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CLASSIFICATION AND INSTRUMENTS OF CREDIT
Transcript of CLASSIFICATION AND INSTRUMENTS OF CREDIT
Public and Private.
This is based on the nature of the recipients of credit. Public credit includes all grants of credit to governments: national, provincial, municipal and its instrumentalities. Private refers to all grants of credit to non-governments: individuals, partnerships, corporations and other private institutions.
2. Agricultural credit
- includes the promises to pay of farmers and farm organizations for the funds they borrowed in the acquisition of farm inputs,such as fertilizers, chemicals, seeds, and facilities for production and other agricultural operations.
3. Investment credit
- is the promise to pay of individuals or business firms for the loans they obtain in buying capital goods such as machineries, lands and construction of plants and factories. This is also called industrial credit.
This is a very simple way of classifying credit which involves the time period in the contract. These are:
1. Short-term credit
- is a loan which is payable in less than one year.
2. Long-term credit
- is a loan whose maturity is from five years or more.
3. Intermediate credit
- is a loan which matures only in one year and less than five years.
Secured and Unsecured.
This is according to the presence or absence of pledges of assets or security for the loan. Usually, the most acceptable security or collateral is land with a title. Other forms of assets which are acceptable are stocks, bonds, houses, machines, crops, and other valuable properties. Unsecured loans are granted without security.
Credit may be classified according to the purposes for which the loans are used. Some of these are:
1. Commercial credit
- includes the promise to pay of businessmen for the funds they borrowed in the purchase of goods for productive or profitable ventures. There are the merchants, distributors and manufacturers.
4. Consumer credit
-constitutes all the obligations to pay of people for the money they borrowed for consumption purpose, such as medical care, tuition fees, goods and other things for personal needs.
5. Speculative credit
- is a type of credit which is used for dealing in securities or goods with the intention of making a profit through favorable price changes.
Instruments of credit are also classified in several ways. They vary according to purposes, customs and government laws. Nevertheless, credit instruments which are commonly used by people are either promises to pay or orders to pay.
Promises to Pay
It is simply an arrangement between the seller and the buyer. Charge account credit is sometimes called book credit and it is usually not secured. It is used by retailers, wholesalers’ transactions and others.
2. Promissory notes.
It is a written promise to pay a sum of money on demand or on a definite future date to a designated person or bearer.
- the person who promise to pay
- the one to whom the promise is directed
- It is a written or printed acknowledgement of debt. It is a certificate of indebtedness. Bonds are usually long term notes issued by the government and private corporations for the purpose of financing their respective projects.
Orders to Pay
It is a written and signed order of a depositor upon a bank to pay on demand the order of a bearer or deaignated person a specified sum of money.
- a person who draws a check
- person to whom payment is made
The different kinds of checks are:
a. Certified check
- payment to the payee is especially guaranteed by the drawee bank. Said bank writes or stamps “certified”, “guaranteed” or “accepted” on the check with the date and signature.
b. Cashier’s check
- it is drawn upon a bank by the cashier of a business organization. It is also known as
if it is drawn by the treasurer. And if it is the manager who draws the check, it is called
. These checks are used to meet their payrolls and other operating expenses.
c. Personal check
- this is a kind of check in which the drawer is an individual. It is commonly used by individuals and businessmen.
d. Bank draft-
it is drawn by a bank upon another bank where it maintains an account.
e. Bank money order-
the process of making payment is just like in sending postal money order to a relative designated payee. The only distinction is that in bank money order the order is drawn by a bank on another bank to pay a specified payee.
f. Bill of exchange
- it is unconditional signed written in order addressed by one person to another to pay on demand or at a specified future date a certain sum of money to order or bearer.
g. Bank acceptance
- it is similar to a trade acceptance, except that the order to pay is drawn upon a bank by the seller of goods. This ia used in foreign transactions where the drawee and the acceptor is a bank.
Advantages of Checking Deposits
1. Checks are not liable to loss or theft compared to other types of money.
2. Checks can be easily carried from place to place and from payee to payee, regardless of the sum of money.
3. The exact amount of money for payment can be written on the checks, thus, facilitating exchange.
4. Checks can serve as convenient receipts for payments.
Disadvantages of Checks
1. Checks may not be accepted from an unknown person.
2. Signatures may be forged or the amount may be changed.
3. It is sometimes inconvenient to cash checks in banks,especially if the amount involved is small.
4. The possibility of overdrawn checks or bouncing checks may happen.
Negotiable Credit Instruments
Most credit instruments, especially checks, have been widely used because of their qualities of saleability and transferability. And above all because of their legal quality of negotiability.
Holder in Due Course
Not all persons who accept a check or other negotiable instruments are entitled “holder in due course”.
The following are certain conditions in order to qualify as a holder in due course:
1. The credit instrument is complete. It does not show any visible proof of forgery,alteration or any irregular features which makes it questionable or ambiguous.
The characteristics of negotiability have been given only to checks, commercial drafts, promissory notes and a few other instruments of credit. All other kinds of properties are merely assignable which means that an assignee (buyer) can only obtain rights in the property which are equal to the rights of the assignor (seller).
Requirements of Negotiable Instruments
1. It is in writing and signed by the drawer or maker.
2. It contains an unconditional promise or order to pay a certain sum of money.
3. It is payable on demand or at a definite future time.
4. It is payable to bearer or to order.
5. It names the drawee with reasonable certainty.
Requisites of Endorsement
When a person signs his name, with or without qualifications, to a credit instrument for the purpose of transferring it to another, he performs the act of endorsement.
However,there are qualifications for a person ti be able to endorse a credit instrument, a check for instance, to another. There are, among other things:
1. He has a legitimate title to the check.
2. He is authorized to obtain payment in behalf of one who has a good title to the check.
3. It is a valid transfer.
4. It is not fake credit instrument.
5. He is not aware of any insolvency proceedings against the drawer of the check.
Types of Endorsement
1. Special endorsement
- it specifies the name of the person to be paid. “Paid to the order of Constancio Milagros,” signed “Yolanda Bautista”.
2. Endorsement in bank
- it indicates no name or endorsee. The check is merely signed “Esther Alhambra”. This is payable to bearer.
3. Restricted endorsement
- it confines the endorsement to a specific purpose, like “For collection only” or “Pay to Hedelina Dalaso only”, signed by “Jesus Dayao”. This limits further negotation of the check.
4. Conditional endorsement
- it requires payment of the check under specified conditions, such as “Pay to the order of Mario Castro when he passes the board examination”, signed by “Antonio Garcia”.
6. Facultative endorsement
- a type of endorsement which uses discretion to forego certain rights guaranteed by law but are waivable. Example: “Pay to Brian Emmanuel Queja,Notice of Dishonor Waived”
Holders of credit instrument such as checks and matured notes for example, hand them to the banks or drawees for payments or acceptance. This act is called “presentment”. It is made at the place and time indicated in the credit instrument. In case payment or acceptance of the credit instrument is denied, this means it is dishonored. However, such refusal for payment or acceptance can be protested in order to hold the endorsers responsible.