CREDIT AND COLLECTION WEEK 2 - Also assisted the reconstruction of war-damaged properties.

- 1958, it became the Dev’t Bank of the Philippines.

THE DEVELOPMENT OF CREDIT
CENTRAL BANK OF THE PHILIPPINES
Pre-Spanish Time • Established in 1949.
The Philippines had been trading with foreign countries such as • After President Manuel Roxas assumed office in 1946, he
China Japan Sumatra India instructed then Finance Secretary Miguel Cuaderno, Sr. to draw up a
Arabia Siam Borneo Java charter for a central bank.
Moluccas East Indian islands • The establishment of a monetary authority became imperative a
Hundreds of years prior to the arrival of the Spanish colonization, year later as a result of the findings of the Joint Philippine- American
what were Filipino traders famous for? Finance Commission chaired by Mr. Cuaderno.
• Honesty and excellent credit record
3 January 1949
These cultural values came from the Malay culture. • The Central Bank of the Philippines (CBP) was inaugurated and
formally opened with Hon. Miguel Cuaderno, Sr. as the first
Dishonesty and non-payment of debt were greatly discouraged by governor.
punishment which are considered primitive under the present • Since the establishment of the CB, monetary policies have been
culture. fashioned to improve production, employment, and quality of life of
the people, esp. in rural sectors where poverty has been more
Spanish Time widespread.
•During the initial years of Spanish rule, free trade was encouraged.
•The goods of the Far East were marketed to America through THE BASIC ELEMENTS OF CREDIT
Manila and then through Acapulco, Mexico. 1. Trust and confidence.
The essence of credit is confidence on the part of the creditor.
Galleon Trade Motivated by faith in his fellowmen.
• Is a product of mercantilism in the Philippines 2. Futurity
• Was called the Manila-Acapulco Trade There is always a future time involved Regardless of the hour, day,
• Was called galleon trade because it was carried on by transpacific month or year
galleons. 3. Risk
• Pacific Ocean to Atlantic Ocean The uncertainty faced by the creditor, if he gets paid in full, in part
• It was a government monopoly on not at all. The risk is minimized when loan is “Secured.”
• The privilege of doing business in the galleon trade went to the
governor-general, religious officials, royal officials, soldiers, and their FOUNDATION OF CREDIT
relatives and friends. What is the basis of credit? Confidence

Obras Pias Confidence is 2-fold in character

• A charity foundation by laymen used for charity works and  The lender must feel morally certain that the borrower will be
religious activities. It became a banking institution run by friars. able to pay his debt; that his affairs are in such that he will be
• Forerunner of the banking institutions in the Philippines. able to pay the debt, when it is due.
• The funds of the obras pias were donated by rich citizens for  The lender must feel certain that the borrower is a man of
religious integrity. The delay caused by the obligation is vexatious, and
projects and these were managed by the religious orders. men never voluntarily accept a credit instrument which is likely
to be contested in the courts.
America Era
• American government gave priority to agricultural development. Credit
• The American administrators introduced a better banking and • is based upon confidence in character as well as upon confidence
credit in business ability.
system to promote economic development, especially in the rural
areas. THE CREDIT CONTRACT
Credit arise in various ways:
Rural Credit Law 1. Purchase and sale of goods and services.
• Was enacted in 1915 2. Borrowing money.
• Used to complement the agricultural cooperatives, particularly 3. Issuance of fiduciary money.
credit
associations in every town all over the country. CHARACTERISTICS OF A CREDIT CONTRACT
Credit contract is characterized as follows:
Philippine National Bank 1. It is a bi-partite contract.
• Established in 1916 There are 2 parties involved.
• Extended long-term loans to agriculture and industry. 2. It is a pecuniary contract.
• Has also functioned as de facto Central Bank of the Philippines Pecuniary – in the form of money (it acts as the standard of value)
until 1949. 3. It creates a legal obligation.
The contract creates the right of the creditor to collect from the
Factors in the Failure of the Credit Program debtor.
1. Farmers did not have steady income due to the destruction of 4. It has the fiduciary element.
their crops. It is based on trust. Faith on the borrower’s ability and willingness to
2. They were exploited by the landlords who give them unfair share pay should exist.
in the harvest. 5. It is based on personal factors.
3. The negative attitudes of the borrowers toward their debts The contract is perfected based on the person’s degree of moral as
influenced their refusal to settle their financial obligations. well as business competence.
4. They considered loans as another form of dole outs and therefore
they did not feel the responsibility of paying the gov’t lending WEEK 3
institutions.
THE GREATER THE TEST,
UNDER THE REPUBLIC THE GREATER THE CAPACITY.
Philippines became a republic on July 4, 1946. It was a period of
reconstruction and rehabilitation. The Emergence and Challenge of the Credit Economy

