Republic of the Philippines

GUIMARAS STATE COLLEGE

Mc Lain, Buenavista, Guimaras

MODULE 2
FIRST SEMESTER A.Y 2020-2021

PREPARED BY: INSTR. JANICE M. CHAVEZ

Course Title: Monetary Policy and Central Banking

Module 2: Philippine Credit System

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 Republic of the Philippines
GUIMARAS STATE COLLEGE
Mc Lain, Buenavista, Guimaras

Module Overview: This module discusses the nature of credit and its characteristics as well as its
foundations, the credit instruments, negotiation and endorsement and the guidelines in accepting
checks for payment are also tackled. Module Outcomes:

1. Identify the nature of credit.

2. Discuss the characteristics of credit
3. Explain the foundations of credit
4. Illustrate the 5 Cs of credit
5. Discuss the classifications of credit.
6. Determine different credit instruments
7. Discuss about negotiation and endorsement
8. Explain the guidelines in accepting checks for payment

Lesson Outcomes:
Define the classifications of credit according to type of user
Define the classifications of credit according to purpose
Define the classifications of credit according to maturity
Determine the sources of credit
Identify investment credit instrument
Identify commercial credit instrument
Identify what is check
Enumerate different kinds of check
Discuss the uses and limitations of check
Discuss different kinds of endorsement
Listed the liabilities of general endorser

Nature of Credit

Credit- is the ability to obtain a thing of value in exchange for a promise to pay a definite sum of
money on demand or at a future determinable time. This creates obligations and rights for both
debtor and creditor. There is the obligation of the debtor to pay the debt and the right of the creditor
to collect payment.

Elements of Credit

1. It is the ability to obtain a thing of value. The thing of value may be cash form of credit or
merchandise form of credit. The debtor can apply for cash credits from several sources like
banks, private individuals, or other financial intermediaries. Merchandise form of credit is
non-cash form, and its sources are retail outlets and the like.

2. A promise to pay. The debtor makes a promise to pay to the creditor. For a promise to pay to
be valid, it should be acknowledged in writing by both the debtor and the creditor. The
promise should specify the principal amount, interest, and the maturity date.

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GUIMARAS STATE COLLEGE
Mc Lain, Buenavista, Guimaras

3. Definite sum of money. Credit involves an exact amount of money loaned or money value for
non-cash form of credit. The contract must identify the principal value of the loan and the
corresponding interest for the credit period.

4. Payable on demand or future time. A promise by the debtor for the settlement of obligation
may involve a future date, known as loan maturity, or anytime the creditor demands
payment.

Characteristics of Credit

 It is a bie-partite or a two-party contract. Two parties are involved in the agreement (the
debtor or the party requesting a loan and the creditor or the source of credit). The creditor
demonstrates his faith in the debtor by extending the loan or transferring ownership of the
goods or service in exchange for a promise to pay. To be legal, the contract must be in
writing, specifying the amount, time of payment, interest, and other terms agreed upon by
both parties.

 It is elastic. It can be increased or decreased by the creditor. Loan limit or elasticity depends
upon the capacity of the debtor and appraised value of his collateral.

 The presence of trust of faith. The basic element of credit is the creditor’s reliance on both
the debtor’s ability and willingness to pay his debt. This is also the risk factor in credit,
particularly when obligation remains unsettled during its maturity period. The debtor’s ability
to pay is dependent on his assets and will recall to maturity date for prompt payment, which
measures his willingness to settle obligations.

 It involves futurity. Maturity date for settlement of obligation is a future time. The creditor
puts his trust in the debtor’s ability and willingness to fulfil an obligation when it falls due.

Foundations of Credit

 Confidence. The creditor must trust the debtor’s personal character as a measure of the
latter’s capacity to pay. The creditor must have confidence in the debtor’s willingness and
capacity to settle an obligation.

 Proper facilities. In a credit contract, legal facilities must exist to make the agreement valid.

These are the credit information and credit document.

• Credit information- includes data about the creditor that are a gauge of his paying
capacity which can be gathered through a credit investigation.

