FM 213

DEPARTMENT OF BUSINESS ADMINISTRATION EDUCATION
FINANCIAL MANAGEMENT PROGRAM

Mabini Street, Tagum City
Davao del Norte
UNIVERSITY OF MINDANAO
Tagum College
Department of Business Administration Education

Financial Management Program
Physically Distanced but Academically Engaged
Self-Instructional Manual (SIM) for Self-Directed

Learning (SDL)
Course/Subject: FM 213 - Banking and Financial Institutions
Name of Teacher: Rizza Mae Dumlao-Catungal
THIS SIM/SDL MANUAL IS A DRAFT VERSION ONLY;

NOT FOR REPRODUCTION AND DISTRIBUTION
OUTSIDE OF ITS INTENDED USE. THIS IS INTENDED
ONLY FOR THE USE OF THE STUDENTS WHO ARE
OFFICIALLY ENROLLED IN THE COURSE/SUBJECT.
EXPECT REVISIONS OF THE MANUAL.
1
Davao del Norte
Table of Contents
Page
Part 1. Course Outline and Policies ...................................................... 4

Part 2. Instruction Delivery
CC’s Voice ............................................................................…….. 8
Course Outcomes ........................................................................... 8
Big Picture A: Unit Learning Outcomes ............................................. 8
Big Picture in Focus:ULO a ……………………………………… 8
Metalanguage .......................................................................... 8
Essential Knowledge ............................................................... 9
Self-Help .................................................................................... 17
Let’s Check .................................................................................... 19
Let’s Analyze ......................................................................... 20
In a Nutshell .................................................................................... 21
Q&A List .................................................................................... 22
Keywords Index ......................................................................... 24
Big Picture B: Unit Learning Outcomes……………………………… 42

Big Picture in Focus:ULOa ……………………………………………… 43
Metalanguage .......................................................................... 44
Self-Help .................................................................................... 54
Let’s Check .................................................................................... 55
Let’s Analyze ......................................................................... 55
In a Nutshell .................................................................................... 56
Q&A List .................................................................................... 57
Keywords Index ......................................................................... 58
Big Picture C: Unit Learning Outcomes ............................................. 75
Big Picture in Focus:ULOa……………………………………………… 76
Metalanguage .......................................................................... 83
Self-Help .................................................................................... 84
Let’s Check .................................................................................... 84
Let’s Analyze ......................................................................... 85
In a Nutshell .................................................................................... 85
Q&A List .................................................................................... 86
Keywords Index ......................................................................... 86
Big Picture D: Unit Learning Outcomes ………………………………. 105

Big Picture inFocus:ULOa ……………………………………………… 106
Metalanguage .......................................................................... 106
2
Davao del Norte
Self-Help .................................................................................... 217
Let’s Check .................................................................................... 217
Let’s Analyze ......................................................................... 218
In a Nutshell .................................................................................... 218
Q&A List .................................................................................... 219
Keywords Index ......................................................................... 219
Part 3. Course Schedule ......................................................................... 220

Online Code of Conduct .............................................................. 221
Monitoring of OBD and DED............................................................ 222
3
Davao del Norte
Course Outline: FM 213 - Banking and Financial Institutions
Course Coordinator: Rizza Mae Dumlao-Catungal

Email: ryzariobuya23@gmail.com
Student Consultation: Friday 1:00-2:00PM
Mobile: 0917-1160166
Phone: N/A
Effectivity Date: August 2020
Mode of Delivery: Online Blended Delivery
Time Frame: 54 Hours
Student Workload: Expected Self-Directed Learning
Requisites: BE 121
Credit: 3
Attendance Requirements: A minimum of 95% attendance is
required at all scheduled sessions.
Course Outline Policy
Areas of Concern Details

Contact and Non- This 3-unit course self-instructional manual is
contact Hours designed for blended learning mode of instructional
delivery with scheduled face to face or virtual
sessions. The expected number of hours will be 54,
including the face to face or virtual meetings. A
Learning Management System (LMS), Quipper, will
be used to facilitate your learning. Other sessions
may also be conducted through online
communication channels such as Facebook,
Messenger, WhatsApp, Viber, E-mail, Line, Zoom,
Skype, or any other similar applications. You may
also contact the course coordinator through a
mobile number or telephone.
Assessment Task Submission of assessment tasks shall be on the 3 rd,
Submission 5th, 7th,and 9th week of the term. The assessment
paper shall be attached with a cover page indicating
the title of the assessment task (if the task is a
performance), the name of the course coordinator,
date of submission, and the name of the student.
The document should be e-mailed to the course
coordinator. It is also expected that you already paid
4
Davao del Norte
your tuition and other fees before the submission of
the assessment task.
If the assessment task is done in real-time through
the features in the Learning Management System,
the schedule shall be arranged ahead of time by the
course coordinator.
Turnitin submission To ensure honesty and authenticity, all assessment
(if necessary) tasks are required to be submitted through Turnitin
with a maximum similarity index of 30% allowed.
This means that if your paper goes beyond 30%,
the students will either opt to redo her/his paper or
explain in writing addressed to the course
coordinator the reasons for the similarity. Also, if the
document has reached a more than 30% similarity
index, the student may be called for disciplinary
action following the University’s OPM on Intellectual
and Academic Honesty.
Please note that academic dishonesty such as
cheating and commissioning other students or
people to complete the task for you have severe
punishments (reprimand, warning, expulsion).
Penalties for Late The score for an assessment item submitted after
Assignments / the designated time on the due date, without an
Assessments approved extension of time, will be reduced by 5%
of the possible maximum score for that assessment
item for each day that the assessment item is late.
However, if the late submission of the assessment
paper has a valid reason, a letter of explanation
should be submitted and approved by the course
coordinator. If necessary, you will also be required
to present/attach pieces of evidence.
Return of Assignments Assessment tasks will be returned to you within two
/ Assessments (2) weeks after the submission. This will be returned
through e-mail or via the Quipper.
For group assessment tasks, the course coordinator
will require some or few of the students for online or
virtual sessions to ask clarificatory questions to
validate the originality of the assessment task
submitted and to ensure that all the group members
are involved.
Assignment You should request in writing addressed to the
Resubmission course coordinator your intention to resubmit an
assessment task. The resubmission is premised on
the student’s failure to comply with the similarity
index and other reasonable grounds such as
5
Davao del Norte
academic literacy three (3) standards or other
reasonable circumstances, e.g., illness, accident
financial constraints.
Re-marking of You should request in writing addressed to the
Assessment Papers course coordinator your intention to appeal or
and Appeal contest the score given to an assessment task. The
letter should explicitly explain the reasons/points to
contest the grade. The course coordinator shall
communicate with you on the approval and
disapproval of the request.
If disapproved by the course coordinator, you can
elevate your case to the program head or the dean
with the original letter of request. The final decision
will come from the dean of the college.
Grading System Your grades will be based on the following:
Examinations
First to Third 30%
Final 30% = 60%
Class Participations
Quizzes 10%
Assignments 5%
Research/Requirements 15%
Oral Recitation 10% = 40%
Total = 100%
Submission of the final grades shall follow the usual
University system and procedures.
Preferred Referencing Use the general practice of the APA 6th Edition.
Style
Student You are required to have an e-mail account, which
Communication is a requirement to access the LMS portal. Then,
the course coordinator shall enroll the students to
have access to the materials and resources of the
course.
You may call or send SMS to your course
coordinator through his/her phone number. Online
communication channels, such as those stated
above, may be used.
You can also meet the course coordinator in
person through the scheduled face to face sessions
to raise your issues and concerns.
Contact Details of the Dr. Gina Fe G. Israel
Dean Dean of College
E-mail: deansofficetagum@umindanao.edu.ph
Phone: 09158325092 / 09099942314
6
Davao del Norte
Contact Details of the Prof. Regi C. Aaron, MBA
Program Head Email: regiaaron@yahoo.com
Mobile: 09097980080
Students with Special Students with special needs shall communicate with
Needs the course coordinator about the nature of his or her
special needs. Depending on the nature of the
need, the course coordinator with the approval of
the program head may provide alternative
assessment tasks or extension of the deadline for
submission of assessment tasks. However, the
alternative assessment tasks should still be in the
service of achieving the desired course learning
outcomes.
Library Contact Details Clarissa R. Donayre, MSLS
E-mail:lictagum@umindanao.edu.ph
Phone: 0927 395 1639
Well-being Welfare Rochen D. Yntig, RGC
Support Help Desk GSTC Head
Contact Details E-mail: chenny.yntig@gmail.com
Phone: 0932 771 7219
Mersun Faith A. Delco, RPm

Psychometrician
E-mail: mersunfaithdelco@gmail.com
Phone: 0927 608 6037
Alfred Joshua M. Navarro

Facilitator
E-mail: is40fotb@gmail.com
Phone: 0977 341 6064
7
Davao del Norte
CC’s Voice: Hello there! Good day! Welcome to this course Banking and Financial
Institutions .According to Oxford handbook banks helps the economy to modulate the
circulation of money; the industry allocates the money through loans if there is a surplus
of money (deposits). This activity can create liquidity in the economy because the
deposits will be an injection to the economy by providing loans to business or personal
use and this loan will have an interest which increases the deposits through annual
interest. Learning banking theory will be interesting because it can be apply in your
professional job or in your daily events. Therefore, enjoy while learning this course.
CO: As a student of this course you are expected to explain and analyze the basic
concepts of bank and banking perspective.
Let us begin!
Big Picture A
Week 1-3: Unit Learning Outcomes (ULO): At the end of the unit, you are
expected to:
a. Understand the nature and basic concepts of banking perspectives, the
history, significant, function and process of establishment in banking
industry;
b. Understand the nature and basic concepts of banking perspectives by
knowing the general aspect establishing the bank; and
c. Understand the nature and basic concepts of banking management.
Big Picture in Focus: ULOa. Understand the nature and basic

concepts of banking perspectives, the history, significant,
function and process of establishment in banking industry.
Metalanguage
The following are terms to be remembered as we go through in studying
this unit. Please refer to these definitions as supplement in case you will
encounter difficulty in understanding the basic concepts of banking and financial
institutions.
Deposit – a sum of money paid into bank or building society account.
Loan – an act of lending something to someone or to some establishment. Loan
is any property or money which is borrowed to someone or to an establishment,
8
Davao del Norte
which is expected to be paid back with interest.
Interest – Interest is the money paid regularly at a particular rate for the use of
money lent, or for delaying the repayment of a debt or loan.
Check – A check is written, dated, and signed instrument that directs a bank to
pay a specific sum of money to the bearer.
Lender – the lender is an organization or an individual that borrows money in
financial institution.
Financial Institution- is a company engaged in the business of dealing with
financial and monetary transactions such as deposits, loans, investments, and
currency exchange.
Note – a piece of paper money, constituting a central bank’s promissory note to
pay as stated sum to the bearer on demand.
Capital- bank’s capital can be trough of as the margin to which creditors are
covered if the bank would liquidate its assets.
Funds – all the financial resources of the firm, such as cash in hand, bank
balance, account receivable. Any change in these resources is reflected in the
firm’s financial position.
Stocks and Bonds – the difference between stocks and bonds is that stocks
are shares in the ownership of a business, while bond are a form of debt that the
issuing entity promises to repay at some point in the future.
Laundering-conceal the origin of money which obtained illegally transfer to the
bank or to the legitimate business.
Network- a group or a system of interconnected people or thing
Essential Knowledge
The following are basic concept of Bank and Banking Perspective that
may be useful for you to understand this field of expertise. The said concepts
might be confusing or difficult as a beginner but at the later part of this unit would
be of great help for you to understand the nature of its existence. Please note
that you are not limited to exclusively refer to these resources. Thus, you are
expected to utilize other books, research articles and other resources that are
available in the university’s library e.g. ebrary, search.proquest.cometc., and
even online tutorial websites.
Historical Perspective Worldwide

The establishment of the banking system is evident since 2,000 B.C.,
the transaction was stated in the temples of Babylon, while the credit transaction
was written on the clay discover in the ruins in the ancient past. In the 4 th century
B.C. deposit and loaning funds through Credit is already occurred, the
transaction was dealing with temples, public associates, and private industry and
it was develop at 2nd century A.D., which the transaction was registered in public
9
Davao del Norte
notaries. The champagne fairs where the settlement of the credit transpires, this
era the settlement must be made in the designated periods. During 8 th century
B.C. in Assyria the settlement of interest on loans and charging fee is
manifested by the bank draft and check. Venetian banking starting the
assessment of integrity of the banks client while sedentary banking
(Mediterranean cities, particularly Venice, Genoa, and Barcelona) started
commercial banking system which was developed until today. But the goldsmith
can claim the direct predecessor of business banking as a whole. InLombard
Jews there a few persons that dominated the financial industry.
 The Florentine Financial power was usher by Medici family
 Fugger family is a greatest money lender of the 16th century.
 John law’s financial system creates chaos which almost
destroys France financial system.
Philippine Banking History

The Philippine banking history is just like how Philippines win stand the
colonization period. The influence of the colonization in means of races and
culture become relevant into banking perspectives. Therefore we can divide the
history of banking through the timeline of colonization which are; Spanish Era,
American Era, Japanese Era, the Post war Era, and the Present.
Spanish Era; in 16th century Mexico and Philippines develop financial institution
to take care the developing galleon trade between two countries, they called the
institution ObrasPias. The ObrasPias operates in 1820 and funded by pious
Catholic with an interest bearing loan. The institution becomes non-existent by
1851. The Spanish government became aware to the development of financial
institution in Philippines which they supported by establishing the first
commercial bank in 1828. In 1851 new bank was established called
BancoEspañol-Filipino and start its operations. The said financial institutions
finance some of the foreign trade and it also provides wide-ranging banking
function. In 17 October 1854 the bank was given a privilege to issue a note and
this bank still exists under the name of Bank of the Philippine Island (Bankodelas
Islas Filipinas). The island becomes attractive towards European market due to
the opening of Suez Canal in 1869 because it becomes more accessible. The
Charter bank of India, Australia, and China established branches in the county in
1873.after two years Hongkong and Shanghai Banking Corporation also
establish branch in Philippines’. The foreign bank engaged into general banking
business, as well as bought and sold drafts and bill exchange. As of today the
said bank is more on exchange bank than a commercial bank. After the
establishment of the foreign bank there is an establishment of savings bank
named Monte de Piedad in 1882. In 1853 the Banco Peninsular Ultramarino of
Madrid also put the branch I the Philippines. After the colonization of Spanish
era there were four banks in operation in which the three is commercial and one
is savings bank.
10
Davao del Norte
The American Era: the bank under Spanish era is still operational but soon the
industry merged with the branches of the International Banking Corporation
(Subsequently absorb by the National City Bank of New York) and the Guaranty
Trust Company. In 1906 postal Saving Bank was establish as part and parcel of
the Bureau of Post to encourage the people to save specially the low income
groups. After two year Agricultural bank was created the initial capital is P1,
000,000.00 but it was a failure due to lack of capitalization. When the Philippine
granted the charter the foreign bank was dominated the Philippine financial
institution until 1916. The bank was capitalized at P 20, 000,000.00 which
majority owned by the government and partly private citizens. The operation of
the bank is to grant notes, loans and the like. This also help to extend the short
term loan to long term to agricultural and merchants. However after re-
organization the capital decrease to 10, 000,000.00 in 1934. More bank was
establish after World War I, these are Yokohama Specie Bank(1919), the China
Banking Corporation (1920), the People’s Bank and Trust Company and the
Mercantile bank of China in 1926. When the Commonwealth created the banks
still joins in, the NetherlandschIndische Handelsbank created a branch in 1937.
In 1938 the first private commercial bank which financed by Filipino, was
establish under the name of The Philippine Bank of Commerce. The same year
the bank of Taiwan was approved consent to form and operate a branch in
Manila. Three banks commenced commercial banking operation, these are:
Bank of the Commonwealth, Philippine Bank Communications and the
Government-owned Agricultural-Industrial Bank, these three banks were
established in 1939. In American era, there were 17 banks in manila 22
provincial branches, 54 provincial agencies, and 1,000 sub-agencies, and the
total of the bank two of these are owned by the government. Due to the
increasing number of banks not only branches but a head officers with a
branches of bank, Philippine create a first Philippine Commission passed Act 52
which provides an examination and inspection to safeguard the interest of the
depositor and the shareholders. In 1929 the Bureau of banking was created to
supervise bank through the bank Commissioner. The establishment of Manila
Clearing House is a milestone for the financial institution because it was
organized by domestic bank only. With this development banking industry
gained stability and was exempted from Banking Holiday of 1933.
The Japanese Era. Banking industry was not spare by the havoc of the Second
World War The bank is given permission to operate in Japanese occupation to
accommodate the military bank transaction and the management of the bank is
facilitated by military. The Southern Development Bank (Nampo Kaihatsu Ginko)
opened a bank in Manila in 1942 and serves as a fiscal agent of the Japanese
government in the Philippines.
Post War Era: Upon the independency of Manila from colonization, the banking
industry is unable to operate due to the funds which are considered as military
11
Davao del Norte
bank notes. In this concern the government aids the problem by Presidential
Directive, Executive Order 96, which is invalidated the Japanese occupation
deposits but the wartime payment of loans consider valid. The Executive 48
helps the bank to reopen and the first license was granted to the National City of
New York and several banks were followed. In 1945 Commonwealth Act 725
enables domestic banks to reopen in March 1946 which provides a sum of P
10,000.00 to rehabilitate the domestic bank through the government subscription
of banks preferred shares. In 1946, the Postal Savings Bank boasted of added
facilities in cities, provinces and municipalities.in January 2 1947 the
Rehabilitation Finance Corporation was created to rehabilitate the war-ravaged
to promote economic development. During this period the Bank of America was
granted to do the operation, management, and operation. In 1949 the Republic
Act No. 265 otherwise known as the Central Bank Act.
Philippine Banking Today

The business of banking has improved irrevocably and the bank must reach the
great expectation of the client for the greater security, for better earnings, and for
more selections. The development of technology makes a great contribution to
banking system. Technology leads the e banking possible. The instruments or
devise used to provide e-banking service are called e-money, which is divided
into three:
Access Device- Access Device needs an Automated Tellering Machine (ATM),

Phone, or computer which allows the client to withdraw, deposit, transfer funds
and pay bills without going to the bank physically.
Card-Based Product- They called it Stored value card (SVC) which is
embedded to the card given to the client. The funds is stored to microchips
implanted to the card which you can use for payment without an actual cash.
Prepaid software Product or Network Money- This involve funds which is
secure in electronic form and transferable over the communication of the
network or internet. Example G-Cash, BPI Application and the like.
As of June 2001, there are 155 banks were already providing service
through electronic mails or maintain their website, there were 31 banks (24
commercial banks and 7 thrift banks) already having an electronic banking
transaction. The top six which provide electronic banking are Metrobank, Bank of
the Philippine Islands, Equitable Bank, Land Bank of the Philippines, Philippine
National Bank and Citi Bank. The bank who wants to provide electronic banking
service must seek for endorsement from Monetary Board of the
BangkoSentralngPilipinas, which provides the process, guidelines, and
requirements stated in the BSP’s Circular no. 269 (December 21, 2000). On 23
May 2000, the law was passed which is republic Act No. 8791, also known as
the General banking Law of 2000, this law provides the guidelines for the
banking industry from organization and operation, quasi banks, and trust entities.
Among the more significant features of the new law are the following:
12
Davao del Norte
Greater foreign participation in the system, thus inducing competition.
Foreign bank are allowed to acquire up to 100 percent of the voting stock of an
existing bank within seven years after the effectivity of the act.
Three-year moratorium on the establishment of commercial banks to
hasten the ongoing consolidation process in the banking system.
Stricter rules governing bank exposure to directors, officers,
stockholders, and related interests (DOSRI). The definition of DOSRI is
expanded to include investments of the bank in enterprise owned or controlled
by said DOSRI. The Monetary Board is also given the power to define the term
“related Interest”.
 Grant authority to the Monetary Board to adopt internationally accepted

standards relating to the risk-based capital adequacy.
 Application of fit-proper rule test for a director or officer to hold said position
in a bank. In this regard, the monetary Board is empowered to disqualify,
remove or suspend a director or officer for acts or omissions that render him
unfit for the position.
 Grant of authority to BSP to regulate electronic banking to ensure
adequate protection of the banks’ depositors and other clients.
 Anti-Money Laundering Act of 2001 also known as Republic Act 9160
have five salient features (Anti laundering Law):
First is criminalizing, meaning, that money laundering is now a crime in the
Philippines.
Second is the establishment of a system of covered transaction reporting.
RA 9160 identifies the forms of business institution or “covered transactions’
to authorized persons.
Third is the creation of Anti-Money laundering Council that will administer
the implementation of RA 9160.
Fourth is the amendment of the BankSecrecyLaw which has been blamed
for making our country a potential haven for Money Laundering. The
objective of RA 9160 is to ensure that the country is not used for Money
laundering. However, it continues to protect and perseveres the integrity and
confidentiality of bank accounts.
Fifth is the institution of procedures and arrangements that facilitate
cooperation between the Philippines and foreign governments in
investigation, tracking, and prosecution of money laundering.
 The Monetary Board approved the issuance of Circular No. 237 on April
19 2000 which makes the consolidating and clarifying all existing rules and
regulations on mergers and consolidations of the banks and other financial
institutions (Section X112 of the Manual of the Regulations for the Banks
and Section 4112 of the Manual of Regulations for the Non-bank Financial
Institution).
Merger refers to the preoccupation of one or more corporation by a different
corporation which retains its identity or name and takes over the rights,
privileges, franchise, and properties. Also assuming the liabilities and obligation
13
Davao del Norte
of the occupy corporation. The absorbing corporation will continue to exist while
the other corporation will be dismissed.
Consolidation is the arrangement of two or more corporations into a single new
corporation which protect all component of the corporation. The consolidated
corporation will be terminated and the company will act as one corporation in
terms of the privileges as well as the obligation.
 General banking law of 2000 is reinforcement for deregulation to attract
more investment from global competition. This quoted as follow:
Sec 11. Foreign Stock Holdings: Foreign individuals and non-bank
corporations may own or control up to 405 of the voting stock of a
domestic bank. This rule shall apply to Filipinos and domestic non-
domestic non-bank corporations.
Sec. 72. Transacting Business in the Philippines. The entry of foreign
banks in the Philippines through the establishment of a branches shall be
governed by the provisions of the Foreign bank Liberation Act.
The conduct of offshore banking business in the Philippines
shall be govern by the provisions of Presidential Decree No. 1034,
otherwise known as the Offshore Banking System Decree”
Sec 73. Acquisition of Voting Stocks in a domestic Bank. Within
seven (7) years from the effectivity of this Act and subject to guidelines
issued pursuant to the Foreign bank Liberation Act, The Monetary Board
may authorized a foreign bank to acquire up to one hundred percent
(100%) of the voting stocks of only (1) bank organized under the law of
Republics of the Philippines
Within the same period, the Monetary Board may authorize any
foreign bank, which prior to the effectivity of this Act availed itself of the
privileges to acquire up to sixty percent (60%0 of the voting stocks of the
a bank under the Foreign Bank Liberation Act and The Thrift Bank Act, to
further acquire voting shares of such bank to the extent necessary for it
to own one hundred percent (100%) of the voting stocks thereof.
In the exercise of the authority, the Monetary Board shall adopt
measures as may be necessary to ensure that all times the control of
seventy percent (70%) of the resources or assets of the entire banking
system is held by banks which are at least majority-owned by Filipinos.
Any right, privilege, or incentive granted to foreign bank under
this section shall be equally enjoyed and extended under the same
conditions to the banks organized under the laws of the Republic of the
Philippines (Sec 2 and 3, RA 7721).
Sec 74. Local branches of Foreign Banks: In the case of a foreign
bank which has more than one branch in the Philippines, all such
branches shall be treated as 1 unit for the purpose of this Act, and all
references to the Philippine branches of foreign bank shall be held to
refer to such units.
Perspective on Bank or Banking and Nature of Banking Business

14
Davao del Norte
In section 3 of New General Banking Law the meaning of bank is
highlighted as: Bank shall refer to the entities engaged in the lending of funds
obtained in the form of deposits. This implies the function of the bank which is
loaning fund from the deposits of its clients.
The nature of the bank is making money from other people’s money
therefore every transaction of the bank was built in trust and integrity. Trust form
the client who deposited in the bank and integrity that the bank can make money
of it.
Example : Anita make a deposit of 100,000.00 into BDO savings account the
entry for the transaction is :
Cash 100,000.00
Deposit (Anita) 100,000.00
Supposing Mr. Sanchez will borrow money from BDO amounting to 100,000.00
and deposit it from his account from the bank, the transaction will be recorded
as:
Loans and Discount 100,000.00

Mr. Sanchez Demand Deposit 100,000.00
4.2.3. In loan transaction it must have an interest which serves as an

income for the bank.
Principles of Banking and Types of Banks

The principle of the bank is known as partial reverse system which instead the
bank safe keep the money deposited in the financial institution the bank will
invest it towards profitability. Another principle is the deposits determination,
which indicates that the higher deposit the client has in bank the more possibility
to acquire loan.
Types of the Bank: there were several characteristics of the bank, in this case
bank can be categorized according to ownership, to structure, to function, and to
management:
To Ownership
Privately Owned: owned and organized by the private citizen to acquire

profitability. Most banks in the country fall in this type.
Publicly Owned: owned and organized by the government and the operation we
enacted by special laws. Example Land Bank and Banko Sentral ng Pilipinas
15
Davao del Norte
As to Place
Domestic, when the majority of the owner of the bank is Filipino (Conformity
with the Philippine Corporation Code) and the bank located in the Philippines.
Foreign, when the bank was governed by foreign country but the location of the
bank is in Philippines. Though the corporation must conforms the policy and
procedure imposed by Philippines laws on bank and financial institution.
As to Structure:
Stock Corporation. The purpose of this bank is to acquire profit, this type of
bank sell a corporate share in the market to raise their capital and the share
must be sold by par value.
Non-Stocks Corporation. The bank is on membership basis which promote the
mutual benefits to its member as well as the bank.
As to function
Commercial Bank. Most of the function of the bank is deposit, loans, and e-
banking. Example BDO
Trust Company. The function of this bank is to deal with fiduciary activities,
such as administrator of estates, guardian of minors’ interest, executor of last
wills and testament. Most of the function of Trust company is offered by other
bank and legal offices.
Saving Bank. The function of this bank is for long term investment, this is
applicable to the client who did not need the money immediately. This bank
might be stock or non-stock bank.
Rural Bank. This bank was governed by Republic Act 720 which is organized
primarily to cater to the needs of small business, farmers, cottage industries and
cooperative. The bank also caters bank deposit and loans.
Development Bank. This bank was under the supervision of Development bank
of the Philippines, the bank cater the needs of the economy in terms of
development by giving medium to long term loan.
Cooperative Bank. The function of this bank is to accommodate the needs of
the cooperatives which is to furnish credits needs to continue its operation. The
cooperative must be registered and operating under the cooperative association.
Investment Bank. The function of this bank is to sell stocks and bonds to raise
a capital for a newly organized corporation and some government bodies. The
bank underwrites sale security and conduct economic survey to evaluate the risk
of the investment. The operation of investment bank is regulated by Private
Development Corporation.
Central Bank, This bank is a regulatory bank; this is a bank of all banks inside a
country. The function is not directly deal with public but they handle the liquidity
of the economy. Example BankoSentralngPilipinas
As to Management
Unit Bank. Is owned by one corporation and independent to other banks. Rural
bank is best example of this type of management which the concerned of the
16
Davao del Norte
management is only the locality.
Group Banking. The ownership and management is held by a group of
companies. The bank is managed by the board of director which possesses
shares in the company and these directors are a member of different holdings.
The decision making of this type of bank is depending of the number of shares
the individual or corporation held in the bank, the common problem with this form
of management is monopolization.
Branch Banking. The management style of this bank is delegation which is the
bank have a branch office in every strategic location that is manage by directors.
The directors of the branch will be guided by the head office in means of the
decision making.
Chain Banking. The bank management is controlled by one or more persons
that, results to the difficulties of the bank due to instability of management.
Economic Significance of Bank and State Supervise the Bank.