Rehabilitation Finance Corporation EMERGENCE

- Was established on Oct. 29, 1946. the fact of something becoming known or starting to exist
- It provided credit facilities for the rehabilitation of agriculture,
commerce and industry. ECONOMY
the system of trade and industry by which the wealth of a country is c. Credit helps expand the purchasing power of every member of the
made and used business community – from producer to the ultimate consumer.
d. Credit enables immediate consumption of goods thereby
In the days before civilization, providing for an increase in material well-being.
e. Credit helps expand economic opportunities through education,
What was the earliest method of acquiring goods that were owned job training and job creation.
by someone else? f. Credit spreads progress to various sectors of the economy.
 It’s probably by a simple act of plunder or robbery where brute g. Credit makes possible the birth of new industries.
force and strength had the force of authority h. Credit helps buying become more convenient for consumers.
 The stronger party almost always took possession of the
weaker one trough force or stealth DISADVANTAGES OF USING CREDIT
a. Credit, at times encourages speculations.
THE BIRTH OF CREDIT b. Credit also tends to contribute to extravagance and carelessness
on the part of people who obtain it.
Credere (Latin of Credit) c. Failure to generate expected income can only cause a collapse
 To trust which affects the nation’s economy.
d. Credit causes one businessman to be dependent upon others.
People have trust in one other.
Credit is a product of necessity The Cost of Credit
How much do you pay for your credit?
Other meanings of credit  Interest
 Credit • Is usually expressed as per cent
the ability to borrow money, goods or service and agrees to pay at a • it is rent paid for the use of money (Business Mathematics, Altares, Arce)
specified time  Risk
 Credit (in banking) • the possibility of something bad happening
An entry in the books of a bank showing its obligation to a customer.
 Credit (in bookkeeping) WEEK 4
An entry showing that the person named has a right to demand
something but not necessarily money. CLASSES AND KINDS OF CREDIT
 Credit is the lifeblood of business. 1.The classes and kinds of credit according to its purpose are:
 The customers are able to obtain the desired goods even at a a. Commercial credit
time when they suffer from lack of cash or purchasing power. Includes the promise to pay off businessmen for the funds they
 Purchasing power borrowed in the purchase of goods for productive or profitable
The financial ability to buy products and services ventures. These are merchants, distributors and manufacturers.
 What is the importance of credit? b. Agricultural Credit
WHOLESALE VS RETAIL Includes the promise to pay off farmers and farm organization for
Customers are able to buy and get what they desire even when they the funds and farm organization for the funds they borrowed in the
don’t have enough cash because of CREDIT acquisition of farm inputs.
c. Investment Credit
Customers are able to buy and get what they desire even when they Includes the promise to pay off individuals or business firms for the
don’t have enough cash because of CREDIT.9% of personal loans they obtained in buying capital goods. This is also called
consumption expenditures were done through credit compared to “industrial credit”.
50% in Singapore and 30% in Malaysia and 16% in Thailand

d. Consumer Credit
All obligations to pay off people for the money they borrowed for
consumption purposes.
e. Speculative Credit
Used for dealing in securities or goods with the intention of making a
profit through favorable price changes.
f. Export Credit
Involved in all sorts of transactions for which cash is not paid on or
before shipment of goods out of the country.
g. Industrial Credit
Is intended for financing the needs of industries like logging, fishing,
manufacturing, and others, and which involves big amounts of
money.
h. Real Estate Credit
When credit is secured purposely for construction, acquisition,
expansion or improvement of real estate properties, it is termed as
real estate credit.

