Definition of credit

1. Things 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 credit in
non-cash form where sources are retail outlets and the like.
2. The debtor makes a promise to pay creditor. A promise to pay , to be valid
should be in writing acknowledged by both the debtor and the creditor. The
promise should speciify the principal amount, interest and the maturity value.
3. 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. 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. Two parties involved in the agreement: Debtor and the creditor. Creditor is
the source of credit, the party who extends the loan and Debtor is the party
requesting for a loan. To be legal, the contract must be in writing specifying
the amount, time of payment, interest and other terms agreed upon by both
parties.
2. It can be increased or decreased by the creditor. Loan limit or elasticity
depends on the capacity of the debtor and appraised value of his collateral.
3. The basic element of credit is the willingness to pay his debt. This is the risk
factor in credit particularly when obligation remains unsettled during its
maturity period. The debtors ability to pay is dependent on his asset and
will to recall maturity date from prompt payment, which measures his
willingness to settle obligations.
4. Maturity date for settlement of obligation is a future time. The creditor vests
his trust on debtors ability and willingness to fulfil obligation when it falls
due.

Foundation of credit
1. Creditor must trust the debtors personal character as a measure of his
capacity to pay. Creditors confidence on the debtors willingness and
capacity to settle obligation is based on trust.
2. In a credit contract, 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 of other supporting paper to
determine his credit rating such as income tax return/ withheld or
employment certificate for personal loans and financial statements for
business loan.
3. 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. Regulations protecting both parties are highly considered for credit
transactions. To evaluate, debtor are given more protection since they canot
 be imprisoned for non-performance of obligation, that is, if they are insolvent
or do not have any asset or property, in this case, the creditor take the risk.
5. This is the possibility that the debtor may not fulfil his promis for payment.
Credit risk shall be borne by the creditors
Cs of credit
1. The personality of the debtor, including his mental and moral attitudes
determining his credit rating.
2. This signifies the persons willingness and ability to pay. The is a measure of
his income level as basis of his paying capacity.
3. This consists of the persons real and personal property which can be strong
foundation for credit approval. His capital can serve as his liquid assets in
case of non-payment or non-fulfilment of obligation.
4. Something that you promise to give someone if you cannot pay back the
loan. This is something of value, the debtors assets as pledge. Common
practice is for collateral to be forty percent (40%) higher than the amount of
loan. Inability to discharge loan obligation may protect creditor with the
presence of collateral as his security.
5. This may include local business conditions or economic conditions during
time of loan application. During wide fluctionations of money value., it is
unwise for creditors to grant loans. When a business or economy is facing
periods of recession or depression, ability to fulfull loan payments maybe
impossible, so creditors may not consider the application.

Classification of credit

As to type of user

1. The personality of the debtor, including his mental and moral attitudes
determining his credit rating.
2. This signifies the persons willingness and ability to pay. The is a measure of
his income level as basis of his paying capacity.
3. This consists of the persons real and personal property which can be strong
foundation for credit approval. His capital can serve as his liquid assets in
case of non-payment or non-fulfilment of obligation.
4. Something that you promise to give someone if you cannot pay back the
loan. This is something of value, the debtors assets as pledge. Common
practice is for collateral to be forty percent (40%) higher than the amount of
loan. Inability to discharge loan obligation may protect creditor with the
presence of collateral as his security.
5. This may include local business conditions or economic conditions during
time of loan application. During wide fluctionations of money value., it is
unwise for creditors to grant loans. When a business or economy is facing
periods of recession or depression, ability to fulfull loan payments maybe
impossible, so creditors may not consider the application.

As to pupose

1. INVESTMENT CREDIT is extended by banks for company who intends to

purchase fixed assets land, building, equipment for business use.
 2. AGRICULTURAL CREDIT is a loan intended for the acquisition of fertilizers,
pesticides, seedlings, transportation of agricultural products and farm
improvements. Debtor are farm breeders and creditors are rural banks.
These loans can be on a short-term or long-term maturity.
3. EXPORT CREDIT uses Letter of Credit as a tool for financing international
trade. This letter of credit is issued by the importers bank. It guarantees
payment to the exporter up to some specified amount of money where the
exporter is protected by a substitution of the banks good faith and credit for
that of the importer. There are two general types: THE IMPORT LETTER OF
CREDIT which requires payment be made in the importers currency; and the
EXPORT LETTER OF CREDIT which requires that it be made in the exporters
currency. Parties to this loan are the importer, importers bank, exporter, and
exporters bank.
4. REAL ESTATE LOAN is intended for the purchase of house and lot, for house
construction, or improvement.
5. INDUSTRIAL CREDI is intended to finance industries like logging, fishing,
mining, quarrying and the like.