Without the bank the fund will be idle, it will be stagnant without any
development. Through baking and financial institution the money inside the
economy will be more liquid because of trade transaction. The bank allows credit
toward business, and as well as the personal transaction. This allows developing
agricultural, industrial, and commercial business. Bank also provides passage
for foreign trade. The bank helps the business with international market by
providing network for their transaction like payments and transfer of funds in
order to settle the business credits.
The following are the reasons why bank supervise the bank
 The money inside the bank is owned by the people and it must be returned
with an interest. If the bank will fail the trust of the people will be destroy and
it can create negative influence to the society.
 To make sure that the management of the bank will not create misconduct.
That the management will only promote the interest of the depositors. The
management must be vigilant, honest, and efficient to protect the interest of
their client.
 The bank management might abuse their power that may result to failure
and might hurt the overall economy.
 The bank is a quasi-public corporation which the government supported in
order to protect the interest of the citizen of the country.
Self-Help: You can also refer to the sources below to help

you further understand the lesson:
Leuterio, Mercedes M, et al. (2009) Banking theory and practice. Manila, Philippines
:Anvil Publishing, Inc..
17
Davao del Norte
Barth, J. (2011). Guardians of Finance: Making Regulators Work for Us. MIT Press.
Retrieved on January 2017,
http://site.ebrary.com/lib/uniofmindanao/docDetail.action?docID=10531189 Earp,
C. (2011). Banking and financial institutions: aguide for directors, investors and
counterparties. John Wiley & Sons. Retrieved on January 2017,
http://site.ebrary.com/lib/uniofmindanao/docDetail.action?docID=10484745
Kane, E. J. (2015). Perspectives on banking and banking crises 1. Banking and
Financial Services Policy Report, 34(5), 10-16. Retrieved on May 2016,
https://search.proquest.com/docview/1684452571?accountid=31259
Lopez-Mariano, N. (2014). Elements of finance. Manila, Philippines : Rex Bookstore,
Inc.
Malikov, E., Restrepo-tobón, D., &Kumbhakar, S. C. (2015). Estimation of banking
technology under credit uncertainty. Empirical Economics, 49(1), 185-211.
Retrieved on May 2016, https://dx.doi.org/10.1007/s00181-014-0849-
McDougal, J. (2011). Financial institutions and services: financial crimes: fraud, theft
and embezzlement. Nova Science Publishers, Inc. Retrieved on January 2017,
Pagoso, Cristobal M. (2010). Money, credit and banking. Manila, Philippines :Rex
Bookstore, Inc.
Phairas, D. (2016). Preventing and recognizing embezzlement. The Journal of Medical
Practice Management : MPM, 31(4), 209-211.Retrieved on May 2016,
Philippines: Philippines banking system now more ready for regional integration – BSP.
Retrieved on May 2016, https://search.proquest.com/docview/1547346983?
accountid=31259
Porter, R. (2011). New directions in financial services regulation. MIT Press.
Let’s Check
Let us try the following activities to know how deep you
understand the topics of this unit.
Activity 1. Cite five functions of the different type of banks given below;
the answer must be in statement form. One points each function.
Commercial Bank
1.____________________________________________________________
2.____________________________________________________________
3.____________________________________________________________
18
Davao del Norte
4.____________________________________________________________
5.____________________________________________________________
Trust Company
1.____________________________________________________________
2.____________________________________________________________
3.____________________________________________________________
4.____________________________________________________________
5.____________________________________________________________
Saving Bank
1.____________________________________________________________
2.____________________________________________________________
3.____________________________________________________________
4.____________________________________________________________
5.____________________________________________________________
Rural Bank.
1.____________________________________________________________
2.____________________________________________________________
3.____________________________________________________________
4.____________________________________________________________
5.____________________________________________________________
Let’s Analyze
Activity 2. Record the bank transaction given in every occurrence use the
available page for your answer.
19
Davao del Norte
Example: Anita make a deposit of 100,000.00 into BDO savings account the
entry for the transaction is :
Cash 100,000.00
Deposit (Anita) 100,000.00
Supposing Mr. Sanchez will borrow money from BDO amounting to 100,000.00
and deposit it from his account from the bank, the transaction will be recorded as:
Loans and Discount 100,000.00

Mr. Sanchez Demand Deposit100,000.00
Luigi is a depositor of a bank his current savings is 120,000. He

deposited 20,000 thousand pesos from his business income. Last three
months Luigi have approved loan for a car which is due today amounting
to 35, 000 with an interest of 2,000.
You must:
1. Record the transactions.
2. Balance the transactions.
Guide Question:
1. How much is the remaining balance of Mr. Luigi?
In a Nutshell
In this part you are going to jot down what you have learned in this unit.
The said statement of yours could be in a form of concluding statements,
arguments, or perspective you have drawn from this lesson. The first three items
is done for you.
1. Banking industry is old as time which is develops overtime by

realizing the different needs of people and needs of business. The banking
industry also influenced by the colonization history of certain economy. The
more colonization occurs in the country the more banking influences were
developed.
2. Banking industry in the Philippines is developing overtime,
nowadays the establishment offering e-money to accommodate the different
needs of the client. This development becomes possible due to the development
and innovation of technology. This helps the bank’s client to transact without
visiting the branch.
3. There are a lot of guidelines to open a bank in the Philippines like
the type of organizational structure the company require to establish
(Corporation, how many board of directors they must consider, the qualification
of the directors, the capital requirement, the share the director must possess, the
20
Davao del Norte
interest of different party which involves in the operation of the banks and the
citizenship of the bank directors. These guidelines helps the bank to control the
function of the financial institution, even the bank is privately own the
government must provide a strict guidelines because banks are considered as
quasi organization.
Now it’s your turn!

4.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
5.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
6.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
7.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
8.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
21
Davao del Norte
________________________________________________________________
________________________________________________________________
________________________________________________________________
Q&AList
In this section you are going to list what boggles you in this unit. You may
indicate your questions but noting you have to indicate the answers after your question
is being raised and clarified. You can write your questions below.
Questions/Issues Answers
1.
2.
3.
4.
5.
Keywords Index
Economic Significance of
Stock Corporation Perspective on Bank
Bank
Commercial Bank Branch Banking Banking Business
Trust Company Chain Banking Foreign Banks
Saving Bank Group Banking Acquisition of Voting
Unit Bank State Supervise the Bank Foreign Stock Holdings
Big Picture in Focus: ULOb. Understand the nature and basic

concepts of banking perspectives by knowing the general22
aspect establishing the bank.
Davao del Norte
Metalanguage
The following are terms to be remembered aswegothroughin studying
this unit.Pleaserefertothesedefinitions as supplement incaseyouwill encounter
difficulty in understanding the basic concepts of banking and financial
institutions.
Bank- A bank is a financial institution licensed to receive deposits and make
loans. Banks may also provide financial services such as wealth management,
currency exchange, and safe deposit boxes. There are several different kinds of
banks including retail banks, commercial or corporate banks, and investment
banks. In most countries, banks are regulated by the national government or
central bank.
Economic- is a social science concerned with the production, distribution, and
consumption of goods and services. ... Economics can generally be broken
down into macroeconomics, which concentrates on the behavior of the economy
as a whole, and microeconomics, which focuses on individual people and
businesses.
Stockholder- also referred to as a stockholder, is a person, company, or
institution that owns at least one share of a company's stock, which is known as
equity.These rewards come in the form of increased stock valuations, or as
financial profits distributed as dividends.
Capital - the most important city or town of a country or region, usually its seat
of government and administrative center.
Administration- The definition of administration refers to the group of
individuals who are in charge of creating and enforcing rules and regulations, or
those in leadership positions who complete important tasks
Management- Management is the coordination and administration of tasks to
achieve a goal. Such administration activities include setting the organization’s
strategy and coordinating the efforts of staff to accomplish these objectives
through the application of available resources
Organization - It can also refer to a system of arrangement or order, or a
structure for classifying things.
Related Interest- company (other than an insured bank or a foreign bank) that
is controlled by an executive officer, director, or principal shareholder or (2) a
political or campaign committee that is controlled by or the funds or services of
which will benefit an executive officer, director, or principal
Essential Knowledge
The following are basic concept of Bank and Banking Perspective that may be
useful for you to understand this field of expertise. The said concepts might be
confusing or difficult as a beginner but at the later part of this unit would be of
great help for you to understand the nature of its existence. Please note that you
are not limited to exclusively refer to these resources. Thus, you are expected to
23
Davao del Norte
utilize other books, research articles and other resources that are available in the
university’s library e.g. ebrary, search.proquest.cometc., and even online tutorial
websites.
General Aspects in Establishing Banks

The following criteria which organize could under the succeeding pattern to have
an initial success:
Economic Justification for Bank. –the bank must armed the company with the
right information before forming the project they must assess the competition,
the degree of risk, the potential customer, the availability of man power, the
culture of people and the products in the community. If the result is positive then
the establishing of the project can proceed.
Selection of Stockholder- the success or failure of the bank depends in the
owner/stockholders. The bank must choose the right character of the right
managers/owner of the financial institution they must have a good moral
character, knowledgeable about banking management, must have an adequate
capital, honest and righteous citizen and above all they want the best for the
bank.
The Determination of the Kind of Bank to be formed- the survey of economy
is needed to determine the type of bank applicable in one location. The study will
evaluate the income of the community, the business and industries, the
population of the place, and the number of financial institution. The capital of the
organization also matter in the determination of bank category.
Determination of the Amount of Capital to be Raised. After the determination

of bank type it is easier to determine the amount of capital to be gathered. The
organization must be aware of the minimum requirement for registration and
must consider the investment for fixed assets and initial cost of operation before
the bank become profitable.
Organization, Management, and Administration

Sec. 8 Organization. The Monetary Board may authorize the organization of a
bank or quasi-bank subject to the following condition:
Sec. 8.1 That the entity is a stock corporation
Sec.8.2. That the funds are obtained from the public, which shall mean twenty
percent (20) or more persons; and
Sec.8.3. That the minimum capital requirements prescribed by the Monetary
Board for each category of banks are satisfied.
Sec. 9. Issuance of Stocks. The monetary Board may prescribe rules and
regulation on the type of stocks a bank may issue, including the term thereof and
the rights appurtenant thereto to determine compliance with the laws and
regulations governing capital equity structure of banks: provided, that the banks
shall issue par value stocks only.
Sec 10. Treasury Stocks. No bank shall purchase or acquire shares of its own
24
Davao del Norte
capital stock or accept its shares as a security for a loan, except when stocks so
Foreign Stockholdings. Foreign individuals and non-bank corporations may own
or control up to forty percent (40%) of the voting stocks of domestic bank. This
rule shall apply to Filipino and domestic non-bank corporation.
Sec. 12. Stockholdings of Family Groups or Related Interest. Stockholdings
of individuals related to each other within fourth degree of consanguinity or
affinity, legitimate or common-law shall be considered family groups or related
interest and must be fully disclosed in all transactions by such an individual with
the bank.
Sec 13. Corporate Stockholdings. Two or more corporations owned or
controlled by the same family group or same group of person shall be
considered related interest and must fully disclosed in all transactions such
corporations or related groups of persons with the bank.
Sec. 14. Certificate of Authority to Register. The Securities and Exchange
Commission shall not register the articles of incorporate on of any bank, or any
amendments thereto, unless accompanied by certificate of authority issued by
the Monetary Board, under its seal. Such certificate shall not be issued unless
the Monetary Board is satisfied from the evidence submitted to it.
Sec 14.1. that all requirements of existing laws and regulations to engage in the
business for which the applicant is proposed to be incorporated have been
complied with.
Sec. 14. 2. That the public interest and economic conditions, both general and
local justify the authorization, and
Sec 14.3. that the amount of capital, the financing, organization, direction and
administrators reasonably assure the safety of deposits and the public interest.
Section 15. Board of directors. The provisions of the Corporation code to the
contrary notwithstanding, there shall be at least five (5), and a maximum of
fifteen (15) members of board of directors of a bank, two (2) of whom shall be
independent director. An independent director shall mean a person other than an
officer or employee of the bank, its subsidiaries or affiliates or related interest.
Non-Filipino citizens may become members of the board directors of a bank to
the extent of the foreign participation in the equity of said bank
The meeting of the board directors may be conducted through modern

technologies such as, but not limited to, teleconferencing and video-
conferencing.
Furthermore, in the conformity with the Corporation Code and the Basic
Guidelines in Establishing Banks, the following points must also be taken to
account.
 That there should be not less than five (5) nor more than fifteen (15)
incorporators. In case there are more than fifteen (15) persons initially
interested with the organizing and investing in the proposed bank, the
excess may be listed among the original subscribers in the Articles of
25
Davao del Norte
Incorporation.
 That at least twenty five percent (25%) of the total authorized capital stocks
shall be subscribed by the subscribers of the proposed bank and at least
twenty five percent (25%) of such subscription shall be paid-up, provided
that in no case shall the paid-up capital be less than the minimum required
capital
That the majority of the incorporators are residents of the Philippines

 Incorporators must possess the capacity to contract, which means that they
must be majority age, and are competent to enter into contractual obligation.
 That the number of members of the board directors of the bank shall not be
less than five (5) nor more than fifteen (15) and shall always be in odd
number and at least two directors are “independent directors”.
Section 16. Fit and Proper Rule. To maintain the quality of the bank
management and afford better protection to depositors and the public general,
the Monetary Board shall prescribe, pass upon and review the qualifications and
disqualifications of individuals elected or appointed bank directors or officers and
disqualify those found unfit.
After due notice to board directors of the bank, the monetary Board may
disqualify, suspend, or remove any bank director or officer who commits or omits
an acct which render him unfit for the position.
In the determining whether and individual is fit and proper to hold the position of
a director or officer of a bank, regard shall be given to his integrity, experience,
education, training, and competence.
Section 17. Directors of Merger and Consolidated Banks. In the case of bank
merger or consolidation, the number of director shall not exceed to twenty one
(21).
Section 18 Compensation and other Benefits of Directors and Officers. To
protect the funds of depositors and creditors, the Monetary Board may regulate
the payment by the bank of its directors and officers of compensation,
allowance, fees, bonuses, stock option, profit sharing and fringe benefits.
Sec 18.1 When bank is under comptrollership or conservatorship; or
Sec 18.2 When bank is found by the Monetary Board to be in an unsatisfactory
financial condition.
Section 19 prohibition on Public Officials. Except as otherwise provided in
the Rural Bank Act, no appointive or elective public officials, whether full-time or
part time shall at the same time serve as officer of any private bank, save in
case where such service is incident to financial assistance provide by the
government owned or controlled corporation to the bank or unless otherwise
provided under existing laws.
Section 20. Bank Branches. Universal or commercial bank may open branches
or other offices within or outside the Philippines upon prior approval of the
26
Davao del Norte
BangkoSentral Branching by all other banks shall governed by pertinent laws.
A bank may, subject to prior approval of the monetary board, use any or all of its
branches as outlets for the presentation and/or sales of the financial products of
its allied undertaking or of its investment house units
A bank authorized to establish branches or other offices shall be responsible for

all business conducted in such branches and offices to the same extent and in
the same manner as though such business had all been conducted in the head
office. A bank and its branches and office shall be treated as one unit.
Section 21. Banking Days and Hours. Unless otherwise authorized by the
BangkoSentral in the interest of the banking public, all banks including their
branches and offices shall transact business on all working days for at least six
(6) hours a day. In addition, banks or any of their branches or offices may open
for business on Saturdays, Sundays, or holidays for at least three (3) hours a
day: provided, that banks which opt to open on days other than working days
shall report to the BangkoSentral, the additional days during which they or their
branches or offices shall transact business.
For purposes of this Section, working days shall mean Monday to Fridays,
except if such days are holiday.
Section 22. Strikes and Lockouts. The banking industry is hereby declared as
indispensable to the national interest and, notwithstanding the provisions of any
law to the contrary any strike or lockout involving banks, if unsettled after seven
(7) calendar days shall be reported by the BangkoSentral to the Secretary of
Labor who may assume jurisdiction over the dispute or decide it or certify the
same to the National Labor Relations Commission for compulsory arbitration.
However, the President of the Philippines may at any time intervene and assume
jurisdiction over such labor dispute in order to settle or terminate the same.
Licensing of Foreign Banks

Section 72. Transacting business in the Philippines. The entry of foreign
banks in the Philippines through the establishment of branches shall governed
by the provisions of the Foreign Banks Liberalization Act. The conduct of
offshore banking business in the Philippines shall governed by the provisions of
Presidential Decree No. 1034, otherwise known as the “Offshore Banking
System Decree”.
Section 73. Acquisition of Voting Stock in a Domestic Bank. Within seven

years from the effectivity of this act and subject to guidelines issued pursuant to
the Foreign Banks Liberation Act, the Monetary Board may authorize a foreign
bank to acquire up to one hundred percent (100%) of the voting stock of only
one (1) bank organized under the laws of the republic of the Philippines.
27
Davao del Norte
Within the same period, the Monetary Board may authorize any foreign bank,
which prior to the effectivity of this Act availed itself of the privilege to acquire up
to sixty percent (60%) of the voting stock of a bank under the Foreign Banks
liberalization Act and the Thrift Bank Act, to further acquire o such bank to the
extent necessary for it to own one hundred percent (100%) of the voting stocks
thereof.
In the exercise of this authority, the Monetary Board shall adopt measures as
may be necessary to ensure that all the times the control of seventy percent
(70%) of the resources or assets of the entire banking system is held by banks
that are at least majority owned by Filipinos.
Any right, privilege, or incentive granted to a foreign bank under this section shall
equally enjoy by and extended under the same conditions to banks organized
under the laws of the Republic of the Philippines.
Section 74 Local Branches of Foreign Banks. In the case of foreign bank
which has more than one (1) branch in the Philippines, all such branches shall
be treated as one (1) unit for the purpose of this Act, and all references to the
Philippine branches of foreign banks shall be held to refer to such units.
Section 75. Head Office Guarantee. In order provide effective protection of the
interests of the depositors and other creditors of Philippine branches of a foreign
banks, the head office of such branches shall fully guarantee the prompt
payment of all liabilities of its Philippine branch.
Residents and citizens of the Philippines who are creditors of a branch in the
Philippines of a foreign bank shall have preferential rights to the assets of such
branch in accordance with existing laws.
Section 76. Summons and Legal Process. Summons and legal process
served upon the Philippine agent or head of any foreign bank designated to
accept service thereof shall give jurisdiction to course over such bank, and
service of notice on such agent or head shall be as binding upon the bank which
he represents as if made upon the bank itself.
Should the authority of such agent or head to accept service of summons and
legal process for the bank or notice to it be revoked, or should such agent or
head become mentally incompetent or otherwise unable to accept service while
exercising such authority, it shall be the duty of the bank to name and designate
promptly another agent or head upon whom service of summons and process in
legal proceeding against the bank and notice affecting the bank may be made
and to file the Securities and Exchange Commission a duly authenticated
nomination of such agent.
In the absence of the agent or head or should there be no person authorized by

28
Davao del Norte
the bank upon whom service of summons, process and legal notices may be
made upon the BankoSentral Deputy Governor in-charge of supervising and
examining department and such service shall be as effective as if made upon
the bank or its duly authorize agent or head.
In case of service for the bank upon the BangkoSentral Deputy Governor in
charge of the supervising and examining departments, the said Deputy Governor
shall register and transmit by mail to the by mail to the president or secrecy of
the bank at its head or principal office a copy, duly certified by him, of the
summons process, or notice. The sending of such copy of the summons,
process, or notice shall be necessary part of the service and shall complete the
service. The registry receipt of mailing shall be prima facie evidence of the
transmission of the summons, process, or notice. All and sending of a copy of
summons, process, or notice to the president or secretary of the bank at its head
or principal office shall be paid in advance by the party at whose instance the
service is made.
Section 77 Laws Applicable. In all matters not specifically covered by special

provisions applicable only to foreign bank or its branches and other offices in the
Philippines any foreign bank licensed to do business in the business in the
Philippines shall be bound by the provision in this act, all other law, rules and
regulation applicable to bank organized under the law of the Philippines of the
same class, except those that provide for creation, formation, organization, or
dissolution of corporations or for fixing of the relations, liabilities, responsibilities,
or duties of stockholders, members, directors or officers of corporations to each
other or to the corporation.
Section 78. Revocation of License of Foreign Bank. The Monetary Board
may revoke the license to transact business in the Philippines of any foreign
bank, if it finds that the foreign bank is insolvent or in imminent danger thereof or
that its continuance in business will involve probable loss to those transacting
business with it. After the revocation of its license, it shall be unlawful for any
such foreign banks transact business in the Philippines unless its license is
renewed or reissued. After the revocation of such license, the BangkoSentral
shall take the necessary action to protect the creditors of such foreign bank and
the public. The provisions of the New Central Bank Act on sanctions and
penalties shall likewise be applicable.
Bank Location and Bank Organizational Structure

The bank location is relevant towards successful banking, poor location can
affect the profitability of the bank. The bank must also consider that every
location have different needs (like urban and rural needs), to fulfill the needs of
the customer the bank must be accessible to transportation, whether it is
commercial or not.
The required organizational structure of nay bank, must be corporation, under

29
Davao del Norte
Securities and Exchange Commission. SEC facilitates and check some
documentary requirements, before granting certificate of incorporation. The role
of the government regulatory is to check the document and the operational
procedure of the bank. This will be monitored and check by Monetary Board of
Banko Sentral ng Pilipinas.
Self-Help: You can also refer to the sources below to help you further
understand the lesson:
Inc.
Bookstore, Inc.
Practice Management : MPM, 31(4), 209-211. Retrieved on May 2016,
accountid=31259
Let’s Check
30
Davao del Norte
Activity 1: Discuss the following concept in concise manner.
1. Discuss the process of licensing the bank and why it is important.
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
_____________________________________________________________________
2. Why bank must justify the needs of the economy before the establishment?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
_____________________________________________________________________
Let’s Analyze
Activity: Get a 5 articles from any business journal about the struggle of the bank
and establish an alternatives to solve the problem.
1. ____________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
2.____________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
3.____________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
31
Davao del Norte
______________________________________________________________________
______________________________________________________________________
4.____________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
5.____________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
In a Nutshell
is done for you.
1. The economy is needed to determine the type of bank applicable in one

location. The study will evaluate the income of the community, the business and
industries, the population of the place, and the number of financial institution.
The capital of the organization also matter in the determination of bank category.

