Credit Affair

Teach by LY PANHNHA, Copy right

(Compiled by: KEM VEASNA, MBA)

Tel: 092 92 67 20, 098 48 64 63

E-mail: ly_panhnha09@yaho.com

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Learning objectives:

• Define the term credit and explain the important aspects of a credit transaction

• Explain how different types of credit can be classified

• Explain the role of credit and its importance in economies

• Credit in Cambodia economy

• Discuss the business cycle and the efforts by the federal government to stabilize the economy

• Describe what credit does for consumers and business

• Explain the dangers arising from the credit use

Chapter oneCREDIT IN THE ECONOMY

Objective one:

Define the term credit and explain the important aspects of a credit transaction

1.1 Definition of Credit

a. Credit is a medium of exchange with limited acceptance. Credit is a medium of exchange to the extent that it facilitates the transfer of value from buyer to seller, but it is not available to everyone.

b. Credit is not a gift. It is a form of loan which the borrower or debtor must return the principal plus interest.

The Credit Transaction

Selleror

lender

Buyeror

borrower

Cash Credit

Creditor Debtor

Goods, Services, Money

Medium of exchange

Payments

Ability to use credit

Components of the Credit Process

Risk

Time

Security or Collateral

Operational expenses

Legal considerations

Inflation

Financial charge

I. Private credit

a. Consumer credit

+ Retail credit

+ Cash credit

+ Real estate credit

b. Business credit

+ Merchandise credit

+ Financial capital for operations

II. Public credit

1. Declining Amortization2. Balloon Amortization3. Semi-Balloon Amortization4. Single Payment Amortization 5. Negotiation Amortization

Types of Payment

1.Declining Amortization

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1 01/01/2010 2,500.00 - - - -2 01/02/2010 2,500.00 416.00 50.00 466.00 2,034.003 01/03/2010 2,034.00 416.00 40.68 456.68 1,577.324 01/04/2010 1,577.32 416.00 31.55 447.55 1,129.775 01/05/2010 1,129.77 416.00 22.60 438.60 691.186 01/06/2010 691.18 416.00 13.82 429.82 420.007 01/07/2010 420.00 420.00 8.40 428.40 0.00  Total     167.05    

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2. Balloon Amortization

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1 5/1/2010 $1,000.00 - - - -

2 6/1/2010 $1,000.00 - $30.00 - $1,000.00

3 7/1/2010 $1,000.00 - $30.00 - $1,000.00

4 8/1/2010 $1,000.00 - $30.00 - $1,000.00

5 9/1/2010 $1,000.00 - $30.00 - $1,000.00

6 10/1/2010 $1,000.00 - $30.00 - $1,000.00

7 11/1/2010 - - $30.00 $1,000.00 $1,030.00

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Semi-Balloon Amortization

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1 5/1/2010 $1,000.00 - - - -2 6/1/2010 $1,000.00 - $30.00 - $1,000.003 7/1/2010 $1,000.00 - $30.00 - $1,000.004 8/1/2010 $1,000.00 - $30.00 - $1,000.005 9/1/2010 $1,000.00 - $30.00   $1,000.00

6 10/1/2010 $1,000.00 $

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7 11/1/2010 $720.00 $

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8 12/1/2010 $448.40 $

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9 1/1/2011 $250.00 $

250.00 $7.50 $257.50 $0.00Total $192.55

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Single Payment Amortization

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2 6/1/2010 $1,000.00 - - - $1,000.00

3 7/1/2010 $1,000.00 - - - $1,000.00

4 8/1/2010 $1,000.00 - - - $1,000.00

5 9/1/2010 $1,000.00 - - - $1,000.00

6 10/1/2010 $1,000.00 - - - $1,000.00

7 11/1/2010 - - $180.00 $1,000.00 $1,180.00

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The economic compositions are:

- Political stability and situation

- State-laws and legal acts

- Accountability, transparency, and used of state funds

- Cost of living and life-consumptions

- The weather

- Local business and community affairs

- Strike affection

- Migration

- Competitors

- Promotion and support from the government and so forth

Cambodia Banking System

Central bank (National Bank of Cambodia)