Classifications of Credit
1. ACCORDING TO TYPE OF USER
a) Consumer credit
b) Convenient form of payment
c) Aids in financial emergencies
d) Buying durables on installment

a) Consumer credit
 This is a credit used by individuals to help finance or refinance
the purchase of commodities for personal consumption.
 This is different from business credit in terms of the borrower’s
purpose, that is, for personal or household use.
b) Charge accounts
 Are for non-durables, payable, within 2 months or 60-day term,
ADVANTAGES OF USING CREDIT in four payments.
a. Credit facilitates and contributes to the increase in wealth by c) Installment accounts
making funds available for productive purposes.  For durables, payable for more than six months to one or more
b. Credit saves time and expense by providing a safer and more years.
convenient means of completing transactions.
 Payment is monthly and a down payment is needed before unit In the case of a commercial bank, most of their customers are
on credit is delivered businessmen and their needs for funds are mostly short-term in
d) Revolving credit nature.
 Is a combination of charge and installment accounts.
 The credit period is 90 days. For instance, A manufacturer sells his goods on credit to a
 Under this plan, the debtor can avail of loan renewal after 90 wholesaler and a commercial paper evidences the sale. If the
days, or within 90 days, for the paid portion, provided he had manufacturer is in need of funds, he can discount the commercial
not been delinquent in payment of the original loan. paper with the bank and the bank in turn rediscounts the same
commercial paper with the Central Bank to replenish its funds.
2. ACCORDING TO PURPOSE
a) Investment credit
 Is extended by banks for company who intends to purchase
fixed assets – land, building equipment for business use.
b) Agricultural credit
 Is a loan intended for the acquisition of fertilizers, pesticides,
seedlings, transportation of agricultural products and farm
improvements.
 Debtors are farm breeders and creditors are rural banks.
 These loans can be on a short-term or long-term maturity.
c) Export credit
 Used of “letter of credit” as a tool for financing international
trade. This letter of credit of LC is issued by the importer’s bank,
it guarantees payment to the exporter up to some specified
amount of money.
 In LC, the exporter is protected by substitution of the bank’s
good faith and credit for that of the importer.
 2 General Types
o The import letter of credit which requires payment be made in
the importer’s currency.
o The export letter of credit which requires that it be made in the
exporter’s currency.

PARTIES TO LC What is REDISCOUNTING?