2.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
3.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
32
Davao del Norte
________________________________________________________________
________________________________________________________________
________________________________________________________________
4.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
5.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
Q&AList
1.
2.
3.
4.
33
Davao del Norte
5.
Keyword Index
Bank Management Responsibilities Bank Officers
Board Directors Executive Committee The President
Educational Attainment Discount Committee The Cashier
Age Requirement Investment Committee Teller Function
Integrity The Trust Committee Bookkeeping Function
Assiduousness Examination Committee Teller Function
Big Picture in Focus: ULOc. Understand the nature and basic

concepts of banking management.
Metalanguage
The following are terms to be remembered aswegothroughin studying
this unit.Pleaserefertothesedefinitions as supplement incaseyouwill encounter
difficulty in understanding the basic concepts of banking and financial
institutions.
Bank Management- Bank management is characterized by the specific object
of management - financial relations connected with banking activities and other
relations, also connected with implementation of management functions in
banking.
Board Directors - is a governing body that typically meets at regular intervals to
set policies for corporate management and oversight. Every public company
must have a board of directors
Responsibilities - The term responsibility has two different senses in
management literature. Some writers explain it as a duty or task which assigned
to a subordinate on the basis of his position in the organization. Responsibility is
also the obligation of an individual to perform the duty or task assigned to him.
Let us understand what is responsibility and its characteristics in a detailed
manner.
Loan - is a form of debt incurred by an individual or other entity. The lender
usually a corporation, financial institution, or government—advances a sum of
money to the borrower. In return, the borrower agrees to a certain set of terms
34
Davao del Norte
including any finance charges, interest, repayment date, and other conditions.
Essential Knowledge
The following are basic concept of Bank and Banking Perspective that may be
useful for you to understand this field of expertise. The said concepts might be
confusing or difficult as a beginner but at the later part of this unit would be of
great help for you to understand the nature of its existence. Please note that you
are not limited to exclusively refer to these resources. Thus, you are expected to
utilize other books, research articles and other resources that are available in the
university’s library e.g. ebrary, search.proquest.cometc., and even online tutorial
websites.
Bank Management
The bank will be mange by board of directors, because the bank organizational
structure is a corporate entity. The board member might be came from the
stockholder or from the appointment of the member of the board.
Board Directors- the duty of the chairman is to be a head of the company,

some small banks, the chairman and the president is just one person, but this
situation is impractical for big banks.
Qualification:
Every director shall posses at least one share of the capital stocks of the
corporation of which he is a head or director, which might stand in his/her name.
The following is an additional qualification:

 Educational Attainment
 Age Requirement
 Adequate competencies/skills and knowledge about the business
 Integrity
 Assiduousness
The two-third of the directors in any commercial bank must be Filipino citizen or
majority of the member is Filipino.
The proposed directors a bank shall be subject to qualification and other

requirements of existing laws, rules, and regulation of the BangkoSentral.
Responsibilities- The board of director ha a threefold responsibilities. First, is
to safeguard the deposit of the customers or depositors. Secondly, the board of
director should compensate the stockholders. Lastly, they are responsible to the
regularly and supervisory agencies.
To gain the greatest amount of efficient management, the board also creates
standing or special committees to which it delegates some of its functions. The
most common of these and their functions are the following:
35
Davao del Norte
The Executive Committee - This is the committee which act as the advisory
body to the board. The obligation of the board is policy making and
implementation of this policy.
The Loan and Discount Committee- The director deliberated to the board
about discount, line of credit, and other concern about loans.
Investment Committee- every securities the bank wants to purchase must be
checked by this committee.
The Trust Committee - The committee is task to check how the trust fund
should be invested.
The Examination Committee- This committee conduct the internal and external
auditing of the bank.
Section 55 Prohibited Transactions.

55.1 No director, officer, employee, or agent of any bank shall:
 Make false entries in any bank report or statement or participate in any
fraudulent transaction, thereby affecting the financial interest of, or causing
damage to, the bank or any person;
 Without order of a court of competent jurisdiction, disclose to any
unauthorized person any information relative to the funds or properties in the
custody of the bank belonging to private individuals, properties in the
custody of the bank belonging to private individuals corporations, or any
other entity: Provided, that with respect to bank deposits, the provisions of
existing laws shall prevail:
 Accept gifts, fees, commissions, or any other form of remuneration in
connection with the approval of a loan or other credit accommodation from
said bank:
 Overvalue or aid in overvaluing any security for the purpose of influencing in
any way the actions of the bank or any bank; or
 Outsource inherent banking functions.
Bank Officers
All of the officer has its own duties and responsibilities, these must align what is
expected by law.
The President- the president is representation of the company to the general
public and they are the one who held the board meeting.
The Vice President- the vice-president assumes the responsibility of the
president if the president is not around.
The Cashier- The cashier takes the monetary transaction of the bank.
Other officers- the other office are the auditor, comptroller, and bank
associates.
Bank Operation - the bank operation is the implementation of policies of the

board, through the president and other officers.
The Executive Function - in order to have harmonious relationship in the bank,
36
Davao del Norte
the banker should implement the policy and cooperate in making the policy.
The Teller Function - The teller must be efficient, accurate, careful, because
the teller received the money for deposit and release the money for withdrawal.
The bookkeeping Function- the banker must record transaction and fact in
everyday transaction.
Inc.
Bookstore, Inc.
accountid=31259
Let’s Check
37
Davao del Norte
Let us try the following activities to check your understanding in this unit.
Activity1. True or False. In the space provided, write T if the givenstatement is

true and F if false. (One point each).
1. The commercial bank can take funds from the public by selling stocks to 20
persons.
2. Education background and skills is not a criterion to become a board of
director in establishing bank.
3. Two or more corporation (bank) owned and controlled by same family or
same group shall impose collaboration.
4. According to Commercial Bank Act, no appointed government official can be
a board member a bank.
5. The family member of a board member can buy stocks up to 10%.
6. The 25% of the allowable and initial capital must be subscribing into any
commercial bank before the application of Article of Banking Corporation.
7. The Certificate of Authority to Organize was issued by the Securities
Exchange Commission.
8. Transportation and Facilities is irrelevant in choosing the bank location.
9. Economic situation is insignificant for the establishment of commercial bank
in a certain location.
10. The bank are entrusted by people to take good care of their money.
11. The primary failure of the bank happens when the bank cannot satisfy their
depositor.
12. According to Presidential Directive Executive Order 98, they invalidated all
Japanese deposit due to wartime payments.
13. The director has a privilege in granting loan to his/her relatives and friends.
14. One of the responsibilities of the president is to hold the board meeting.
15. Universal bank as well as Rural Banks can be owned by one to fifteen
persons.
16. Access device allows the depositor, investor, and creditor transacts trough
internet.
17. All branches are considered as one of foreign bank will be recognized by the
Offshore Banking System.
18. Foreign can own up to forty five percent of the domestic bank and they can
be a board of director.
19. As of end of June 2001, 155 banks were already accessible by electronic
mail.
20. Bank of the Philippine Island was established after World War I.
38
Davao del Norte
Activity 2: Identification: Identify the following terms, articles, section, or

types of bank stated in every items.One point each items.
1. Assyrian used bank draft and checks.
2. Allow the bank depositor to withdraw on ATM.
3. Transacting Business in the Philippines.
4. Loans and Discounts.
5. In bank operation what is the function of a staff if he record the events
and accounts to interpret the fact about the bank.
6. It is a type of a bank according to management where the ownership is
concentrated on one corporation.
7. The type of ownership of the bank which is owned by the state.
8. Banks which sells stocks.
9. Bank caters the need of fishermen.
10. Corporate Stockholdings.
11. Reviews the qualification of the bank.
12. Working Hours in regular days.
13. Process the legal and management concerns of the bank.
14. Type of organizational structure of the bank.
15. In charge of the loans and credits of the Bank.
16. Bank of Commerce
17. Maybank
18. United Coconut Planters Bank
19. First Consolidated Bank
20. Liberty Bank Rural Bank
Let’s Analyze
Activity 3. In your own words narrate the processing of bank opening here
in the Philippines including restriction, requirements and guidelines with
the section/s it stated. Twenty (20) points for this essay.
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------ 39
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Davao del Norte
is done for you.


2.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
3.______________________________________________________________
________________________________________________________________
________________________________________________________________
40
Davao del Norte
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
4.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
5.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
_______________________________________________________________
Q&A List
indicate your questions but noting you have to indicate the answers after your
question is being raised and clarified. You can write your questions below.
1.
2.
3.
4.
41
Davao del Norte
5.
Keyword Index
Bank Management Responsibilities Bank Officers

Board Directors Executive Committee The President
Educational Attainment Discount Committee The Cashier
Age Requirement Investment Committee Teller Function
Integrity The Trust Committee Bookkeeping Function
Assiduousness Examination Committee Teller Function
Big Picture B
expected to:
a. Understand the nature and basic concepts of Bank Supervision and
Examination;
b. Understand the nature and basic concepts bank reports;
c. Understand the nature and basic concepts of function of commercial bank;
d. Understand the nature and basic concepts of the deposit function; and
e. Understand the nature and basic concepts of Philippine deposit insurance
corporation.
Big Picture in Focus: ULOa. Understand the nature and basic42

concepts of Bank Supervision and Examination.
Davao del Norte
Metalanguage
The following are terms to be remembered aswegothroughin studying this
unit.Pleaserefertothesedefinitions as supplement incaseyouwill encounter
difficulty in understanding the basic concepts of economics.
Examination-is an evaluation of the financial health and resilience of a bank.
Bank examinations are primarily concerned with the strength of the bank's
balance sheet. However, they also include a review of its regulatory compliance
and internal controls.
Investment- may purchase a monetary asset now with the idea that the asset
will provide income in the future or will later be sold at a higher price for a profit.
Prohibition-is the act or practice of forbidding something by law; more
particularly the term refers to the banning of the manufacture, storage (whether
in barrels or in bottles), transportation, sale, possession, and consumption of
alcoholic beverages.
Liquidation- in finance and economics is the process of bringing a business to
an end and distributing its assets to claimants. It is an event that usually occurs
when a company is insolvent, meaning it cannot pay its obligations when they
are due.
Essential Knowledge
Bank Supervision and Examination

The bank examination and supervision is done internally and externally. This is
undertaken in order to ensure the safe and efficient operations of any bank. The
external supervision comes from agencies of the government and is not in any
way connected with the bank management. On the hand, internal controls are
performed by persons within the bank’s management.
Purpose of Examination and Supervision

The first purpose of examination is to find out whether banks are doing their
business in conformity with the banking laws and that of the rules and
regulations of the central bank and other governmental agencies. Any violation
on the part of the banks would lead to their eventual closure or at least a
43
Davao del Norte
reprimand from the supervisory agencies.
Another purpose is to determine how sound the bank is financially. The

examiners should establish the fact that the bank examined owns assets, that
the titles to property are good, that the assets are properly valuated in the books,
and that they are of acceptable quality.
External Supervision
In the Philippines, the Supervision and Examination Sector of the BangkoSentral
is charged with the responsibility of conducting spot and regular checks on all
banking institutions.
Section 25. Supervision and Examination. The BangkoSentral shall have
supervision over, and conduct periodic or special examination of, banking
institutions and quasi banks, including their subsidiaries and affiliates engaged in
allied activities.
For the purpose of this section, subsidiary means a corporation more than fifty
percent (50%) of the voting stocks of which is owned by a bank or quasi-bank an
affiliate means a corporation the voting stock of which, to the extent of fifty
percent (50%) or less, is owned by a bank or quasi-bank or which is related or
linked to such institution or intermediary through a common stockholders or such
other factors as may be determine by the Monetary Board.
The department heads and the examiners of the supervising and/or examining
departments hereby authorized to administer oaths to any directors, officer, or
employee or any institution as well as the books and records of persons and
entities relative to or in connection with the operations, activities, or transactions
of the institution under examination, subject to the provision of existing law
protecting or safeguarding the secrecy or confidentiality of bank deposits as well
as investments of private persons, natural or juridical, in debt instruments issued
by the Government.
No restraining order or injunction shall be issued by the court enjoining the

BangkoSentral from examining any institution subject to supervision or
examination by the BangkoSentral, unless there is convincing proof that the
action of the BangkoSentral is plainly arbitrary and made in bad faith and the
petitioner or plaintiff files with the clerk or judge of the court in which the action is
pending a bond executed in favor of the BangkoSentral, in an amount to be fixed
by the court. The provision of Rule 58 the New Rules of Court insofar as they are
applicable and not inconsistent with the provisions of this section shall govern
the issuance and dissolution of the restraining order or injunction contemplated
in this section.
Section 26 Bank Deposits and Investment. Any director, officer or stockholder

who together with his related interest, contract a loan or any form of financial
accommodation from: (1) his bank: or (2) from a bank (a) which is a subsidiary
44
Davao del Norte
of a bank holding company of which both his bank and the lending bank are
subsidiaries or (b) in which controlling proportion of the shares is owned by the
same interest that owns a controlling proportion of the shares of his bank, in the
excess of five percent (5%) of the capital and surplus of the bank, or in
maximum amount permitted by law, whichever is lower, shall be required be the
lending bank to waive the secrecy of his deposits of whatever nature in all banks
in the Philippines. Any information obtained from an examination of his deposits
shall be held strictly confidential and may be used by the examiners only in
connection with their supervisory and examination responsibility or by the
BankoSentral in an appropriate legal action it has initiated involving the deposit
account.
Section 27 Prohibition. In addition to the prohibition found in Article Act Nos
3019 and 6713, personnel of the Bangko Sentral are hereby prohibited from:
a) Being an officer, director, lawyer or agent, employee, consultant
or stockholder, directly or indirectly, of any institution subject to supervision or
examination by the Bangko Sentral, except non-stock savings and loan
associations and provident funds organized exclusively for employees of the
Bangko Sentral, and except as otherwise provide in this Act.
b) Directly or indirectly requiring or receiving any gift, present or
pecuniary or material benefit for himself or another, from any institution subject
to supervision or examination by Bangko Sentral;
c) Reveling in any manner, except under order of the court, the
Congress or nay government office or agency authorized by law, or under such
conditions as may be prescribe by the Monetary Board, information relating to
the condition or business of any institution. This prohibition shall not be held to
apply to the giving of information to the Monetary Board of the Governor of the
BangkoSentral, or to any person authorized by either of the, in writing, to receive
such information; and
d) Borrowing from any institution subject to supervision or
examination of BangkoSentral shall be prohibited unless said borrowing are
adequately secure, fully disclosed to the Monetary Board, and shall be subject to
such further rules and regulations as the Monetary Board may prescribe.
Provided however, that personnel of the supervising and examining departments
are prohibited from borrowing from bank under their supervision or examination.
Sec 28 Examination and Fees. The supervising and examining department

head personally or by deputy, shall examine the books of every banking
institution once in every twelve (12) months, and at such other times as the
Monetary Board by an affirmative vote of five (5) members, may deem expedient
and to make a report on the same to the Monetary Board: Provided, that there
shall be an interval of at least twelve (12) months between annual examinations.
The bank concerned shall afford to the head the appropriate supervising and
examining departments and general condition at any time during banking hours
when requested to do so by the BangkoSentral. Provided, however, that none of
45
Davao del Norte
the reports and the other papers relative to such examinations shall be open to
inspection by the public except insofar as such publicity is incident to the
proceeding hereinafter authorized or is necessary for the prosecution of violation
in connection with the business of such institutions.
Banking and quasi-banking institutions which are subject to examination by the

BangkoSentral shall pay to the BangkoSentral, within the first thirty (30) days by
the Monetary Board of its average total assets during the preceding year as
shown on its end-of-month balance sheets, after deducting cash on hand and
amounts due from banks, including the Bangko Sentral and banks abroad.
Section 29. Appointment of Conservator. Whenever, on the basis of a report

submitted by the appropriate supervising or examining department, the Monetary
Board finds that a bank or quasi-bank is in a state of continuing inability or
unwillingness to maintain condition of liquidity deemed adequate to protect the
interest of the depositors and creditors, the Monetary Board may appoint a
conservator with a such powers as the Monetary Board shall deem necessary to
take charge of the assets, liabilities, and the management thereof, reorganize
the management, collect all monies and debts due said institution, and exercise
all powers necessary to restore its viability The conservator shall report and be
responsible to the Monetary Board and shall have the power to overrule or
revoke the actions of the previous management and board of the directors of the
bank or quasi-bank.
The conservator should be competent and knowledgeable I the bank operations

and management. The conservatorship shall not exceed one (1) year, payable in
twelve (12) equal monthly payments. Provided that, if any time within one year
period, the conservatorship is terminated on the ground that the institution the
balance of the remuneration which he would have received up to the end of the
year.
The Monetary board shall terminate the conservatorship when it is satisfied that
the institution can continue to operate on its own and the conservatorship is no
longer necessary. The conservatorship shall likewise be terminated should the
Monetary Board, on the basis of the report of the conservator or its own findings,
determine that the continuance in business of the institution would involve
probable loss to its depositors or creditors, in which case the provisions of
Section 30 shall apply.
Section 30. Proceeding in Receivership and Liquidation. Whenever, upon

report of the head of the supervising or examining department, the Monetary
Boards finds that a bank or quasi bank:
A. Is unable to pay its liabilities as they become due in the ordinary
course of business, provided, that this shall not include by financial panic in the
banking community
46
Davao del Norte
B. Has insufficient realizable assets, as determined by BankoSentral, to
meet its liabilities or
C. Cannot continue in business without involving probable losses to its
depositors or creditors; or
D. Has willfully violated a cease and desist order under Section 37 that
ha become final, involving acts or transactions which amount to fraud or
dissipation of the assets of the institution which cases, the Monetary Board may
summarily and without need prior forbid the institution from doing business in the
Philippines and designate the Philippine Deposit insurance Corporation as a
receiver of the banking institution. For a quasi-bank, any person of recognized
competence in banking or finance may be designed as receiver.
The receiver shall immediately gather and take charge of all the assets and
liabilities of the institution, administer the same for the benefit of its creditors, and
exercise the general powers of receiver under the Revised rules of Court but
shall not, with the exception of administrative expenditures, pay or commit any
act that will involve the transfer or disposition of any asset of the institution.
Provided, that the receiver may deposit or place the funds of the institution in
speculative investment. The receiver shall determine as soon as possible, but
not later than ninety 990) days from take-over, whether the institution may be
rehabilitated or otherwise placed to its depositors and creditors and the general
public. Provided, that any determination for the resumption of business of the
institution shall be subject to prior approval of the Monetary Board.
If the receiver determines that the institution cannot be rehabilitated or permitted

to resume business in accordance with the next preceding paragraph, the
Monetary Board shall notify in writing the board of directors of its findings and
direct the receiver to proceed with liquidation of the institution. The receiver
shall:
File ex parte the proper trial court, and without requirement of prior notice or
any other action, a petition for assistance in the liquidation of the institution
pursuant to a liquidation plan adopted by the Philippine Deposit Insurance
Corporation for general application to all closed banks. In case of quasi-banks,
the liquidation plans shall be adopted by the Monetary Board. Upon acquiring
jurisdiction The court shall, upon motion by the Board. Upon acquiring
jurisdiction, the court shall, upon motion by the receiver after due notice,
adjudicate dispute claims against the institution assist the enforcement of
individual liabilities of the stockholder, directors and officers, and decide on the
ether issues as may be material to implement the liquidation plan adopted. The
receiver shall pay the cost of the proceeding from the assets of the institution:
and
Convert the assets of the institution to money, dispose of the same to

creditors and other parties, for the purpose of paying the debts of such institution
47
Davao del Norte
in accordance with the rules on concurrence and preference of credit under the
Civil Code of the Philippine and he may, in the name of the institution and with
the assistance of council as he may retain, institute such as actions as may be
necessary to collect and recover accounts and assets of, or defend any action
against, the institution. The Assets of an institution under receivership or
liquidation shall be deemed in custodialegis in the hands of the receiver and
shall, from the moment the institution was placed under such receivership or
liquidation, be exempted from any order of garnishment, levy, attachment, or
execution.
The Actions of the Monetary Board taken under this direction or under Section
29 of this Act shall be final and executory, and may not be restrained or set
aside by the court except on petition for certiorari on the ground that the action
taken was excess of jurisdiction or with such grave abuse of direction as to
amount to lack or excess of jurisdiction. The petition for certiorari only filled the
stockholder of record representing the majority of the capital stock within ten
days from the receipt by the board of directors of the institution of the order
directing receivership, liquidation, or conservatorship.
The designation of a conservator under Section 29 of this Act or the appointment

of a receiver under this section shall vest exclusively with Monetary Board.
Furthermore, the designation of a conservator is not precondition to the
designation of a receiver.
Section 31.Distribution of Assets. In case of liquidation of a bank or quasi-

bank, after payment of the cost of proceeding, including reasonable expenses
and fees of the receiver to be allowed by the court, the receiver shall pay the
debt of such institution under order of the court, in accordance with rules on
concurrence and preference of credit as provided in the Civil Code
Section 32 Disposition of Revenue and earnings. All revenue and earnings
realized by receiver in winding up the affairs and administering the assets of any
bank or quasi-bank within the purview of this Act shall be used to pay the cost,
fees, and expenses mentioned in the preceding section, salaries of such
personnel whose employment is rendered necessary in the discharge of the
liquidation together with additional expenses cause thereby. The balance of
revenue and earnings after payment of all said expenses, shall form part of the
assets available for payment to creditors
Section 33. Disposition of Banking Franchise. The BankoSentral may, if
public interest requires, award to institution, upon such terms and conditions as
the Monetary Board may approve, the banking franchise of a bank under
liquidations to operate in the area where said bank or its branches were
previously operating. Provided, that whatever proceeds may be realized from
such award shall be subject to appropriate exclusive disposition of the Monetary
Board.
Section 34. Refusal to Make Report or Permit Examination. Any officer,
48
Davao del Norte
owner, agent, manager, director, or officer-in charge of any institution subject to
the supervision or examination by the BangkoSentral within the purview of this
Act who, being required in writing by the Monetary Board or by the head of the
supervising and examining department willfully refuses to file the required report
or permit any lawful examination into the affairs of such institution shall be
punished by a fine of not less than fifty thousand pesos (P50,000.00) nor more
than one hundred thousand pesos (100,000.00) or by imprisonment of not less
than one (1) year nor more than (5) years, or both, in the discretion of the court.
Section 35. False Statement. The willfully making of a false or misleading
statement on a martial fact to the Monetary Board or the examiners of the
BangkoSentrall shall be punished by a fine of not less than one hundred
thousand pesos (100,000.00) nor more than two hundred thousand pesos
(200,00.00), or by imprisonment of not more than (5) years, or both, at the
discretion of the court.
Section 36. Proceeding Upon Violation of this Act and Other Banking
Rules, Regulation, Orders or Instruction. Whenever a bank or quasi-bank or
whenever any person or entity willfully violates this Act or other pertinent banking
laws being enforced or implemented by the BangkoSentral or any order,
instruction, rule or regulation issued by the Monetary Board, the person or
persons responsible for such violation shall unless otherwise provided in this Act
be punished by a fine of not less than fifty thousand pesos (PHP 50,000.00) nor
more than two hundred thousand pesos (P 200,000.00) o r by imprisonment of
not less than two (2) years nor more than ten (10) years or both, at the
discretion of the court.
Whenever a bank or quasi-bank persists in carrying on its business in an

unlawful or unsafe manner, The Board may, without prejudice to the penalties
provided in the preceding paragraph of this section and the administrative
sanctions provided in Section 37 of this Act, take action under Section 30 of this
Act.
Section 37: Administrative Sanctions on Banks and Quasi-Banks. Without

