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BRIEF HISTORY OF CREDIT AND ITS DEFINITION Barter- is the exchange of goods or services to another goods or services. -It increases the productivity of tribal units particularly due to specialization. Money- serves as a medium of exchange .

BRIEF HISTORY OF CREDIT AND ITS DEFINITION

Barter- is the exchange of goods or services to

another goods or services.

-It increases the productivity of tribal units particularly due to specialization

Money- serves as a medium of exchange.

According to Adam Smith , money originated in man’s rational effort to meet the necessity of finding some medium of exchange Money is responsible for increasing the production and thus adds to the creation of wealth and also in accelerating consumption with the concomitant rise in the standard of living of the people.

One of the unique features of our business system is that it operates to a large extent on promises called credit.

Credit comes from the latin word

“credere” which means to trust Credit is akin

to a two way street In banking, credit is held

to refer to “ an entry in the books of the bank showing its obligation to a customer” that is for the deposits made by the latter.

In bookkeeping, credit is “ an entry showing that the person named has the right

to demand some thing but not necessarily money”.

In commerce, credit pertains to “an exchange transaction”.

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.

Credit is defined as a transaction involving the transfer of goods, services, funds, property or rights, thereby creating an obligation on the part of those who receive them, that must be complied with in the future.

neighbor 5.Rights Possession or use of a commercial

Note:

Not all of these 5 types of transactions would necessarily result in the creation of credit.

Reasons for Concern When a transaction is consummated and all parties are satisfied, there is no reason to be concerned But since a transaction could turn sour, or pose a problem, or even create a legal dispute, such as when:

1.Goods delivered are spoiled or substandard.2.Services provided such as car repair are inadequate or technically defective

3.When the prices, for either goods or services, were not clearly understood by both parties

Note: It would be best to avoid problems by handling transactions properly, from the beginning, with the use of appropriate documents, free from defects “An ounce of prevention is better than a pound of cure”.

CHARACTERISTICS OF CREDIT

1.It is a bi-partie contract.

2.Presence of trust or faith.

3.It involves futurity.

3 Definite sum of money.

4 Payable on demand or future time.

ADVANTAGES OF CREDIT

1.Credit facilitates and contributes to the increase in wealth by making funds available for productive purposes.

2.Credit saves time and expense by providing a safer and more convenient means of completing transactions.

3.Credit helps expand the purchasing power of every member of the business community.

4.Credit enables immediate consumption of goods thereby providing for an increase in material well-being.

5.Credit helps expand economic opportunities through education, job training and job creation.

6 Credit spreads progress to various sectors of the economy.

7 Credit makes possible the birth of new industries

8 Credit helps buying become more convenient for customers

DISADVANTAGES OF CREDIT

1.Credit, at times, encourages speculation

2.Credit also tends to contribute to extravagance and carelessness on the part of the people who obtain it.3.Because of credit, many entrepreneurs resort to over-expansion

4.Business can be expanded or contracted rapidly through the use of credit

Calculating the True Costs of Credit

There are two common and distinct types

of credit: Credit for merchandise sold, and Cash

or Bank Loans The most common term for merchandise credit is 2/10 N 30.

Credit Period – the number of days until full payment is required.

Cash Discount – A percentage deducted from the purchase price if the buyer pays within the specified time shorter than the credit period.

Cash Discount Period – The number of days after the beginning of the credit period during which the cash discount is available.

CLASSIFICATION AND SOURCES OF CREDIT

There are equally important purposes in the classification of credit, first, as a quick guide to those who need them, as to where and how to get them, and second, to guide those who provide them as to where to find these users of funds

Credit is generally classified according to purpose for where the loan funds are intended to be used:

Advantages of Charge Account

1.It is a very convenient way of shopping.

2.It eliminates the inconvenience as well as the danger of carrying too much money.

3.Charge account enable customers to buy goods only at the time they want them.

4.Charge account enables consumers to obtain goods even before they have the money.

