MEANING,CLASSIFICATION AND FUNCTION
OF CREDIT
■ Credit is a term derived from the Latin
word credo meaning to believe, to trust.
■ Certitude and celerity
■ Contact
■ Cost consciousness
■ Credit means securing something of
value whether tangible or intangible in
return for the promise to pay at some
determined future date.
■ Character
■ Do not give credit to anybody you do
not trust
■ Congeniality
CLASSIFICATION OF CREDIT
■ According to forms
– Charge account
– Secured charge account
– Installment account
■ According to use
■ confidence
■ Computer literate
■ Considerations
■ Common sense
Essential traits and characteristics
■ Relate well to customers and
understanding of business psychology
■ Good articulations to effectively
communicate
– Consumer credit
■ Capable of maintaining persistent and
continuous follow-up
– Industrial credit
■ Analytical mind
– Trade credit
■ Academic experience
■ The primary role that credit and
collection unit – maximize profit and
minimize bad debts through proper
credit evaluation of each credit
applicant.
■ Credit positions vary according to the
position by top management.
■ The personal qualification expected on
this level begin with the ability to gather,
organize and retain detailed information
pertinent to accounts and to translate
them into the operations of credit
routine.
Cardinal C’s of credit men
■ Competence and capability
■ Communication
■ Constructiveness
■ Creativity
■ conscientiousness
■ Consistency
■ Committed to achieve goals
■ Professional grasp
CREDIT PRODUCT AND PROVIDERS
■ There are many forms of credit
consumers can obtain and use and
many types of organization that provide
credit.
FEATURES OF CREDIT AGREEMENT
■ Secured or unsecured credit
■ Amortized or balloon
■ Fixed sum or running account
■ Restricted or unrestricted
■ Credit sale, conditional sale or hire
purchase
■ Two party or third party
CREDIT PRODUCTS
■ Mortgages
■ Personal loans
•
Commitment
■ Retail credit
•
Capital
■ Revolving loans
•
Collateral
■ Pawning
Other personal information
■ Banks
•
Relationship status
■ Savings and loans association
•
Dependents
■ Finance houses
•
Employment
■ Credit unions
•
Previous connections
■ Government agencies
■ Licensed moneylenders
Customer’s assets and liabilities
•
Property
PRINCIPLES OF LENDING
•
Stocks
A broad indication of borrowing periods
•
Life insurance
•
others
•
Outstanding mortgage
•
Loan/credit card
Other income
Reasons for differences in the interest
charged
❖ Market rates
❖ Duration of borrowing
❖ Types of customer and type of
business
❖ Whether security is granted or not
❖ The amount borrowed
The following sources could be used:
•
Customer’s account
•
Direct debit information
•
Evidence of regular savings
•
Safe custody records
•
Lending files
•
Customer profiles
The person
•
Character
•
Capacity
•
Rental income
•
Dividend
•
Commission/bonus
Monthly financial outgoings
•
Rent
•
Utilities
•
Loan payments/credit card
•
Food/clothing
•
Hobbies/interest/travel
Viability
•
Amount
•
Purpose
•
Term
•
Customer’s stake
•
Repayment
•
Past record
Security
•
Simplicity of title
•
Stability of value
•
Realizability
Credit scoring
•
Any quantitative method, technique
or practice used in the granting, the
management or recovery of
consumer credit.
Credit score card
CREDIT INVESTIGATION PROCEDURE AND
REPORTS
Credit qualities to investigate
▪ Income
▪ Employment
▪ Payment record
▪ Residence
▪ Marital status
▪ Age
▪ Reference and reputation
▪ Collateral
In the field of investigation
Credit policy
•
A high level document stating the
credit framework and objectives of a
financial institution.
Credit interview
•
Preparing for the interview
•
Plan ahead
•
Know the account
•
Planning and scheduling
•
Eliminate interferences
Purpose of credit interview
•
Determine if
✓ Make it a habit before going to the
field to check records thoroughly for
any information on the subject of the
investigation.
✓ During the process of investigation,
asking for references from banks,
commercial firms and from
individuals who happened to have
across the name of the subject of
investigation.
✓ In the process of investigation, the
analytical mind should not only focus
on the fundamental matters about the
subject.
✓ Reporting bank or company
experience in credit dealings with the
subject with the subject inquiry
•
the applicant is eligible in
terms of age
•
Mature enough to take
responsibility
✓ In getting financial statements the
following should be obtained: total
current assets, total assets, total
liabilities, net worth, gross income
•
Recognize the seriousness of
the transaction
✓ Obtain a statement from the current
bank or credit companies.
•
Sufficient regular income
•
true identity
✓ Any change in previous relationship
should be satisfactorily explained.
In preparation of report
✓ Use quotation marks in narrating the
information gathered.
✓ Information gathered should be
arranged in the following order:
✓ Banks who reported current
dealings should be reported
ahead of those banks who
reported the past dealings
✓ Commercial firms in trade who
reported current dealings
should be reported ahead of
those who reported past
dealings
✓ In conducting credit checking on a
business firm together with the
names of the firm/s principal. The
credit investigation should be
prepared in a manner that
information about the firm should be
reported ahead.
✓ Every report should indicate by a way
of a footnote.
✓ Use credit language for proper use.
Be brief but complete.
“The credit report is an important basis of a
credit decision.”
Credit evaluation
▪ The following answers should be
answered:
-
Is the risk sufficiently good to
be acceptable at all?
-
If the risk is satisfactory to
what extent should be granted
?
-
And under what conditions or
terms should be granted?
Credit report are classified into:
▪ Prompt and satisfactory
▪ Satisfactory
▪ Slow but collective
▪ Poor or unsatisfactory
▪ Character + capacity + capital =
▪ GOOD CREDIT RISK
▪ Character- capacity - capital =
FRAUDULENT CREDIT RISK