LICEO DE CAGAYAN UNIVERSITY

Rodolfo N. Pelaez Boulevard, Kauswagan

Cagayan de Oro City, Misamis Oriental

MIDTERM -ASSIGNMENT 2
LEARNING INSIGHT
Submitted By:

Charrysah T. Tabaosares

BSBA – FM4

Submitted To:

Mario E. Temporada

Date Submitted:

September 28, 2020

CLASSIFICATION AND SOURCES OF CREDIT
Credit is generally classified according to purpose for where the loan funds are intended to
be used):

1. Agricultural credit - These are loans to be used in the cultivation and improvement
of farmlands, or in the production of agricultural products (poultry, pig farm, rice
and corn vegetables, tilapia).
Under agricultural credit we have:

 Time loan- This is usually a secured loan (collateralized by the farm property
where the loans fund are to be used).The loan is intended for the
development or improvement of the farm, ex. Poultry building, dikes for rice
farming.

 Crop loan- This is called ‘crop’ loan because it finances the production of
crops like rice and corn, cassava, tomatoes and cabbage. The maturity of the
loan coincides with the harvest cycle.

 Commodity or quedan loan- This is a loan to finance the marketing of

harvested crops.

Ex. A palay farmer will deposits his harvest of 100 bags in a bonded
NFA warehouse. He is issued a warehouse receipt which he can use to
secure a loan from a bank.

2. Commercial credit - These are loans, or credit arrangements, for the purpose of
financing the production and marketing of commodities. These could be loans
granted by the banks to businesses, or by business establishments to other business.

Some examples are:

 Loans for the purchase of raw materials by manufacturer.

 Credit provided by the supplier of raw materials.

 Credit provided by the manufacturer, in the form of finished goods, to the

wholesalers and retailers.
 3. Industrial credits are loans used to finance the construction of factory buildings or
the purchase of machinery and equipment. In this category are bonds (20 to 30
years) and long-term bank loans.

4. Consumer credit. These are loans funds granted to individuals by banks, coops,
department stores, credit card companies, savings and loan associations, the GSIS
and SSS(for salary loans), Pag-Ibig for multipurpose loans. The loan funds are used
to purchase personal items like TV’s, refs, cosmetics, clothes, or to pay for education
and medical expense.

5. Commodity loans for non-farm products, using warehouse receipts Commodities

or goods are either finished product or raw materials.

The credit could also be classified according to maturity:

 Short-term, 1 year or less

 Medium-term, 1 year to 5 years and

 Long-term, over 5 years.

The unsecured loans are also called character or clean loans, and also signature loans. The
loan is granted simply because of the borrower’s reputation or character, thus the term
‘character’ loan and all the lender wants is the ‘signature’ of the borrowers on the
promissory note, which is the only document required. A promissory note with only one
signature is called a single-name paper (the paper refers to the promissory note), the
borrower’s character is sufficient to assure the lender of repayment.

The biggest sources of credit are the financial institutions. Financial institutions are either
intermediaries or non-intermediaries. Financial institution that are intermediaries channel
the savings of individuals and businesses into loans and investments. Financial
intermediaries pool funds, invest prudently by avoiding risks and by the technique of
diversification- or “not putting one’s egg in one basket”. Financial intermediaries provide
managerial competence. They have the best manpower development programs and they
recruit the best talents from the best campuses in the country. They also match short-term
and long-term with short-term and long-term uses. They generally use conservative
financial strategies, using long-term funds for short-term credits. They also provide a
continuing steam of earnings. Lastly, they create processes that allow all types of
transaction to be handled efficiently and cheaply for the convenience of their clients.
Financial institutions are either bank or non-bank. A bank is licensed by the Bangko Sentral
and is authorized to accept deposits from the public. Non-bank financial institutions are
prohibited from accepting deposits. It is because of the strict delineation (bank vs. non-
bank)that an investment bank (its official and accepted name in the US and throughout the
world) in this country must not use the word ‘bank’ but it must call itself, and so should the
public, as an investment house. Only in the Philippines.

Banks. A bank is primarily in the lending business. A bank starts by using the personal
funds of its owner, also called owners’ equity.

Rural banks. A rural bank is just another bank created by law to improve the Philippine
countryside, particularly the agricultural sector. Rural banks are governed by Republic Act
no. 7353 or New Rural Bank Act.

To encourage the establishment of more rural banks, Republic Act No. 7353 gave
special privileges:

 Rural banks may accept as security real estate properties without ‘torrens
tittles’

 In the foreclosure of mortgages, rural are exempt from publication in

newspaper, where the amount of the principal amount of the loan does not
exceed P100,000.