5.Charge account provide a valuable means of reference in many business transactions.

b Installment Credit

Precautions in Buying on Installment

1 Never allow yourself to be rushed or

pressured into signing a contract until you became conversant with all the facts.

2 Always insist for an extra copy of the

contract.

3 Never sign any contract before all the

blank

spaces are filled in.

4 Read very carefully what you sign.

5 Read again after signing.

SOURCES OF CREDIT

1.Financial Institutions- the biggest sources of credit.

2.Financing Companies – primarily organized for the purpose of

extending credit facilities to consumers and to industrial,

commercial, or agricultural enterprises either by discounting or

factoring commercial papers or accounts receivables, buying or

selling contracts, leases, chattel mortgages and other movable

Loans are also either secured or unsecured Security

refers to a real or personal property used as collateral, usually required by the lender.

Unsecured Loans are also called as character or clean

loans

DOCUMENTS IN CREDIT TRANSACTIONS

A.Documents for Credit Evaluation

Document that are used in credit transactions could be classified into 2 major types:

1 those used for credit evaluation to eventually approve or disapprove an applicant

2 those used to document an approved credit transaction

Documents Required for Credit EvaluationInitials Used:

ITR-Income Tax ReturnsB/S – Bank StatementsBOD – Board of Directors

OCT – Orig Certificate of Title SEC – Securities and Exchange Commission F/S – Financial Statements

DTI – Department of Trade and Industry

SN – Serial Numbers TCT – Transfer Certificate of Title

Documentation and Instruments used for

Approved Credit Application

Promissory Note – it also called as P/N or Pronote It is the most solid evidence of debt This can be negotiable or non-negotiable.

For Pronote to be negotiable, it must comply with the requirements of the negotiable instruments law.

1 It must be complete and regular in its face.

2 It must be signed by the maker.

3 It must contain an unconditional promise to

pay a definite sum of money.

4 It must be payable on demand or a fixed

future date.

5 It must be payable to a specific person or

bearer.

Details of a More Complicated Pronote

1 Surcharges and penalties.

2 Where to file for collection in case of

non-payment.

3 Place where payment is to be made.

4 Provision as to extraordinary inflation.

5 Party responsible for goods in transit (merchandise

credit).

6 Successors-in-interest and holder in due course

provisions.

7 Provision that should the government increase the

interest structure, the rate in the pronote will change accordingly.

Deed of Conditional Sale – the seller transfers the

possession of the appliance but not its ownership.

2 Issues

1 The right of repossession; and

2 “Who Bears the loss” in a fortuitous event?

Deed of Absolute Sale – transfer the ownership and possession of the thing bought to the buyer.

Trust Receipt - a receipt of goods for the receiver to hold on trust In a trust receipt, the possession of goods is transferred

by the seller to the potential buyer

- It is used by a popular cosmetic company

- It is predominantly used in the import-export business

Warehouse Receipts – it is obviously issued by the warehouse ( usually a government-registered and bonded warehouse).It

is not a credit instrument It is a document used in a deposit transaction

Pledge – In a contract of pledge, used in pawnshops, it is essential that the thing pledged is in the possession of the pledgee

Mortgage - is a contract whereby the debtor secures to the creditor the fulfillment of a principal obligation, especially subjecting to such security immovable property

or movable personal property in case the principal obligation is not complied with at the time stipulated

Foreclosure - means that the mortgaged property securing the unpaid and past due obligation will be sold at public auction, with the information on the auction sale published before hand in a community newspaper of general circulation, to the highest bidder

Disclosure Statement – This form is requires in all credit transactions that charge interest This is a document where the lender must show the true cost of the credit it is providing to the borrower, who, in turn, will read and sign it

Letter of Credit –A letter written by a company’s bank to the company’s foreign supplier, stating that the bank guarantees payment of an invoiced amount if all the underlying agreements are met.

Explanatory Notes for Diagram 8-A

Step 1 The Vietnam importer inquires from the US exporter as to prices product features, warranty etc.

Step 2 If the potential sale is agreed upon, the US exporter asks the Vietnam importer to open a letter of credit with a commercial bank.

