Overview of Credit obligations and the creditor must also know the

extent of his claims. The most accurate way of

Debtor’s Viewpoint measuring these magnitudes is thru the use of a
• The ability to obtain things of value in reliable standard of deferred payments which is
exchange for a promise to pay at a money expressing such debts or clams by the
determinate future time. price involved.
Creditor’s Viewpoint Classification and Kinds of Credit
• Willingness to accept the debtor’s promise
based on trust and confidence As to Purpose
• Personal/Consumer – granted to individuals
Elements of Credit to facilitate the consumption of goods and
services
Trust - From the origin of the word credit which is • Commercial – granted to businessmen,
creditum, meaning trust, it is evident that the first used to finance short-term working capital
consideration in granting credit would be the needs
presence of trust and confidence. • Industrial – granted to businessmen, used
Futurity - A distinct aspect which sets apart cash to finance long-term capital expenditures
transaction from a credit transaction is the • Agricultural – granted to finance agricultural
element of time or futurity. Whether the time is needs such as for irrigation system,
an hour, a day, a month or a year does not acquisition of seeds, fertilizers and others
matter, provided that payment is after the • Real Estate – granted by individuals or
specified lapse of time. contractors, used to finance the acquisition
and improvement of real estates
Risk - Since the creditor has only to rely upon • Import/Export – granted to businessmen
the debtor’s future performance, there is the • Public Utility – granted to franchise holders
element of risk. This is due to the uncertainty of for purchase of public utility vehicles
payment of the possible reduction of payment. • Service – granted to businessmen who are
engaged in rendering services
Characteristics of Credit
As to Security
It is bilateral or a two-party contract
• Secured – credit issued with
Every debtor has his corresponding creditor; collateral(assets)
creditor his corresponding debtor. The creditor • Unsecured - credit issued w/o collateral,
demonstrates his faith in his debtor by also known as character or clean loan
transferring title or ownership of the goods or
services solely on his debtor’s promise to pay for As to Maturity
them later. In turn, the debtor binds himself to • Time Loan – payable on a definite maturity
pay and the same time recognizes the right of date
the creditor to collect from him the price of goods o Short-term – within a year
and services transferred to him. o Medium-term – from 1-5 years
o Long-term – more than 5 years
It is a personal contract • Demand/Call Loan – payable upon
demand/with indefinite maturity
When a loan is extended, the debtor’s character
is the primary basis. Although the debtor’s As to Source
willingness to pay may be beyond question, • Public – granted by government institutions
another personal element must be considered, • Private – granted by commercial
his ability to pay. enterprises, banks, and other financial
institutions
It is a pecuniary contract
As to Source of Repayment
In order to protect the rights of both parties, the
• Self-liquidating – repayment will come from
debtor must know the exact amount of his
the income derived from the use of principal
 • Non-self-liquidating – repayment will come Lending involved risks, hence the need to
from the personal income (salary) of the diversify the loan portfolio as a means of
debtor spreading the risks. Due consideration should be
given to the amount involved because the larger
As to Method of Release/Repayment the amount, the greater the aggregate risk.
• Lump-sum – the principal is given once to
the debtor, the principal is paid in full Maturity
• Installment – the principal is broken down in It must always be kept in mind that the longer
staggered releases/repayments the time, the greater the risk. Maturity of the loan
should therefore be patterned to the duration of
As to Payment of Interest the financing needed by the borrower.
• Ordinary – interest is paid(at the end of the
period)together with the principal on Security
maturity date To reduce the risks involved in lending,
• Discount – interest is automatically collaterals such as real estate, shares of stocks,
deducted from the principal at the time it is receivables, machineries and equipment,
granted inventories and others should be required.

