Chapter 6 Flashcards
is defined as prudence or sagacity in the conduct of affairs
policy
prudence means
sound judgement
sagacity means
shrewdness
are general statements used as guides for the members of an organization as they perform their jobs
policies
it provides guidelines on routine and repetitious tasks
policies
policies are designed or set at various levels
strategic policies at the top management level
tactical policies at the middle management level
operational policies for the rank and file
it reflect the objectives and management philosopy of the organization
policies
are proposed by the credit department, then later approved by the BOD who may delegate this function to a credit committee or the company president
credit policies
They are revised from time to time and the inputs of branches or district officers are sometimes taken into consideration.
credit policies
the decision to produce a written policy manual would depend on
Financial resources of the company
philosophy of the management
organizational size and structure
complexity of credit transactions
approval limits
Some of the areas where general policies have to be designed are
approval authority
credit limits
loan to market value ratios
past due limits
territorial limits
single proprietor vs. corporation
other side agreements imposed by lender
separations of credit from marketing operations
the approval authority to approve could either be
geographical or based on rank or title
in geographical how much is the amount of loan then who will approve it
Over 500k head office
200k to 499999 regional office
50k to 199999 branch or district office
if based on rank or title how much is the amount of loan and who will approve
Over 500k president
200k to 499,999 vice president
50k to 199,999 loan officer
Is the maximum amount of credit that could be granted to one borrower
credit limits
example of credit limits
single borrower rule in a bank
Credit limit should be
sound and practical
in secured loans, this represents the maximum loan that could be granted to a borrower based on the propertys market value
loan to market valie ratios
this limit is imposed as a performance measurement tool of branches or of the credit and collection department
past due limits
it coulsd be the basis for the promotability of employees
past due limits
it is also used in the collection incentive progran
past due limits
the past due limit of banks
25%
is privilege whereby banks who are low on funds may borrow from the bangko sentral using their own loans as collateral
re-discounting
Areas where credit could be granted are clearly identified based on geographical limits
territorial limits
Some of the factors used in delineating territorial limits are
Peace and order situation particularly in provinces where insurgents are active
availability of regular public transport facilities prevalence of crime
travel time
road conditions
The main issue here is liability
single proprietorship vs corporation
Is single proprietorship has,,, while corporation has
unlimited liability limited liability
This means that if an entrepreneur uses a single proprietorship as the type of legal organization for his business and he incurs a liability and excess of his business resources he is still liable to the extent of all his personal assets present and future
unlimited liability
the other common conditions imposed by lenders are
compensating balance
annual clean-ups
submission of regular periodic financial statements
exclusive marketing agreement
exclusive warehousing and transport agreement assurance of quick response repair services
some banks require that their borrowers should maintain a balance in their bank equivalent to 10% of the loan
compensating balance
in some types pf loans, banks require their borrowers to pay all unpaid loans at least once a year this tests the borrowers financial capacity
annual clean-ups
merchandise credit is granted provided that the buyer will sell and carry in its inventory, on an exclusive basis, only the products of the creditor-supplier
exclusive marketing agreement
This is required by lenders who have interest in warehouses and transportation facilities
Exclusive warehousing and transport agreement
Landers for car financing would like to make sure that when there are car breakdown the dealer has complete service facilities
Assurance of quick response repair services
It is this department sole responsibility is to make sure that credit resources are used properly no credit sales should be allowed to unworthy customers
Credit department
Some of the terms that may be used in loan payment terms
Pay on demand
Payment required immediately after the occurence
Payment required when merchandise is sold
Payment with specific due dates
Arrangements that fall in paymemt required after mechandise is sold
Consignment only
trust receipt
the receiver of the goods held in trust
entrustee
owner of the goods
entrustor
Kinds of payment with certain due date
- due dates in calendar days
- fixed one year with renewal
- payments after availments
- interest only, and ballon payment at end of term
- amortized payments of equal amounts
- graduated payment schemes
- decreasing payment schemes
- acceleration clause
this applies to a line of credit and a revolving credit agreement
payments after availments
the principal payment is a large lump-sum payment and is called
balloon
a large lump sum payment at any time, either at the end of the credit term, or during the term
balloon payment
this payment scheme provides for equal periodic payments of equal amounts
amortized
is really an amortized type of credit
installment payment scheme
monthly payments are popularly called
installments
payments on medium term and long term bank loans are called
amortizations
this payment set up is popular in home mortgages, particularly to applicants who just graduated from college and are just starting out
graduated payment scheme
this is a very rare payment plan and is the exact opposite of the graduated payment scheme
decreasing payment scheme
this scheme is appropriate for individuals who are at the peak of their career or who are currently experiencing financial success
decreasing payment scheme
several factors to be taken into account in determining the term to be used
nature of the product
the sellers mark up on the product
the loan value vs market value
the terms used by competitors
this particularly applies in cash loans secured by real estate property
the loan value vs market value
this is a provision in an installment contract which accelerates the due date of the loan or credit in case of non payment of some periodic payments
use of acceleration clause
kinds of interest
simple and compound
interest used in various kinds of credit have different modes and are calculated in many different ways
simple interest
add on interest rate
compound interest-amortized
fixed rate and variable rate
this is popular in appliance or installment credits and consumer loans
add-on interest rate
is the rate charged by banks to its prime, or its best, clients
prime rate
6C’s od credit
character
capacity
capital
collateral
conditions
cash flow
the first and the most important C
character
are the favtors to be considered in approving or disapproving a ctedit application
credit criteria
refers to a persons attitude towards credit, which excludes many other things
credit character
refers to his mental disposition and his personal values in relation to credit commitments
credit character
if the applicant does not have a credit history, how will the evaluator judge his character
applicants attachment to community, job or business, to the thing purchased
this refers to the applicants sense of belonging in a community
attachment to the community
this refers to a borrowers resources
capital
tjis refers to personal and real properties that are used to secure a credit obligation
collateral