Step 3 The importer, applies for a letter of credit with his bank because that’s where the L/C will be opened.

Step 4 Upon approval of the application, processing, and documentation, the importer’s bank or the opening bank notifies its correspondent bank in the US.

Step 5 The correspondent bank advises the exporter bank.

Step 6 The exporter’s bank will notify the exporter.

Step 7 The exporter will verify from its bank if the L/C contains the terms and conditions it has prescribed.

Step 8 Satisfied with the L/C, the exporters will deliver the merchandise ordered to the Shipping line.

Step 9 The shipping line acknowledges receipt of the merchandise for shipment to Vietnam and prepares the bill of lading and other documents which are then sent back to the exporter.

Step 10 Exporter submits the shipping documents and collects money from his bank, even if the merchandise is still in transit.

Step 11 Exporter’s bank request for reimbursement from the correspondent bank and is paid, even if the merchandise is still

in transit.

Step 12 Correspondent Bank requests reimbursement from the opening bank in Vietnam and is also paid, even if the merchandise is still in transit.

Explanatory Note on Diagram 8-B

Step 1 Shipment arrives at the seaport or airport

Step 2 The imported merchandise is deposited at a bonded warehouse designated and under the supervision and control

of the Vietnam Bank

Step 3 The warehouse transmits the shipping documents and the warehouse receipt to the importer’s bank

Step 4 The importer is notified by the bank

Step 5 The importer requests the bank to release the merchandise The importer signs a trust receipt The bank issue release papers to the warehouse

Step 6 The importer goes to the warehouse

Step 7 The warehouse transfers the possession of the merchandise to the importer

Step 8 Importer’s customers buys the merchandise and takes hold of the merchandise

Step 9 Importer’s customer pays for the merchandise

Step 10 Importer pays the bank, less his

marginal deposit.

The Bank is protected from non-payment in 2 ways:

1.The L/C credit is secured by collateral.

2.The importer is compelled to pay, or be

criminally payable.

POLICY - is defined as “ prudence or sagacity

in the conduct of affairs.

In business, policies are general statements used as guides for the members of the organization as they perform their jobs.

-It is designed or set at various levels, strategic policies at the top management level, tactical policies at the middle management level and operational policies for the rank-and-file.

The decision to produce a written policy manual would depend on:

1.Financial resources of the company

2.Philosophy of the management

3.Organizational size and structure

4.Complexity of credit transactions

5.Approval Limits

General Policies on Credit

1.Approval authority

2.Credit Limits

3.Loan-to-market value ratios

4.Past due limits

5.Territorial limits

6 Single Proprietor vs Corporation

7 Other side agreements imposed by lender

8 Separation of credit from marketing

Credit Decision-Making

The short credit process

1.Initial discussion between the lender and borrower.

2.The borrower signs an application form and an authorization for the credit department to conduct credit inquires.

3.The lender conducts an initial interview, using the credit application as guides, and evaluate the documents submitted.

4.The lender initiates information gathering and validating based

on the credit application.

5.The lender obtain information from other creditors in the area 6.Appraisal of property offered as collateral.

7.The credit investigator organizes all the available information.

8.A decision is made.

9.If disapproved, the applicant is informed.

10.If approved, the applicant is also informed

and all documentation is completed.

11.Registration of chattel or real estate

mortgage.

12.Amount being borrowed, or unit being

purchase is released.

Credit investigation This task is performed by

the credit investigator who has the main objective of verifying and evaluating the applicant’s character, credit standing and integrity through the process of data gathering of all essential facts.

The request for the Credit Investigation Report (CIR) may come from any of officers/department of the bank for any of the following purposes:

1.On clients seeking loan accommodations or credit line

2.On clients applying with International Banking

department to secure availment of L/C, trust receipts and others

3.On clients opening current or checking

account/savings account

4.On co-makers and guarantors for credit

5.On beneficiaries named in the L/C

6.On prospective buyers of assets acquired by the

bank