• Credit document- is the written agreement signed by both parties identifying principal
loan, interest, and maturity date or other supporting papers to determine the debtor’s
credit rating such as a copy of income tax return/withheld or employment certificate
for personal loans and financial statements for business loans.

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GUIMARAS STATE COLLEGE
Mc Lain, Buenavista, Guimaras

 Stability of monetary standard. The purchasing power of money is considered when

extending credit. The more stable the value of money, the greater is the possibility of
approving credit. Creditors may be reluctant to part with excess income when there are wide
fluctuations of money value.

 Government assistance. Regulations protecting both parties are highly considered for credit
transactions. When evaluating, debtors are given more protection since they cannot be
imprisoned for non-performance of obligation, that is, if they are insolvent or do not have
any asset or property.

 Credit risk. This is the possibility that the debtor may not fulfil his promise for payment.

Five C’s of Credit

Character. This refers to the personality of the debtor, including his mental and moral
attitudes that determine his credit rating.

Capacity. This signifies the person’s willingness and capacity to pay. This is a measure of his
income level as basis of his paying capacity.

Capital. This consists of the person’s real and personal property which can be a strong
foundation for credit approval. His capital can serve as his liquid assets in case of
nonpayment or non-fulfillment of obligation.

Collateral. This is something of value or the debtor’s assets that can be used as pledge. The
common practice is for the collateral to be 40% higher than the amount of loan. The
collateral protects the creditor in the event of the debtor’s inability to discharge his loan
obligation.

Conditions. This may include local business or economic conditions during the time of the
loan application. During wide fluctuations of money value, it is unwise for creditors to grant
loans. When a business or economy is facing periods of recession or depression, fulfilling
loan payments may be impossible, so creditors may not consider the application.

Classifications of Credit

According to type of user

 Consumer credit. This is credit used by individuals to help finance or refinance the purchase
of commodities for personal consumption.
- Can be in the form of a charge account, an instalment account, revolving credit, or a
layaway plan.

• Charge accounts- are for non-durables, payable within two months in four
payments.

• Instalment accounts- are for durables, payable over more than six months to one
or more years. Payment is monthly, and a down payment is needed before the unit
purchased on credit is delivered.

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GUIMARAS STATE COLLEGE
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• Revolving credit- is a combination of charge and installment accounts with a

credit period of 90 days.

• Lay-away plan- is consumer credit that requires full payment of the product
within a period before it is delivered.
• Replevin- is the creditor’s right to reposses the item under contract, which is the
durable good, when the debtors fail to fulfill his obligation. It is applicable to
installment account.

Consumer credit may be used in the following ways:

• As a convenient form of payment. A typical charge account involves purchase

form a retail store that are paid once or twice a month.

• As aids in financial emergencies. Consumer credit helps consumers through

periods of financial stress. Some people may not have liquid assets to meet
emergencies, so consumer credit can tide a family over during financial difficulty.

• For buying durables on installment. It helps consumers purchase durable goods

that they cannot afford to buy through a single cash payment.

 Commercial bank credit. Is extended by one businessman to another businessman. It differs

from the preceding in terms of the parties concerned. The creditor is a commercial bank
while the debtor can be a business firm or private businessman. The debtor may consider a
commercial bank for loans to assist him in business operations or expansion.

According to Purpose

 Investment credit- is extended by banks to company that intends to purchase fixed assets like
land, buildings, or equipment for business use.

 Agricultural credit- is a loan intended for the acquisition of fertilizers, pesticides, seedlings,
transportation of agricultural products, and farm improvements. Debtors are farm breeders
and creditors are rural banks, and loans can be of short-term or long-term maturity.

 Export credit- uses letter of credit, or LC, as a tool for financing international trade. The LC
is issued by the importer’s bank, and it guarantees the exporter payment of a specified
amount of money.

Two general types of Letter of Credit

• Import letter of credit- requires payment to be made in the importer’s currency.

• Export letter of credit- requires payment to be made in the exporter’s currency.

Parties to this loan are: importer, the importer’s bank, the exporter, and the exporter’s bank

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GUIMARAS STATE COLLEGE
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 Real estate loan- intended for the purchase of a house and lot, for house construction or
home improvement.