As to maturity

1. SHORT TERM LOANS are payable within a period of one year

2. INTERMEDIATE TERM OR MEDIUM TERM LOANS are payable for a period of
one to five years.
3. LONG TERM LOANS are payable for more than five years.

Sources of credit

1. Private Individuals are individual money lenders who loan surplus income to
those in immediate need of cash. They require no collateral but charged
higher interest. Sometimes called loan sharks or usurers because they
prescribe rate of 5/6 or over and above what the law requires.
2. Retail stores are outlets offering a merchandise form of consumer credit. It
offers a book account , Palista for customers of the store and collection
period is during paydays of the month.
3. Pawnshops extend loans in exchange for collateral, a pawn. Pawn acceptable
are personal property or movable assets. The pawner is given ninety days
grace period from the date of maturity of the loan within which to redeem the
pawn by paying the principal amount of the loan plus interest that accrued
thereon. On or before the expiration of the 90-days grace period, the
pawnbroker shall duly notify the pawner in writing that the pawn shall be sold
or otherwise dispose of through auction. If upon the expiration of the grace
period, pawner fails to redeem his pawn, the pawnbroker may sell or dispose
of the pawn only after he has published a notice of auction of unredeemed
articles held as a security for loans in at least two newspapers circulated in
the city or municipality where the pawnbroker has his place of business, six
days prior to the date set for the public auction.
4. Savings and mortgage banks. Any corporation organized for the purpose of
accumulating the savings of depositors and investing them, together with its
capital, in readily marketable bonds and debt securities; commercial papers
and accounts receivables; drafts, bills of exchange, acceptances or notes
 arising out of commercial transactions or in loans secured by bonds,
mortgages on real estate and insured improvements thereon, and other
forms of security or unsecured, and financing of home building and home
development; and such other investments and loans which the Monetary
Board may determine as necessary in the furtherance of the national
economic objectives.
5. Mutual savings banks are mutually owned by their depositors and either pay
out their profits to savers in interest dividends or retail them as reserve
cushion against loss. They sell interest bearing savings deposits to the
public and acquire assets largely in the form of urban residential mortgage.
6. Savings and loan associations. These are organized to obtain funds for home
construction, and majority of their savings are placed in home mortgages.
There are stockholders in these organization who receive dividends over and
above what is paid out to savers. They are sometimes called building and
loan associations which sell financial service to the public and invest the
funds acquired..
7. Credit Unions are mutual institutions whose membership have some common
bond, such as employment in the same company. They are small, non-profit,
thrift and lending institutions organized around some common bond of
membership, typically a common employer. They accept deposits on which
they pay interest or dividends only from their membership and small loans
only to their members usually for the purpose of buying consumer-durable
goods.
8. Insurance Companies are both mutual and stock owned. They receive funds
from policy holders and place the funds in loans, both individually to home
buyers and other small borrowers and also through security purchases in the
organized money and capital market. Service offered to the public is financial
protection against lifes various misfortunes. To build up huge amount of
funds, they have to place part of their assets in investments.
9. Pension funds. The procedure for pension fund is the reverse of that for
insurance companies. The person who lives the longest beyond retirement
receives the highest return of investment, through the periodic pension
checks he receives. Insured pension funds are managed by insurance
companies, and the investment of these funds is frequently subject to the
same government restrictions like insurance contracts. Non insured funds
have wider range in the type of assets they may acquire.
10.Bond and money market funds. These are companies which accept savings
and place them in a pool of investments that allows diversification of assets.
11.Sales Finance companies includes sales and personal finance companies
which make loans to individuals for the purpose of buying automobiles. They
do not lend directly to consumer or companies but they buy the sales
contracts or instalment contracts from the retailer or dealer.
12.Banks. These are commercial, savings, rural, development and investment
banks. They approve loans based on collateral presented. Collaterals are
title for real property or securities. In the absence of available pledge, a co-
maker is required, serving as guarantor for the loan. They are major sources
of credit particularly for businessmen and for the development of certain
industries. COMMERCIAL BANK is a corporation which accepts or creates
demand deposits subject to withdrawal by check. These institutions also
accept drafts and issues letter of credit, by discounting and negotiating
 promissory notes, drafts, bill of exchange and other evidences of debts, by
receiving deposits by buying and selling foreign exchange and gold and silver
bullion and by lending money against personal security or against securities
consisting of personal property or mortgages on improved real estate and
insured improvements thereon.

