Definition of Credit, Elements, Functions, Kinds, Types and Benefits
Definition of Credit
The definition of credit is an ability to carry out a purchase or hold a business a loan with a promise, the payment will be carried out at the specified time agreed
The word "credit" has been commonly used in banking practices in providing various facilities related to loans. The definition of "credit" in its increasingly widespread use needs to be explored, the extent to which its use is relevant in business practices in general and banking in particular.
The word "credit" comes from the Roman "credere" which means believe or "credo" or "credit"which means I believe. This means that the lender believes in the recipient of the credit, that the credit that he has disbursed will be returned according to the agreement. Meanwhile, for the recipient of the credit, it means accepting the trust, so that he has an obligation to repay the loan in accordance with the time period.
Therefore, to convince the bank that the customer can really be trusted, then before the credit is given, the bank first conducts a credit analysis. Credit analysis includes the background of the customer or company, business prospects, guarantees provided and other factors. The purpose of this analysis is to ensure that the bank is sure that the credit provided is completely safe.
Also Read Articles That May Be Related: Sources of Bank Funds – Definition, Distribution, Products, Credit and Financing, Experts
Credit According to Experts
- According to Black's Law Dictionary, credit is defined as: The ability of a business actor to lend money, or obtain credit goods in a timely manner, as a result of the lender's proper arguments, as well as reliability and capability pay it
-
According to the Banking Law Number 10 of 1998. Credit is the provision of money or bills that can be equated with it, based on a loan agreement or agreement between the bank and other parties that require the borrower to repay the debt after a certain period of time by giving flower.
-
According to Law 10/1998. Regarding Banking, Article 1 number 11, is the provision of money or equivalent claims, based on an agreement or agreement lending and borrowing between banks and other parties that require the borrower to repay the debt after a certain period of time by giving interest.
-
According to Brymont P.Kent: Definition of credit according to Brymont P. Kent is the right to receive payment or the obligation to make payment at the time requested or at a future time, due to the delivery of the goods at this time.
-
According to Rolling G. Thomas: According to him, the notion of credit is the trust of the borrower to pay a certain amount of money in the future.
-
According to Amir R. Coal: According to Amir. R. Coal, the definition of credit is the awarding of achievements whose counter-achievement will occur a certain amount of money in the future
-
According to Firdaus and Ariyanti: The definition of credit according to Firdaus and Ariyanti which defines the meaning of credit is a reputation owned by someone who allows him to get money, goods or labor, by exchanging it with an agreement to pay it at a time that will come.
-
According to Malay S.P. Hasibuan: The meaning of credit is all types of loans that must be repaid with interest by the borrower according to the agreed agreement.
-
According to Anwar: Credit reduction according to Anwar is the provision of achievements (services) by one party to another others and their achievements are returned within a certain period of time with money as a counter-achievement (reply services).
-
According to Thomas Suyatno: Credit is the provision of money whose bills are equalized according to the agreement between the borrower and the lender.
-
According to Muljono: According to Muljono, the notion of credit is the ability to carry out a purchase or carry out a loan with an agreement to pay at a predetermined time.
-
According to Dr. Al-Amin Ahmad: According to him, the notion of credit is to pay debts that are carried out gradually at a predetermined or determined rate.
Also Read Articles That May Be Related: Rural Banks – History, Definition, Business, Objectives, Targets, Types, Functions, Management, Examples
Elements of Credit
The word credit contains elements that are glued together. So if we talk about credit, it includes talking about the elements contained in it.
-
Trust
Trust is a belief for lenders that the credit given is really received back in the future according to the credit period. Trust is given by the bank as the main basis for why a credit dares to be disbursed. -
Deal
This agreement is stated in an agreement in which each party (the creditor and the credit recipient) sign their respective rights and obligations. This agreement is then stated in a credit agreement and signed by both parties before the credit is disbursed. -
Time period
The term includes the agreed loan repayment period. The term can be in the form of short term (under 1 year), medium term (1 to 3 years) or long term (above 3 years). The time period is the time limit for repaying credit installments that have been agreed upon by both parties. For certain conditions this time period can be extended as needed. -
Risk
Due to the grace period, the return of credit will allow a risk of uncollectible or non-performing loans. The longer the credit period, the greater the risk. This risk is borne by the bank, both intentional risk by the customer and unintentional risk, for example due to a disaster nature or the bankruptcy of the customer's business without any other intentional element, so that the customer is no longer able to pay off the outstanding credit obtained. -
Remuneration
The remuneration for the bank is a profit or income for granting credit. In conventional banks, remuneration is known as interest. In addition to remuneration in the form of interest, banks also charge customers credit administration fees which are also bank profits. For banks with sharia principles, the remuneration is determined by the profit sharing principle.
