditor.
 There is the obligation of the debtor to pay his debt
and the right of the creditor to collect payment.
What is REDISCOUNTING? NATURE OF CREDIT
 is a standing credit facility provided by the BSP to 1. It is the ability to obtain a thing of value.
help banks meet temporary liquidity needs by Thing of value may mean cash form of credit or
refinancing the loans they extend to their clients. merchandise form of credit.
 is one of the Bangko Sentral ng Pilipinas' (BSP) Debtor can apply for cash credit from several sources
standing credit facility and enable banks to like banks, private individuals or other financial
liquidate and refinance loans using securities as intermediaries.
collaterals. Merchandise form of creit is non-cash form, where
 Through the facility, the BSP also makes possible sources are retail outlets and the like.
the timely delivery of credit to all productive 2. A promise to pay
sectors of the economy. The debtor makes a promise to pay the creditor. A
 Moreover, rediscounting is one of the monetary promise to pay, to be valid should be in writing
tools of the BSP to regulate the level of liquidity in acknowledged by both the debtor and the creditor.
the financial system. The BSP’s rediscounting is The promise should specify the
administered by the Department of Loans and 1) Principal amount
Credit. 2) Interest
3) Maturity date
Types of Loans Granted by Banks 3. Definite sum of money
1. Demand or callable loan Credit involves exact amount of money loaned, or
This loan that does not have a definite maturity and money value for non-cash form of credit.
therefore, is subject to payment anytime the bank The contract must identify the principal value of loan
deems it payable. and the corresponding interest for the credit period.
2. Time Loan 4. Payable on demand or future time
This type of loan may be a short-term, medium-term or A promise by the debtor for the settlement of
long-term which payable at a specified future time. obligation may involve a future date as loan maturity,
Banks may extend loans against the general credit or anytime the creditor demands payment.
standing of the borrower.
TIME LOAN CHARACTERISTICS OF CREDIT
Character Loan 1. It is a bi-partite or a two-party contract
Is usually short-term. For loans whose payment is 2 parties are involved in the agreement:
longer than one year, the bank requires collateral. – 1. Debtor
called “Collateralized Loan or Secured loan” 2. Creditor
Collateralized Loan 2. It’s elastic
Is a loan which is a secured loan. -It can be increased or decreased by the creditor.
Foreclosure proceeding may be imposed by the court -The loan limit or elasticity depends upon the capacity
in the even of failure to pay or default in the payment of the debtor and appraised value of his collateral.
of the obligation. 3. The presence of trust and faith
-The basic element of credit is the creditor’s reliance
3. Foreclosure on both the debtor’s ability and willingness to pay his
Is the process of enforcing the lien on the property debt.
pledges by selling the property in an auction in order to -This is also the risk factor in credit, esp. when
recover the money lent and all the expenses incurred obligations remains unpaid on the maturity date.
in the process. In tagalog = rematahin - The debtor’s ability to pay is dependent on his asset
What is Lien? and will to pay on time, which is the measure of his
is the legal right of a creditor to sell the collateral willingness to pay the obligations.
property of a debtor who fails to meet the obligations 4. It involves futurity
of a loan contract. -Maturity date for settlement of obligation is a future
time.
Mortgage Contract -The creditor trusts on the debtor’s ability and
is a debt instrument, secured by the collateral of willingness to fulfill obligation when it falls due.
specified real estate property, that the borrower is
obliged to pay back with a predetermined set of FOUNDATIONS OF CREDIT
payments. 1. Confidence
2 Parties
-Creditor must trust the debtor’s personal character as
a measure of his capacity to pay.
-The creditor’s confidence on the debtor’s willingness
and capacity to settle obligation is based on trust.
2. Proper Facilities
- Legal facilities must exist to make the agreement
valid.
-These are the credit information and credit document.

-Credit information includes data about the debtor as a

gauge of his paying capacity which can be gathered
out of a credit investigation.
- Credit document is the written agreement signed by
both parties identifying principal loan, interest and
maturity date or other supporting papers to determine
his credit rating such as copy of income tax return/
withheld or employment certificate for personal loans
and financial statements for business loans.
3. Stability of monetary standard
-Purchasing power of money is considered when
extending credit. The more stable value of money, the
greater is the possibility for approving credit. Creditors
may be reluctant in parting with excess income during
wide fluctuations of money value.
4. Government Assistance
- Regulations protecting both parties are highly
considered for credit transactions.
-To evaluate, debtors are given more protection since
they cannot be imprisoned for non-performance of
obligation, that is, if they are insolvent or do not have
any assets or property. In this case, the creditors take
the risk.
5. Credit Risk
- This is the possibility that the debtor may not fulfill
his promise for payment.
-Credit risk shall be borne by the creditors.