prejudice to the criminal sanctions against the culpable persons provided in
Section 34, 35, and 36 of this Act, the Monetary Board may, at its discretion,
impose upon any bank or quasi bank, Their directors and/or officers, for any
willful violation of its charter or by-laws, willful delay in the submission of reports
or publications thereof as required by law, rules, and regulations; any refusal to
permit examination into the affairs of the institution; any willful making of a false
or misleading statement to the Board of the appropriate supervising and
examining department or its examiners; any willful failure or refusal to comply
with, or violation of, any banking law or any order, instruction or ruling by the
governor: or any commission of irregularities, and or conducting business in an
unsafe or unsound manner as may be determined by the Monetary Board, the
following administrative sanctions, whenever applicable:
A. Fines in amounts as may be determined by the Monetary Board to be
49
Davao del Norte
appropriate, but in no case to exceed thirty thousand pesos
(P30,000.00) a day for each violation, taking into consideration the
attendant circumstances, such as the nature and gravity of the
violation or irregularity and the size of the bank or quasi-bank;
B. Suspension of re-discounting privilege or access to BangkoSentral
Credit facilities.
C. Suspension of lending or foreign exchange operations or authority to
accept new deposits or make new investments
D. Suspension of inter-bank clearing privileged; and/or
E. Revocation of quasi-banking license
Resignation or termination from office shall not exempt director or officer from
administrative or criminal sanctions.
The Monetary Board may, whenever warranted by circumstances, preventively

suspend any director or officer of a bank or quasi-bank pending an investigation.
Provided, that should the case be not finally decided by the BangkoSentral
within a period of one hundred twenty (120) days after the date of suspension,
said director or officer shall be reinstated in his position, Provided, further, that
when the delay in the disposition of the of the case is due to the fault, negligence
or petition of the director or officer, the period of delay shall not be counted in
computing the period of suspension herein provided.
Whether or not there an administrative proceeding, if the institution and/or the

directors and /or officers concerned continue with or otherwise persist in the
commission of the indicated practice or violation, and may further order that
immediate action be taken to correct the conditions resulting from such practice
or violation. The cease and desist order shall be immediately effective upon
service on the respondents.
The respondents shall be afforded an opportunity to defend their action in a

hearing before the Monetary Board or any committee chaired by any Monetary
Board Member created for the purpose, upon request made by the respondent
within five (5) days from receipt of the order. If no such hearing is requested
within said period, the order shall be final. If a hearing is conducted, all issues
shall be determined on the basis of records, after which the Monetary Board may
either reconsider or make its order final.
The Governor is hereby authorized, at his discretion, to impose upon banking

institutions, for any failure to comply with the requirements of law, Monetary
Board regulations and policies, and/or instructions issued by the Monetary Board
or by the Governor, fines not in excess of ten thousand pesos (p10,000.00) a
day for each violation, the imposition of which shall be final and executor y until
reversed, modified, or lifted by the Monetary Board on appeal.
50
Davao del Norte
Mechanism of Examination
The bank books can be examine by bank examiner at any time during banking
hours all document can be in possession by the bank examiner, to verify all
transaction of the bank. This authentication might disrupt few bank transaction
but the bank examiner must return the documents within the day.The analysis of
the information requires more time, the bank examiner must have enough time
to evaluate, if the bank follow the rules, procedure, and the policy imposed by
the Monetary Board. The result of the examination must be deliberated by the
examiners and the board members. If they’re the violation of the banking policy
is recognized, the directors must act accordingly to correct the said policy.
Internal Controls
Internal control was created by the bank to correct the any infringement of the
banks’ operation. The violation in the operation of the bank is unavoidable
because of the diversified human nature, but the internal control can minimize
this problem by counter checking and monitoring the banks’ operation. The
board of director must appoint the committee for internal control, because most
of the board of director take a hand off towards the connection of audit.
Programming of Controls
The following are the reasons why the banking industry must have an internal
control or auditors:
Embezzlement - the misappropriation of which belongs to stockholders,
through fraudulent.
Peculation - All kind of embezzlement.
Examination- it is the analysis of all banks assets and liabilities, including its
existence and ownership.
THE CAUSES OF OF PECULATION ARE: gambling, pride and envy, living

beyond one’s income, unsound salary policies, poor employment relation, and
immorality
Preventive Measures. Good and effective internal control is one way to

prevent against speculation in the banking industry. There are two
elements in effective internal control: establishing rules and regulation,
second establishing of proofs and balance.
BANK CREDIT INSTRUMENTS

One of the function of the bank is providing credits, and its obligation is to
facilitate the credit to enhance their operation. The written evidence must be
always available as a proof of credit transaction. This chapter will talk about
credit instruments; it’s importance, function, and general division.
Negotiability of Credit Instruments

Credit instrument is use for exchange for money or representation of money; it
51
Davao del Norte
can be evidence of a loan or to be used as money representation. Even the
credit instrument can be a substitute of money; this instrument has its limitation.
Not all instruments can be generally acceptable like money, example bills of
exchange and promissory notes.
The banks use negotiable documents is plying their trade and the most common
of these are the bills of exchange, the promissory note and the check. However,
not all instruments used by the banks are unlimited acceptance.
General Division of Credit Instruments

In order to distinguish one instrument from another, the following is a short
description of each. A general division between the credit instruments is that of
promises to pay and orders to pay:
PROMISORY NOTE- A promissory note is an unconditional promise of the

maker to pay a sum certain in money to order or to bearer on demand or at a
future determinable time.
BANK NOTE: A bank note is an unconditional promise of a bank to pay a sum

certain in money on demand. Such note is used as a substitute for money. Years
ago, the Philippine National Bank and the Bank of the Philippine Islands issued
bank notes.
The essential features or characteristic of a note are that it is a direct obligation

of the issuing bank. It is negotiated by simple delivery by reason of the fact that it
is a bearer instruments. The transferee acquires a clean title to it and becomes
the creditor and the note can be circulated for longer periods of time before it is
finally redeemed.
BANK ACCEPTANCE- A banker’s acceptances promise to pay a draft that is
presented to it for acceptance. To constitute the bank’s intention of honoring the
instrument, the word ‘’ACCEPTANCE” is stamped on the face of the draft and it
is duly signed by the bank’s representative.
LETTER OF CREDIT - A letter of credit is also a promise of a bank to honor

drafts drawn against it or for its account. By virtue of the letter of the letter of
credit, a bank substitutes its credit for that of the accredited buyer and promises
to pay the beneficiary or his representative upon presentation of a draft, subject
to the conditions in the letter of credit.
BANK NOTES DISTINGUISHED FROM STANDARD FROM MONEY

The bank notes are practically like money. The only divergence of the note from
the real money is the fact that the note represents private bank credit rather than
the states credit. To all appearance and the intent of usage, the bank note
resembles money closely.
52
Davao del Norte
BANK NOTES DISTINGUISHED FROM DEPOSITS
The bank issuing notes as well as receiving deposits increase their loaning
capacity. When writing a check, any amount covered by existing deposits
increases their loading capacity. When writing a check, any amount covered by
existing deposits may be draw, while in the case of bank notes there are uniform
denominations.
ORDER TO PAY
BILL OF EXCHANGE. A bill of exchange is an order of one person/bank

(drawer) to another person/bank (drawee) to pay a third person (Payee) a sum
certain in money or demand or at some specified future. A bill of exchange is
also in the form of a check.
CHECK. A check is the order of a depositor to his bank to pay a third person or
himself a sum certain in money on demand. Such is commonly known as a
personal check.
NOW Account. NOW is an acronym that stands for “Negotiable order of

Withdrawal”. NOW account earn interest and account holders can write as
many NOW check as they want on the account. It has feature of a savings
deposit as it earns interest. It is also like a current/checking account as it offers
depositors the convenience of issuing checks for intended only for deposits.
DRAFT. A draft is also an order to pay and is a bill of exchange. Drafts are
classified as sight or demand, time, commercial, or bank drafts. Such
instruments which are paid at sight upon presentation. Furthermore, are known
as demand drafts. Those payable at a future determinable time are time drafts.
Furthermore, it may a time sight or a time date draft.
PROMISE TO PAY VERSUS ORDERS TO PAY

There exist similarities as well as differences between promises to pay and
orders to pay. In a promissory note there are two parties, the maker who makes
the promise and the payee who is to receive payment. In an order to pay, there
are three parties the drawer, the drawee and the payee.
CHECK AND DRAFTS DISTINGUISHED
Both check and drafts are bills of exchange since both are negotiable
instruments. A check is drawn against deposit; a draft may be orders to pay.
They are also negotiable instruments provided they contain the essentials of
negotiability. There are three parties involved in a check or in draft; a number of
other instruments are frequently used in the money market. Short descriptions of
some of the more important instruments used nowadays by banks are provided
below:
53
Davao del Norte
TREASURY BILLS. Treasury bills are short-term securities issued by the

country's Treasury. This will reduce a bank’s ability to lend to its clients leading
to a contraction of the money supply. The bill consists of an obligation to pay the
bearer the face value of the bill upon given date.
BANKER’S ACCEPTANCE/ LETTER OF CREDIT. Although BS’s, as they are

known, have their origin in trade bills issued by merchants, today they are an
important money market instrument. It is a time draft and accepted by a bank.
Before acceptance, the draft is merely an order by the drawer to the bank to pay
a specified sum of money on a specified date to armed person or to the bearer
of the draft, it is not an obligation of the bank.
NEGOTIABLE CERTIFICATES OF DEPOSITS. NCD’s are like fixed deposits

except they are bearer documents. They offer a market related rate of interest
and are completely liquid because they can be negotiated during the term of the
deposit.
COMMERCIAL PAPER. Short-term commercial paper is a debit instrument

commonly issued by corporations to funds a temporary capital requirement. This
form of corporate borrowing usually matures within one year.
BANK GUARANTEE. A Guarantee by Bank (banker guarantee) is a written
undertaking wherein the bank agrees to make stipulated payments on your
behalf should you fail to fulfil or carry out specified terms of contract.
NEGOTIATION
Without prejudice to legal concepts, negotiation means transfer of the instrument

from one person to another either by endorsement and delivery, by mere
delivery or by assignment. Such transfer will depend on the tenor of the
instrument, particularly to whom it is made payable, or to what extent is the
interest of the transferee. When the name is specified, the distinction lies in the
addition of the words or order or or bearer.
Negotiation has certain conditions. These are follows:

The credit instrument is complete and regular on face value
The holder obtains possession of the instrument before it has become past due
and even without notice that it was previously dishonored
The holder took the instrument in good faith and for value At the time it was
negotiated to the holder, no defect in instrument or title were detected.
PRESENTED
54
Davao del Norte
Presented means the exhibiting of the instrument at the bank either for payment
or for acceptance. The check should be presented for payment within a
reasonable period of time after its issue according to the Negotiable Instrument
Law.
DISHONOR
Dishonor means that the check is refused payment or a time draft is refused
acceptance. The refusal therefore, may be termed dishonor by non-acceptance.
If this happens, the holder of the instrument may file a protest in writing or orally.
ENDORSEMENT
Endorsement forms part of a negotiation of an instrument. It is simply indicated
by the signature of the endorser at the back of the instrument or on some paper
attached thereto. If such is the case, it is termed blank endorsement.
When a specified person is named as the transferee, followed by the signature

of the endorser, this is termed special endorsement.
An endorsement which restricts the further negotiation of the instrument is

deemed as a restricted endorsement. For example, the check is endorsed as
“For deposit only” followed by the signature of the endorser.
An endorsement is qualified when the words “Without recourse” appear as part

of the endorsement. This does not impair the negotiability of the instrument.
SIGNIFICANCE OF BANK CREDIT INSTRUMENTS.

Besides facilitating to a great extent the dealing in credit, such bills of exchange
and promissory notes might also bright about losses on the part of the bank
Hence care should be taken in the preparation of these paper. Since the bank is
also responsible to honor checks for payment, or bill or exchange in general, it
should see to it that its normal cash need would always be enough to answer the
demand of depositors and customer. In this way, the public confidence in the
soundness of bank and their patronage of the banking system as a whole shall
be strengthen considerably.
Self-Help: You can also refer to the sources below to help you
further understand the lesson:
55
Davao del Norte
Inc.
Bookstore, Inc.
accountid=31259
Let’s Check
Activity 1: Matching type. Read the following statement and choose the letter
corresponds to your answer.
1. Short-term paper is a debit instrument commonly issued by corporations to

funds a temporary capital requirement. This form of corporate borrowing usually
matures within one year
2. ______________________forms part of a negotiation of an instrument. It is
simply indicated by the signature of the endorser at the back of the instrument or
on some paper attached thereto. If such is the case, it is termed blank
endorsement.
3. This will reduce a bank’s ability to lend to its clients leading to a contraction
of the money supply. The bill consists of an obligation to pay the bearer the face
value of the bill upon given date.
4. What is an order of one person/bank (drawer) to another person/bank
(drawee) to pay a third person (Payee) a sum certain in money or demand or at
some specified future. A bill of exchange is also in the form of a check.
5. _________________means that the check is refused payment or a time draft
is refused acceptance. The refusal therefore, may be termed dishonor by non-
acceptance. If this happens, the holder of the instrument may file a protest in
56
Davao del Norte
writing or orally.
A. ENDORSEMENT
B. TREASURY BILL
C. DISHONOR
D. DEPOSITS
E. BILL OF EXCHANGE
F. COMMERCIAL PAPER.
In a Nutshell
is done for you.


2.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
3.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
4.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
57
Davao del Norte
________________________________________________________________
________________________________________________________________
________________________________________________________________
5.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
Q&AList
1.
2.
3.
4.
5.
Keyword Index
BANK REPORTS ANNUAL REPORTS CASH ITEMS

ELECTRONIC
Cash on-hand. FOREIGN BANKS
TRANSACTIONS
58
Davao del Norte
AUTHORITY Other cash resources LOANS
GOVERNMENTS
FINANCIAL STATEMENT EXCHANGES
SECURITIES
CAPITAL STOCK CLEARING HOUSE FIXTURE
BANK REPORTS COLLECTIONS REAL STATE OWNED

concepts bank reports.
Metalanguage
BANK REPORTS - A call report contains information about the bank's financial
health, and by examining multiple call reports it can provide insight regarding the
welfare of the U.S. banking system more broadly.
NEEDS- is something that is necessary for an organism to live a healthy life.
Needs are distinguished from wants. In the case of a need, a deficiency causes
a clear adverse outcome: a dysfunction or death. In other words, a need is
something required for a safe, stable and healthy life
AUTHORITY- is the legitimate power that a person or a group of persons
consensually possess and practice over other people. In a civil state, authority is
made formal by way of a judicial branch and an executive branch of government
FINANCIAL STATEMENT- are written records that convey the business
activities and the financial performance of a company. Financial statements are
often audited by government agencies, accountants, firms, etc. to ensure
accuracy and for tax, financing, or investing purposes
Essential Knowledge
BANK REPORTS
59
Davao del Norte
The bank so that the public will know the true financial condition of a bank at any
given time. these reports are prepared for manifold purposes. A condensed
financial statement of a bank, together with that of its subsidiaries and affiliates,
is usually published quarterly in newspapers of wide circulation. likewise, this
must also be made available to customers and stockholders in varied forms. for
a more minute scrutiny of the bank's management, detailed statement of
condition is likewise prepared. Such report will be used to direct course of action
in order to improve the banks business and its attendant functions and services.
This chapter focuses on the provisions in the new general banking Act. And the
New central Bank Act insofar as bank reports are concerned. Other topics
relating to bank reports are also incorporated to shed light on the purposed of
preparing bank reports.
WHO NEEDS BANK REPORTS?
The bank reports serve multiple purposes. These are rendered to meet with the
requirements of the supervisory and regulatory agencies. Bank directors and
officers also needs statement as a basis for wise and judicious action. the
stockholders who invest money to the bank for safekeeping are likewise eager to
find their bank in shipshape condition. The lending capacity of banks are well as
its loan policies maybe reflected in the statement and, therefore, borrowers will
be on the lookout for such reports. Potential investors seeking outlets for their
excess funds maybe enticed to augment the banks capital if convinced of the
financial strength of the bank. Of course, the general public, too, should be made
aware of banking functions through the banks report. For it could be a source of
potential depositors, borrowers, and stockholders.
In relation to bank reports, the pertinent provisions of chapter IV of the new

general banking Act are cited below:
Sec.58 Independent auditor. The monetary board require a bank, quasi- bank,
ortrust entity to engage the services of an independent auditor to chosen
by the bank quasi-bank, monetary board. The term of the engagement shall
be as prescribed by the monetary board which may either be on a containing
basis of where the auditor shall act as resident examiner, or on the basis of
quasi-banks, or trust entity board of directors. A copy of a report shall be
furnished to the monetary board. The monetary board may also thereof, to
conduct, either personally or by commit y created by the board, an annual
balance sheet audit of the banks,quasibank,or trust entity to review the Internal
audit and control system of the bank, quasi bank, are trust entity and to submit a
report of such audit.
Sec.59. AUTHORITY TO REGULATE ELECTRONIC TRANSACTIONS.

The BangkoSentral shall be full authority to regulate the use of electronic
60
Davao del Norte
devices, such as computers, and processes of recording, storing and
transmitting information or data in connection with the operations of a bank,
quasi-bank or trust entity, including the delivery of services and product to
costumers of such entity.
Sec.60.FINANCIAL STATEMENT.
Every bank, Quasi-bank, or trust entity shall submit to the appropriate
supervising and examining department of the BangkoSental Financial
Statements in such form and frequency as maybe prescribed by the
BangkoSentral. Such statement which shall be as of a specific dated
designated by the BangkoSentral, shall show the actual financial condition of
the institution submitting the statement, and of its branches, offices, subsidiaries
and affiliate including the result of its operation and shall contained such
information as maybe required in BangkoSentral regulation.
Sec.61.Publication of financial statement.

Every bank quasi- bank, Or trust entity shall published a statement of its financial
condition, including those of its subsidiary and affiliate in such terms
understandable to layman an in such frequency as maybe prescribe in the
BangkoSentral in English or where the principal office, in the case of domestic
institution, are the principal branch of office in the case of foreign bank, is
located, but if no newspaper is published in the same province, then in a
newspaper published in metro manila or in the nearest city or province.
The BankoSentral may by regulation prescribe the newspaper where the

newspaper statements prescribe here in shall be published.The monetary
board may allow the costing of the financial statement of a bank, quasi-bank,
or trust entity in public places it may determine, in Lieu of the publication,
required in the preceding paragraph when warranted.
Additionally, banks shall make available to the public in such form and manner
as the BankoSentral may prescribe the complete set of its audited financial
statement as well such other relevant information including those on
enterprises majority - owned or controlled by the bank, that will inform the
public of the true financial condition of a bank as of any given time.
In periods of national and/or local emergency or of imminent panic which directly

threaten monetary and banking stability, the monetary board, by a vote of at
least five (5) of its members, in special cases and upon application of the
bark,quasi bank or trust entity allows such quasi bank or trust company to
differ for a stated period of time the publication of the statement of financial
condition required herein.
SEC.62.PUBLICATION OF CAPITAL STOCK.

61
Davao del Norte
A bank,quasi-bank,or trust entity incorporated under the laws of the Philippines
shall not published the amount of its authorized or subscribe capital stock
without indicating at the same time with equal prominent, the amount of its
capital actuality paid up.
No branch of any foreign bank doing business in the Philippines shall in any we
announced the amount of the capital and surplus of its head office, or of the
bank in its entirety without indicating at the same time and with equal
prominent the amount of the capital, if any, definitely assigned to such branch. in
case no capital has been definitely assigned to such branch, such Fact shall be
stated in, and shall form part of the publication.
TYPE OF BANK REPORTS:
The bank report are generally financial in nature and are composed largely of
the statement of condition and the income statement. But where publication of its
balance sheets is must, a bank is not required to publish its income statement.
the following are different types of report:
CONDENSED WITH BANK STATEMENT.

The accounts in such a statement would appear in condense form. This is
usually issued for publication or sent to depositors and stockholders as a means
of serving then an opportunity to look into their particular banks financial
position. The frequency of publication will be dependent in the requirement of the
supervisory and regulatory agency. Stockholder are furnished annually, either in
writing or orally.
REAL BANK STATEMENT.

This statement is usually in more detailed form an is prepared for the regulatory
and supervisory agencies. it is also the basis for the preparation of other reports.
Furthermore, bank management is properly guided and will therefore, act
accordingly when it knows the details resulting from the banks operation.
ANNUAL REPORTS.
Some banks also renders a "progress report" which contents the resume of its
yearly operation, this is usually in brochure form. Such report is made available
to the general public as A means of advertising, while there is no uniform or
standardized system of reporting, such report do contain the " focal points " in
the banks progress. The addition of new building, the setting up of branches,
and the like maybe stressed in the brochure through "right ups" or pictorial
reporting. an income statement, as well as the reconciliation of the banks’ capital
position may also be featured.
THE BANK STATEMENT
62
Davao del Norte
The majority interest among the numerous reports, however, is the bank
statement, which serve to underscore the banks position at certain periods of
time. it might do well , therefore, to examine and try to understand its contents.
while there is no hard and fast rule as to the uniformity and pattern of reporting,
most of the bank statements include the asset liabilities. The most common bank
assets or resources are:
Cash on-hand. This account represents notes and coins held by the bank to
meet depositors withdrawals and other normal cash needs.
Other cash resources.This account comprise of (a) exchanges for the clearing
house, (b) collections in transit, and (c) other cash terms. Such details
classification is necessary as it reflects different aspects of liquidity and relation
to the banks immediate cash needs.
A. EXCHANGES FOR THE CLEARINGHOUSE.This consist of checks

deposited at or cashed by the bank preparing the statement during the
course of the day. and which are drawn on banks within the city that re
members of the clearing house .hence, such items are subject to clearing at
the designated clearing period.(In the Philippines, all commercial banks are
members of the clearing house.)
B. COLLECTIONS AND TRANSET, this account consists of "out- of- town"
Checks or drops drawn on bank outside the city. The bank receiving them
for deposit and/or collections usually credits the account of the depositor or
costumer pending receipt of the proceeds. in either case, the entry in the
banks books are owned deferred, subject to final payment or receipt of the
proceed.
C. OTHER CASH ITEMS. This account may include other miscellaneous
items such as bond coupons for which the depositors have been credited
pending collections of the coupon. or, in the where not all banks are
members of the clearing house, the checks or drops may represent claims
against non-member banks.
D. DUE FROM BANKS, this represents deposit carried with other banks.
they are usually in the form of demand deposits occasionally, however, the
bank depositing, them may keep them in reserve as time deposits in order to
earn deposits interest. in the Philippines, the bulk of deposits are, in the form
of legal reserves keep with the BangkoSentral by private banks.
E. BALANCES WITH FOREIGN BANKS, this consists of deposits for funds
held abroad mainly to fill foreign exchange needs.
F. LOANS AND DISCOUNTS, this account is a major item of the banks
assets side. it consist of all promissory notes and bills of exchange held by
the banks evidencing the existence of debt or securing a debt. The
promissory notes may either be secured or unsecured.
G. GOVERNMENTS SECURITIES.This is other major items which will serve
to buffer any provable loans of the depositors.it consist of the evidences of
indebtedness fully guaranteed by the republic of the Philippines in the form
63
Davao del Norte
of bonds and other instruments of similar nature.
H. OTHER SECURITIES, this will represents the stocks and bonds or short
terms investment not fully guaranteed by the Philippines government. the
securities may be long to private corporations.
I. BANK BUILDING, FURNITURE AND FIXTURE, this items represent the
monetary valued the properties owned by the banks to carry on its functions.
J. OTHER REAL STATE OWNED, this account arises out of the fact that
banks foreclose real estate mortgages and the monitory value if the assets
in their books until the real state are disposed of. This transaction happens
when banks are to accept real state is security for loans which turn outs to
be unpaid.
K. COSTUMER LIABILITY UNDER LETTER OF CREDIT, the use of letters
of credit in financing foreign and domestic trade has become quite popular
this days, hence, bank statements carry in their books and account
representing the costumer obligation to reimburse the bank by virtue of the
banks commitment to substitute its credit for the borrowers by honoring
drops drawn against it.
L. COSTUMERS LIABILITY UNDER ACCEPTANCES. This is similar to the
costumer liability under letters of credit except that the banks obligation in
this regard is of a greater magnitude when the banks accepts a drop it in
effect promises to pay the drop upon presentation.
M. INCOME ACCRUAL BUT NOT YET COLLECTED. When a banks
grants loans with interest collected majority, the bank in effect has future
earnings which as yet have not been collected. The interest runs during the
entire period, in the case of bonds, interest payments accrue but may not as
yet be collectible. Hence such accruals are considered as bank resources,
since eventually they will be realize.
N. OTHER ASSETS, this item serves to “round up" any or all other assets
not otherwise described in details.
BANK LIABILITIES
On the liability side of the banks statements are found three main classifications
namely: the liabilities, the reserve accounts and the stockholders equity.
LIABILITIES
DEMAND DEPOSITS, This account represent claims of depositors who
withdraw their deposits by means of checks. The bank must stand ready to pay
these deposits at any time within regular banking hours.
TIME DEPOSIT. This represents the claims of depositors who knew their money
in the bank for a specified period of time and for which the bank must likewise be
ready to pay at maturity. Withdrawal may require written notice if they are made
prior to the date of maturity.
64
Davao del Norte
GOVERNMENT DEPOSITS. This represents deposits, either time or demand,

which belongs to the government or its instrumentalists and political subdivisions
CASHIER'S CHECK OUTSTANDING. The banks cashier, in his official capacity

as such, issues to either pay the banks obligations, to accommodate customers
or to remit funds. Hence, the bank provide for payment of proceeds against such
checks.
CERTIFIED CHECKS OUTSTANDING. When the depositor requests the bank

to certify his check, the bank immediately sets aside the amount of check by
debiting the depositor's account before stamping certification on the face of the
check. Hence, upon certification, the bank assumes the obligation of honouring
the check, It, therefore, makes the instrument more acceptable. The ban cannot
later on refuse payment on the ground of forgery, insufficiency of funds, or stop-
payment order.
DUE TO BANKS. This account represents deposits or balances of other banks

with the bank preparing the statement. Collection items paid for but not yet
remitted by the bank requesting collection may likewise be included in these
items.
LETTERS OF CREDIT OUTSTANDING. This account arises out of the issuance

of letters of credit for which the bank obligates itself to pay or guarantee
payment. The bank has a right of recourse against the customer whose credit it
substitutes.
ACCEPTANCE OUTSTANDING This is similar to the account letters of credit

outstanding except that it makes the banks obligation more real than contingent.
The bank will then honor the drafts presented to it and will also have the right of
recourse against the customer. The acceptance makes the instrument easily
negotiable and more acceptable for discounting.
BILLS PAYABLE. This represents the claims of creditor of the bank for funds
borrowed by it.
RE-DISCOUNTED NOTES. This account arises out of the use of endorsed

commercial papers for the purpose of procuring funds. The commercial papers
server as the security and the banks endorsement thereon establishes its
obligation in case the primary debtors fail to pay. Commercial banks discount
their notes with BangkoSentral when they run out of loan-able funds or for some
other need.
DISCOUNTS COLLECTED BUT NOT YET EARNED. When the bank gives out
a loan and collects interest in advance, the amount deducted is not as yet really
65
Davao del Norte
earned in full. Hence, the bank cannot yet consider this as an asset but treats
the same as a liability, and makes adjustments accordingly through the life of the
loan.
OTHER LIABILITIES. This account serves as the counterpart of the "other

assets" and includes all other liabilities not otherwise designated in detail.
Officers unpaid checks may be one of such accounts.
Reserves. The accounting reserves in a bank statement are:

Reserve for accrued taxes.
A bank, as in the case of any corporation, is levied numerous taxes. While such
are paid at different tax period, the total and exact amounts cannot be known
ahead of time. Hence, the bank provides a certain amount based on past
payments made. It may set aside the amounts monthly
Reserve for accrued interest.
This represents the interest accruals on time deposits as well as interest
payments on money borrowed by the bank. Interest on deposits as well as
interest on deposits is usually computed on the daily balances of depositors
account, or in some other stipulated manner.
Reserve for accrued expenses.
This constitute the salaries, supplies,and other expenses estimate on the banks
budget for the year.
Reserve for depreciation on bank properties.
This items represent the wear and tear on the banks building, furniture, and
fixtures.
Reserve for depreciation on securities.
The portion of banks assets are compose of securities.
Reserve for contingencies.
This will represents losses incurred by the banks either through bad loans or
investments.
STOCK HOLDER EQUITY

The account representing the stock holders equity are sometimes
termed as the banks capital accounts. This group of accounts becomes doubly
significant for the fact that it is usually a " thin equity" compared to the deposit
liability. It has already been stated that the bank" trades in the equity " therefore,
the banks net worth represent how much the depositors called positive to
recover in-case of loss, not to mention the claim of stock holders themselves. It
is perhaps for this reason that the state set the capital to deposits ratio an tab
strict surveillance on the imperilment of a banks capital position. The items
comprising the stock holders equity are the following:
Capital stock.
This account is carried as per the par or face value of the total number of stocks
appearing in the banks charter.
Surplus
66
Davao del Norte
This account may consist of earning derived from operation apart of the surplus
maybe derive from the sales of obsolete assets.
Undivided profits
This account is gaining more adherents in banks financial management for the
reason that t is of transitory nature. This represents earnings from current
operation not yet paid out as dividend.
MINIMUM CAPITAL REQUIREMENTS

In reading the statement of conditions, a significant ratio must at all times be
meet with the banks. For it is so provided by law in accordance to section 34 of
the new general banking act.
The monetary board shall prescribed the minimum ratio which the net worth of a
bank must bear to its total risk assets which include contingent account.
For purposes of this Section, the monetary board may require that such ratio be
determined on the basis of the net worth and risk assets of a bank and
subsidiaries, financial or otherwise, as well as prescribe the composition and the
manner of determining the net worth and total risk assets of banks and their
subsidiaries. Provided, that in the exercise of this, authority, the monetary board
shall, to the extent Feasible, conform to internationally accepted standards,
including those of the bank for international Settlements (BIS), relating to risk -
based capital requirements. Provided, further, that it may alter or suspend
compliance with such ratio whenever necessary for a maximum period of one (1)
year .provided, finally, that such ratio shall be applied uniformly to banks of the
same category.
In case a bank does not comply with the prescribed minimum ratio, the monetary
board may limit or prohibit the distribution of net profits by such bank and may
require that part or all of the net profits be used to increase the capital accounts
of the banks until the minimum requirement has been met. The monetary board
may, furthermore, restrict or prohibit the acquisition of major assets and the
making of new investment by the bank, with the exception of purchase of readily
marketable evidence of indebtedness or obligations the servicing until the
minimum required capital ratio has been restored.
In case of a bank merger or consolidation, or when a bank is under rehabilitation

under a program approved by the BangkoSentral, the monetary board may
temporarily relive the surviving bank,consolidated bank, or constituents banks or
corporation under such conditions as it may prescribed.
Before the effectively of the roles which the monetary board is authorized to
proscribed under these provision, section 22 of general banking acct, as
amended section 9 of the thrift banks acct, and all pertinent rules issued
pursuant there to, shall continue to be in force
67
Davao del Norte
BANKING EARNINGS AND EXPENSES

Banking earnings and expenses of great importance to a bank, and for that
matter to all other businesses, is the profits and loss statement. Although these
is seldom published, it is nevertheless important in the appraisal of banks
financial conditions. A bank must earn enough to meet its expenses, to cover
losses, as well as to provide a return on the stock holders investments. A banks
profits and loss statements (or income statements) is singular in sense that it
deals mainly on financial transactions in the account are confined to the sources
of income and the disposition of the same.
The most significant sources of the commercial banks income are in the form of
interest on loans and investments in government and other securities, other
minor, but equally significant, sources are the services and other fees charged
by the banks for services rendered such as services fees on loan processing
service fees on deposits acc9unt, collection, earnings from the trust department,
and the like, income may likewise come from unexpected spruces such as
recoveries from loans previously" written off" or charge as losses, or profits from
the sales of securities above par.
The current operating expenses of a bank are practically the same as that of
other businesses except for the interest paid on time deposits. The banks also
use stationary and supplies, furniture and fixtures which depreciate : pay salaries
of employees : use telephone and service: and such expenses common to other
businesses,
If the income statement shows a profit, it is indicative of efficient bank

management and will further enhance the banks position in the community, on
the other hand, a loss may mean settlements of some of its operations and loss
prestige in the community, it is perhaps for this reason that banks desist from
publishing much too often their statement of earnings and expenses, although
they use the same to a large extent for internal management purposes and to
meet the requirements of the supervisory and regulatory agencies.
CRITICISM ON PUBLISHED STATEMENTS

While some reports do stir a "Hornet's nest", sometimes they are so common
place nowadays as to arose the interest of the ordinary laymen because of a
number of reasons:
1. Published statement are too abbreviated as to give any significant detail in
banking operations.
2. The ordinary layman is not conversant with banking functions, or perhaps
even with the banks, so that he cannot understand the significance of the
accounts appearing in the statement.
3. The assets and liabilities are so combined as to make it impossible to “look
through” or discover the real picture of the bank unless one is an expert in
68
Davao del Norte
financial statement analysis.
4. The real picture of the bank's financial position as reflected in the financial
reports will depend largely on how the accountant estimates the valuation of
assets and how completely he enumerates the liabilities. Some accountants, for
instance, resort to secret reserves.
Nevertheless, it is of common assent that such statements and/or reports would

serve to reinforce the existing trust and confidence of the public in banks and the
banking system.
Whether these reports present the real pictures or a distorted one is immaterial,
for they would nevertheless give the student of banking a glimpse of banking
functions.
ANALYSIS OF TRANSACTIONS
As a palliative to the criticisms levelled on bank statements, a few transactions
which give rise to the contents of the bank statement and changes therein are
cited. Offhand, it must be admitted that such presentations would not make the
student all-knowing regarding banking functions and transactions. This may,
therefore, only serve as eye-openers and it is up to the reader to seek “wider
horizons” to broaden his knowledge of banking theory and practice.
Assuming that the bank's charter represents the issue of 50,000 shares at a
value of P100.00 each and that the stockholders have fully paid their shares, the
resulting figure will be:
Assets Liabilities
Cash P5,000,000.00
Stockholders' Equity
P5,000,000.00
Total Liabilities and
Total Assets P5,000,000.00 Stockholders' Equity P5,000,000.00
Then out of the cash received, the management buys a building worth
P1,000,000 , and furniture and equipment worth P500,000.00. Hence, the
balance sheet will now be:
Assets Liabilities
Cash P3, 500,000.00

Bank Building P1, 000,000.00
Furniture & Fixture P500, 000.00 Stockholder’s Equity P5,000,000.00
Total Assets P5,000,000.00 Stockholder’s Equity P5,000,000.00
69
Davao del Norte
The above transaction has led to a decrease in cash (a current asset) but
transferred to a fixed assets (bank building, furniture and fixture). Capital
remains the same but now reflects current and fixed capital.
The bank receives demand deposits to the tune of P1, 000,000.00 in cash. The
position will now shift a little and will appear as follows:
Assets Liabilities
Cash P4, 500,000.00 Demand Deposits P1,000,000.00
Bank Building 1,000,000.00
Furniture & Fixture500,000.00 Stockholders' Equity 5,000,000.00
Total Assets P6, 000,000.00 Stockholders' Equity P6, 000,000.00
There is an apparent increase in cash, but the bank now has a liability
commensurate to the increase in cash. However, because of the imposition of
the legal reserve requirement, the statement will be adjusted as follows
(assuming that the legal requirement is 10 %):
Assets Liabilities
Cash P4,400,000.00 Demand

Deposits P1,000,000.00 Due from Bank 100,000.00
Bank Building
1,000,000.00 Furniture
& Fixture 500,000.00 Stockholders' Equity
5,000,000.00
Total Liabilities
Total Assets P6,000,000.00
and Stockholders' Equity P6,000,000.00
In the preceding balance sheet, there is a slight change to reflect the
10% legal reserve requirement. Hence, the cash is decreased by P100,000.00
The bank receives loan applications and after due processing
approves the loans for P200,000.00 in cash. The statement will then be:
Assets Liabilities
Cash P4,200,000.00 Demand
Deposits P1,000,000.00 Due from Bank 100,000.00
Loans & Discounts
200,000.00 Bank Building
1,000,000.00
Furniture & Fixture 500,000.00 Stockholders' Equity
5,000,000.00 Total
Liabilities and Total Assets
P6,000,000.00 Stockholders' Equity
P6,000,000.00
70
Davao del Norte
The transactions show a change in cash which is made up by the
creation of the asset loans and discounts. Hence, the total on the asset side
does not change. The liabilities and net worth also remain the same.
Another transaction which might be of interest is the granting of
loans which will turn into deposits. For example, a borrower requests for an
overdraft line of P40,000.00. It would mean that the borrower will retain the
money in a current account which he may utilize later. Hence, the balance sheet
will appear as follows:
Assets Liabilities
Cash P4.196,000.00
Demand Deposits P1,040,000.00 Due from Bank
104,000.00 Loans
and Discounts 200,000.00
Overdraft 40,000.00
Bank Building 1,000,000.00
Furniture & Fixture 500.000.00
Stockholders' Equity 5.000.000,00
Total Liabilities and Total
Assets P6,040,000.00 Stockholders' Equity
P6,040,000.00
It will be noted that overdraft is also an asset because it represents a loan on the
part of the person requesting the same. At the same time, however, the bank
stands as debtor because the proceeds were turned into a deposit. (The interest
on the overdraft and the loans and discounts has not been considered for
purposes of simplifying the presentation.)
The multifarious functions of a commercial bank will further resort to a

pyramiding of transactions. However, these few transactions above may serve
our purpose in trying to understand and "see through” banking operations in
detail and banking business as a whole.
CLASSIFICATION OF BANK ACCOUNTS
It must have been noted in the shift on the balance sheet affected by the
transactions that there is also a change in the bank accounts. Assets are
generally of a current or fixed nature. However, some are more liquid than others
and, therefore, in analysing bank statements, it might be noticed that their
sequence reflects the classification. The same is true with the liabilities.
Generally, the liabilities represent claims of stockholders, depositors, outside
creditors (which may be other banks or the general public).
Furthermore, the banks have the contingent accounts which are kept separate
as reflected in balance sheets. The letters of credit or dealings in foreign
exchange may comprise these contingent accounts.
71
Davao del Norte
The commercial banks now do not only deal in their original functions which
characterized them, but rather embrace multifarious functions that have been
attributed to other types of banks. A bank of almost any type (provided it
operates within lawful boundaries) relegates the commercial bank’s functions to
a department within the omnibus organization. Hence, a savings department, a
trust department, and other such departments may be housed in a commercial
bank. Similarly, a trust company may also departmentalize its functions to
include a “commercial banking department”. The process of departmentalization
is the “rule of the day”, or what is actually being resorted to in the banking circles
today.
Nonetheless, it must be borne in mind that whether the setup is dedicated purely
to commercial banking functions or relegated to a “commercial banking
department” in a bigger institution, such major functions are distinctly classified
as “dealings in credit”. Hence, the connotation becomes evident that a
commercial bank is a credit institution.
This chapter distinguishes the difference between commercial banks and
universal banks. The functions, services and powers of these two types of bank,
as provided for in the New General Banking Law of 2000, are presented.
Likewise, bank departmentalization, forms a bank credit and sources of bank
funds are explained.
Self-Help: You can also refer to the sources below to help you
further understand the lesson.
Inc.
72
Davao del Norte
Bookstore, Inc.
accountid=31259
Let’s Check
Activity 1: Solve the following problems.
1. Assuming that the bank's charter represents the issue of 100,000 shares at a
value of P200.00 each and that the stockholders have fully paid their shares, the
resulting figure will be:
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
2. Consider the previous data, the cash received, the management buys a
building worth P2,000,000 , and furniture and equipment worth P800,000.00.
Hence, the balance sheet will now be:
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
Let’s Analyze
ACTIVITY I: explain the following briefly and concisely.
Give two examples of each bank classification and explain each.
1.______________________________________________________________
73
Davao del Norte
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
2.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
In a Nutshell
is done for you.
1. The account representing the stock holders equity are sometimes termed as
the banks capital accounts. This group of accounts becomes doubly significant
for the fact that it is usually a " thin equity" compared to the deposit liability. It
has already been stated that the bank" trades in the equity " therefore, the banks
net worth represent how much the depositors called positive to recover in-case
of loss, not to mention the claim of stock holders themselves

2.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
3.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
74
Davao del Norte
________________________________________________________________
________________________________________________________________
________________________________________________________________
4.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
5.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
Q&AList
1.
2.
3.
4.
5.
75
Davao del Norte
Keyword Index
BANK REPORTS ANNUAL REPORTS CASH ITEMS

ELECTRONIC
Cash on-hand. FOREIGN BANKS
TRANSACTIONS
AUTHORITY Other cash resources LOANS
GOVERNMENTS
FINANCIAL STATEMENT EXCHANGES
SECURITIES
CAPITAL STOCK CLEARING HOUSE FIXTURE
BANK REPORTS COLLECTIONS REAL STATE OWNED

concepts of function of commercial bank.
Metalanguage
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.
DEPOSIT- A deposit is a transaction involving a transfer of money to another
party for safekeeping. However, a deposit can refer to a portion of money used
as security or collateral for the delivery of a good.
BANK SERVICES - Any activities involved in accepting and safeguarding money
owned by other individuals and entities, and then lending out this money in order
to earn a profit.
CREDIT INFORMATION- about a person's or company's ability to pay debt,
examined especially by banks before they decide to lend money: When we apply
for a loan, the lender checks the records held by consumer credit information
agencies.
RENTAL- also known as hiring or letting, is an agreement where a payment is
made for the temporary use of a good, service or property owned by another.
UNIVERSAL BANK- is a system in which banks provide a wide variety of
comprehensive financial services, including those tailored to retail, commercial,
76
Davao del Norte
and investment services.
Essential Knowledge
FUNCTIONS OF A COMMERCIAL BANK
A commercial bank (KB) deals in multifarious functions and

service. With these powers and scope of authority the a commercial bank
performs, the BangkoSentral requires P2, 400.00 (in million pesos) as the
minimum level of capitalization. The most common functions of KBs are the
following:
Deposit function. A commercial bank primarily receives demand deposits which

can only be withdrawn by means of checks. It may, however also receives other
types of deposits.
Loan function. It advances sum of money for relatively short periods of time to
persons engaged in commerce and trade. It charges interest on such loans at
legal rates.
Exchange function. This refers to the transfer of funds without the physical
transfer of cash. Commercial banks deal in offsetting of book entries either
domestically or internationally. Credit instruments are used in effecting transfer
or swapping of credits.
Fixed function. Commercial banks also engage in fiduciary activities such as
administrators of estates, guardians of minors interest; registrar and transfer
agents of stocks and bonds; executors of last wills and testaments, and other
similar functions.
Advisory function. Commercial banks, through their experienced officers, give
expert advice to client on their business dealings.
BANK SERVICES
Besides these functions, the commercial banks also deal in varied services,
namely:
1.Rental of safe deposits bases. Some people have valuables such as jewelry
and/or important documents which they want to keep safe. The commercial bank
77
Davao del Norte
provides this service through the renting out of safe deposit boxes. Such papers
are kept in specifically constructed vaults to allow maximum safety from fire,
burglary and other risks.
2.Sale of drafts cashier’s checks. Commercial banks also undertake the sale
of drafts and cashier’s check. In previous chapter, these types of credit
instruments were already mentioned. The bank charges a small fee for the
service.
3.Sale of traveller’s checks. A traveller is provided a safe medium of exchange
through this service of commercial banks. Such checks are contained in a wallet
and are in convenient denomination in dollars. The traveller is made to sign
twice, once when buying the check (when he signs all of them) and again when
he uses the check for payment (when he signs each one as it used).
4.Collection agent. To facilitate transactions between foreign creditors and
debtors, or even in domestic trade, the commercial bank acts as collection agent
for a nominal fee. Instruments for collection are represented by drafts, checks,
bond coupons, promissory notes, and others.
5.Credit information. Commercial banks used credit information not only within
their own offices but also disseminate such information to others who need the
same. This may be done directly or indirectly. Such information is kept in the
strictest confidence.
6.Payrolls. Bank employees are also assigned to prepare payroll payments by
inserting the correct amount in envelopes to cover salaries of employees of
business concerns. All the business establishment has to do is to issue a check
against its deposits in the bank for the total amount.
For clear overview of the operations of commercial banks in the Philippines, the
provision of the General Banking Law of 2000 (R.A 8791) under Chapter IV,
Articles II and Article III, Section 53 are quoted hereunder:
Sec. 29. Powers of a Commercial Bank. A commercial bank shall have, in

addition to the general powers incident to corporations, all such powers as may
be necessary to carry on the business of commercial banking, such as accepting
drafts and issuing letter of credit, discounting and negotiating promissory notes,
drafts, bills exchange, and other evidences of debt; accepting or creating
demand deposits; receiving other types of deposit and deposits substitute;
buying and selling foreign exchange and gold or silver bullion; acquiring
marketable bonds and other debt securities; and extending credit, subject to
such rules as the Monetary Board may promulgate. These rules may include the
determination of bonds and other debt securities eligible for investment, the
maturities and aggregate amount of such investment.
Sec. 30. Equity investments of a Commercial Bank. A commercial bank may,

subject to the condition stated in the succeeding paragraphs, invest only in the
equities of allied enterprise as may be determined by the Monetary Board. Allied
enterprise may either be financial or non-financial.
78
Davao del Norte
Except as the Monetary Board may otherwise prescribe:
30.1 The total investment in equities of allied enterprise shall not exceed
thirty five (35%) of the net worth of the bank; and
30.2 The equity investment in any one enterprise shall not exceed twenty-
five (25%) of the net worth of the bank.
The acquisition of such equity or equities is subject to the prior approval of the
Monetary Board which shall promulgate appropriate guidelines to govern such
investments.
Sec. 31. Equity Investments of a Commercial Bank in Financial Allied

Enterprises. A commercial bank may own up to one hundred percent (100%) of
the equity of thrift bank or a rural bank.
Where the equity investment of a commercial bank is in other financial allied

enterprises, including another commercial bank, such investment shall remain a
minority holding in that enterprise.
Sec 32. Equity investment of a Commercial bank in non-financial Allied

Enterprise. A commercial bank may own up to one hundred percent (100%) of
the equity in a non-financial allied enterprise.
UNIVERSAL BANK
A universal bank (UB) is also a commercial bank. Meaning, a UB exercise the

powers and services authorized for KB. Aside from the powers and services of a
KB, a UB has additional functions. As such, UB’s required minimum capital is
P4, 950.0 (in million pesos). Hence, a UB is also called an expanded commercial
bank (EKB).
The powers of UB is clearly stipulated in the New Banking Law of 2000,

otherwise known as R.A. 8791, under Chapter Iv, Article I:
Sec. 23. Powers of a Universal Bank. A universal bank shall have the authority
to exercise, in addition to the powers authorized for a commercial bank Section
29, the powers of an investment house as provided in existing laws and the
power to invest in non-allied enterprises as provided in this Act.
Sec 24. Equity investments of a Universal Bank. A universal bank may,

subject to the conditions stated in the succeeding paragraph, invest in the
equities of allied and non-allied enterprise as may be determined by the
monetary Board. Allied enterprises may either be financial or non-financial.
Except as the Monetary Board may otherwise prescribe:
79
Davao del Norte
24.1 The total investment in equities of allied and non-allied enterprises shall
not exceed fifty percent (50%) of the net worth of the bank; and
24.2 The equity investment in any one enterprise, whether allied or on-allied,
shall not exceed twenty-five percent (25%) of the net worth of the bank.
As used in this Act, “net worth” shall mean the total of the unimpaired paid-in
capital including paid-in surplus, retained earnings and undivided profit, net of
valuation reserves and other adjustments as may be required by the
BankoSentral.
The acquisition of such equity or equities is subject to the prior approval of the
Monetary Board which shall promulgate appropriate guidelines to govern such
investments.
Sec. 25. Equity Investments of a Universal Bank in Financial Allied

Enterprise. A universal bank can own up to one hundred percent (100%) of the
equity in a thrift bank, a rural bank, or a financial allied enterprise.
A publicly listed universal or commercial bank may own up to one hundred

percent (100%) of the voting stock of only one other universal or commercial
bank.
Sec. 26. Equity Investments of a Universal Bank in Non-Financial Allied

Enterprises. A universal bank may own up to one hundred percent (100%) of
the equity in a non-financial allied enterprise.
Sec. 27. Equity Investments of a Universal Bank in Non-Allied Enterprises.