Also Read Articles That May Be Related: Definition of Deposit – Opening, Interest, Renewal, Disbursement, Transfer, Certificate or Futures
Credit Function
Credit at the beginning of its development functions to stimulate both parties to help each other with the aim of achieving needs, be it in the field of business or daily needs. Credit can fulfill its function if socio-economically good for debtors, creditors, or the community brings a better influence.
Credit Function – From the tangible benefits as well as the expected benefits, credit in economic life and trade has a function. The various credit functions are as follows
- Increase the usability of money
- Increase enthusiasm for business
- Increase circulation and money traffic
- It is a tool for economic stability
- Improve international relations
- Increase the usability and circulation of goods
- Increase income distribution
- As a motivator and dynamist of trade and economic activities
- Increase the capital of the company
- Can increase the IPC (income per capita) of the community
- Changing the way people think and act so that they have economic value
Also Read Articles That May Be Related: Functions and Types of Commercial Banks in Economics
Credit Purpose
Purpose of Credit – The presence of credit and its various functions. The purpose of the credit is as follows..
- Get bank income on the results of loan interest received
- Productive and utilize existing funds
- Running on bank operational activities
- Increase working capital in the company
- Speed up payment traffic
- Improving the welfare and income of the community
Also Read Articles That May Be Related: Understanding Money, Functions and According to Experts
Credit Principles/Terms
In getting credit, there are various procedures that must be passed which are determined by the bank or institution In order for finances to run well and healthy, there are 6 C's which are credit principles, among others, as follows: following.
-
Character (personality / character): Personality is the personal nature or character of the debtor to get credit, such as honesty, attitude of business motivation, and so on.
-
Capacity (ability): Capability is the ability of the capital owned to meet obligations on time, especially in liquidity, profitability, solvency, and solidity.
-
Capital (capital): Capital is the ability of the debtor to carry out business activities or to use credit and repay it.
-
Collateral (collateral): Collateral is a guarantee that must be provided for liability if the debtor is unable to pay off his debt.
-
Condition of Economic (economic condition): Economic condition is the economic condition of a country as a whole comprehensive and have an impact on government policies in the monetary sector, especially those related to credit banking
-
Constraints (limits or barriers): Limitations or barriers are the debtor's assessment of being affected by obstacles that do not allow a person to venture somewhere.
Although there are credit principles known as the 6 Cs, there are also credit principles known as the 4 Ps, including the following.
-
Personality: Personality is the bank's assessment of the borrower's personality, such as curriculum vitae, hobbies, family circumstances (wife or children), social standing (association in the community and how the community perceives the borrower and so on.
-
Purpose: Purpose is the bank assesses the borrower seeking funds regarding the purpose or need for use credit, and whether the purpose of using the credit is in accordance with the line of business credit concerned.
-
Payment: Payment is to determine the ability of the debtor regarding loan repayments obtained from prospects for smooth sales and income so that it is estimated that the ability to repay loans can be reviewed over time the amount.
-
Prospect: Prospect is the future business expectation of the prospective debtor.
Also Read Articles That May Be Related: Definition, Purpose, Role, Duties of the Central Bank + Functions and Authorities
Types of Credit
1. Types of Credit Based on Institutions
- Banking Credit, which is a type of credit given to the public by state or private banks for a business or consumption activity
- Liquidity Credit, which is a type of credit given to banks operating in Indonesia by central banks that function as funds to finance a credit activity.
- Direct Credit, which is a type of credit granted to a government or semi-government institution (credit program) by BI.
- Interbank Loan Credit, namely the type of credit provided by a bank with excess funds to a bank that lacks funds.
2. Types of Credit Based on Term
- Short term loan, which is a type of credit with a maximum term of one year. The forms are in the form of current account credit, sales credit, note credit, and buyer credit as well as working capital credit.
- Medium term loan, which is a type of credit with maturities of one year to three years.
- Long-Term Credit, which is a type of credit that has a maturity of more than three years. Generally in the form of investment loans established with the aim of increasing the company's capital in the long term to carry out rehabilitation, expansion (expansion), and the establishment of new projects.
3. Types of Credit Based on Purpose or Use
- Consumptive Credit, which is a type of credit used to meet the needs of himself and his family, for example on car and house loans for himself and his family. This one credit is very unproductive
- Working Capital Credit or Trade Credit, namely the type of credit used to increase a debtor's business capital. This one credit is very productive
- Investment Credit, which is a type of credit that is used in productive investments, but only gets the results in a relatively long period of time. Credit that is usually given a grace period, for example, is credit for oil palm plantations and so on.
