LESSON 6 : Philippine Credit System
Bill of Exchange - orders from the bank to make payment to a
specified party, usually either the exporter or the exporter’s
bank.
Bank Draft - the drawer is a bank directing another bank to pay
at a specified time the payee named in the instrument.
TYPES OF BANK DEPOSITS
1. Savings Deposit
2. Time Deposit
3. Demand Deposit
Unpain Seller - assumes the position of the creditor to whom
full payment has not been paid. Under such circumstances, the
unpaid seller is entitled to any of the following rights:
1. The right to retain possession of goods.
2. The right to stop the goods in transit
3. The right to resell the goods
4. The right to rescind the transfer of title and resume ownership
of the goods.
Under the Philippine Laws, the following are the rights of the
Creditor;
1. Right to Attachment - a provisional remedy by which the
court temporarily confiscates the property of the debtor as a form
of security of any judgement that the plaintiff (creditor) may
recover.
2. Right to Garnishment - is the creditor’s option to request
from the court a third party- the garnishee - to hold and control
the debtor’s properties during the legal proceedings.
3. Right to Receivership - is a remedy wherein the claimed
property is placed under the custody of a third party called the
receiver.
4. Right to Replevin - a provisional remedy compelling the
creditor to deliver to the creditor any personal property claimed
or merchandise loaned for non-payment of obligation.
5. Right to Composition - is the will of the debtor at his own
violation to pay his creditors’ certain portions of their claims in
exchange for release from his liabilities. This right should be valid
under the following conditions;
A list of debtors properties and other creditors
Acceptance of the creditor must be in writing
Bank deposit certificates must be presented by the debtor
Terms and conditions must be approved by the court.
Contract of Loan - an agreement wherein a party delivers to
another money or consumable things upon the condition that the
same amount or same type and quality shall be paid. Contract of
loan can be mutuum (consumable) or commodatum (non-
consumable).
Interest Payment - the charged on top of the principal amount
loaned. If the interest rate is not stipulated in the agreement, the
legal rate of 6% per annum applies.
TYPES OF INTEREST
1. Legal Interest - interest rate prescribed by the law in
instances the interest rate is not stipulated in the contract.
2. Conventional Interest - interest rate agreed upon by both
parties.
3. Usurious Interest - interest rate over and above what the
law prescribes.
4. Compound Interest - interest on interest or accrued interest
added to the principal sum.
LESSON 7: Philippine Credit System Part 3
Mortgage Contract - is an accessory contract that is dependent
on a primary obligation that may be a contract of mutuum or
commodatum where pledge and mortgage serve as the collateral
for the security of the loan. A mortage contract can be a real
estate mortage or a chattel mortgage.
Credit Insurance - this is protection against unusual losses
resulting from the sales of merchandise on a credit basis.
CREDIT INSURANCE MAY BE CLASSIFIED INTO 5 TYPES;
1. Credit Life, Credit Accident, and Sickness Insurance
2. Accounts Receivable Insurance
3. Domestic Merchandise Credit Insurance
4. Export Credit Insurance
5. Government Credit Insurance
- The protection given to the insured is based on the maximum
primary loss the insured is willing to assume and the maximum
losses which the insurer will assume. In determining the insurable
amount, factors include the applicant's line of business and past
credit experience. The premium to be paid for the coverage
is determined by;
Type of policy
Terms of sale
Projected sales volume for the year ahead
Type of coverage
Extent of extraordinary coverage
Face value or amount of policy
Other special endorsements
PARTIES TO AN INSURANCE CONTRACT
1. Insurer
2. Insured
3. Beneficiary
ELEMENTS OF AN INSURANCE CONTRACT
1. The insured possesses an interest of some kind susceptible to
pecuniary estimation known as insurable interest.
2. The insured is subject to risk or loss through the
deconstruction or impairment of that interest by the occurrence
of designated perils.
3. The insurer assumes the risk of loss.
4. Such assumption is part of a general scheme to distribute
actual losses among a large group of persons.
5. As consideration for the insurer’s promise the insured makes a
ratable contribution which is called premium , to a general
insurance fund.
FINANCIAL SYSTEM HAS THE FOLLOWING ELEMENTS;
1. Financial Claims
2. Financial Institutions
3. Financial Markets
4. Government Agency
- These financial institutions perform the following functions;
Facilitate transfer of funds from investors to borrowers
Investigation and credit analysis
Brokerage function by matching supply and demand for funds
THE WAYS A BANK MANAGES ITS CREDIT RISK;
1. Diversification
2. Credit-Risk Analysis
3. Collateral
4. Credit Rating Rationing
5. Monitoring and Restrictive Covernants
6. Long-term Relationships
CREDIT QUALITIES TO INVESTIGATE;
1. Income
2. Employment
3. Payment Record
4. Residence
5. Marital Status
6. Age
7. References and Reputation
8. Reserve Assets
9. Equity in Purchase for Installment Accounts
10. Collateral
SOURCES OF CREDIT INFORMATION
1. Salesman’s Reports
2. Customer-Supplied Information
3. Bank Information
4. Credit Interchange with credit representatives of other
companies
5. Other Sources of Information (SEC. CMAP, etc.)
LESSON 8 : Philippine Banking System Part 1
Banking - is the service performed by financial institutions
known as banks which are primarily concerned with the
safekeeping of funds through the acceptance of deposits of
money and the provision of credit through the lending of money.