The equity investment of a universal bank, or of its wholly or majority- owned
subsidiaries, in a single non-allied enterprise shall not exceed thirty-five percent
(35%) of the total equity in that enterprise nor shall it exceed thirty five (35%) of
the voting stock in that enterprise.
Sec. 28. Equity Investments in Quasi-Banks. To promote competitive

conditions in financial markets, the Monetary Board may further limit to forty
percent (40%) equity investments of universal banks in quasi-banks. This rule
shall also apply in the case of commercial banks.
A UB may perform the functions of an investment house either directly or

indirectly through a subsidiary investment house. In either case, the underwriting
of equity securities and securities dealing shall be subject to pertinent laws and
regulation of the Securities and Exchange Commission (SEC). provided that if
the investment house functions are performed directly by the UB, such functions
shall be undertaken by a separate and distinct department on other similar unit
in the UB but it cannot perform such functions both directly and indirectly through
a subsidiary.
80
Davao del Norte
NON-FINANCIAL ALLIED UNDERTAKINGS
A bank may acquire up to one hundred percent (100%) of the equity of a non-
financial allied undertaking. The determination of whether the corporation is
engaged in a non-financial allied undertaking shall be based on the primary
purpose as stated in its articles of incorporation and the volume of its principal
business.
The UB’s and the KBs may invest in equities of the following non-financial allied
undertakings;
1.Warehousing companies;
2. Storage companies;
3. Safe deposit box companies;
4.Companies primarily engaged in the management of mutual funds but not in
the mutual funds themselves;
5.Management corporations engaged or to be engaged in an activity similar to
the management of mutual funds;
6.Companies engaged in providing computer services;
7.Insurance agencies/brokerages;
8.Companies engaged in home building and home development;
9.Companies providing drying and/or milling facilities for agricultural crops such
as rice and corn;
10.Service Bureaus organized to perform for and in behalf of banks and non-
bank financial institutions the services allowed to be outsourced under Circular
No. 268. Provided, that data processing companies may be allowed to invest up
to 40% in the equity of Service Bureaus;
11.Philippine Clearing House Corporation (PCHC) and Philippine Deposit
Insurance Corporation (PDIC); and
12.Such other similar activities as the Monetary Board may declare as non-
financial allied undertakings of banks.
The UBs may further invest in health maintenance organizations (HMOs).
FINANCIAL ALLIED UNDERTAKINGS
With prior BSP approval, banks may invest in equities of the financial allied
undertakings enumerated below. The determination of whether the corporation is
engaged in a financial allied undertaking shall be based on its primary purpose
as stated in its articles of incorporation and the volume of its principal business.
The following are the Financial Allied Undertakings:
1.Leasing companies including leasing of stalls and spaces in a commercial

establishment; provided, that bank investment in/acquisition of shares of such
leasing company shall be limited/applicable only in cases of conversion of
81
Davao del Norte
outstanding loan obligation into equity;
2.Investment houses;
3.Banks;
4.Financing companies;
5.Credit card companies;
6.Financial institution catering to small and medium scale industries including
venture capital corporations (VCC);
7.Companies engaged in stock brokerage/securities dealership;
8.Companies engaged in foreign exchange dealership/brokerage
In addition, the UBS (EKBs) may invest in the following as financial allied
undertakings:
a) Insurance companies; and
b) Holding companies , provided that the investments of such holding
company are confined to the equities of allied undertakings and/or non-allied
undertakings of the UBs allowed under the BSP regulations.
DEPARTMENTALIZATION
In order for the banking functions to be effected with the maximum efficiency
and, therefore, improve the serviceability of banks, the commercial bank has
different departments which specialize in their numerous functions and services.
For its internal operations, bank generally deals in three diverse activities which,
however, tend to complement one another. Such are the executive, the teller,
and the bookkeeping activities.
Except in smaller banking units like rural banks, most banks in the Philippines
may well be considered as big business. Hence, they will have departments of
common usage amongst them, although nor uniformly.
1.Cash Department. The cashier heads this department, which will take care of
the deposit function of the bank and allied activities. It may be sub-divided into
New Accounts, Signature Control, Safe Deposit Boxes, and Armored Car
Services.
2.Loan and Discount Department. This department is headed by a loan officer.

This is sometimes called the credit department. It takes care of everything
connected with loans. It is also conveniently divided into sections which may
include that of Small Loans, Bank Credit Investigation, Rediscounting, Statistics,
Loan Releases, Renewals, Collections, and others.
3.Trust Department. This is usually headed by a trust officer who is well-versed

in trust functions. It deals more on a legal officer's work and a lawyer would be
ideal for this job. The divisions will be in line with the fiduciary activities engaged
82
Davao del Norte
in.
4.Foreign Department. This department deals in exchanges on the international

level, although it also attends to some domestic exchanges. It is devoted to the
processing of applications for letters of credit, the buying and selling of foreign
exchange, and similar transactions. It also keeps an eye on the movement of the
prices of investment securities.
5.Accounting Department. This department takes care of all the transactions of

the bank. It puts in order all the books, proof sheets, financial statements, and
other accounting procedures used in the bank.
6.Auditing Department. This department takes care of seeing to it that

disbursements are in order by conducting pre-audits, spot checks on the
transactions and physical assets, and institutes general procedures used in the
bank.
7.Legal Department. It is the duty of this department to see to it that the bank is
amply protected legally for any action that it takes. All matters of legal
importance are referred to it.
8.Administrative Department. The general administrative of the bank falls

under this department. Personnel recruiting, hiring, training and the like may be
undertaken by it. Likewise are the administrative matters which are more of
routine rather than execution of policy or decision-making.
FORMS OF BANK CREDIT
Bank credit represents the bank's trust and confidence in the borrower's
willingness and ability to pay a loan when due. On the other hand, it could also
mean the depositor's trust in the bank which makes him put his money for
safekeeping. Hence, bank credit partakes of different forms. It may be in the
form of bank notes, deposits, letters of credit, line of credit, acceptance, and
notes payable. Today, the most popular are the deposits and letter of credit.
However, acceptances are also attached to letters of credit, while loaning
activities would emphasize the use of lines of credit, particularly the overdraft
line.
SOURCES OF BANK FUNDS
The major or primary sources of bank funds are the contribution of stockholders
and sizable deposits. Hence, the banks will try heir best to outdo one another to
attract depositors. For while the stockholders are required to pud in a minimum
amount of capital as initial outlay before starting their business, the degree of
success of a bank with more deposits would be very much better, indeed.
83
Davao del Norte
Furthermore, earning money on borrowed funds is the very nature of banking
business.
To augment its capital and deposits, the bank also has other
sources such as interest from loans and investments, collection and service
fees, earnings on trust, monetized depreciation, and others.
Inc.
Bookstore, Inc.
accountid=31259
Let’s Check
Activity I: Give an actual event of the following bank function:
84
Davao del Norte
1. Deposit function
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
2. Loan function
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
3. Exchange function.
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
4. Fixed function
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
5. Advisory function
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
Let’s Analyze
ACTIVITY1: Explain the concept briefly and concisely
1. Explain the forms of bank credit.
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
2. Explain the concept and sources bank funds and funding.
85
Davao del Norte
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
In a Nutshell
is done for you.
1. A universal bank (UB) is also a commercial bank. Meaning, a UB exercise the

powers and services authorized for KB. Aside from the powers and services of a
KB, a UB has additional functions. As such, UB’s required minimum capital is
P4, 950.0 (in million pesos). Hence, a UB is also called an expanded commercial
bank (EKB).
2.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
3.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
4.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
5.______________________________________________________________
86
Davao del Norte
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
Q&AList
1.
2.
3.
4.
5.
Keyword Index
COMMERCIAL BANK EXCHANGE FUNCTION LOAN FUNCTION
DEPOSIT FIXED FUNCTION CREDIT INFORMATION
BANK SERVICES ADVISORY FUNCTION PAYROLLS
CREDIT INFORMATION SAFE DEPOSITS BASES COMMERCIAL BANK
EQUITY
RENTAL SALE OF DRAFTS
INVESTMENTS
87
Davao del Norte
UNIVERSAL BANK COLLECTION AGENT ENTERPRISES
Big Picture in Focus: ULOd. Understand the nature and basic

concepts of the deposit function.
Metalanguage
DEPOSIT FUNCTION- A deposit is a transaction involving a transfer of money to
another party for safekeeping. However, a deposit can refer to a portion of
money used as security or collateral for the delivery of a good.
DEPOSITORS- person who deposits money in a bank or who has a bank
account.
TIME CERTIFICATE- A time deposit is an interest-bearing bank account that has
a pre-set date of maturity. A certificate of deposit (CD) is the best-known
example. The money must remain in the account for the fixed term in order to
earn the stated interest rate.
SAVINGS DEPOSIT- a bank deposit usually of an individual or a nonprofit
organization drawing regular interest and payable on 30 days notice
EARNINGS OR INCOME- is money (or some equivalent value) that an
individual or business receives, usually in exchange for providing a good or
service or through investing capital. In this case, income is referred to as
"earnings.”
Essential Knowledge
THE DEPOSIT FUNCTION

Deposits constitute the lifeblood of a banking institution. It is for this reason that
a bank must have substantial amount of deposits to prove its worth in the
financial system. A bank will not succeed in its task of dealing in credit" without
deposits or very little of it. Its success, therefore, will depend largely on its ability
to outdo other banks in attracting deposits.
88
Davao del Norte
This chapter discusses the deposit function of the banks. Presented here are the
types of deposits, the types of depositors, motives of depositors, the receiving
and paying tellers, and others that have something to do with deposit function. It
also explains the significance of deposits to a bank and how to open an account.
WAYS OF ENTICING DEPOSITORS
There are many ways that banks employ to entice depositors into bringing their
excess funds for safekeeping. They make their building imposing enough to
conjure the idea of financial strength, hence, a veritable attraction to depositors.
The banks, therefore, sink a great portion of their own capital in imposing
buildings and fixtures in trying to invite depositors. Other banks offer insurance
coverage for their depositors as a means of competing for deposits. Others
adopt gimmicks which would likewise attain the goal of alluring the depositor. For
children's pleasures, they give temporary piggy banks made of hard paper with
attractive and appealing characters promoting the habit of thrift.
The developments in communications and technology also enhance the banks'

ability to attract customers. Modern banking offers convenience to depositors
through varied products and services done electronically. The computers,
coupled with high-tech electronic devices are now utilized in banking
transactions called e-banking. E-banking is prevalent in large banking institutions
located in metropolitan areas, key cities, and municipalities.
Thus, depositors have the option of transacting business even if they are
not physically present in the bank/s where they entrust their deposits. The
depositors can now access their funds through thousands of Automated
Tellering Machines (ATMs) located nationwide. They can also pay bills, transfer
funds, inquire balances, reorder checks, and shop cashless through ATMs, land
phones, mobile phones, and the internet. More and more banks are planning to
engage in e-banking, except those small banks in the remote areas which do not
have the financial capacity for modernizations. As such, every e-banker has to
employ strategically planned use of modern technology to jostle itself at the
topmost of competition. Every single manner of outdoing one another to get the
deposits certainly underscores the importance of this particular phase of banking
business.
DEPOSITS DEFINED
Under the concept of bank credit, deposits are represented by money or
representative money entrusted to banks for safekeeping. The term "deposit,"
however, may also partake of other meanings. The keeping of valuables such as
jewellery and important documents could likewise mean deposits in a sense. To
a bank, however, deposits are money borrowed and makes the bank a debtor,
on the other hand, can claim the deposits at his pleasure and is therefore the
creditor. Hence, the bank can lend the deposits while the depositor does not as
89
Davao del Norte
yet claim these and earn interest on the loans granted. Since deposits are
liabilities of the bank failure on its part to meet the depositor's demand will give
the depositor demand will give the depositors a right of recourse against the
bank.
Another definition is contained in Section 58 of the New Central Bank Law of

2000 (R.A. 7653) which states that the term "demand deposits means "all those
liabilities of the BangkoSentral and of other banks which are denominated in
Philippine currency and are subject to payment in legal tender upon demand by
the presentation of checks" It may seem, from the above definitions, that there is
only one kind of deposit. The subsequent statements will, however, prove
otherwise.
TYPES OF DEPOSITS
Deposits are usually classified according to the method of withdrawal and

according to the way they are created. Such delineations are simply established
to set apart one type from another in some instances.
According to the method of withdrawal, deposits may either be demand or time.

The demand deposits are those which are withdrawn upon the presentation of
checks during banking hours. However, even when banks are closed for
business, claims against such deposits may be made by the depositor through
his checking account.
Since the bank must stand ready at all times to meet the depositors demands
the bank cannot lend these deposits for long periods of time. Hence, while these
represent sizable amounts, the bank stands to profit less from them if the
reserves against them should be one hundred percent.But due to the partial
reserve system, demand deposits are significant in the bank's expansion of
credit. This type of deposit does not receive interest in modern times. The paying
of interest led to unethical competitive practices in the past and, thus, the
regulatory agencies saw fit to enjoin banks to stop the payment of interest on
demand deposits, So that now, banks vie for the bigger deposits through other
means.
Time deposits are those which can only be withdrawn after a certain period of
time or at a designated maturity. The depositors place their excess funds as time
deposits for varied purposes such as to build up a fund for building their homes,
for Christmas shopping, and such other postponed consumption purposes. For
this reason, this type of deposit is further subdivided into the following:
1.Time certificate of deposit. This is evidenced by a certificate to the effect that

the deposit can only be withdrawn at maturity or after due notice of withdrawal,
usually thirty days, and upon presentation and surrender of the instrument
90
Davao del Norte
Should the deposit be withdrawn before maturity due to an emergency, interest
accruing on the deposit will be forfeited.
2.Special time deposits. This type is evidenced by a written contract to the
effect that neither all nor part may be withdrawn before the maturity date or at
least upon dye notice of at least thirty days.
3.Savings deposit. Savings deposits are evidenced by a passbook and can be
withdrawn only upon due notice of at least thirty days or depending upon the
individual bank's policy. In the modern banking system, however, these deposits
may be withdrawn on demand provided the bank is in a position to meet the
demand of the depositor.It does not mean, therefore, that the bank cannot setup
the defence of a written notice of withdrawal should the occasion arise for doing
so.
All time deposits receive interest at varying rates. For example, the certificate of
deposit may be given a higher rate than that of savings. This is due to the fact
that the former is kept with the bank for a longer period which will also allow its
investment for long term commitments. But, in order to avoid cut-throat
competition between banks, the BangkoSentralngPilipinas sets the minimum
and maximum percentages which banks can offer to customers. Bank
management then implements the requirements as it sees fit.
According to the way the deposit is created, they are classified as primary (or
direct) and derivative deposits. Direct or primary deposits are those which are
made "over the counter when the depositor himself brings his money and/or
checks and other near cash items to the bank hands them to the teller.
Sometimes, the depositor may send his representative to deposit for him. For e-
bankers, depositors can deposit through ATMs after they have registered
personally at the bank.
Derivative deposits, on the other hand, are created from the proceeds of loans in
this instance, the borrower enters into an arrangement that the bank places the
loan proceeds under a current account from which he can draw checks
eventually.
The direct deposits simply reflect a change in form, from currency to deposit
money and do not, therefore, increase the money in circulation. The derivative
deposits on the other hand, increase the volume of money because they
represent new money created by the bank out of the proceeds of the loans. The
multiple expansion of credit is also enhanced by more derivative deposits.
Hence, the line drawn between these types of deposits becomes doubly
significant in economic analysis.
The analysis of transactions as reflected in the balance sheet may also serve to
underscore the effect of derivative deposits on the banking business and the
economic situation.
91
Davao del Norte
KINDS OF DEPOSITORS
If there are distinctions among deposits, there are also different kinds of
depositors. The deposits may come from either individuals or businesses and
from the government and its instrumentalities and political subdivisions. When
funds are deposited by individuals or businesses, these are known as individual
deposits or business accounts. If the government is the depositor, they are
termed government deposits.
The banks may also deposit money with other banks on a reciprocal basis.
These are classified as interbank deposits. The banks are known as
correspondents. Such deposits provide for the exchange of funds between
banks for varied purposes.
The deposits made by these depositors may be either demand or time in

conformity with the method of withdrawal and according to the reason of the
depositor in keeping his funds in the bank. They may also consist of primary or
direct deposits or derived from proceeds of loans.
MOTIVES OF DEPOSITORS
When depositors entrust their money to the banks, each of them may have one
more motives for doing so. Such motives may either be for safety, for
convenience for earnings or income, and for accommodation.
1.Safety The depositors place their excess funds in the bank because they are
aware that modern banks have fireproof and burglar proof safes and vaults to
keep money in. Compared to keeping the money at home, the bank is
considered to be a safer place. Besides, bank funds are duly protected by proper
safeguards and regulations imposed by the state. So that either time or demand
deposits will be relatively safe.
2.Convenience. When the depositor is prompted by the conveniences offered

through depositing, he opens a current account which is serviced by the use of
checks. Thus, he could pay his bills in exact amounts, he could carry large
amounts of money safely and portable, he could use his cancelled check as a
receipt, and he could issue a stop-payment order if he draws the check
erroneously or loses the same. Besides the conveniences he enjoys, he also
acquires a certain degree of safety.
3.Earnings or Income. A person places his money as time deposits if he is after

earnings or income. Only time deposits of varied types earn interest. Service
charges are also nominal if he has to pay at all.
4.Accommodation. Businessmen deposit their money because of the special

favors they want from banks. Lines of credit may be accorded them upon proper
92
Davao del Norte
arrangements . They could also deal in trade by having the bank as guarantor
through the issuance of letters of credit.
SIGNIFICANCE OF DEPOSITS TO A BANK
When a bank can attract depositors at all levels, it will build up available loanable
funds on which it could earn interest. If the bank loans increase because of more
deposits, then the stockholders will likewise be assured of safe returns on their
investment. So, increase in the earnings or income of stockholders by way of
dividends from current profits will also encourage them to increase their
investments. Increased investments will accrue to the benefit of the customers
and the general public through improved banking facilities and services. The
bank management will see to it that it does not only retain the good depositors
but also attract new ones.
Evidence of the stockholders' intention to invite depositors and at the same time
improve banking services could be gleaned from the shift in the use of purely
manual operations to automation. Today, our banks, which grace not only the
commercial centers but also small districts, exhibit these expensive and modern
machines in beautiful buildings of the most recent structural or architectural
designs. Such development alone is indeed a far cry from the bankers of old
who kept the money in benches and carved the evidences of debt on tablets
made of clay.
THE DEPOSIT FUNCTION

Generally speaking, all the officials of the bank down to the lowliest employee
perform the deposit function in the sense that they indirectly contribute to the
satisfaction of the customer-depositor. Directly, however, the teller system
employed by banks performed the operations connected with the receipt of
deposits and other allied activities related to it.
The bank, if relatively small sized, may employ a single teller system where one
teller performs both the receiving of deposits and the paying out of checks and
other instruments exchanged for cash. But, as a bank increases in size and
volume of operations, individual tellers who perform separate tasks might be
more practical and economical due to expeditious performance and divided
work. Each of the tellers assigned to specific jobs shall, therefore, have their own
responsibilities and duties. Thus, pinpointing of erroneous performance could be
easily done.
Modern banks have acquired many new methods to improve service as well as
mechanized devices to step up the bank's multifarious activities. For one thing,
banks nowadays employ several tellers in order to give maximum service
benefits to their customers. Hence, we see the teller's cage labelled “Receiving”
or “Paying" or with some other activity. Also, teller functions are done through
93
Davao del Norte
electronic devices such as ATMs, phones, mobile phones, and the internet. As
to the large e-bankers, “Receiving and Paying tellers do not exist anymore as
the depositors can transact any business with anyone among those who sit in
the tellers' cages. This is so because of the computer software’s which can track
down several transactions at the same time.
To a bank, the paying teller has a greater amount of responsibility because his
negligence may lead to losses on the bank's part. However, the teller who
performs the first step in the deposit function is the receiving teller; for it is he
who accepts deposits for and in behalf of the bank.
THE RECEIVING TELLER

The receiving teller receives and verifies deposit items and deposit slip, gives
proper receipt for the deposit made, distributes the items deposited, and finally
checks and proves the day's work. A brief description of each phase of his
activities may be gleaned from the succeeding paragraphs.
When a customer-depositor approaches the receiving teller's window, he hands

the teller a duly accomplished deposit slip indicating there in the cash and other
instruments representing cash in some detail. Upon receipt, the teller examines
the deposit slip to ascertain, among other things, whether the amount
representing cash tallies with the physical count of currency. He also sees to it
that a detailed description of the credit instruments are in order, such as the
number, the bank on which drawn (in case of checks or drafts), and the amount.
Then he segregates the currency into the different denominations in the
compartments for this purpose in the drawer. He examines closely the credit
instruments for any defects and if he finds none, marks them "non-negotiable."
Having thus examined and satisfied with the verification, he places the duplicate
of the deposit ticket into the machine to acknowledge receipt of the deposit
indicated in the passbook. He initials the receipt (or the passbook) before giving
it to the depositor for instruments. In regard to the currency, the teller is
responsible for: depositor with an ATM account who deposits over-the-counter,
the teller only gives the machine-validated receipts.
At the end of the day, that is after banking hours, the teller sorts out all the items
deposited comprising of cash, checks, and other credit instruments ready for
distribution to the proper departments. This will become very much easier since
in the first step the teller shall have segregated the items already.
As the teller performs the other functions, from time to time he fills in the proof
sheet indicating the deposits received and at the end of the day, he merely goes
over the same to see if he made any error. If he discovers any erroneous entry,
he proceeds to look for the mistake and then reflects the necessary correction.
94
Davao del Norte
In the receipt of the items deposited, the receiving teller exercises due care and
diligence in examining the cash and credit instruments so that he may be
relieved of the responsibilities attached to his duties. These responsibilities are
in relation to the currency or the credit instruments. In regard to the currency the
teller is responsible
1. Errors in counting the money deposited. In order to be sure of his count,
the receiving teller does it twice and sees to it that the amount on the deposit
ticket tallies with the actual count of the currency. Otherwise, he may either fall
short or incur an excess at the end of the day. In either case, he will have to
balance the proof sheets. If he falls short, he is responsible for the deficiency. If
he has an excess, he should be able to explain the excess.
2. Presence of mutilated or counterfeit money. By experience, a teller can

say which is counterfeit money or not, simply by the "feel" of the paper currency
or the tingling of the metal money. Nonetheless, he should also be careful to
watch out for advertisements or have a sample on hand to be able to detect
counterfeit bills.
According to the provisions on the means of payment, the mutilated currency is

that which cannot be recognized under the law. The demonetized currency or
coins come under this category.
Should the receiving teller fail to detect either counterfeit currency or mutilated
money, the bank may have to suffer losses through negligence. The bank will, in
turn, charge the teller for irresponsibility or negligence in the performance of his
functions.
For the credit instruments that the teller receives for deposit, he has to be careful
in order to avoid responsibilities in connection with:
1.Post-dated checks. Checks which are dated after the date of deposit are
known as post-dated checks. The teller should not receive such checks for
deposit as he cannot be sure whether they shall be honored. If he overlooks this,
the bank may account for such mistake.
2.Stale checks. Stale checks are those which are dated very much earlier, say
about a month, from the date of deposit. In conformity with the Negotiable
Instruments Law, checks should be promptly presented for payment or for
clearing within a reasonable period of time. Hence, if the teller notices such a
check he should tell the depositor to refer the check or instrument to the drawer.
Otherwise, the bank might become liable for it. Because in some cases, the
drawer may be relieved of the liability, behind the issuance of stale checks, if his
interest is also jeopardized.
3.Material alterations. Material alterations may be on the date, the amount (that
is, the amount in words do not tally with the amount in figures), the payee. The
teller must see to it that any change made on the face of the instruments is
properly initialled by the drawer. If there are any erasures, it might be better to
95
Davao del Norte
have the instruments completely replaced instead.
4.Wrongly endorsed instruments. There are proper ways of making
endorsements so that no question as to liability may arise. In case the
instrument is not endorsed according to the name appearing on its face, the
teller should require the depositor to correct the wrong endorsement. Hence, if
the instrument is made payable to "Jose Cruz" and is signed at the back “Jose
C. Cruz” the teller should make the depositor correct the endorsement by
making the endorser sign his name as appearing on the face, i.e., Jose Cruz,
and then again sign his regular signature with the middle initial, i.e., Jose C.
Cruz. This will ensure the identity of the endorser beyond reasonable doubt, and
also his corresponding liability.
For both currency and credit instruments, the teller is responsible for:
1.Carelessness in adding deposit slips. This refers to the proof sheets rather
than the individual deposit slips. It may be that the teller is not very careful in
adding so that the amount of deposits may not tally with the actual currency and
credit instruments. Again, any deficiency or excess in this case must be
explained by the teller.
2.Carelessness in designating the account to be credited. It may happen
that there are several depositors with identical names. The teller must, therefore,
see to it that the right person is duly credited for the deposit. Careless crediting
of proper accounts may eventually lead to bank embarrassment or even loss.
This particular aspect is minimized today by the use of account numbers. Hence,
the teller should make it a point to check the account number.
On the whole, the receiving teller must be very careful and prudent in the
exercise of his functions in order to minimize embarrassment or loss to his bank
as well as to insure his trusted position as a bank representative in the deposit
function.
Deposit Slips (Tickets) and Deposit Items

