Commercial Banks

- Intro
- Capitalization and nature
- Corporate powers
- Deposit functions
- Lending functions
- Borrowing functions
- Other functions
- Other services
- Others (discretion of the group)

INTRO

What Is a Commercial Bank?

The term “commercial bank” refers to a financial institution that accepts deposits, offers
checking account services, makes various loans, and offers basic financial products like
certificates of deposit (CDs) and savings accounts to individuals and small businesses.
A commercial bank is where most people do their banking.

Commercial banks make money by providing and earning interest from loans such as
mortgages, auto loans, business loans, and personal loans. Customer deposits provide
banks with the capital to make these loans.

 Commercial banks offer basic banking services, including deposit accounts and
loans, to consumers and small to midsize businesses.
 Commercial banks make money from a variety of fees and by earning interest
income from loans.
 Commercial banks have traditionally been located in physical locations, but a
growing number now operate exclusively online.
 Commercial banks are important to the economy because they create capital,
credit, and liquidity in the market.

Capitalization and nature

According to the BSP Circular No. 854 Series of 2014, the minimum capitalization of
commercial banks shall be:

Head office - 2.00 Billion pesos

Up to 10 branches - 4.00 Billion pesos
11 to 100 branches - 10.00 Billion pesos
More than 100 branches - 10.00 Billion pesos

As a profit driven financial institution, the nature of commercial banks is that all
operations for loans and deposits are available for the public. Commercial banks make
money by providing and earning interest from loans such as mortgages, auto loans,
business loans, and personal loans. Customer deposits provide banks with the capital
to make these loans.

Corporate powers

According to the Bangko Sentral ng Pilipinas, a commercial bank has the power to
accept drafts, issue letters of credit, discounting and negotiating promissory notes,
drafts, bills of exchange and other evidences of debt, accepting or creating demand
deposits, receiving other types of deposits and deposit substitutes, buying and selling
foreign exchange and gold or silver bullion, acquiring marketable bonds and other debt
securities and extending credit - all of which is subject to the rules the Monetary Board
may promulgate. This and the other general powers that corporations have as well as
those provided in other laws since banks are corporations according to law.

invest in the equities of allied enterprises as provided in Sections 31 and 32 of R.A.

No. 8791;
(b) purchase, hold and convey real estate as specified under Sections 51 and 52 of R.A.
No. 8791;
(c) receive in custody funds, documents and valuable objects;
(d) act as financial agent and buy and sell, by order of and for the account of their
customers, shares, evidences of indebtedness and all types of securities;
(e) make collections and payments for the account of others and perform such other
services for their customers as are not incompatible with banking business;
(f) upon prior approval of the Monetary Board, act as managing agent, adviser,
consultant or administrator of investment management/advisory/consultancy
accounts;
(g) rent out safety deposit boxes; and
(h) engage in quasi-banking functions.

Deposit functions

A commercial bank is authorized to accept or create demand deposits subject to

withdrawal by check. Demand deposits, also known as current accounts or checking
accounts, do not earn interest.

It is also authorized to accept savings deposits which earn interest and are
evidenced by a passbook issued by the bank in the name of the depositor. In making
a deposit, the depositor accomplishes a deposit slip which shall be given to the teller,
together with the amount to be deposited and the passbook. In making a withdrawal, the
depositor accomplishes a withdrawal slip which shall be given to the teller, together with
the passbook before the teller gives him the amount he wants to with- draw.
EX. BDO

FEATURES

Minimum Initial Deposit Php 2,000.00

Minimum MADB Requirement (1) Php 2,000.00

Minimum Balance to Earn Php 5,000.00

Interest

Gross Interest Rate Per Annum 0.0625%

https://www.bdo.com.ph/personal/accounts/peso-savings-account/atm-savings

It is also authorized to accept time deposits which earn interest and are evidenced
by a certificate issued by the bank in the name of the depositor. The minimum period of
time deposit is thirty days. When the time deposit reaches its maturity date, the
depositor shall surrender the certificate duly endorsed, and he receives the amount of
the deposit plus accrued interest, if interest has not been paid by the bank in advance.

EX. BDO

FEATURES

Minimum Initial placement Php 1,000.00

Terms of Placement 30, 60, 90, 180, 360 Days

Proof of Ownership Certificate of Peso Time Deposit

Interest rate per annum See interest rate table below

https://www.bdo.com.ph/mobile/personal/accounts/time-deposit/peso-time-deposit

EX. ROBINSONS BANK

THE SAME WITH A MINIMUM INITIAL PLACEMENT OF P1000

30 days to 5 years

ADDITIONAL INFO

A commercial bank may also offer NOW accounts. These are a special type of savings
deposit (interest-bearing deposits) which can be withdrawn by means of a Negotiable
Order of Withdrawal (NOW). This type of deposit is offered only to natural persons. It
may also accept, whether as depository, trustee, agent or administrator, any fund or
money of the government, its branches, agencies, subdivisions, and instrumentalities,
including government-owned or controlled corporations.