 Rural banks are exempt from the payment of fees, documentary stamps and
other charges in the registration of mortgages in the Registry of Deeds up to
the loan amount of P50,000.

Insurance companies. The major activity of insurance companies is cash accumulation. Its
customers, called policy owners, pay premium today, in exchange for the future payment in
case of the death or disability of the insured or the maturity of the insurance policy.

Pre-need companies operate under the same ‘cash accumulation’ scheme as the insurance
companies. The major exception are: from the marketing view point, pre-need companies
stress the major concerns of people: their children’s future (educational plans) and old age
(pension plans); insurance companies are heavily regulated by the Insurance Commission.
Pension funds. Pension funds collect employees’ contributions, mostly mandatory and on a
monthly basis, from employees’ paychecks. These are invested in stocks, bonds, and loans
mostly on a long-term basis, so that they will grow into sufficient amounts to pay off the
retirement benefits of their members.
Investment house. An investment house’s main function is the channeling (actually,
obtaining or pooling together) of private funds from various individuals and businesses for
investment, as capital stock, in public corporations.

Financing companies were defined by the” Financing Company Act” or R.A. NO. 5980 as
corporation or partnerships (except those regulated by the Central Bank, Insurance
Commissioner and the Cooperative Development Authority) which are 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 receivable , or by buying and selling contracts, leases, chattel
mortgages, or other evidences of indebtedness, or by leasing motor vehicles, heavy
equipment and industrial machinery, business and office machines and equipment,
appliances and other movable property.

Appliance companies. Their source of investible funds (used to grant credit to installment
buyers) is owners’ equity –the owners’ capital fund. To expand operations and increase
sales, they resort to borrowing from banks or financing companies, using the same
receivable of their customers. These receivables are either assigned (in case of loans) or
sold.

Self-financing. The installment sales of appliance companies and car dealers are either self-
finance or not. A self-financing company is the seller of merchandise and also the lender
(that is, it assumes the risk of non-payment); it will accept the credit application, approve
it, and released the unit being purchased. In ‘finance ‘terms, it carries its own receivables.
Later, when they need funds, they can pledge or borrow money versus these receivables to
get fresh funds.

Lending investor. The arrival of lending investors is a recent phenomenon in the

Philippines financial circles. While, in fact, there were so many private lenders in the past,
most of them were unregistered and were in violation of the General Banking Act (Republic
Act No. 337, as amended).

Pawnshops. Presidential decree 114 was passed to regular pawnshops. With a minimum
paid- up capitalization of only P100,000, pawnshops lend money in small amounts. They
require personal property (jewelry, mostly) as security. Section 9 of that decree provides
that the loan amount should not be less than 30% of the appraised value of the property
offered as security for the loan.
Supplier’s credit. In the ‘buy and sell’ business (or trading), suppliers are the biggest source
of credit. The term are 30, 60, 90 or even 120 days, all of which are non-cash credits, or in
the form of raw materials or finished goods or merchandised.
Line of credit. This is an agreement between a commercial bank and a business specifying
the amount of short-term credit the bank will make available on a non-guaranteed basis, or
subject to availability of funds.

Open-booked-credit. These are still wholesaler who provide what is popularly known as
open-book credit to their customers, usually retailers. In the open-book arrangement
(which is suppliers’ credit too) the buyers (debtors) get the good they want to purchase
and the wholesaler simply record the total amount in their books, or ledger, without
requiring the buyer to sign any documents.

Revolving credit agreement. The only difference between a line of credit and a revolving
credit agreement, or RCA, is that the RCA is guaranteed by the bank. The term “guaranteed’
and ‘subject to availability of funds’ are difficult to understand, especially to a small scale
entrepreneur in need of loan.

Letters of credit. A letter of credit is issued by the bank which guarantees payment to the
beneficiary or payee of the LC.

Packing credit advances. This is credit granted by a bank to an exporter to finance the
manufacturing of export goods.

Treasury bills. A T-bill is a short term unsecured debt of the government. It is issued by the
government treasury, the common maturities are 91 & 182 days. It is fully guaranteed by
the government, which gets its authority to borrow from R.A Nos. 245 and 265, which
states in section 95 (R.A No. 265 – also known as the Charter of the Central Bank of the
Philippines): “the Central Bank may make direct provisional advances to the government
or to any of its political subdivisions to finance expenditures authorized in the annual
appropriation act of the borrowing entity.

Pledging of A\R. This is a loan collateralized by accounts receivable. The promissory notes
are assigned by way of pledge.

Commercial papers are similar to treasury bills.it is an unsecured short-term certificate of

debt. It is also issued in large denomination with specific due dates. While treasury bills are
issued by the government, commercial paper issued by large private corporations of
finance companies. The repurchase agreements may sound exotic investment product. It is
not.