The deposit function entails the distribution of the deposit slips and the deposit
items. Such function is performed by the receiving teller. The distribution is
handled physically as follows:
1. Deposit Slips. Deposit slips are the forms filled in by the depositor when he
makes a deposit . The receiving teller sorts the deposit slips in groups or
batches according to the subdivision of the depositors' individual ledgers. Then
the batches are sent to the corresponding bookkeepers.
2. Deposit Items. Deposit items comprise of cash and credit instruments or
other items and are distributed as follows:
a. The currency composed of notes and coins will be sent to the cashier.
b. Checks drawn on the bank where the teller is employed are sent to the
bookkeeper.
c. Checks drawn on other banks are sent to the distributing section or transit
96
Davao del Norte
department for proper disposal. The clearing house items, for example, are
sorted and later sent to the clearing house.
d. Drafts and other items to be acted upon are sent to the corresponding
departments such as the foreign, the loans and discount, and others.
For bookkeeping and accounting procedures, the deposit slips which bear the
monetary value of the deposits, shall be the basis of credit entries into the
different depositors' subsidiary ledgers. The deposit liabilities will be the total of
all these as appearing in the balance sheet.
In regard to the deposit items, the proper reflection in the books of accounts of
the bank shall be debit entries. These in turn will affect the cash and other cash
items accounts. The use of proof sheets greatly facilitates the receiving teller in
proving the day's work
THE PAYING TELLER

The paying teller is sometimes alluded to as the first teller. However, this rather
seems to be a misnomer after we have shown the fact that the receiving teller
logically fills this frontal position. Nonetheless, it is an accepted fact that the
degree of responsibility of the greater than that of the receiving teller. Hence,
referring to him as the first teller may, thus, have some justification after all.
The paying teller is the one who pays out cash in exchange for checks and other
instruments necessitating encashment. Thus, his detailed functions will include
the counting and verification of the cash received from the cashier, the keeping
and safeguarding of the supply of cash, the paying or cashing of checks
presented by customers, the distribution of the items exchanged for cash to the
proper departments of the bank, and proving the day's work.
A short description of the functions might give us the proper perspective with to
what a paying teller does in the performance of his duties.
Early in the morning, just before the bank opens its doors for business for the
day, the paying teller will receive from the cashier the necessary amount of cash,
which he determines, through experience, to be used for the normal
requirements. The currency he receives will also be of different denominations
as gauged from past performance to meet customer's needs. He have had some
excess from the previous day's operations and so he adds this to the money
released to him the next day. He sees to it that such money is kept well and that
the supply is enough to meet the normal needs for the day.
As checks or other items for encashment are presented to him, he first examines
them to avoid any liability on the part of the bank which might be caused by his
negligence. If everything is in order, he renders the payment and after which he
stamps the instruments accordingly to indicate discharge of the same. Just like
97
Davao del Norte
the receiving teller, he also sorts out the items exchanged for cash to facilitate
their distribution at the end of the day.
Lastly, he proves that all his work is in order for the day. He makes an actual
count of the cash left to ascertain if it tallies with his proof sheet. He may also
have an excess or deficiency. Hence, he should look for the error and make the
necessary correction.
In order that he may be relieved of the responsibilities attached to his duties, he

examines the items exchanged for cash in relation to:
a. The date of the check. He makes sure that the check is neither post-dated
not stale. If the check is post-dated, he must not pay; if stale, he should likewise
not pay but request the person presenting it to refer the same to the drawer of
the check. Otherwise, he may put his bank in a predicament, perhaps
unnecessary liability.
b.Wrong endorsement. The paying teller, as is true with the receiving teller,
must be sure that the endorsement is correctly effected at the back of the
instrument. Hence, liability of endorsers will be pinpointed rather than obscured.
c.Material alteration. As mentioned already, this will refer to erasures or
changes on the date, the payee, or the amount in words and figures. The paying
teller must exercise greater care in these alterations than the receiving teller. For
once he pays, it will be hard to retrieve what has been paid. Hence, his
negligence will again jeopardize the bank's interest.
d.Forgery. This aspect is the concern of the paying teller as he has access to
the depositor's specimen signature before payment. Hence, his bank might
suffer the loss in some instances if the paying teller does not exercise caution
and care in determining whether the check is forged either as to the signature or
other parts of the check. A payee's name, for example, could also be changed
through sheer ingenuity.
e.Crossed checks. Crossed checks are of two kinds, either crossed specially or
generally. The paying teller should scrutinize the check to determine the extent
of the bank's commitment on such check. Such checks are meant for deposit
rather than for encashment, in most cases.
f.Stop-payment order. When a check is lost or for any other reason the owner
wishes to withhold its payment, the drawer requests the bank to stop its
payment. The bank provides a signal to indicate the “Stop Payment Order."
Such will be kept among the depositor's ledgers, so that the paying teller could
determine beforehand whether the drawer wishes to stop payment on the check.
Hence, the paying teller should heed the order.
g.Insufficient funds. The paying teller must also determine whether or not the
drawer of the check has sufficient funds to cover the same. Otherwise, it may
cause loss on the part of the bank. Sometimes, depositors may not keep an
accurate record, so they may issue checks in excess of their deposits. It may
also work out the other way around. It may be that deposits made were not
98
Davao del Norte
properly accounted for. Hence, care must again be taken in this regard. In any
case, it might bring embarrassment to the depositor or to the bank.
h.Erroneous payment. A paying teller should count the money to be paid at
least twice. For he may overpay or underpay.
i.Supply of cash. In order to be always ready with cash, a paying teller, through
constancy doing the same work, should be in a position to know how much he
gets from the cashier to meet requirements. Hence, one is guided by days
requiring "heavy withdrawals” such as paydays, nearing holidays, bank holidays,
and similar occurrences. For any indication that the bank runs out of cash in the
presence of customers could lead to loss of face and loss of confidence.
OTHER TELLERS
As the bank grows in size and volume of business, it will also have other tellers
with specific functions aside from the receiving and paying tellers. However,
these tellers will also have similar functions with only a few deviations. For
example, a mail teller will take care of deposits by mail. He, therefore, also goes
through the operations of a receiving teller. Or a teller is assigned to do nothing
but change big bills into smaller denominations or vice versa. Such teller also
does the work, sub-sellers are assigned, therefore, either to the receiving teller
or to the paying teller. Other personnel are also employed to facilitate the work of
the tellers.
HOW TO OPEN A BANK ACCOUNT
In discussing this topic, it must be borne in mind that there are different kinds of
deposits, and therefore their administration will also entail different kinds of bank
accounts. It is thus deemed wise in this respect to describe how a current
account is opened by a depositor and then to show the deviations in the case of
savings accounts. Furthermore, there will also arise some differences between
individuals and a business of different forms in the matter of opening their bank
accounts.
When a person wishes to put his money in a bank in the form of demand
deposits, he follows the procedure below in opening his account: The
prospective depositor approaches the counter marked "New Current Accounts”
and the officer behind the counter will break the ice by saying: “May I help you?”
Then the customer indicates his intention of opening a checking account.
The officer then inquires of the prospective depositor if the latter is known to the
bank officials, or whether he could give as reference any person of good moral
character and credit standing in the community or within the bank. The
prospective depositor should also present valid IDs. Upon satisfying the
requirement, the applicant is then given the necessary forms to fill out.
The forms will consist of the information card wherein questions about his
99
Davao del Norte
lineage, age, income, and other pertinent matters should be truthfully answered.
The specimen signature card is another form where he signs his name two or
three times. Sometimes, however, the information card is also the "specimen
signature card.” The applicant is likewise given the first ledger sheet where he
will write the account number assigned to him and again sign the same several
times.
After he has signed all these, the officer examines the same. The depositor is
then given the deposit slip where he will indicate the currency and credit
instruments to be deposited in his name. He hands them over to the officer who
approves the duly filled out forms.
The depositor now technically becomes the bank's creditor and he may, at his
pleasure, start writing out checks against his deposits. In case of a savings
account, practically the same procedure is followed, except that instead of a
check book, the depositor is given a passbook where the amount of deposits
and withdrawals are to be entered and properly initialled by the teller. A receipt
for the deposit, therefore, becomes unnecessary. When the depositor wishes to
withdraw from his account, he simply fills out in a withdrawal slip. If the depositor
cannot go to the bank himself, he fills out the withdrawal slip and names his
representative. The authorized signature of the depositor and that of the
representative will then be examined before the paying teller hands the money to
the representative. As usual, the amount is entered in the passbook and is
properly initialled.
In case of a savings account with ATM card, the same procedure with savings
account is also followed, except that instead of a passbook, the depositor is
given a receipt for his initial deposit. After two weeks, he returns to the bank to
claim his card bearing his name and card number on the front. The ATM card is
used in various banking transactions such as deposit, withdrawal, account
balance inquiry, and bills payment. The depositor can access his account 24
hours a day through the bank's ATMs located anywhere in the country. If the
bank is a member of banks consortium like BancNet or Megalink, its depositor
can access his account in any ATMs of the consortium which are located
nationwide.
As a matter of marketing strategy, some banks offer to depositors a combination
of current and savings with ATM-operated accounts. In this case, funds can be
withdrawn either through check or through ATM.In case of current and savings
accounts, partnerships should present the articles of co-partnership and indicate
who is authorized to sign checks or withdraw deposits. For corporations, the
articles of incorporation and by-laws are usually required to be presented,
together with the board resolution indicating the officer/officers who may sign
checks and also withdrawal slips for savings accounts.
For accounts opened under joint names, both parties must sign the check in
100
Davao del Norte
case of current accounts or the withdrawal slip in case of savings accounts. A
joint account would appear as Jose and Maria Cruz. However, if the account
appears as "Jose and/or Maria Cruz," then either one of the depositors may sign
the check (for current accounts) or the withdrawal slip (for savings accounts).
In case the account is opened for and in the name of a minor, the guardian signs
for and in behalf of the minor.Anybody can make a deposit either in a current
account or a savings account for and in the name of the depositor. Anyone can
also present a check against a current account of an individual, partnership, or
corporation. But in case of savings accounts, the depositor himself must
personally withdraw or he may name his representative through a written
withdrawal slip, and by presenting the passbook.
After the initial steps in opening the accounts, as they become regular
depositors, the persons or entities will subsequently deal only with the receiving
and paying tellers, as the case may be, and no longer with the officer handling
“New Accounts."It will also form part of the teller's functions to advise the
depositors on matters where they need help and guidance as in filling out
deposit slips, in exchanging foreign currency, as well as in facilitating banking
transactions which will otherwise get on the nerves of impatient customers.
CURRENT VERSUS SAVINGS ACCOUNTS

There are some significant differences which the tellers must be aware of and
which the depositor must know in order to keep his account with the bank. Such
distinctions will be in the initial deposit, the service fees, the penalty for issuance
of bouncing checks, the age of depositors, the minimum balances for purposes
of interest payments or imposition of service charges, and others.
101
Davao del Norte
Inc.
Bookstore, Inc.
accountid=31259
Let’s Check
Activity 1: Explain the following term by giving an actual event
1. The date of the check.
________________________________________________________________
________________________________________________________________
________________________________________________________________
2. Wrong endorsement.
________________________________________________________________
________________________________________________________________
________________________________________________________________
3. Material alteration.
________________________________________________________________
________________________________________________________________
________________________________________________________________
4. Forgery
________________________________________________________________
________________________________________________________________
________________________________________________________________
5. Crossed checks
________________________________________________________________
________________________________________________________________
102
Davao del Norte
________________________________________________________________
6. Stop-payment order.
________________________________________________________________
________________________________________________________________
________________________________________________________________
7. Insufficient funds.
________________________________________________________________
________________________________________________________________
________________________________________________________________
8. Erroneous payment.
________________________________________________________________
________________________________________________________________
________________________________________________________________
9. Supply of cash.
________________________________________________________________
________________________________________________________________
________________________________________________________________
Let’s Analyze
1. Give at least two strategy in enticing banking activities.
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
In a Nutshell
is done for you.
1.There are some significant differences which the tellers must be aware of
and which the depositor must know in order to keep his account with the
bank. Such distinctions will be in the initial deposit, the service fees, the
penalty for issuance of bouncing checks, the age of depositors, the
minimum balances for purposes of interest payments or imposition of
103
Davao del Norte
service charges, and others.

2.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
3.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
4.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
5.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
Q&AList
104
Davao del Norte
1.
2.
3.
4.
5.
Keyword Index
PAYROLLS BANK SERVICES LOAN FUNCTION

COMMERCIAL BANK CREDIT INFORMATION CREDIT INFORMATION
EQUITY INVESTMENTS RENTAL ADVISORY FUNCTION
SAFE DEPOSITS
ENTERPRISES UNIVERSAL BANK
BASES
COMMERCIAL BANK EXCHANGE FUNCTION SALE OF DRAFTS
DEPOSIT FIXED FUNCTION COLLECTION AGENT
Big Picture in Focus: ULOe. Understand the nature and basic

concepts of Philippine deposit insurance corporation.
Metalanguage
INSURANCE CORPORATION - policies to protect individuals and businesses
against the RISK of financial losses in return for regular payments of
PREMIUMS.An insurance company operates by pooling risks amongst a large
number of policyholders.
AUTHORITY- the power or right to give orders, make decisions, and enforce
105
Davao del Norte
obedience.
BOARD OF DIRECTORS- is an elected group of individuals that represent
shareholders. The board is a governing body that typically meets at regular
intervals to set policies for corporate management and oversight. Every public
company must have a board of directors.
POWERS AND DUTIES - powers of an ambassador are specified in his or her
credentials, or documents of introduction, which the ambassador submits to the
foreign government.
Essential Knowledge
PHILIPPINE DEPOSIT INSURANCE CORPORATION

This chapter focuses on the role of the Philippine Deposit Insurance Corporation
(PDIC) in relation to deposits and banks going into bankruptcy. It present the
composition and authority of the PDIC board of directors and the powers and
duties of this president.
THE ROLE OF THE PDIC
The Philippine Deposit Insurance Corporation (PDIC) is the second pillar of

support to the Philippine banking industry. It is an addition to the central funding
facility of the BangkoSentralngPilipinas (BSP). Its mission is, broadly, to provide
adequate depositor protection and education, and the immediate processing and
settlement of depositor claims. While the BSP exist to supervise the general
banking industry, the PDIC serves to protect and guide the public, thereby
enhancing their trust in the banking system.
As an attach agency of the Department of Finance, the PDIC is a government

corporation created by virtue of R.A. 3691 for the purpose of insuring deposits in
banks that are entitled to the benefit of insurance. The Republic Act No. 3691
was amended in 1992 not only to increase the PDIC’s capitalization but also to
include receivership and liquidation as its additional important functions. Its
creation was precipitated by the closure of a number of banks in the early 60’s.
The old Central Bank of the Philippines (CBP) had to quickly initiate legislation
patterned after the deposit insurance act of the United States federal
government. Since its inception, the PDIC endured waves of banks failures
106
Davao del Norte
especially during the financial crises that hit the 1980’s and the Asian debacles
in the 1990s.
The PDIC draws upon its net insurance reserves or consolidated resource in the
carrying out of its operations. Its investment income has grown stronger over the
years because of financial strengthening measures and bank monitoring
activities. As of March 2000, its net insurance reserves or consolidated
resources available to cover insurance claims from banks closures reached
₱24.14 billion. It extends insurance coverage to 967 member banks, composed
of 52 commercial banks, 116 thrift banks, and 799 rural banks. The amount of its
insured deposits reached ₱377.03 billion.
BOARD OF DIRECTORS: COMPOSITION AND AUTHORITY

The powers and functions of the PDIC are vested in and exercised by a board of
directors consisting of (5) members. The following constitute the membership of
the board of directors:
1.The Secretary of Finance, who is the ex-officio chairman of the board without
compensation;
2.The Governor of the BangkoSentral, who is an ex-officio member of the board
without compensation;
3.The President of the Corporation, who is appointed by the president of the
Philippines from either the government or private sector to serve on full-time
basis for a term of six (6) years. The president also serves as vice chairman of
the board.
4.Two (2) members from the private sectors are appointed for a term of six (6)
years without reappointment by the president of the Philippines.
No person shall be appointed as member of the board unless he is good moral

character and of unquestionable integrity and responsibility, and who is of
recognized competence in economics, banking and finance, law, management
administration or insurance, and shall be at least thirty-five (35) years old. For
the duration of their tenure or term in office and for the period of one year
thereafter, the appointive members of the board shall be disqualified from
holding any office, position, or employment in any insured banks.
The board of directors shall have the authority:

1.To prepare and issue rules and regulations it considers necessary for the
effective discharge of its responsibilities;
2.To direct the management, operation, and administration of the Corporation;
3.To appoint, establish the rank, fix the remuneration, and remove any officers or
employee of the Corporation for cause, subject to Civil Service and pertinent
compensation laws; and
4.To authorize such expenditures by the Corporation as are in the interest of the
effective administration and operation of the Corporation.
107
Davao del Norte
PRESIDENT: POWERS AND DUTIES
The President of the Corporation is the Chief Executive. His salary is fixed by the
president of the Philippines at sum commensurate to the importance and
responsibility attach to the position. His powers and duties are:
1.To prepare the agenda for the meeting of the board and to submit for the
consideration for the board the policies and measures which he believes to be
necessary to carry out the purpose and provisions of this Act;
2.To execute and administer the policies and measures approved by the board;
3.To direct and supervise the operations and internal administration of the
Corporation in accordance with the policies established by the board. The
president may delegate certain administrative responsibilities to other offices of
the Corporation, subject to the rules and regulations of the boards;
4.To represent the Corporation, upon prior authority of the board, in all dealings
with other offices, agencies, and instrumentalities of the government and with all
other persons or entities, public or private, whether domestic, foreign, or
international;
5.To authorize, with his signature, upon prior authority of the board, contracts
entered into by the Corporation, notes and securities issued by the Corporation,
notes and the annual reports, balance sheets, profits and loss statement
correspondence and other documents of the Corporation. The signature of the
president may be in facsimile wherever appropriate;
6.To present the Corporation, either personally or through counsel, in all legal
proceedings or actions;
7.To delegate, with the prior approval of the board of directors, his power to
represent the Corporation to other officers of the Corporation; and
8.To exercise such other powers as may be vested in him by the board.
The president is assisted by a vice president and officials whose appointment

and removal shall be approved and whose salary are fixed by the board of
directors upon recommendation of the president of the Corporation. During the
absence or temporary incapacity of the of the president, or in any case of
vacancy or permanent incapacity and pending the appointment of a new
president of the Corporation by the president of the Philippines, the vice
president acts as the president and discharges the duties and responsibilities
thereof.
SOURCES OF FUNDS
The principal sources of corporate funds are the capital infusion of government
in the form of a Permanent Insurance Fund (PIF) which was initially capitalized
at ₱5 million, incomes from insurance premium assessments on member banks,
and investment in government securities. Borrowing from the BangkoSentral
supplement these resources.
From the initial ₱5 million in 1963, the PIF was gradually increased over the
108
Davao del Norte
years to ₱2 billion by 1985. However, even with assessment premium at the
maximum rate then authorized by law, resources were grossly inadequate to
meet insurance claims resulting from a series of bank closures in the 1980s. The
only recourse was to borrow from the then Central Bank of the Philippines (CBP)
with initial amount of P13 million in 1972; surging to ₱1.07 billion by 1985, and
again to ₱2.75 billion by 1990.
The amendment to the R.A. 3591 contained in the R.A.7400 which was enacted
in 1992 raised the PIF to ₱3 billion. Complementing the capital increases to
strengthen the financial capacity of the Corporation, the maximum annual rate
for insurance premium assessed against total deposits more than doubled from
– to –of one percent. Premium collections increased 186 percent in 1993 over
the preceding year when the new rate was made effective. Thereafter,
collections paralleled strong deposit growth in the banking Industry. Investments
increased as debts were reduced with the strengthening of capital and greater
collections in premium.
BANK MONITORING AND EXTENSION OF FINANCIAL ASSISTANCE

The best protection for depositors is ensuring that the banks operate along
prudential norms and are managed well. This is achieved through effective
supervision and monitoring of bank's performance, that complement the powers
of the BSP. Previously, the PDIC conducts independent field examinations to
correct unsafe and unsound practices of banks. With the passage of the New
General Banking Law, the PDIC examinations are focused on banks provided
with financial assistance and on banks proposed for mergers to determine their
viability under new conditions. Special investigations are also held on selected
banks for assessment audit of general ledgers covering deposits, and for
examination of trust and cash operations.
The Corporation, likewise, extends financial assistance to banks in order to

protect the interest of depositors. Assistance is provided if there is a viable
rehabilitation plan premised on the full restoration of capital and entry of
competent and professional management. As a matter of policy, the cost of
PDIC assistance should be less than the cost the PDIC expects to incur if the
bank were to be closed.
Termination and Reinstatement of Insured Status of Banks
Pursuant to the provisions in R.A. 3591, as amended, and in relation to the PDIC
Amendment Rules and Regulations, PDIC issued the following guidelines on the
termination and reinstatement of insured status of banks due to non-payment of
assessment:
1.PDIC shall terminate the insured status of a bank upon its continued failure of
refusal to pay the assessment, due semi-annually, computed by multiplying the
assessment rate as determined by the PDIC Board of Directors and the banks
109
Davao del Norte
liability for deposits.
2.First demand letters shall be sent to banks through registered mail, thirty (30)
days after the 31 January and 31 July prescribed deadlines for filing of certified
statements and remitting the corresponding assessments. Interest charges at
the legal rate of twelve percent (12%) per annum, reckoned from due date/s,
shall be imposed upon these banks.
3.Failure to comply within thirty (30) days after receipt of the first demand letter
shall constitute willful failure or refusal by the bank to file the required certified
statement and pay the corresponding assessment and interest charges.
Thereafter, PDIC shall send the second demand letter through registered mail.
Penalty charges at twice the rate of interest charges or twenty-four percent
(24%) per annum shall be added thereon, reckoned thirty (30) days from receipt
of the first demand letter
4.Termination proceedings of the bank's insured status shall start thirty (30) days
after receipt by the bank of the PDIC's second demand letter.
5.The third and final demand letter shall be sent to the bank through registered
mail. Should the bank still fail to remit the assessment payment, including
interest and penalty charges within thirty (30) days from the date of mailing of
the third and final demand letter, the PDIC shall terminate the banks insured
status which shall be effective after the lapse of said thirty (30) days, whether or
not said demand letter has been actually received by the bank.
6.The order of termination shall be sent to the bank, by such mode of service as
may be expeditious and efficient, upon the expiration of the thirty-day period
from date of mailing of the third and final demand letter. The order of termination
shall be final and executory until set aside, modified or suspended by the PDIC
Board of Directors.
7.The Corporation shall publish the order of termination of the insured status in a
newspaper of general and/or local circulation for three (3) consecutive days. The
cost of said publication shall be chargeable to the bank. Immediately upon
receipt of the order of termination from the Corporation, the bank shall give
written notice of such termination to each of the depositors at his last address
recorded in the books of the bank. Willful failure by the bank to do so shall
subject its directors and/or officers to an administrative fine not exceeding one
thousand pesos (P1, 000.00) per day and/or render them criminally liable for
violation thereof, which is punishable by a fine of not more than twenty thousand
pesos (P20, 000.00) and by imprisonment of not more than five years.
8.Failure of the bank for whatever reason to give written notice to the depositors
shall not in any way affect the validity and affectivity of the order of termination of
insured status against the depositors of the bank.
9.The insured deposits of each depositor in the bank as of the effective date of
termination, less all subsequent withdrawals/debit adjustments from any
deposits of such depositor, shall continue to be insured for a period of ninety
(90) days from the date of such termination. No additions to any such deposits
and no new deposits in such bank after the date of such termination shall be
insured by PDIC.
110
Davao del Norte
10.The bank whose insured status has been terminated shall not advertise nor
hold itself out as having insured deposits unless, in the same connection, the
bank shall state with equal prominence that such additions to the insured
deposits and new deposits made after such termination are not so insured. Any
director/officer of such bank who violates or causes the violation of the foregoing
shall be criminally liable.
11.A bank whose insured status has been terminated may request for the
reinstatement of its insured status by means of a written application filed with the
Corporation. The PDIC Board of Directors may approve such application based
on a recommendation that: (a) the cause or causes for termination of insured
status has/have been corrected, and (b) that the bank may continue to operate
with insurance cover to its depositors, creditors, and the general public, thereby
not exposing the Deposit Insurance Fund to undue risk.
PAYMENT OF INSURED DEPOSIT CLAIMS

The maximum deposit insurance coverage is P100, 000.00 per depositor. All
deposit Payment of Insured Deposit Claims accounts by a depositor in a closed
bank maintained in the same right and capacity shall be added together. The
amount in excess of P100, 000.00 coverage, if the closed bank is rehabilitated or
taken over by another bank, can still be claimed upon final liquidation of the
remaining assets of the closed bank. The claim may be filed with the liquidator of
the closed bank after filing the claim for insured deposits. However, if the closed
bank is rehabilitated, the excess deposits are usually assumed by the
rehabilitator. The schedule of payment beyond the P100, 000.00 maximum
insurance shall be based on priorities set by law. Under the law, claims for
deposit in excess of the insured P100, 000.00 will be settled together with claims
of other ordinary creditors, after preferred claims like government taxes, labor
claims, secured credits, and trust funds are settled.
From January 1992 to July 2000, 139 banks were closed, consisting of two (2)
commercial banks, 13 thrift banks and 124 rural banks. The estimated insured
deposits in these closed banks amounted to P9.10 billion. PDIC has already paid
P6.06 billion or 66.6 percent of insured deposits. In terms of number of accounts,
the said amount corresponded to 191,871 accounts or only 30.6 percent of the
insured number of accounts.
The PDIC continues to adopt measures to expedite claims settlement process.

