CHAPTER IV

CREDIT, ITS USES, CLASSIFICATIONS, AND RISKS

 CREDIT
• simply defined as the power or ability to obtain
money, goods and services at the present time in
exchange for promise to pay with money upin
demand or at a future determinate time.
 FUNCTIONS OF CREDIT
• is used as substitute for money
• it enables goods and services to be transferred from one
person to another-
• as a medium of exchange -enables business and
corporations to gather large amounts of capital to
undertake large-scale production
• allows wealth fully utilized
• helps in the expansion and contraction of the money supply
 CHARACTERISTICS OF CREDIT
• Credit as a Bipartite contract- credit always involves two parties: the
debtor who obtains the money, goods or services in exchange of his
promise to pay out at a future date; and the creditor who leads his
money goods and services for the light to collect on demand or at a
future determinable time.
• Credit as a Pecuniary contract-credit is always expressed in terms on
money. When you buy goods on credit from a retail store or borrow
money from a bank or any financing institution, it is understood that
such obligation shall be paid in money.
• Credit as a Fiduciary contract- since credit always been
based on trust and confidence, the debtor must always be
able to merit the confidence of the creditor. Without this,
there can be no credit transaction.
• In credit, Risk is always involved- there is always the
possibility of the obligation not being paid.
• Credit always invloved futurity- payment on credit is
always done at a future date.
 SIGNIFICANCE OF CREDIT
• Credit olays an important role in the distribution of goods.
• Since big quantities of goods move through the marketing channels, a
great bulk of such goods is financed through credit.
• The role of credit is to provide financial means for businessmen who
take advantages of market opportunities in both domestic and foreign
markets.
• It is also important that we must also recognize the endeavors of both
the government and the private business to promote full
employment.
CREDIT AND THE BUSINESS CYCLE
A. PERSONAL CREDIT
- Are those credit for one’s personal use
• LENDING ACTS
-is an act designed to protect consumers againsts unfair billing practices of people
who extend credit to a purchase of goods on installment basis.
B. Bank Credit
c. Commercial credit
D. export and import credit
• export credit are obtained to finance the selling of goods outside
the country.import credits are also obtained the buying of goods
from other country.
E. Investment credit
• To provide funds needed by the business to acquire costly
productive marketing and facilities.
F. Agriculural credit
• credits given to farmer for the development, improvement and
cultivation of their land. They maybe in the form of:
1. crop loans- financing the production of a particular cropb.
2. livestock loan- obtained to finance the raising of pigs, chickens,
ducks, goats, and other animals for breeding practices.
3. agricultural time loan- use to finance the development and
improvement of a farmland.
4. commodity loans- obtained to finance the selling and distribuions
of farm cfrops, which are keptin a warehouse and evidenced by
warehouse receipts.
G. Industrial credit
• loans granted to industries to finance the acquisition of equipment and
machineries to finance the construction of a plant or factory and to some
extent to finnce the purchase of raw materials for manufacturing capital
goods or goods for consumpion purposes.
H. Real estate credit
• loans to finance the purchase and improvement of real properties.I.
Government or public credit
• credits obained from any of the government institutions or their
instrumentaliies.
J. Secured and unsecured credit
• secured credit- those credits which are covered by praperties of value
called collaterals to guarantee loans.
• unsecured credit- one where the borrower has merrited the full trust and
confidence of the creditor, that is, the creditor is willing to pan with his
money, goods or services for just a mere promise to pay.
K. short-term, medim-term and long-term loans
• short-terms loan are those loans payable within a
year.medium-term loans payable from one year to five years.
• long-term loans are loans payable beyond five years and usually
up to 15 to 20 years.
L. Direct loansbdiscount loans and credit line
• direct loans are loans whose interest payments are made at the
time the loans matures.
• discount loans are thoese loans where interest payments are
deducted at the time the loans are granted.
• credit line is the agreement between the he debtor and
creditorwherein the debtor is allowed to obtainfunds from the
creditor up to a certain amount.
3 types of credit lines
1. regular credit line- the debtor is allowed todraw funds
from the creditor up to an amount agreed upon and the
funds drawn when paid can be borrowed again.
2. 2.maximum loan commitment- borrower can obtain
funds from the creditor up to a certain amount agreed
upon.
3. 3. overdraft line- the banks allows the depositors to draw
from the bank beyond their acual deposits.
 SOURCES OF CREDIT
• Banks- banks are the most common sources of credit.

Bank are classified as:

• Commercial banks
• thrift banks
• rural banks
• Commercial banks- it specializes in giving commercial loans to
businessman
• Thrift bank- it gives loans to individuals for their personal needs and
to the industry for the enhancement of our agriculture and economy.
Thrift bank is further subdivided into three caregories:
1. Savings and mortgage bank- it accumulates the saving s of
depositors and investing them together with its capital in
marketable securities such as bonds and other debt securities.
2. Stock savings and loan association- it is engaged in the business of
accumulating the savings of the people and using such
accumulated funds, together with its capital
3. Private developmennt bank - Aims to develop and expand the
economy of the country pursuant to the socio-economic program
of the government.
• Rural bank- are banks organize to cater to the needs of farmers and
small business in the rural areas including the cottage industries.
 CREDIT RISK
• refers to the possibility of non payment of
the obligation when it falls due. Credit risk
may be minimized by a careful examination
of the C's of credit.
 C's of credit
Character
• it is a quality of a credit risk which makes the debtor
pay or intend to pay when his debt is due.
• it is the quality inherent in an individual ,making him
conscientiously concerned about his obligation.
CAPACITY
• Capacity signifies the ability of a debtor to pay his obligations.
• Capacity includes the ability of a company or management to make
good its commitment.
Capital
• capital is the financial strenght of a business.
• To creditor it is the guarantee that a credit transaction entered can be
redeemed.

Collateral
• collaterals are properties of value pledged to secure a loan. They may
be personal or real properties.
• This includes financial and other resources such as bank deposits,
inventories, recievables and other assets that the company can pledge
for loans.
Loans secured by movable personal properties are called chattel
mortgages.
Loans secured by fixed assets are called real estate mortgages.
Other collaterals that my be given are:
a. corporate securities such as stocks and bonds
b. signatures of co-makers and co-signers
c. goods in bonded warehouses represented by
warehouse receipt
d. hold outs on deposits
e. pledges on receivables
Condition
• refers to the environment in the customers industry,
economically, legally and politically in relation to growth.
• These are external factors over which the credit applicant
has little or no control but which may have significant
influence upon the appraisal of credit risk.
According to Chapin and Hassnet most business are subject
to two types of movement, namely:
A. The regular recurring seasonal activity
B. The regular oscillation of business as a whole