the issue of bad credit as an issue of bad debt.

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 dividend. Actually, however, the stock price and the dividend are counted separately.


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 considered together as one.


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.


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