ACCORDING TO CORPORATE FINANCE INSTITUTE

NOW accounts were never prohibited, but after 2011, the prohibition of paying interest
on demand deposit accounts was removed.

Republic Act (RA) No. 11765, or the Financial Products and Services Consumer
Protection Act

Republic Act No. 11765: An Act Affording More Protection To Consumers Of Financial
Products And Services - Dodd-Frank, Consumer Protection Act - Philippines.

OW accounts are not used any more – mostly after the Dodd-Frank Act. The primary
advantage that a NOW account offered was the fact that it was interest-bearing. After
the repeal of Regulation Q, the interest benefit was no longer there, as interest could be
paid on checking and demand deposit accounts.
Another main difference was that NOW accounts were available for seven-day holding
periods, so consumers needed to plan ahead at least seven days for advance notice.
However, the feature is not exercised often in practice.

https://morb.bsp.gov.ph/221-authority-to-accept-negotiate-order-of-withdrawal-accounts/

https://morb.bsp.gov.ph/manual-of-regulations-for-banks/?hilite=%27216%27

https://databank.worldbank.org/metadataglossary/world-development-indicators/
series/FB.CBK.DPTR.P3#:~:text=the%20reporting%20country.-,The%20major
%20types%20of%20deposits%20are%20checking,savings%20accounts%2C%20and
%20time%20deposits.&text=Access%20to%20finance%20can%20expand,obstacles
%20for%20people%20and%20businesses.

Borrowing functions
A commercial bank may borrow from the BSP (CB) and other government and private
financial institutions to increase its loanable funds and working capital. Borrowing from
the central bank may be in the form of:

1. Rediscounting
2. Direct Advance

Rediscounting -This is a mode of borrowing whereby the bank assigns in favor of the
Central Bank the eligible borrowers' papers in accordance with established guidelines,
terms and conditions

The maximum amount of rediscounting facilities which may be allowed to an ordinary

commercial bank shall be equal to 100% of its net worth, that is, the total of paid-in
capital plus surplus reserves and accumulated earnings.

The maturity of Central Bank rediscounts for commercial credit shall not exceed 180
days from the date the proceeds of such rediscounts are released to the applicant
bank.

Direct Advamce - As a lender of last resort, the Direct advance or loan. Central Bank
may grant direct advances to a commercial bank in times of emergency or when it can
no longer be allowed to rediscount its eligible borrowers' papers.

An example of this is when the bank is experiencing heavy withdrawals to a point that it
has become illiquid to pursue its normal operations. The same conditions prescribed for
rediscounting apply to the availment of direct advance.

https://www.youtube.com/watch?v=3gMpRApsdIs

Other borrowings

A commercial bank may issue short and long-term commercial papers, including bonds,
in accordance with law, rules, and regulations being enforced by the Central Bank and
Securities and Exchange Commission.

Other Functions

Deposit Substitute Operations

This is also known as quasi-banking or money market operations.

Commercial banks may perform quasi-banking functions or they can engage in money
market operations-shall be limited to its own promissory notes, repurchase agreements,
and certificates of assignment/or participation with recourse.

The elements of quasi-banking are the following:

1. Borrowing funds for the borrower's own account.

2. Twenty or more lenders at any one time.

3. Methods of borrowing are issuance, endorsement, or acceptance of debt instruments

of any kind, other than depo- sits, such as acceptances, promissory notes,
participations, certificates of assignment or similar instruments with recourse, trust
certificates, repurchase agreements, and such other instruments which the Monetary
Board of the Central Bank may determine and allow from time to time.

4. The purpose may be for (a) relending, or (b) purchasing of receivables and other
obligations.

Lending Operations

1. Secured loans - Secured loans are business or personal loans that require some
type of collateral as a condition of borrowing. A bank or lender can request collateral for
large loans for which the money is being used to purchase a specific asset or in cases
where your credit scores aren’t sufficient to qualify for an unsecured loan. Secured
loans may allow borrowers to enjoy lower interest rates, as they present a lower risk to
lenders. In some cases, the collateral for a secured loan may be the asset you’re using
the money to purchase. If you’re getting a mortgage for a home, for example, the loan is
secured by the property you’re buying. The same would be true with a car loan.

https://www.investopedia.com/secured-loans-5076025

2. An unsecured loan - is a loan that doesn’t require any type of collateral. Instead
of relying on a borrower’s assets as security, lenders approve unsecured loans
based on a borrower’s creditworthiness.