-17 commercial banks: 3 foreign branch bank and 14 locally incorporated

- 2 representative offices

- 7 specialized banks: 1 state own, 6 private own

- 17 Microfinance Institution

- 26 Registered and 60 unregistered

- 21 NBC branches, money changers: registered 3,808 stores (pp: 556 and provincial 3252 stores)

Source: NBC 2008

Chapter two

Roles of The Credit Manager

Learning objectives:

• Describe the reasons a business would offer credit purchase options

• Describe three example of outside providers of credit programs

• Credit Management Functions

• Describe the goals of the credit manager

• Explain the steps in the credit management process

• Discuss important qualification for a career in credit management

Objective 5: Goals of the credit manager

- Increase sale revenues

- Monitor and control the volume of receivables

- Control operating costs and expenses

- Reduce collection expenses and bad debt

- Develop credit and collections policies

- Train and supervise other employees

- Cooperate with other departments

- Maintain good customer relations

Objective 6: The Credit Management Process

Promotion of credit programs

Initial screening of applications

Credit investigation

Credit decision

Control the account

Collections

Objective 7: Career in Credit Management

The Demand for Credit Manager

Most credit managers initially receive training and education in other areas such as:

• Accounting

• Finance or

• General business administration

Objective 9: important qualification for a career in credit management

- Careful Attention to detail

- Ability to make decisions

- Persistence(Try to do)

- Good human relations skills

CHAPTER 3

The Consumer Credit Investigation

Learning Objectives:

- Identify the credit qualities that should be investigated

- Outline the information the credit applicant supplies to the credit analyst

- Explain the differences between facts and opinions

Objective two: What to Investigate?

These C’s help the credit manager complete a quick mental check to determine any category of information has been overlooked. More specific qualities also need to be investigated, however, before most credit decision can be made.

The 6 Cs

• Character, Capacity, Capital, Collateral, Conditions, Common Sense

The 6 c’s

• Character

• Capacity

• Capital

• Collateral

• Conditions

• Common Sense

Character: is an intangible sum of personal attributes related to integrity and the moral strength of a person. The elements are:

- Personal habits and attitudes such as drinking, gambling, and so forth

- Business or professional conducts: payment of obligations, tendency to make unwarranted claims or to return goods without cause, attitude toward of obligations, speculative tendencies, and respect for the rights of others.

- Credit character: is best described as the willingness of a credit customer to pay his/her payments as agreed.

Capacity: is the ability of a credit applicant to pay a specific dollar obligation when it is due. The elements are:

- The knowledge and skill to generate incomes and payments & indebtedness

- Income must also be sustainable and predictable

- Capacity will be threatened if an individual becomes unemployed or if income is significantly reduced.

Capital: is the financial strength of a credit applicant, primarily determined by the level of reserve assets. These assets may be:

- Tangible assets – saving account balances

- Intangible assets – ability to find another job quickly coz of specialized skills and knowledge

Collateral: is the assignment of ownership rights in property in the event a credit customer does not pay. The collateral, often referred to as the security for a loan or credit obligation, may be the item being purchased using credit or property already owned.

Conditions: is a credit analysis category that looks at how the applicant fits into the economic system and how economic events will affect the ability and willing to pay. They are:

- Interest rate

- The financial service charge fee

- Compulsory saving

- Collateral and authorized by local authorities and so on

Common Sense: is simply good judgment. This credit analysis tool is normally mentioned after an account has been determined to be an uncollectible bad debt. The credit analyst will then remark that common sense should have been used to avoid credit relationship in the first place.

Relative importance of the C’s of Credit Analysis

Possession: is the legal process used to reclaim security or collateral in the event of nonpayment of a loan. Acquiring capital through repossession and other channel can be difficult, expensive, and may adversely affect the image of the credit grantor. Even though the legal means to collect an account exists, the best outcome arises from granting credit to applicants who possess the willingness and ability to pay.

Credit Quality to Investigate

- Payment record

- Income

- Indebtedness and expenditures

- Employment

- Residence

- Marital status

- Ages

- Reverse assets

- Equity in purchase

- Collateral

- Purpose for the credit

The economic compositions are:

- Political stability and situation

- State-laws and legal acts

- Accountability, transparency, and used of state funds

- Cost of living and life-consumptions

- The weather

- Local business and community affairs

- Strike affection

- Migration

- Competitors

- Promotion and support from the government and so forth

Exercises

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Exercises

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Exercises

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Exercises

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