 Industrial credit- intended to finance industries like logging, fishing, mining, and quarry.

According to Maturity

 Short-term loans- are payable within one year.

 Intermediate-term or medium-term loans are payable within one to five years.
 Long-term loans- are payable beyond five years.

According to Form of Credit

 Cash form of credit

 Merchandise form of credit

Sources of Credit

1. Private individuals. These are the individual money lenders who loan surplus income to
those in immediate need of cash. They usually do not require collateral but charge higher
interest rates. They are sometimes called “loan sharks” or usurers because they lend money at
an interest rate of 20% (5/6), which is over and above what the law allows.

2. Retail stores. These outlets offer merchandise form of consumer credit. It offers a book
account (palista) for customers of the store, and collection is during paydays of the month.

3. Pawnshops. Pawnbrokers extend loans in exchange for a collateral or a pawn. Acceptable

pawns are personal property or movable assets. The pawner is giver a 90-day grace period
from the date of maturity of the loan to redeem the pawn by paying the principal amount plus
the interest that accrued.

4. Savings and mortgage banks. Includes corporations organized for the purpose of
accumulating the savings of depositors and investing them, together with its capital, in
readily marketable bonds and debt securities; commercial papers and account receivables;
drafts, bills of exchange, acceptances, or notes arising out of commercial transactions or in
loans secured by bonds, mortgages on real estate and insured improvements thereon and
other forms of security or unsecured financing for home building and home development.

5. Mutual savings bank. Mutually owned by depositors, these banks pay out their profit to
savers in interest dividends or retail them as a reserve cushion against loss. They sell
interestbearing savings deposits to the public and acquire assets largely in the form of urban
residential mortgage.

6. Savings and loan associations. These are organized to obtain funds for home construction,
and majority of their savings are placed in home mortgages. There are stockholders in these
organizations who receive dividends over and above what is paid out to savers. These are

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GUIMARAS STATE COLLEGE
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sometimes called building and loan associations which sell financial service to the public
and invest the funds acquired.

7. Credit unions. These are mutual institutions whose members have some common bonds, such
as employment in the same company. They are small, non-profit, thrift and lending
institutions organized around some common bond of membership, typically a common
employer. They accept deposits on which they pay interest or dividends only to their
members and extend small loans only to their members, usually for the purpose of buying
consumer-durable goods.

8. Insurance companies. These companies are both mutual and stockholder-owned. They
receive funds from policy-holders and place the funds in individual loans to home buyers and
other small borrowers and in security purchases in the organized money and capital markets.

9. Pension funds. The procedure for pension funds is the reverse of that followed by insurance
companies. The person who lives the longest beyond retirement receives the highest return in
the investment through the periodic pension checks he receives.

10. Bond and money market funds. These are companies which accept savings and place them in
a pool for investments that allows diversification of assets.

11. Sales finance companies. These include sales and personal finance companies which make
loans to individuals for the purpose of buying automobiles. Typically, they do not lend
directly to consumers or companies but buy sales contracts or installment contracts from the
retailer or dealer.

12. Banks. These are commercial banks, savings banks, rural, development, and investment
banks. They approve loans based on collateral presented, which may be titles for real
property or securities. In the absence of an available pledge, a co-maker is required, serving
as guarantor for the loans. They are major sources of credit particularly for businessmen and
for the development of certain industries.

Commercial bank- is any corporation which accepts or creates demand deposits subject to
withdrawal by check. These institutions also accept drafts and issue letters of credit in
addition to discounting and negotiating promissory notes, drafts, bills of exchange and other
evidences of debts.

Credit Instruments

Credit instruments- are promises or orders to pay a definite or determinable sum of money to the
bearer or order on demand or at a future specified time. This document is evidence of a credit
obligation resulting from a past transaction that establishes the responsibility of the debtor to his
creditor.

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GUIMARAS STATE COLLEGE
Mc Lain, Buenavista, Guimaras

Credit instruments have four characteristics:

 Payable to bearer when the instrument does not specify the payee’s name.
 Payable to order when the instrument specifies the payee’s name.
 Payable on demand for an instrument with the current date, like an open check.
 Payable at a future time for an instrument with a future time.

