It
is necessary to review the issue of bad credit as an issue of bad debt.
Economic
affairs have both nominal expressions as well as substantial expressions.
Nominal
expressions refer to configurations, while substantial expressions refer to
content.
Nominal
value is expressed as a fixed or unchanging absolute amount. By contrast,
substantial value is expressed as a floating or changing relative amount. Put
another way, while nominal value is unique, substantial value is varied.
Bad
credit is caused when nominal values of assets and liabilities lose touch with
their substantial values. This means that bad credit is what creditors
perceive, while bad debt is what debtors see.
Credits
form assets and debts form liabilities. When analyzing bad credit, we need to
analyze both the asset structure and the liability structure.
The
nominal value of assets is the acquisition cost, and the substantial value is
the market value. Assets are secured by their nominal values when funds are
procured.
Liabilities
and capital correspond to assets. The nominal value of a liability is the
original principal, while its substantial value is the amount repaid.
The
amount repaid comprises two factors: the total amount repaid and the repayment
plan. The substantial value of capital is the sum of the stock price and the
div
When
the nominal value exceeds the substantial value, unrealized profit or latent
profit results. Conversely, when the substantial value exceeds the nominal
value, unrealized loss or latent loss is generated. An asset that includes
latent loss is called a bad credit.
The
policies to be adopted are restricted by presupposed circumstances.
When
the market is expanding and the economy is growing, substantial value is
expressed as greater than the nominal value. On the contrary, when the market
is constricted and the economy is stagnant, nominal value is basically
expressed as less than the substantial value.
In
accounting, the nominal expression is generally used, however the flow of money
puts importance on the substantial value.
While
an asset is expressed with its nominal value in terms of accounting, it is
measured with its substantial value in light of funds. This means that an asset
is measured based on its value as collateral. For a liability, however, the
nominal value and the substantial value are cons
The
structure of a liability consists of original principal and interest. The
amount repaid also consists of original principal and interest. However, the
amount repaid as the portion of the original principal is not involved in
either the lease or the profit and loss. Only the nominal asset value is
expressed in relation to both the lease and the profit and loss. The
substantial portion of an asset and the nominal portion of a liability
constitute the basis of the fund.
This
is our assumption.
The
problem involved in bad credit is the original principal portion of the
liability and the collateral portion of the asset.
As
the market expands, the portion of the original principal also expands, and the
fund-raising capacity increases. Conversely, when the market contracts, the
original principal compresses and pressure for repayment increases.
The
capacity to increase funds is backed by the funding power of the collateral.
This
is why new fund-raising would be impaired unless the funding power of the
collateral recovers even in an expanding market. As banks base their strength
on collateral, a situation arises where they cannot lend money even if they
wanted to. Banks are not reluctant to lend money, but they need to review their
business practices with a view towards profits. For this reason it is necessary
to shift from a collateral approach to a capitalization approach.
An
important thing here is that our presumptions have changed. What was assumed
when the funds were raised? Essentially, business raises funds based on its
business profits. Therefore, a leasing deal comes into effect based on nominal
value. It is not possible to change from the nominal standard to the
substantial standard because of changes in the situation.
Top
priority should be given to securing profits. The next step is to look at the
flow of funds. The perspective of business needs to be changed to one of a
long-range outlook, which also entails reviewing asset values on a long-term
basis.
Fundamentally,
business is intended to thrive continually, and it is premised on maintaining a
long-term balance. Examining the value of business by its near-term profits or
asset values is a fruitless exercise. The purpose, social function and role of
business is its cornerstone, and both financial institutions and government
entities need to recognize this and act accordingly.