TYPES OF BANKS
1. Commercial Banks - cover the widest range of functions
among the financial intermediaries.
2. Thrift Banks - a type of financial institution that specializes in
offering savings accounts and originating home mortgages for
consumers.
3. Investments Banks - a financial services company that acts
as an intermediary in large and complex financial transactions.
4. Rural Banks - much like commercial banks, but are operating
primarily to serve the need of the people in rural areas.
5. Specialized Government Banks - these are banks created
by the government for specific purposes under special charters.
BANKING THEORIES
1. The Commercial Loan Theory - holds that banks should lend
only on short-term, self- liquidating, and commercial paper.
2. The Shiftability Theory - holds that the liquidity of a bank
depends on its ability to shift its assets to another entity at a
predictable price.
3. The Anticipated Income Theory - holds that there are no
such things as self-liquidating loans.
Commercial Bank Balance Sheet
Asset - Liabilities = Net Worth
Assets Include;
- Cash
- Loans
- Investements
- Securities (Liquid or Marketable Securities)
Liabilities Include;
- Demand Deposits
- Time Deposits
- Government and other Bank Deposits
- Funds Borrowed from Legal Reserves
QUANTITATIVE INSTRUMENTS OF MONETARY CONTROL
1. Open Market Operations - purchase and sale of government
securities by BSP
2. Discount Rate Policy - a move by the BSP to either increase
or decrease the interest rate of borrowing from the legal reserve
by member banks.
3. Reserve Requirements - the percentage from the total or
overall deposits of a member bank that the BSP requires to be
deposited to them.
QUALITATIVE INSTRUMENTS OF MONETARY CONTROL
1. Stock Market Credit - minimum margin requirement on the
purchase of stocks.
2. Moral Suasion - this comprises a variety of informal method
used by BSP to persuade its member banks to behave in a
particular manner.
LESSON 9: Philippine Bank System Part 2
Depository Institutions - these are companies that accept
deposits, make loans, transfer funds, obtain needed currency
supplies, and manage investments.
TYPES OF DEPOSITORY INSTITUTIONS
1. Commercial Banks
2. Rural Banks
3. Savings and Loans Associations
4. Credit Unions
Non-Depository Institutions - also called as financial
intermediaries because they collect funds from those who have
surpluses and channel the funds efficiently to those who have
deficits.
TYPES OF NON-DEPOSITORY INSTITUTIONS
1. Insurance Companies
2. Investments Companies
a. Close-End Investment Company - issues a fixed
number of shares, which it sells to the public to raise
money to buy investments.
b. Open-End Investment Company - issues new share
whenever someone wants to buy them and repurchase
whenever an investor wants to sell them.
3. Mortgage Bankers
4. Pension Funds
FUNCTIONS OF COMMERCIAL BANKS
1. Collection Function
2. Paying Function
3. Loaning Function
4. Receiving Function
5. Trust Function
Transit Letter - is a document on which are listed all transit
items drawn against another bank outside NCR.
Remittance Letter- is a document on which are listed all
remittance items drawn against another bank outside PH.
Clearing House - is an association of bank in a city that is
established to facilitate the clearing of clearing items among the
members.
KINDS OF ACCOUNTS
a. Individual Accounts
b. Survivorship Accounts
c. Joint Accounts
d. Partnership or Corporation Accounts
TYPES OF TRUST SERVICES
1. Personal Trust Services
a. Employees’ Benefit Trust
b. Living Trust
c. Escrow Arrangement
d. Custodianship
e. Insurance Trust
f. Property Administration
g. Guardianship
h. Eduactional Trust
i. Trust Loans
2. Corporate Trust Services
LESSON 10 : Monetary Policy
Fiscal Policy - refers to the use of government spending and tax
policies to influence economic conditions, especially
macroeconomic conditions.
Monteray Policy - is a set of tools used by nation’s central bank
to control the overall money supply and promote economic
growth and employ strategies such as revising interest rates and
changing bank reserve requirements.
GOALS OF MONETARY POLICY
1. Controlling Inflation
2. Smoothing out the Business Cycle
3. Ensuring Financial Stability
ADVANTAGES OF MONETARY POLICY OVER FISCAL
POLICY
1. Monetary Policy is more flexible and less political than fiscal
policy.
2. The central bank when it does act, can take action in a series
of small steps like cutting or raising rates a little bit at a time, and
see how the economy reacts. In contrast, Congress has to extend
so much political energy to pass a big tax or spending bill.
3. When an economy recovers from a downturn, the central bank
can take back a monetary stimulus more easily than Congress
can take back a tax or added spending.
TYPES OF MONETRAY POLICY
1. Expansionary Monetary Policy
2. Contractionary Monetary Policy
MONETARY POLICY TOOLS
1. Control over Short-term Interest Rates
2. The Discount Window
3. The Reserve Requirements and Other Regulation
LIMITATIONS OF MONETARY POLICY
Cases of Deflation
Cases of Banks Decreasing the Money they Lend
Uncertainty about how the Economy Reacts to Expansionary
and Contractionary Policies
Cases of the Government Reducing the Money Supply
Bond Market Vigilantes
Liquidity Trap - is when the interest rates are close to zero
and savings rates are high, rendering monetary policy
ineffective.
Money Aggregate - are broad categories that measure the
money supply in an economy.
Inflation Targeting - is an approach to monetary policy that
involves the use of a publicly announced inflation target set by
the government, which the BSP commits to achieve over a two-
year horizon.
