MODULE 1

CREDIT AND COLLECTION

By: NEOFE JAVIER LAZARO, MBA/MLIS

Course Code: Credit and Collection

Course Description:
Pre-Requisites: n/a
Department: Business Administration
Table of Contents
INSTRUCTION TO THE
USER .......................................................................................... ….4
INTRODUCTION ............................................................................................................
.... 5 CHAPTER I
CREDIT..........................................................................................................................
..... 6 LEARNING
OUTCOMES ............................................................................................. ………6
PRE-TEST .....................................................................................................................
…..6
LESSON - I
CREDIT .........................................................................................................................
............... 7
A. Learning
Outcomes ..................................................................................................... 7
B. Time Allotment ........................................................................................................
7
C.
Discussion................................................................................................................. 7
D. Activity ...................................................................................................................
14
E. Post Test .................................................................................................................
15
REFERENCES .............................................................................................................
15

INSTRUCTION TO THE USER

Welcome to the new normal! To ensure that your learning is unhampered by the current health
and other challenges, we provide you with this module that will give you educational experience
by accomplishing tasks at your own pace or time. With this learning module, you will be
introduced to the key concepts of credit and collection that are essential to your role as a future
business professional, particularly in the field of finance. This chapter will begin with a pre-test
that will measure your knowledge about the subject matter. This will then be followed by a
discussion of each lesson and then activities and or exercises for you to accomplish. Lastly,
you will be required to answer the post test for the evaluation of your understanding and
learning throughout this chapter. Keep this module neat and clean and do not copy, share, or
reproduce this material by any means. Internalize each lesson and accomplish the tests and
exercises with all honesty. Do not copy and paste from the internet without citing your reference,
or else you will be charged for plagiarism. Study diligently, for what you do today is what you will
be in the future. God bless and enjoy learning!

INTRODUCTION
This module will serve as an alternative learning material to the usual way of classroom
teaching and learning delivery. The instructor will facilitate and explain the module to the
students to achieve its expected learning outcomes and activities and to ensure that they will
learn amidst of pandemic. This material discusses the key concepts with regards to credit as an
introduction to credit and collections. It is very important that the learner cooperates by using
this module page by page and completing all the given activities. At the end of the module, the
learning outcome is evaluated based on the different tasks given to the learner. Through the
learner’s cooperation in this kind of flexible learning delivery, understanding about credit is
possible. It is expected that after using this module the learner will become well-oriented about
credit.
CHAPTER I
CREDIT OVERVIEW
Credit is very important in our daily life. The use of credit has not only been expanded
among individual consumers, retailers, wholesalers, manufacturers, and financial executives
among national, provincial, and local governments. Merchants are called upon to extend credit
to buyers. Other lending institutions extend credit to borrowers who wish to obtain money with
which to make purchases.
LEARNING OUTCOMES
At the end of the module, you can
• Define credit
• Discuss the function and significance of credit
• Discuss advantages and use of credit
• Identify characteristics of credit
• Organize an installment Loan Department

PRE-TEST
Before we start with the discussion, please try to answer the following test. This only
aims to test your knowledge about our lesson and that the results of this test will not be graded.
 1. What is credit?
____________________________________________________________________________
____________________________________________________________________________
____________________________
2. Why is credit significant?
____________________________________________________________________________
____________________________________________________________________________
_____________

CREDIT DEFINED
What is credit?
How do you define credit?
This term has many meanings in the financial world, but generally, C credit is simply
defined as the power or ability to obtain money, goods, and services at the present time in
exchange for a promise to pay with money upon demand or at a future determinable time. credit
is a contract agreement in which a borrower receives a sum of money or something of value
and repays the lender at a later date, generally with interest. • Credit also refers to an individual
or business' creditworthiness or credit history. • In accounting, a credit may either decrease
assets or increase liabilities as well as decrease expenses or increase revenue.

