Nature and Functions of Credit

A. Historical Perspective
The purpose of the workshop is to explore the extension of federal credit in a historical perspective and
consider today's realities within the context of longstanding debates over public sector risk management,
including, for example, federal loan insurance and credit. The footprint of the federal government is large,
and permeates all aspects of our economy. Understanding and managing these exposures, both direct
and indirect, has been an area of interest for historians, economists, legal scholars and policymakers for
many decades.

The aim of the first panel is to discuss the growth of federal credit and insurance programs from a
historical perspective, and how the concept of public risk changed overtime.

 Why have certain periods seen the dramatic expansion in the provision of federal credit?

 How do expansions and contractions in federal lending fit within our broader understanding of
macro-economic cycles?

 How have federal authorities represented the size and composition of the U.S. balance sheet, and
how have they managed its assets and liabilities, actual and contingent?

 How should the contingent liabilities of the government and taxpayers be defined, particularly as
it relates to insurance and other “lender of last resort” functions?

B. Nature of Credit
Credit relations function in the system of economic relations. They are based on a special type of
movement of capital - debt. Credit relations - is part of economic relations, which is linked to the provision
of funds in the loan and return it along with a certain percentage.
To give credit is to accept another's promise to pay in exchange for a valuable consideration,
"the power to get goods in exchange by giving a promise or contract to deliver an equivalent at some
future time." In short, credit is a promise to pay money.

C. Meaning of Credit
An increase to a liability or to an equity account is a credit. Conversely, a decrease to an asset account is
a credit. A decrease to a liability or equity account is a debit. Debits and credits occur simultaneously in
every financial transaction in double-entry bookkeeping.

Credit (from Latin word, Trust) is a contractual agreement in which a borrower receives something of
value now and agrees to repay the lender at some date in the future, generally with interest. Credit also
refers to an accounting entry that either decreases assets or increases liabilities and equity on the
company's balance sheet.

D. Basic elements of Credit

The following are the elements contained in the credit.

1. Trust
Confidence the bank as lender of accomplishment given to debtors to repay the mortgage
according to a predetermined time period.

2. Period
The time-scale has been agreed regarding the provision of credit by banks and credit
repayment by the debtors.

3. Achievement
Achievement may be regarded as an object of interest or fee agreed upon banks and
debtors.

4. Risk
To avoid bad risks in the credit agreement, was held binding angunan or warranties are
charged to the debtors or borrowers.

Debt History
Income
Current Debt
Collateral

E. Credit Contract
A consumer credit contract is a contract where a borrower is given credit for personal use, such as
through a mortgage, credit card, arranged overdraft, personal or cash loan, or pawn broking pledge.

F. Credit and Business Cycle

What is a 'Credit Cycle'

A credit cycle is a cycle involving the access to credit by borrowers. Credit cycles first go through periods
in which funds are easy to borrow; these periods are characterized by lower interest rates, lowered
lending requirements and an increase in the amount of available credit. These periods are followed by
a contraction in the availability of funds. During the contraction period, interest rates climb and lending
rules become more strict, meaning that less people can borrow. The contraction period continues until
risks are reduced for the lending institutions, at which point the cycle starts again.

G. Advantages and
Disadvantages
H. Cost of using Credit
Using Credit: The Rewards & Risks

Rewards: Convenience, Protection, Emergencies, Opportunity to build Credit, Special Offers & Bonuses
Risks: Interest, Fees, Overspending, Debt
Other factors include:
Annual Fee – yearly change you pay for the privilege of using credit (card companies)
Credit Limit – maximum amount of credit a lender will extend to a customer
Over the limit fee – spending more than limit
Finance Charge – actual dollar cost of using credit to maintain balance
Orgination Fee – charge for setting up the loan (Home loans)
Loan Term – length of time you have to pay for loan (installment & mortgage loans)
Late Fee – penalty for making a payment after due date
Universal Default – clause in their agreement stating interest rate
Grace Period – length of time you have before you start accumulating interest

I. How Credit affects prices

As prices rise in response to the increased credit demand for goods, the owner of the goods finds that he
can get larger credit at his bank, for the goods are worth more. Reached credit is not contracted or
reserves increased, a money stringency, possibly a crisis, will result, causing great loss to the business
community by a rapid fall in the price level.

The influence of credit upon prices, therefore, operates through its effect on the demand for money, and
especially on the proportion between money in circulation and that required as a reserve for credit
transactions.
J. Impact of credit upon creditor & debtor
The debtors are gainers during inflation, while the creditors are losers. The reason this happens is
because, during inflation, the value of money.
A creditor is an entity that extends credit by giving another entity permission to borrow ... payment
immediately is also considered a creditor, based on the fact that the ... the lender the right to claim any
of the debtor's real assets (e.g. real estate or ... however, one's creditworthiness has a primary
impact one one's interest rate.