1) Importer  is a standing credit facility provided by the BSP to help banks
2) Importer’s bank meet temporary liquidity needs by refinancing the loans they
3) Exporter extend to their clients.
4) Exporter’s bank  is one of the Bangko Sentral ng Pilipinas' (BSP) standing credit
facility and enable banks to liquidate and refinance loans using
d) Real estate loan securities as collaterals.
 Is intended for the purchase of house and lot, for house  Through the facility, the BSP also makes possible the timely
construction, or improvement. delivery of credit to all productive sectors of the economy.
e) Industrial credit  Moreover, rediscounting is one of the monetary tools of the
 Is intended to finance industries like logging, fishing, mining, BSP to regulate the level of liquidity in the financial system. The
quarrying and the like. BSP’s rediscounting is administered by the Department of Loans
and Credit.
3. ACCORDING TO MATURITY
1) Short-term loans – are payable within a period of one year. Types of Loans Granted by Banks
2) Intermediate loans or medium-term – payable for a period of one 1. Demand or callable loan
to five years. This loan that does not have a definite maturity and therefore, is
3) Long-term loans – are payable for more than five years. subject to payment anytime the bank deems it payable.
2. Time Loan
4. ACCORDING TO FORMS OF CREDIT This type of loan may be a short-term, medium-term or long-term
1) Cash form of credit – borrowing cash which payable at a specified future time. Banks may extend loans
2) Merchandise form of credit – borrowing goods against the general credit standing of the borrower.
TIME LOAN
The following can be used as collateral: land, stocks, bonds, Character Loan
machines, houses, crops and other valuable properties. Is usually short-term. For loans whose payment is longer than one
year, the bank requires collateral. – called “Collateralized Loan or
-Loans, whether secured or unsecured, are risk-inherent although Secured loan”
the former is less risky. Although secured loans are backed by Collateralized Loan
collateral, creditors prefer to have cash rather than a property or Is a loan which is a secured loan.
asset which still needs to be converted into cash. Foreclosure proceeding may be imposed by the court in the even of
failure to pay or default in the payment of the obligation.
-The following are considered private sectors of the economy;
individuals, partnerships, corporations and other private 3. Foreclosure
institutions. Is the process of enforcing the lien on the property pledges by selling
A public credit includes all grants of credit to government whether the property in an auction in order to recover the money lent and all
national, provincial, municipal and its instrumentalities while a the expenses incurred in the process. In tagalog = rematahin
Private credit refers to all grants of credit to non- government. What is Lien?
is the legal right of a creditor to sell the collateral property of a
LOANS AND DISCOUNT FUNCTION debtor who fails to meet the obligations of a loan contract.
Banks do not only accept deposits but also extend loans.
Mortgage Contract
LOANS is a debt instrument, secured by the collateral of specified real
-They are the most substantial source of credit not only for estate property, that the borrower is obliged to pay back with a
individuals and private businesses but also for the government. predetermined set of payments.
-The commercial banks stand ready to help our businessmen in their 2 Parties
need for credit. The mortgagee –the bank The mortgagor –the
-It is important that a bank will be able to accumulate the necessary borrower
amount to pay the interest to their depositor.
Credit According to the Allocation of Risk
1. Secured Credit
Credit of this depends on some specific thing, legally set aside to -Credit information includes data about the debtor as a gauge of his
guarantee its payment. paying capacity which can be gathered out of a credit investigation.
Banks require collaterals like real estate titles to assure payments of - Credit document is the written agreement signed by both parties
debt. identifying principal loan, interest and maturity date or other
The great majority of loans, about 66% granted by commercial supporting papers to determine his credit rating such as copy of
banks, are secured loans. income tax return/ withheld or employment certificate for personal
2. Unsecured Credit loans and financial statements for business loans.
This is the type of credit where the debtor assured payment without 3. Stability of monetary standard
a particular asset pledged to secure the debt. -Purchasing power of money is considered when extending credit.
When a consumer buys an appliance on credit or a farmer gets a The more stable value of money, the greater is the possibility for
loan, say for Masagana ’99, they obtain credit without collateral to approving credit. Creditors may be reluctant in parting with excess
back up. income during wide fluctuations of money value.
About 34% of total loans granted by commercial banks are on this 4. Government Assistance
category. Micro credit also belongs to this category. - Regulations protecting both parties are highly considered for credit
transactions.
NATURE OF CREDIT -To evaluate, debtors are given more protection since they cannot
Credit be imprisoned for non-performance of obligation, that is, if they are
 Is the ability to obtain a thing of value in exchange for a insolvent or do not have any assets or property. In this case, the
promise to pay definite sum of money, on demand or future creditors take the risk.
determinable time. 5. Credit Risk
 This creates obligations and rights to both debtor and creditor. - This is the possibility that the debtor may not fulfill his promise for
 There is the obligation of the debtor to pay his debt and the payment.
right of the creditor to collect payment. -Credit risk shall be borne by the creditors.
NATURE OF CREDIT
1. It is the ability to obtain a thing of value.
Thing of value may mean cash form of credit or merchandise form of
credit.
Debtor can apply for cash credit from several sources like banks,
private individuals or other financial intermediaries.
Merchandise form of creit is non-cash form, where sources are retail
outlets and the like.
2. A promise to pay
The debtor makes a promise to pay the creditor. A promise to pay,
to be valid should be in writing acknowledged by both the debtor
and the creditor.
The promise should specify the
1) Principal amount
2) Interest
3) Maturity date
3. Definite sum of money
Credit involves exact amount of money loaned, or money value for
non-cash form of credit.
The contract must identify the principal value of loan and the
corresponding interest for the credit period.
4. Payable on demand or future time
A promise by the debtor for the settlement of obligation may involve
a future date as loan maturity, or anytime the creditor demands
payment.

CHARACTERISTICS OF CREDIT
1. It is a bi-partite or a two-party contract
2 parties are involved in the agreement:
1. Debtor
2. Creditor
2. It’s elastic
-It can be increased or decreased by the creditor.
-The loan limit or elasticity depends upon the capacity of the debtor
and appraised value of his collateral.
3. The presence of trust and faith
-The basic element of credit is the creditor’s reliance on both the
debtor’s ability and willingness to pay his debt.
-This is also the risk factor in credit, esp. when obligations remains
unpaid on the maturity date.
- The debtor’s ability to pay is dependent on his asset and will to pay
on time, which is the measure of his willingness to pay the
obligations.
4. It involves futurity
-Maturity date for settlement of obligation is a future time.
-The creditor trusts on the debtor’s ability and willingness to fulfill
obligation when it falls due.

FOUNDATIONS OF CREDIT
1. Confidence
-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.