FUNCTIONS OF CREDIT
Many believe that credit avoids the use of money, or credit is used as substitute for
money. As such, it enables goods and services to be transferred from one person to another. It
then functions as a medium of exchange. Many people are capable of consuming more in
spite of the fact that they lack the money with which to buy the goods because they can avail
themselves of credit. Credit thus facilitates the production and consumption of goods and
usually results in the growth of the economy. As a medium of exchange, credit is faster, safer,
and more convenient form of obtaining goods and services than money. For instance, the use of
checks for obtaining economic goods is definitely safer and more convenient than using money,
Credit has the tendency to elevate the moral standards of the people since everyone intending
to have credit has to prove himself worthy of trust. Credit induces people to save. People are
urged to save by knowing that every they have saved may be employed for a profit. These may
earn interest when kept in banks, which in turn are lent out by the banks for producti0n or
consumption, thereby contributing to the growth of the economy. Some people obtain
appliances and cars on installment credit. They are forced to set aside portion of their monthly
income to pay for such obligations.
Credit enables businessmen and corporations to gather large amounts of capital
to undertake large-scale production. A businessman can borrow large amounts of capital
from banks and other financing institutions to be employed in his business. A corporation can
accumulate capital through the sale of stocks and bonds. If one buys stocks from a corporation,
he actually entrusts his money to the management of that corporation. It is understood that the
corporation has a responsibility for compensating the stockholder for the risk he has taken.
Another way of obtaining added capital is through the sale of bonds, which are evidence of
indebtedness. The bondholders entrust their money to the corporate management to earn
interest.
Credit allows wealth to be fully utilized. With the use of fixed assets as collaterals,
people can obtain 'loans from financing institutions. In this way, they can still use their properties
at the same time that they convert them into cash for other purposes.
Credit helps in the expansion and contraction of the money supply. Through credit,
the Central Bank can expand and contract the volume of money in circulation. For instance, the
Central Bank may increase the discount rates to discourage borrowers from obtaining loans
from banks and thus reduce the outflow of funds from them to the banks and to the economy.
On the other hand, if the Central Bank decreases the discount rates, businessmen and others in
need of funds are encouraged to borrow from banks and from the Central Bank, thus allowing
the outflow of money into the economy. The Central Bank may also increase or decrease the
reserve requirements against the deposit liabilities of banks, which will either be kept in the
Central Bank or in the bank vaults. These may be in the form of cash, government securities or
in both. If the Central Bank believes that there is inflation and it is necessary to increase the
reserve ratios of banks against their deposit liabilities, the effect would be that the
lending capacity of banks will decrease and thus, the outflow of funds to the economy
will be reduced and money supply in the economy will correspondingly be reduced. On the
other hand, if the Central Bank believes that money in the economy is not sufficient to meet the
economic needs, it will decrease the reserve requirements, and the effect would be that the
lending capacity of banks will increase and thus will allow more money to circulate in the
economy. These are just some of the instances in which credit can be contracted or expanded.

CHARACTERISTICS OF CREDIT
Credit as a Mutual Contract Credit always involves 2 parties:
the debtor who obtains money, goods or services in exchange of his promise to pay at a future
date; and
the creditor who lends his money, goods or services for the right to collect on demand or at a
future determinable time.

Credit as a Pecuniary Contract

Credit is always expressed in terms of money. When you buy goods on credit from a retail store
or borrow money from a bank or any financing institution, it is understood that such obligation
shall be paid in money.
Credit as a Fiduciary Contract
Since credit has always been based on trust and confidence. The debtor must always be able to
merit the trust and confidence of the creditor. Without this, there can be credit transactions.
In credit, Risk is Always Involved
There is always a possibility of the obligation not being paid. For instance, the debtor loses his
income, or dies, or becomes bankrupt, or there may be unforeseen events, which may prevent
him from paying his obligations.
Credit always involves futurity.
Payment on credit is always done at a future date. In actual accounting practice, futurity means
a day or more after the credit is obtained. Good obtained in the morning and paid in the
afternoon do not constitute credit in the business books.