Credit instrument and characteristics

Payable to bearer is when the instrument does not specify the payees name.
Payable to order is when the instrument specifies the payee name
Payable on demand is an instrument with the current dates, like open checks.
Payable at a future time is an instrument with a future time

Classification of credit instrument

1. Investment credit instruments are those which earns income in the form of
dividends or interest. These are stocks and bonds.
a. Bonds are promises to pay the principal as well as the interest to the
holder at a certain specific time indicated on the face of the
intruments. They represent an indebtedness on the part of the issuing
corporation.
1. Advantages
1. It represent a safe form of investment the company must
honor its obligation of paying its indebtedness to the
bondholder upon maturity regardless of whether it is a
losing or making profit
2. It can be used as a collateral to support loans sought by
the bondholder from financial institutions.
3. Transfer to another holder is easily done by mere
endorsement and delivery of the equipment.
b. Stocks are permanent invested capital of a corporation contributed by
the owners (stockholders) which is evidenced by certificates.
1. Common stocks are with voting rights. One share is equivalent
with one vote. The common stockholder receives portion of the
corporate income which remains after all other claimants have
been satisfied.
2. Preferred stocks are given preference to assets, dividends,
declarations and payments. They have right to fixed dividends,
higher than common shares, and secondary to the interest of all
classes of bonds and notes.
2. Commercial credit instruments are substitutes for money on a business
transactions. These are promissory notes, checks, bill of exchange, bank
draft and bank deposits.
a. Promissory note is a written promise by a person, called the maker, to
another party, the payee to pay a definite sum of money at a certain
future time.
1. Elements of a promissory note:
1. A promise to pay
2. Definite sum of money
3. The future date
b. Check is a written order drawn by a depositor, the drawer, upon a
bank, the drawee, to pay on demand or at a future determinable time
sum of money to order or bearer, the payee.
1. Open check is either payable to order or bearer and payable on
demand or encashed because it has a current date on its face.
2. Post-dated check is an instrument where the date on the face is
a future date considering the day of encashment or payment.
3. Cross check is determined by the presence of a two parallel line
on the left corner. It must be presented through a payees
banking account for deposit.
4. Certified check is an instrument with the word certified stamped
on its face which means good for payment.
5. Managers check/Cashiers check is an order drawn by a bank
for, the same bank, signed by the manager or the cashier
directing the bank to pay the person designated by the
depositor or the depositor himself, definite sum of money on
demand or future determinable time.
6. Travellers check is a promise to pay on demand where this is
generally purchased by an individual before leaving for a trip
outside the country.
7. Overdraft check is known as no sufficient fund check. This is
drawn against the depositors account where the balance is not
sufficient to pay the check.
8. Bouncing check is an instrument drawn against no fund cases
like the depositor has closed his account with the drawee bank.
9. Stale-date check is a check where the date on its face and date
of payment or encashment exceeds six months.
10.ENDORSEMENT OF CHECKS
1. Special endorsement applies to check payable to order
where the name of the payee is specified on the face of
the check.
2. Blank endorsement apples to checks payable to bearer
where there is no specified payee. Whoever is the holder
in due course, must endorse the check at the back for
encashment.
3. Restrictive endorsement prohibits further negotiation of
the check when endorsement is in the favour of a
particular person only. It specifies the word for deposit
only
4. Qualified endorsement constitutes the endorser as a mere
assignor of the title of the check. It must be done by
adding words without recourse or word of similar
import.
11.USES AND LIMITATIONS OF CHECKS
1. Safety and convenience
2. Stop payment notice
3. For odd amounts
4. As a receipt
5. For large amounts
c. A bill of exchange orders the bank to make payment to a specified
party, usually either the exporter or the exporters bank. If the
documents are drawn correctly and other terms of the letter of credit,
an instrument to finance import-export, have been met, the importers
bank will then comply with the order.
1. Sight draft is payable on demand as soon as the importers bank
receives it.
2. Time draft is payable on some future date.
d. Bank deposits
1. Saving deposit is an interest-earning deposit computed on a
daily or monthly balance of deposit.
2. Time deposit is another interest earning deposit that may only
be withdrawn after the stipulation period of time and interest is
higher than saving deposits where maturity is from 30 days to 5
years.
3. Demand deposit also referred to as checking or current account
generally does not earn interest.