“Loan discounting makes the loan more Interest

expensive” Several factors should be considered in
- If you are the borrower, you are better off establishing the rate such as the cost of funds
availing an ordinary loan. It’s better to pay and the account relationship of the borrower with
the interest at the end of the period. the lender.
- If you are the borrower, the word “discount” Loan Liquidation
will always involve additional cost on your Repayment of the loan should be discussed
end thoroughly with the borrower and carefully
Effective interest rate – true cost of borrowing considered when the loan is made to avoid
possible trouble later. Failure to repay the loan
If ordinary loan, on time impairs the liquidity of the lender’s loan
your nominal rate = effective rate portfolio and increases the risk.
= interest/net loan proceeds The Cs of Good Loans
= 100,000/1,000,000
= .1 or 10% • Character - Refers to the borrower’s
payment habits and attitudes, which you
If discounted loan, effective rate>nominal rate can look for through their track record.
= interest/(discounted)net loan proceeds - even though maganda yung
= 100,000/900,000 track record nila, walang guarantee na
= .1111 or 11.11% makakabayad sila sayo.
• Capital - Refers to the borrower’s net worth
position relative to his outstanding debts.
The usual Asset(market value) – Liabilities,
Loan Considerations
to know if they are capable of paying.
Purpose • Capacity - Refers to the borrower’s ability to
It is important that the purpose for which the loan pay as reflected in his cash flows. Cash flow
will be used be productive to enable the from sales or income, sale or liquidation of
borrower to repay the obligation incurred. It assets, and debt securities of the
should also be useful to the community so it will borrower(wherein uutang uli siya sa iba
contribute to the economic development of the para bayaran yung utang niya).
region. Speculative loans are frowned upon. - if you are the lender, capacity
should always be the focus or yung dapat
Type and Size of Loan na unang titignan if may mangungutang
sayo
 • Conditions - Refers to economic factors Compliance Risk - Compliance risk is the risk to
which may affect the borrower’s line of work earnings or capital arising from violations of, or
or industry and how changing economic non-conformance with, laws, rules, regulations,
conditions might affect the loan. prescribed practices, or ethical standards.
• Collateral - Refers to any asset which may
be pledged against the debt, Reputation Risk - Reputation risk is the risk to
alternative/secondary source of payment. earnings or capital arising from negative public
opinion. This affects the institution's ability to
The Cs of Bad Credit establish new relationships or services or
continue servicing existing relationships.
• Complacency
• Carelessness – in terms of documentation Credit Department
o Inadequate Loan Documentation
- An important arm of the financial function
o Lack of Current Financial Information
- Constantly interacting with the company’s
o Lack of Protective Loan Covenants
costumer base
o Information Not Kept in Files
- Tasked with the job of subjecting the
• Communication – poor communication investment in receivables to the test of
o Unclear Credit Quality Objective profitability.
o Upward Communication
o Unclear Communication by Functions of Credit Department
Regulators
• Contingencies • Setting credit policies
• Competition • Evaluating credit worthiness
• Monitoring credit risk
WEEK 3: Introduction to Credit • Managing collections
Management • Reporting on credit performance

Credit Management – the process by which Overall, the credit department is responsible for
risks that are inherent in the credit process are ensuring that the company's credit policies and
managed and controlled. procedures are effective in managing credit risk
and maximizing cash flow. By carefully
Risk – the potential that events, expected or evaluating creditworthiness, monitoring credit
unexpected may have an adverse impact on risk, and managing collections activities, the
earnings or capital. credit department plays a critical role in
maintaining the financial health of the
Risks Associated with Lending
organization.
(lender viewpoint)
The Credit Manager
Credit Risk - The risk of repayment, i.e., the
possibility that an obligor will fail to perform as Management
agreed. • Maintain a department organizational
structure sufficient to meet all goals and
Interest Rate Risk - The risk to earnings or
objectives
capital arising from movements in interest rates.
• Properly motivate the credit and
Liquidity Risk - The risk to earnings or capital of collections staff
not having sufficient cash to meet financial • Measure department performance with
commitments in a timely manner. appropriate metrics
• Provide for ongoing training of the credit
Transaction Risk - In the lending area, staff
transaction risk is present primarily in the loan • Manage relations with collection agencies
disbursements and credit administration • Manage relations with credit reporting
processes. agencies
 • Manage relations with credit insurance Tests of Credit Department Operations
providers
• Manage relations with other departments • Bad Debt Loss Index
o Bad debt/total credit sales
• Credit Sales Index
Credit Operations o Credit sales/total net assets
• Maintain the corporate credit policy • Collection Percentage
• Recommend changes in the credit policy o Collections made during
to senior management period/receivables outstanding at
• Create a credit scoring model beginning of period
• Manage customer credit files • Receivables Turnover Rate
• Monitor the credit granting and updating o Total credit sales/average receivables
process outstanding
• Accept or reject the staff's credit • Number of Days to Collect
recommendations o 360/receivables turnover rate
• Personally investigate the largest • Acceptance Index
customer credit applications o Applications accepted/ applications
• Personally visit the largest customers to submitted
establish relations • Past Due Index
• Monitor periodic credit reviews o Total past due/total outstanding
• Monitor deductions being taken by • Number of Accounts Opened
customers • Aging of Accounts
• Manage the application of late fees
• Manage the corporate financing program

Qualities of a Credit Man

(The Cardinal CS of a Credit Man)

• Competence and Capability

• Certitude and Celerity
• Constructiveness
• Conscientiousness
• Consistency
• Communication
• Contact
• Creativity
• Cost-consciousness
• Character
• Confidence
• Considerateness
• Computer Literate
• Congeniality/Charming Personality
• Common Sense