Credit instruments can be classified as investment credit instruments and commercial credit
instruments.
Investment credit instruments- are those which earn income in the form of dividends or interest such
as stocks and bonds.
Commercial credit instruments- are substitutes for money in a business transactions. These are
promissory notes, checks, bills of exchange, bank drafts, and bank deposits.

Investment Credit Instruments

A. Bonds- are promises to pay the principal as well as the interest to the holder at a certain
specified time indicated on the face of the instrument. They represent an indebtedness on the
part of the issuing corporation. In the issue, the corporation is called the bond issuer or the
debtor, and the bondholder is the creditor.

Bonds are advantageous because of the following reasons:

 They represent a safe form of investment because the company must honor its obligation of
paying its indebtedness to the bondholder upon maturity regardless of whether it is losing or
making profits.
 They can be used as collateral to support loans sought by the bondholder from financial
institutions.
 They can be easily transferred to another holder by endorsement and delivery of the
instrument.

B. Stocks- are permanent invested capital of a corporation contributed by the owners

(stockholders) who hold certificates. It represents the stockholder’s right to a certain portion
of the assets of a corporation upon liquidation and to certain shares of the profits after prior
claims have been paid. Stocks are transferable to third parties so that the holder may, in
normal times, obtain immediate cash through the sale of said stock. Kinds of stocks are
common stocks and preferred stocks.
C. Common stocks- come with voting rights. One share is equivalent to one vote. The common
stockholder receives a portion of the corporate income, which remains after all other
claimants have been satisfied.
D. Preferred stocks- are given preference to assets, dividend declarations, and payments. They
come with the right to a fixed dividend, which is higher than that from common shares and
secondary to the interest on all classes of bonds and notes.

Commercial Credit Instruments- these documents are used during business transactions to replace
cash which includes promissory notes, checks, bank drafts, bills of exchange, and bank deposits.

 Promissory note- is a written promise by a person-the maker- to another party- the payee- to
pay a definite sum of money at a certain future time. A note can be single-named or

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GUIMARAS STATE COLLEGE
Mc Lain, Buenavista, Guimaras

twonamed. In a single-named note, the sole maker promises to pay, while in the two-named
note, another party- the co-maker-serves as a guarantor and assumes joint liability with the
maker. The payee is the party to whom payment is due or promise to pay is given. The maker
is the issuer of the note or the party making the promise to pay. Promissory note express a
promise to pay a definite sum of money at a future date.

Example of promissory note:

June 23, 2016

I promise to pay Raquel Fernandez the sum of fifty thousand pesos (Php50,000.00), on
September 5, 2016.
Sgd. RUTH APRIL SANTOS
Single-Name Promissory Note

June 23, 2016

I promise to pay Raquel Fernandez the sum of fifty thousand pesos (Php50,000.00), on
September 5, 2016.
Sgd. RUTH APRIL SANTOS
Sgd. RODMANN SANTOS
(Co-maker)
Two-Name Promissory Note

 Check- a written order drawn by a depositor or the drawer upon a bank or the drawee to pay
on demand or at a future determinable time a sum of money to order or bearer or the payee.
A check is payable on demand when it is an open check and the date on its face is a current
date. It is payable at a future time when it is a post-dated check bearing a future date or it is a
crossed check. The instrument is payable to bearer when it simply states “Pay to the order of
CASH.” This check does not identify any person or corporate name to whom the instrument
is payable.

Kind of checks

Open check. This is payable to order or bearer. This instrument does not require
presentation through a payee’s banking account. It has a current date on its face and
can be encashed on demand.
Crossed check. This is characterized by two parallel lines on the upper left-hand
corner. It must be presented through a payee’s banking account for deposit. This
instrument requires three days clearing if it is drawn within the metropolis before it
can be withdrawn by the payee. A crossed check can be payable to order or bearer.
Certified check. This is an instrument that has the word “certified” or “good for
payment” stamped on its face. This is commonly used for commercial transactions
wherein the payee wants assurance of fund sufficiency. This check may have a
current date but becomes “certified” only when a bank official affixes his signature.
Manager’s check/cashier’s check. This is an order drawn by a bank for the same bank
signed by the manager or the cashier, directing the bank to pay the person designated
by the depositor or the depositor himself a definite sum of money on demand at a
future determinable time.