Creditworthiness - Creditworthiness is a measure of how likely you will default on

your debt obligations according to a lender's assessment, or how worthy you are
to receive new credit. Your creditworthiness is what creditors consider before
they approve any new credit.

https://www.investopedia.com/terms/u/unsecuredloan.asp

3. Purpose

Agricultural loans -used for agricultural purposes like hog raising, farming, poultry,
purchase of machineries for farming or fishing and other agricultural endeavors.

https://agdaocoop.com/index.php/agricultural-loan/#:~:text=Agricultural%20loan%20is
%20used%20for,fishing%20and%20other%20agricultural%20endeavors.

Commercial & Industrial loans -Commercial loans are granted to finance the
purchase of goods, commodities, or merchandise for resale. Industrial loans are granted
to finance the purchase and processing of raw materials and manufacture of goods,
including the marketing of such goods. A commercial & industrial loan is done between
a bank and a business, used to fund operating costs and capital expenditures
https://www.investopedia.com/terms/commercial-and-industrial-ci-loan.asp

https://www.investopedia.com/terms/c/commercial-loan.asp

Real estate loans - A real estate loan, which is also referred to as a mortgage, is
commonly used by homebuyers to finance real estate.

https://www.fortunebuilders.com/real-estate-loan/#:~:text=A%20real%20estate%20loan
%2C%20which,over%20a%20period%20of%20time.

Others - Loans that are not under agricultural, commercial, industrial and real estate.

Other functions

Bank as an Agent - Commercial banks, if given the chance to, can act on behalf of a
person to do transactions such as investing (representative in stock exchanges), paying
installments, insurance, taxes, etc.

General Utility Services - Commercial banks can provide for Foreign Exchange
transactions, issuing debit and credit cards, offering locker facilities for jewelry (akin to
renting a room where the bank owns the “room”), traveler cheques, ATM facilities, etc.

Other services
Loan Syndications - Multiple lenders providing a loan for a single individual or company.
Capital One and other commercial banking services can arrange syndicated loan
transactions for companies that require a more flexible credit structure that falls outside
an individual bank’s limits. Loan syndication services can be advantageous for several
reasons. For one, they simplify negotiating multiple credit agreements, and they also
improve borrower control over financing activities. Loan syndications can provide
funding for many different corporate purposes, including acquisitions and capital
expenditures.

Accounts Payable Solutions

Many commercial banks offer customers solutions to streamline their accounts payable
processes. Capital One, for instance, lets users choose from a variety of card options
that you can use to pay invoices. Accounts payable solutions are an important—and
convenient—way for businesses to manage their payments owed to suppliers. By
staying on top of this process, they can make payments easier and get things taken
care of in a more timely fashion.

Liquidity Management Solutions

Liquidity refers to the ease by which you can readily convert assets to cash without
affecting their market prices. Many commercial banks offer liquidity management
solutions to help businesses monitor their money.
Standard liquidity management solutions involve cash concentration, automated
investment and loan sweep, and demand deposit accounts. These can help businesses
keep an eye on where their funds are going and determine their liquidity.

Foreign Exchange
These days, it’s almost impossible to conduct good business without dealing with
foreign currency. 80-95 percent of all US businesses purchase supplies overseas or
have sales overseas.

This is why commercial banks offer foreign exchange services to customers. They help
with conversion rates and mitigate the risks associated with fluctuating foreign currency.
Another benefit to using commercial banks’ foreign exchange services is that they are
typically very secure.

Investment Banking
Investment banking services assist companies and government institutions in
generating capital. They also help facilitate acquisition transactions and other financial
advisory services. Some of the services that are generally provided through commercial
banks are business valuations, fairness opinions, and corporate debt offerings.

Remote Deposit Capture

Remote deposit capture, or RDC, has become essential for financial institutions to
remain competitive, and commercial banks are no exception. RDC allows users to
deposit checks electronically, ensuring quicker deposits and eliminating the need for
people to have to pull up to a physical bank every time they want to deposit something.
This can be especially useful for businesses responsible for depositing large volumes of
checks over short periods of time.

Teksetra provides RDC services, including risk assessment and implementation

expertise, to help businesses start remote deposit capture. Teksetra can help
companies with planning, hardware procurement, maintenance, and every other step
involved with RDC implementation.