SIGNIFICANCE OF CREDIT
The use of credit allows the possible production of goods. As the market for goods and services
expands, a manufacturing firm stands ready to finance its operation through credit, depending
on its capacity. When business opportunities appear and businessmen forecast profitable
market possibilities, businessmen are willing to expand credit. As business opportunities
decline, the need for credit also declines because the financial burden accompanying it
increases. Credit plays an important role in the distribution of goods. Since big quantities of
goods move through the marketing channels, a great bulk of such goods is financed through
credit. The role of credit is to provide financial means for businessmen who take advantage of
market opportunities in both domestic and foreign markets. It is also important that we must also
recognize the endeavors of both the government and the private businesses to promote full
employment. The increase in the production of goods and services, which will automatically
increase employment of labor, will greatly depend on the businessmen’s forecasts of market
expectation. Such increase in demand for the product will be influenced by consumers’ desire
and their ability to fulfill their desire. Consumer credit is vital link between production and
distribution. It allows the consumers to buy goods and services beyond their ability to buy or
what they can afford. Credit in the hands of consumers has a great impact on the quantity of
goods services consumed. Today, many families depend on credit to be able to buy high-priced
goods. Many new homes and automobiles are being financed by installment credit.
CREDIT AND THE BUSINESS CYCLE
All credit’s functions are stimulants or activators of the fluctuations in the business cycle. During
recession, when business activities decline, business and consumer products are reduced.
Thus, the need for credit also declines. On the other hand, during the recovery and prosperity
periods of the business cycle, general optimism prevails among businessmen and consumers.
This favorable outlook results in increased purchases, thus the use of both business and
consumer’s credit is also increased. In periods of prosperity, the influence of a high level of
business activity increases the volume of credit in the economy. However, in periods of
depression, credit men want to aid in maintaining sales volume by relaxing their credit
standards. But this adds to the risk prevailing in a very poor economic situation. Actually, the
expansion of credit in a declining phase of the business cycle softens the downward trend of
business activity. However, many creditors are not willing to shoulder the risk, especially during
such a situation. Many of them oftentimes tend to adopt strict credit policies such as higher
credit standards, or more quality on collaterals required which discourages borrowers. Creditors
may also put more pressure on their collection.
ORGANIZING AND MANAGING AN INSTALLMENT LOAN DEPARTMENT
An installment loan is a specific amount of money that is borrowed from a lender and
then repaid over time in a set number of scheduled payments. The terms of the loan are set at
the time of loan approval and document signing.
Function of Installment Loan Department
The Acquisition Area - originates the loan, which includes direct contact with the
customer or dealer, the gathering and review of credit information, and the decision to grant or
reject the loan.
Servicing - includes disbursing loan proceeds, processing loan forms, preparing
payment books, controlling notes, collateral and documentation, and preparing various reports,
such as delinquencies, extensions, renewals, and irregular payments.
The Payment Area - handles the collection, processing, and posting of all payments
received by the bank.
The Collection Area - provides follow-up, adjustment, and other related activities
involved with delinquent loans. Installment loan departments in larger banks may have
divisions for different types of loans. The specific breakdown will vary from bank to bank, but
may include divisions specializing in direct consumer loans, indirect loans, small business loans,
fleet leasing loans, indirect leasing loans, equipment financing, and education loans. The
functional duties within one division may be consolidated with similar functions of other
divisions. Thus, in a particular bank, the acquisition function may be handled by type of loan,
and the remaining functions may be consolidated. The examiner must determine the
organization of duties and responsibilities within the department at the start of the examination.
That helps to ensure a smoother flow of information from bank personnel to the examiner and
aids in ensuring that all areas of the department are considered in the examination.
Since installation loan departments handle a large volume of loans, most banks use
automated systems. The data and schedules needed by the examiner will normally be
generated by the system as a routine matter since they are also required by department
personnel. Management Information System (MIS) reports will probably be the major source of
detailed information concerning each loan. These reports should include the following
information: renewals, extensions and deferrals, past-due, charge-offs, and collection efforts.
Any lack of that information may constitute a serious shortcoming within the department. In
those banks that do not use automated systems, the necessary schedules should still be
routinely prepared. The examiner should request their preparation and test their accuracy.

ACTIVITY- Module 1 LET’S CHECK YOUR UNDERSTANDING!

1. In your own words, define credit. Give personal example.

2. Define Collection and enumerate an example
3. Discuss the function and significance of credit particularly to businessmen using
a concept map. Provide a short description of it.

References:
Laman, R., Laman, V. P., & Evia, E. (2015). Financial System, Market, & Management – the
basics. GIC Enterprises &Co., Inc.
Brock, T. (2021, March 8). Credit. Investopedia.
[Link]
Capital One. (2021, January 8). The Importance of Credit. [Link]
grow/money-management/why-credit-is-important/
EcoBus Updates. (2015, October 25). The Business Cycle [Video]. YouTube.
[Link]
[Link]/cliparts [Link]
kommercheskiy-bank [Link]