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GUIMARAS STATE COLLEGE
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Traveler’s check. This is a promise to pay on demand. Even amounts are indicated on
the face of the instrument. This check is generally purchased by an individual before
leaving for a trip outside the country. This check is offered by banks, express
companies, or other agencies in denominations of $10, $20, and $100. At the time it
is purchased and presented for payment, the check must be signed twice.
Overdraft check. This check is stamped “no sufficient fund” check because there is
not enough funds in a depositor’s account to cover the check. In this case the
depositor is notified by the bank to resolve the insufficiency and is charged a penalty.
Bouncing check. This is an instrument drawn against “no fund”, for example, when
the depositor has closed his account with the drawee bank. The depositor can be
charged with crime of estafa for drawing a check without any deposit.
Stale-dated check. This check has date on its face or date of payment or encashment
that is more than six months old. For example, if the date on the check is January 1,
2002 and it was presented for encashment on September 5, 2002, the check has
become stale-dated. Bank dishonour this kind of check to protect the interest of the
depositor as the latter may have overlooked issuance of the check since it did not
appear in the monthly bank statement. Drawees are requested to see the depositor or
drawer to ask for an open-check replacement. Under Section 186 of the Negotiable
Instruments Law, a check must be presented for payment within a reasonable time
after issue or the drawer will be discharged from liability thereon to the extent of the
loss caused by the delay.
Post-dated check. This is an instrument where the date on the face is a future date for
encashment or payment. This may be issued by a drawer to coincide with the
fulfillment of a future contract or because, at the present time, the drawer may have
insufficient fund in his current account.

Negotiation and Endorsement

A check is negotiated when it is transferred from one person to another in such a manner as to
assign the transferee as the holder thereof. If payable to order, it is negotiated by the endorsement of
the holder completed by delivery. Endorsement must be written at the back of the check or on a
separate note or detached endorsement. The signature of the holder or endorser alone is sufficient
endorsement.
Endorsement- is the signature of the payee on the back of the negotiable instrument. The original
payee becomes the endorser in negotiating the instrument.

Kinds of Endorsement

1. Special endorsement applies to a check payable to order. Endorsement by the payee at the
back of the instrument is said to be a special endorsement since it is his name specified as
payee on the face of the check.
2. Blank endorsement applies to checks payable to bearer. In this case, the instrument was
drawn against no specified payee. Whoever is the holder in due course must endorse the
check at the back for encashment.
3. Restrictive endorsement prohibits further negotiation of the check when endorsement is in
favour of a particular person only. It carries the word “for deposit only.” It limits further
negotiation of the instrument and lessens the risk on the part of the payee in cases when he

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 Republic of the Philippines
GUIMARAS STATE COLLEGE
Mc Lain, Buenavista, Guimaras

transfers the instrument to another holder. This is commonly used when the instrument issued
by a drawer is payable to the bearer.
4. Qualified endorsement makes the endorser as a mere assignor of the title to the check. It
may be done by adding the phrase “without recourse” or words with similar import.

Uses and Limitations of Check

 Safety and convenience. It is safer to bring along checks for large payments rather than
cash. If the check is lost, the payee may request a replacement from the drawer. “Stop
payment” notice. A drawer may ask his bank “for stop payment” of certain checks issued
due to some default in the performance of any obligation on the part of the payee.
• For odd amounts. Some transactions may require odd amounts which can be easily
paid by simply writing a check.
• As a receipt. Checks serve as official receipts for business transactions, particularly
when received by “the drawer together with his monthly bank statement.”
• For large amounts. Checks are convenient to use as an instruments for paying large
amounts in business transactions.

Because it is a negotiable instrument, a check must conform to the following

requirements:
o It must be in writing and signed by the drawer
o It must contain an unconditional promise or order to pay a certain amount of
money
o It must be payable on demand or at a fixed determinable future time o It must
be payable to bearer or order
o When the instrument is addressed to a drawee, the drawee must be named
with reasonable certainty
Five basic items are on a check’s face:
 the date
 the amount
 the drawer
 the drawee
 the payee

 The amount is usually stated both in figures and in words. In case of discrepancy, the
sum identified in words shall be honoured.
Drawer- is the person or entity that issued the check directing the drawee to pay the payee named
therein. The drawee is the bank that shall pay the party. Payee- is the party entitled to receive
payment.