4. Types of Credit Based on Business Turnover Activities
- Small Credit, which is a type of credit given to small business owners, for example in KUK (Small business credit).
- Medium Credit, which is one type of credit given to rulers with assets that exceed those of small rulers.
- Large Credit, which is a type of credit which is basically viewed in terms of the amount of credit received by the debtor.
5. Types of Credit Based on the Guarantee
- Unsecured Credit or blank credit (unsecured down), which is one type of credit that provides credit without material guarantees (physical collateral). selectively directed at large customers who have proven their bona fide, honesty, and obedience, both in banking transactions or by a business activity that lived it.
- Guaranteed Credit, which is a type of credit for debtors based on a belief in the ability of the debtor and the existence of collateral or collateral in the form of physical (collateral) as additional collateral.
6. Types of Credit Based on Kinds
- Acceptable credit, which is a type of credit for banks in the form of a money loan, for example, the credit limit (L3 or LLL)
- Seller Credit, which is a type of credit for sellers and buyers, which means goods that have been paid later. for example on Usanse L/C,
- Buyer Credit, which is the type of payment that has been made by the seller, but the goods are received later or purchased with an advance payment, such as a red clause L/C.
7. Types of Credit Based on Economic Sector
- Agricultural Credit, which is a type of credit for plantations, livestock and fisheries
- Mining Credit, which is a type of credit for various types of mining
- Export-Import Credit, which is a type of credit for exporters and importers of all kinds of goods.
- Cooperative Credit, which is a type of credit for all types of cooperatives
- Professional Credit, which is a type of credit for all kinds of professions, for example doctors and teachers.
- Industrial Loans, namely types of credit for all kinds of small, medium and large industries.
8. Types of Credit Based on Withdrawal and Repayment
- Current Account Credit, which is a type of credit that can be withdrawn and repaid at any time, the amount is in accordance with a certain needs which are withdrawn by cheque, bilyet, demand deposit or book transfer, settlement by making deposits that.
- Term Loans, namely loans whose withdrawals are at the same time as the ceiling. Repayment of credit is done after the time period has expired which can be done in installments or an agreement.
9. Types of Credit Based on How to Use
- Free Current Account Credit. namely the type of credit that the borrower receives all of his credit in the form of a checking account to him which is given a check and check form the loan statement is filled in based on the amount of credit given, the debtor is free to make withdrawals as long as the credit is walk.
- Limited Current Account Credit, which is a type of credit with a certain limitation for customers in withdrawing their account money. such as the provision of credit with demand deposits and the change into currency which is carried out gradually.
- Aflopend Current Account Credit, which is one type of credit withdrawal credit which is carried out with the meaning that the maximum credit at the time of withdrawal is fully increased by being used by the customer.
- Revolving Credit, which is one type of credit, the credit withdrawal system is the same by means of a free checking account with a period of use of one year, but the method of use is different.
- Term Loans, which is one type of credit, this one has a flexible credit use and usage system pemakaian This means that customers can freely use credit money for any use and the bank does not want to know about it that.
Also Read Articles That May Be Related: Sources of Bank Funds – Definition, Distribution, Products, Credit and Financing, Experts
Credit Benefits
Credit has several benefits in various sectors, including the following.
-
Debtor
• Increase its business by procuring a number of production sectors
• Bank credit is relatively easy to obtain if the debtor's business is accepted for service
• Make it easier for prospective debtors to choose a bank that with their business
• The debtor's financial secrets are protected
• Various types of credit can be adjusted to the prospective debtor -
Government
• As a driver of economic growth in general
• As a controller of monetary activities
• To create business fields
• Can increase state income
• To create and expand markets -
Bank
• Providing credit to maintain and develop the bank's business
• Help market other banking products or services
• Obtaining interest income received from debtors
• Can improve bank profitability and earn increased profits
• To seize market share in the banking industry -
Public
• Can encourage economic growth and expansion
• Able to reduce unemployment
• Provide a sense of security for the community to save their money in the bank
• Can increase the income of the community
Bibliography
- Malay S.P. Hasibuan, 2008. Banking Fundamentals. Publisher PT Bumi Aksara: Jakarta.
- Ibrahim, Johannes. 2004. Credit Cards: The Dilemma Between Contract and Crime. Bandung: Refika Aditama.
- cashmere. 2002. Banking Fundamentals. Jakarta: PT. RajaGrafindo Persada.