Liabilities of General Endorser

A party who endorses without any conditions or qualification makes the following warranties:
 That the check is genuine and all respect what it purports to be;  That he has good title to it;
 That all prior parties have the capacity to contract;
 That the check is, at the time of his endorsement, valid and substituting. It will be paid and if
dishonoured, he will pay the amount thereof to the holder or any subsequent endorser who
may be compelled to pay it.

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 Republic of the Philippines
GUIMARAS STATE COLLEGE
Mc Lain, Buenavista, Guimaras

Guidelines in Accepting Checks for Payment

1. Date must be current (examine month, day and year).

2. Amount in words must tally with the amount in figures.
3. Payee must be the name of the company (corporate accounts).
4. It must be signed by the drawer;
5. Any erasure or adjustment must be validated by the full signature of the drawer;
6. If it is a company check, the corporate title must be indicated. Also, all required signatories
must have signed the check.
7. Whenever more than one receipt is issued for a single check, the amount of the check must
be written after the check number on all receipts covered by it;
8. When payment is part cash and part check, the amount in cash and the amount on the check
must be noted.

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 Republic of the Philippines
GUIMARAS STATE COLLEGE
Mc Lain, Buenavista, Guimaras

ACTIVITIES

I. Arrange Me!
Direction: Arrange the scrambled words. 5 points each

1.
t d c e i r

2.
c d e f e n o c i n

3.

s l c e a t

4.

i n n u o c s d r i e t

5.

o c u g i b h c e k c n n

II. Odd Man Out!

Direction: write the letter of the item that does not belong to the group. 10 points.

1. a. confidence
b. credit risk
c. government assistance
d. creditor

2. a. promise to pay
b. future time
c. replevin
d. definite sum of money

3. a. debtor
b. creditor
c. credit contract
d. money

4. a. promise to pay
b. investment credit
c. in writing
d. legally binding

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GUIMARAS STATE COLLEGE
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5. a. re-possess
b. replevin
c. cash form of credit
d. merchandise form of credit

6. a. character
b. capacity
c. confidence
d. collateral

7. a. promissory notes
b. pawnshops
c. savings and loan associations
d. banks

8. a. a two-party contract
b. involves futurity
c. presence of trust or faith
d. definite sum of money

9. a. stability of monetary standard

b. it is elastic
c. proper facilities
d. credit risk

10. a. credit information

b. credit document
c. proper facilities
d. conditions

III. Matchy-matchy Direction: Match your answer inside the box. 10 points

a. Industrial credit f. replevin

b. Future time g. investment credit
c. Debtor h. charge and installments
d. Principal and interest i. export credit
e. Credit document j. bank

1. Repossession of the item sold on credit for non-payment of obligation

2. Payable within two months
3. Credit according to purpose
4. Financial intermediary-source of credit
5. Element of credit
6. Importer-exporter’s-importer’s bank-exporter’s bank
7. Person borrowing money for credit
8. For purchase of business fixed assets
9. Payable within two months

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 Republic of the Philippines
GUIMARAS STATE COLLEGE
Mc Lain, Buenavista, Guimaras

10. Proper facility as a foundation of credit

IV. Look and Found!
Direction: Research for the image of the following: You may Screenshot the image
or copy and save them and send via messenger or telegram. 20points a. Check
payable to bearer
b. Check payable to order
c. Open check payable to bearer
d. Open check payable to order
e. Crossed check
f. Post-dated check

References:

 Mutya, Ruby, “Introduction to Philippine Money, Credit and Banking”, Anvil Publishing Inc.,
2017
 [Link]
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591
 [Link]
HVmAWNv6WoCQ&q=new%20bsp%20governor&ved=2ahUKEwi784uhveDrAhXhK
qYKHY1fCZUQsKwBKAV6BAgPEAY&biw=13