Procedure of claiming insured deposits is facilitated by simplifying documentary
requirements, particularly for depositors with small balances. Cash payments at
the site for insured deposit claims have been increased from P200 to P1, 000.
Information dissemination schemes have been rationalized to reach target
depositors as well as through continuing networking with local communities. An
emergency pay-out facility has been implemented allowing payment of insured
deposits, under meritorious cases, even before the start of claims settlement
operations.
111
Davao del Norte
Immediate settlement of claims of insured deposits is usually hampered by the

poor bank records which are available to the PDIC only upon closure. Another
reason is delay in turnover of records of closed banks caused by resistance of
some bank owners contending the closure. Nevertheless, the period between
bank closure and start of claims payment has been significantly shortened from
an average of nine months to three months through constant improvements in
service delivery strategies.
BANK RESERVES
The bank reserves are set up primarily to ward off any possible embarrassment
on the part of the bank and to insure the protection of the depositors and
investors. The bank's management uses its wise discretion on such allocation of
bank's assets into reserve. For the management alone is in a position to
determine in what proportions and compositions these may be; although, the
bank supervisory and regulatory agencies often attach much importance on how
such reserves are manipulated by banks.
The bank reserves should not be construed to mean the ordinary accounting
reserves which may either be valuation or funded reserves, or the liability and
surplus reserves. The bank reserves are also termed asset reserves comprising
of the primary, secondary, investment, working, and legal reserves. These are
made up of the bank's assets deployed in such a fashion as not to cause any
threatening or precipitating bank embarrassment or even bank failure. Such
reserves do not, however, appear in the balance sheet but rather are imaginary
a sense although constructive enough in function.
This chapter discusses the bank reserves such as the primary, secondary,
investment, recent working, and legal reserves. The provisions of the New
Central Bank Law on reserve requirements are also presented.
PRIMARY RESERVES
The primary reserve consists mainly of the highly liquid assets of the bank and
its main objective is to maintain the bank's liquidity and solvency. For liquidity is
one of the basic problems of bank management. Such position would be that
wherein there exists an outlay of cash and near cash items. Hence, the bank
keeps primary reserves in the form of non-earning assets. The problem then lies
in how much is ideal to keep at all times to insure the bank's liquid position.
Sometimes, this leads to doing away with earnings.
A bank may keep primary reserves in the form of cash in its vaults, deposits with
the central bank (legal reserves); deposits with other banks, exchanges for the
clearing house and checks for collection. These items may fall under the
classification of excess reserves, working reserves, or legal reserves.
112
Davao del Norte
When a bank can meet the demand of depositors or normal window
requirements, then it will earn the trust and confidence of the public. Otherwise,
rumors may fly and spread like wildfire which will bring a “bank run” (that is, all
depositors will come to claim their deposits). Such occurrence will endanger not
only the individual bank but the banking system and even the whole economic
structure. Thus, the banks do their best to keep the right amount of primary
reserves not too much to deny the bank income from investments, neither too
little to jeopardize the banks' position in the community.
The legal reserves form part and parcel of the primary reserve. It is sometimes
alluded to as the required reserve due to the fact that supervisory and regulatory
agencies impose this requirement uniformly and without discrimination on all
banks. In the Philippines, the BangkoSentralngPilipinas, being the monetary
authority, has jurisdiction over all banks and, therefore, requires the setting up of
legal reserves. Such reserves are usually kept at the BangkoSentral or at the
bank's vault.
This reserve is usually a percentage of demand and time deposits, which may
either be in cash or a combination of cash and highly marketable securities. Its
composition, however, will depend on the discretion of the monetary authority
which usually determines the same on the basis of the prevailing economic
situation. For instance, during an extreme inflation, the BangkoSentral imposes
that the reserve be kept in spot cash, rather than securities and cash, to effect a
reduction in money supply.
The function of the legal reserve is to meet the depositors' demand for cash. But
it seems nowadays that its main function is as an instrument of credit control on
the part of the monetary authority. The banks can only draw on these reserves
from the BangkoSentral in cases of extreme need to meet depositors'
withdrawals.
To have a wholesome picture of the setting up of legal reserves as well
as all its other facets, we quote hereunder the pertinent provisions of the
Republic Act 7653 (New Central Bank Act of 1993), as embodied in Chapter IV,
Article VII, entitled “Bank Reserves."
Sec. 94. Reserve Requirements. In order to control the volume of money

created by the credit operations of the banking system, all banks operating in the
Philippines shall be required to maintain reserves against their deposit liabilities.
Provided, that the Monetary Board may, at its discretion, also require all banks
and/or quasi-banks to maintain reserves against funds held in trust and liabilities
for deposit substitutes as defined in this Act. The required reserves of each bank
shall be proportional to the volume of its deposit liabilities and shall ordinarily
take the form of a deposit in the BangkoSentral. Reserve requirements shall be
applied to all banks of the same category uniformly and without discrimination.
Reserve against deposit substitutes, if imposed, shall be determined in the same
113
Davao del Norte
manner as provided for reserve requirements against regular bank deposits, with
respect to the imposition, increase, and computation of reserves.
The Monetary Board may exempt from reserve requirements deposits and
deposit substitutes with remaining maturities of two (2) years or more, as well as
interbank borrowings.
Since the requirement to maintain bank reserves is imposed primarily to control

the volume of money, the BangkoSentral shall not pay interest on the reserves
maintained with it unless the Monetary Board decides otherwise as warranted by
circumstances.
Sec. 95. Definition of Deposit Substitutes. The term “deposit substitutes" is

defined as an alternative form of obtaining funds from the public, other than
deposits, through the issuance, endorsement, or acceptance of debt instruments
for the borrower's own account, for the purpose of relending or purchasing of
receivables and other obligations. These instruments may include, but need not
be limited to, bankers' acceptances, promissory notes, participations, certificates
of assignment and similar instruments with recourse, and repurchase
agreements. The Monetary Board shall determine what specific instruments
shall be considered as deposit substitutes for the purposes of Section 94 of this
Act. Provided, however, that deposit substitutes of commercial, industrial, and
other non-financial companies for the limited purpose of financing their own
needs or the needs of their agents or dealers shall not be covered by the
provisions of Section 94 of this Act.
Sec. 96. Required Reserves Against Peso Deposits. The Monetary Board
may fix and, when it deems necessary, after the minimum reserve ratios to peso
deposits, as well as to deposit substitutes, which each bank and/or quasi-bank
may maintain, and such ratio shall be applied uniformly to all banks of the same
category as well as to quasi- banks.
Sec. 97. Required Reserves Against Foreign Currency Deposits. The

Monetary Board is to similarly authorized to prescribe and modify the minimum
reserve ratios applicable deposits denominated in foreign currencies.
Sec. 98. Reserve Against Unused Balances of Overdraft Lines. In order to

facilitate BangkoSentral control over the volume of bank credit, the Monetary
Board may establish minimum reserve requirements for unused balances of
overdraft lines.
The powers of the Monetary Board to prescribe and modify reserve
requirements against unused balances of overdraft lines shall be the same as its
powers with respect to reserve requirements against demand deposits.
Sec. 99. Increase in Reserve Requirements. Whenever in the opinion of the

114
Davao del Norte
Monetary Board it becomes necessary to increase requirements against existing
liabilities, the increase shall be made in a gradual manner and shall not exceed
four percentage points in any thirty-day period. Banks and other affected
financial institutions shall be notified reasonably in advance of the date on which
such increase is to become effective.
Sec. 100. Computation on Reserves. The reserve position of each bank or

quasi-bank shall be calculated daily on the basis of the amount, at the close of
business for the day, of the institution's reserves and the amount of its liability
accounts against which reserves are required to be maintained. Provided, that
with reference to holidays or non-banking days, the reserve position as
calculated at the close of the business day immediately preceding such holidays
and non-banking days shall apply on such days.
For the purposes of computing the reserve position of each bank or
quasi- bank, its principal office in the Philippines and all its branches and
agencies located therein shall be considered as a single unit.
Sec. 101. Reserve Deficiencies. Whenever the reserve position of any bank,
computed in the manner specified in the preceding section of this Act, is below
the required minimum, the bank or quasi-bank shall pay the BangkoSentral one-
tenth of one percent (1/10 of 1%) per day on the amount of the deficiency or the
prevailing ninety-one-day treasury bill rate plus three percentage points,
whichever is higher. Provided, however, that banks and quasi-banks shall
ordinarily be permitted to offset any reserve deficiency occurring on one or more
the week with any excess reserves which they may hold on other days of the
week and shall be required to pay the penalty only on the average daily
deficiency during the week. In cases of abuse, the Monetary Board may deny
any bank of quasi-bank the privilege of offsetting reserve deficiencies in the
aforesaid manner.
If a bank or quasi-bank chronically has a reserve deficiency, the
Monetary Board may limit or prohibit the making of new loans or investments by
the institution and may require that part or all of the net profits of the institution
be assigned to surplus.
The Monetary Board may modify or set aside the reserve deficiency
penalties provided in this section, for part or the entire period of a strike or
lockout affecting a bank or a quasi-bank as defined in the Labor Code, or of a
national emergency affecting operations of banks or quasi-banks.
Sec. 102. Interbank Settlement. The BangkoSentral shall establish facilities for
interbank clearing under such rules and regulations as the Monetary Board may
prescribe. Provided, that the BangkoSentral may charge administrative and
other fees for the maintenance of such facilities.
The deposit reserves maintained by the banks in the BangkoSentral in
accordance with the provisions of Section 94 of this Act serve as basis for the
clearing of checks and the settlement of interbank balances, subject to such
115
Davao del Norte
rules and regulations as the Monetary Board may issue with respect to such
operations. Provided that any bank which incurs on overdrawing in its deposit
account with BangkoSentral shall fully cover said overdraft, including interest
thereon at a rate equivalent to one-tenth of one percent of (1/10 of 1%) per day
or the prevailing ninety-one-day treasury bill rate plus three percentage points,
whichever is higher, not later than the next clearing day. Provided, further, that
settlement of clearing balances shall not be effected for any account which
continues to be overdrawn for five (5) consecutive banking days until such time
as the overdrawing is fully covered or otherwise converted into an emergency
loan or advance pursuant to the provisions of Section 84 of this Act. Provided,
finally, that the appropriate clearing office shall be officially notified of banks with
overdrawn balances. Banks with existing overdrafts with the BangkoSentral as
of the effectivity of this Act shall, within such period as may be prescribed by the
Monetary Board, either convert the overdraft into an emergency loan or advance
with a plan of payment, or settle such overdrafts, and that upon failure to so
comply herewith, the BangkoSentral shall take such action against the bank as
may be warranted under this Act.
Sec. 103. Exemption from Attachment and Other Purposes. Deposits

maintained by banks with the BangkoSentral as part of their reserve
requirements shall be exempted from attachment, garnishments, or any other
order or process of any court, government agency or any other administrative
body issued to satisfy the claim of a party other than the government, or its
political subdivisions or instrumentalities.
As one of the instruments of monetary policy, therefore, the level of legal
reserves, together with other similar complementing measures, will serve to
bring about normal price levels or economic stability.
Another form of primary reserve is the working reserves. This is
composed of vault cash in excess of legal requirements and balances with other
banks which are used to meet the depositors' demands. The amount of working
reserves vary in size depending upon several factors. An approaching holiday
season may require a bank to increase its vault cash. An impending “bank run”
may likewise lead to keeping sizable amounts of cash.
There is no hard and fast rule to be followed by banks in setting up their
working reserves. However, by “rule of thumb" bank management avails of its
discretion to keep the minimum to avoid unnecessary temptation upon those
holding the bank's cash, as well as to employ the otherwise idle funds to
productive uses.
Excess Reserves are those over and above the legal reserve
requirements. Besides, it could also be the amount in excess of working
reserves. Hence, whatever is above the required working reserves may be
deemed as excess reserves. Such could be put to good use so that bank may
increase its earnings.
FACTORS AFFECTING SIZE OF PRIMARY RESERVE REQUIREMENTS
Several factors may be considered in order to determine whether the bank has
116
Davao del Norte
just the right amount in the form of primary reserves. These have evolved from
banking experience and perhaps from pure managerial intuition. Nonetheless,
they may well be considered contributory to the successful allocation of bank
reserves, particularly the cash or primary reserve which is known as the bank's
first line of defense.
1.The number of depositors and the diversity of their business interests.

These influence bank management in fixing the primary reserve. To cite an
example, a bank may need heavy cash outlays or withdrawals. In such a case,
the bank needs only a small percentage of cash reserves. On the contrary,
another bank may have a few depositors whose business interests do not need
bigger cash requirements. In this latter case, the bank should have a larger
percentage of cash reserves.
2.The confidence of the public on the bank. A new bank needs a greater
amount of cash to meet normal window requirements since it is still in the stage
of attracting customers. The moment the bank earns the esteem of the public, it
could safely operate on a smaller percentage of cash. However, this is not
absolutely true in all cases. For an older institution may of necessity also provide
higher cash outlays due to loss of confidence because of mismanagement or
some other reasons leading to public distrust.
3.The nature of a banks deposits. This is also a determinant of cash
requirements. This means particularly the proportion of current or time deposits
to total deposits. If there are more demand deposits, then there should be a
bigger cash outlay because the bank must be ready to satisfy the depositor's
demand. On the other hand, a larger percentage of time deposits would need a
smaller cash outlay because these deposits are withdrawn only at maturity or
upon written notice of withdrawal. Hence, the bank could employ delaying tactics
by requiring them the notice of withdrawal should the need arise.
4.The percentage of legal reserve requirements.Such percentage will
certainly affect the cash reserves. If the monetary authority sets a high
percentage of legal reserves, then the primary reserve should be large enough
to absorb such requirements plus the normal cash as determined by other
factors. Conversely, lower legal reserve requirements will also lead to reduction
in cash reserves. Another point along this line would be the composition of the
legal reserves.
5.The percentage and quality of the secondary reserve.The secondary
reserve is the bank's second line of defences. If this consists of highly
marketable securities which could be disposed off with the least delay and
without loss, then the cash reserve should relatively be of a small percentage. A
larger percentage of secondary reserves would also mean a smaller primary
reserve. Otherwise, the opposite would be true. There is a complementary
relationship between these two reserves.
6.The demand for loans. This may also contribute to the need for cash. There
may be many small loan applicants whose cash needs may likewise be small. In
which case, the cash outlay may be of lesser percentage. Or there may be a few
117
Davao del Norte
big loan applications which would entail a tremendous cash outlay.
7.Habits and customs of the community. The existing habits and customs of a
place may also influence the size of the cash reserves. The people of the
community may not as yet be oriented to banks and the banking functions which
may lead to frequent withdrawals. In such a case, a bank should always keep
larger cash outlay. Once the people shall have overcome their apparent
misgivings regarding dishonest officials or personnel of a bank, then they may
start to withdraw less frequently. Commensurately, the bank could then slash the
percentage of cash reserves.
8.Other factors. Seasonal requirements, holidays, paydays, first day of the
week and similar circumstances may also affect the size of primary reserves. In
any case, the bank should be ready to meet the demands of depositors and thus
keep enough cash requirements to service all their needs. Such circumstances
would necessitate heavy withdrawals; hence, larger cash outlays.
A bank's requirements may not easily fit into another's. Too conservative
measures may deny the added income a bank might have by investing its idle
funds in earning assets. Too much profit to the extent of sacrificing liquidity
would likewise be unsound. Yet, to strike a happy middle ground would
nonetheless be the most difficult since banks deal with human beings whose
thoughts cannot be read in advance. To keep non-earning assets to the
minimum would reflect sound bank management and most banks strive to do
this by resorting to shiftable assets to allow for liquidity at all times.
SECONDARY RESERVES
The secondary reserve is often alluded to as a bank's next line of
defense. It is composed of earning assets which are easily converted to cash
with the least delay and without loss. The first major role played by this type of
reserve is to replenish the needs of the primary reserve. If the cash is not
needed, the next function is to keep a maximum percentage of the bank's funds
invested in earning assets.
Quality of Assets. In order that an asset could be included in the
secondary reserve, it must possess three important qualities. The asset must be
of high quality, it must be of short duration, and it must be marketable. Loans
and investments, therefore, as part of the secondary reserve must necessarily
pass such test.
For an asset to comply with the requirement of high quality, it must be
free from credit or money rate risk. Credit risk is present if the issuer's capacity
to pay is questionable so that the asset could not bring in its full value in case of
emergencies. Long maturities, on the other hand, would expose the asset to the
money rate risk due to the fluctuations in the rates of interest. These statements,
therefore, justify the careful choice of the asset included in the secondary
reserve. Furthermore, although the requirements of high quality and short
maturities are met with, conversion to cash would be futile unless there is a
ready market for the assets. Hence, when offered for sale, there should be ready
118
Davao del Norte
buyers who would buy them at the first opportunity at the offered price.
Assets in the Secondary Reserves. Having thus explored the
requirements of the assets comprising the secondary reserve, we could now
pinpoint with some accuracy what specific items could be eligible for this
purpose.
Short-term government securities fit very snugly for the role of highly
marketable assets with the highest quality for the reason that they represent
government debtor's willingness and ability to pay. Such readiness to pay is in
turn possible due to the position of the government to impose taxes and of the
citizens to pay taxes when due. The government enjoys the best credit standing.
Hence, securities in the form of treasury bills, certificates of indebtedness, and
notes qualify for secondary reserve requirements. Each of these have their own
peculiar form.
Banker's acceptances are also considered ideal for the secondary
reserve. The stamped acceptance of a bank on an order to pay which is drawn
either by an individual or al bank makes the instrument more acceptable and
negotiable. Due to the bank acceptors substitution of credit, the acceptance
meets the requirements of high quality and marketability. The instrument itself is
short term and comes mostly from foreign transactions. It is not, therefore,
exposed much to the money rate risk nor is it subject to much credit risk.
Commercial papers originating from businesses with high credit ratings
which need money for short periods of time also qualify for the secondary
requirements. Most often, such papers are sold in the open market. The dealers
are very careful in offering these papers for sale as their reputation is at stake for
any discredit on the corporation issuing these commercial papers in the form of
notes. Hence, a rigid screening and credit investigation is first undertaken before
these papers are accepted for sale. Being in the know regarding the
preliminaries in their issue, banks, therefore, buy them and place them in their
secondary reserve. For such papers could easily be resold to the dealers
themselves.
The marketability of these assets is further enhanced due to the
rediscounting facilities offered by the BangkoSentral. Open market operations of
the BangkoSentral, as an instrument of monetary management, also help banks
in securing or selling securities. Commercial papers, on the other hand, are
marketed by specialized agencies or dealers.
Loans of a short term and self-liquidating nature may safely be included
in the secondary reserve. However, sometimes there is the problem of the credit
risk meeting business reversals. Hence, care is taken by banks when loans
eligible for secondary reserve requirements are "earmarked” for this purpose.
For one thing, the diversity of the loans as to maturities and purposes could be
taken as a wise step to allow offsetting should the need arise.
Size of Secondary Reserves. The size of the secondary reserve is also
a matter of "rule of thumb" on the part of the bank. What would be the most ideal
is as good a guess as anyone would wager. Due to the close link between the
primary and the secondary reserve, certain factors influence the size of the
119
Davao del Norte
latter. Both are used to make sure that the bank meets the demand of
depositors. Shiftability then is the prime consideration. Furthermore, the
secondary reserve has the added task of bringing earnings to the bank.
INVESTMENT RESERVE
The investment reserve is an economic rather than an accounting term
as in the case of primary and secondary reserves. Assets which do not qualify
for the first two reserves could conveniently be deemed as eligible for the
investment reserve.
Assets Eligible For Investment Reserve. Investments imply funds that
are used for long term purposes, particularly in corporate securities. So, the
assets comprising the investment reserves are not as liquid as those in the
primary reserve nor as easily converted into cash as those of the secondary
reserve. They are items of longer maturities which are spaced at even intervals
to allow for a continuous intake and reinvestment of funds. The purpose of
having such reserve is to earn and to be able to meet any unanticipated major
losses resulting from bank failure. However, with the proper governmental
supervision and efficient banking methods, reversals in banking business seem
remote. The investment reserve of banks, therefore, is expected to earn income.
Stocks and bonds are popular assets in the investment reserve. Such
securities must meet the qualities of safety, regularity of income, and liquidity
because of their long term nature. They are subjected not only to the money rate
risk but also to the credit risk and price level risk. Likewise, securities are prone
to be hit by business risks because they are owned by businesses.
Moreover, the diversification of investments certainly offers a cautious
device on the part of the banks. “Putting the eggs in several baskets” could
definitely lead to offsetting the loss in one investment by the gain in another. To
diversify the investments as to maturity, geographically, industrially, and as to
form might be just the proper thing banks would do.
Conclusively, allocating the bank's assets into reserves implies some
degree of difficulty on the part of the banks' management. It certainly
necessitates astute bank management to be able to have the ideal sizes to bring
about a balance between the bank's liquidity, solvency, and profitability. It would
approximate perhaps a juggler who has mastered the art after several failures
and exposure to ridicule. A bank, likewise, whose management has overcome
its early errors and acquired competence in the allocation of reserves, may very
well earn the esteem of the public-its main goal in order to stay in business.
BSP'S CURRENT POLICIES ON RESERVE REQUIREMENTS

1.The Monetary Board, in Circular No. 319 (Resolution No. 63 dated 17
January 2002, as amended by MB Resolution No. 163 dated 31 January
2002), approved the reduction in the liquidity reserve requirement against peso
demand, savings, time deposits, and deposit substitute liabilities of Universal
Banks (UBs) and Commercial Banks (KBs) and Non-bank Financial
Intermediaries with quasi-banking functions (NBQBs), by two percentage points
120
Davao del Norte
from nine percent to seven percent. The regular reserve requirements are
maintained at nine percent.
The required liquidity reserves may be maintained in the form of short-term

market yielding government securities purchased directly from
BangkoSentralngPilipinas Treasury Department, pursuant to Circular 10 dated
29 December 1993.
2.Reserves Against Peso-Denominated Common Trust Funds

Pursuant to memorandum to All Commercial Banks and Non-Bank Financial
Intermediaries Performing Trust, Other Fiduciary Business and Investment
Management Activities dated 15 February 2002:
The Monetary Board approved the reduction in the liquidity reserve requirement
against peso denominated common trust funds (CTF) and trust and other
fiduciary activities (TOFA) - Others:
From Το
a)For universal banks
and commercial banks 10% 8%
b)For thrift banks To remain at 4%
c)For non-bank financial

intermediaries with
or without quasi-banking
functions 10% 8%
In addition to the liquidity reserves, the regular reserves against peso-

denominated common trust funds and such other managed peso funds which
partake the nature of collective investment of peso-denominated common trust
funds of all financial intermediaries authorized to engage in trust and other
fiduciary business shall be maintained as follows:
a) For universal banks and commercial banks 6%
b) For thrift banks
5%
c) For non-bank financial intermediaries with or without quasi-
banking functions 6%
d) For rural banks
4%
3.Reserves Against Trust and Other Fiduciary Accounts (TOFA) - Others

In addition to the basic security deposit required under Subsection X405.1 of the
Manual of Regulations for Banks and Subsection 4405Q.1 of the Manual of
121
Davao del Norte
Regulations for Non-Bank Financial Institutions, all financial intermediaries
authorized to engage in trust and other fiduciary business shall maintain regular
reserves against Trust and Other Fiduciary Accounts (TOFA) – Others, except
(a) accounts held under administration; (b) bond issues under deed of trust or
mortgage; (c) custodianship and safekeeping (d) depository/reorganization; (e)
employees' benefit plans under trust; (f) escrow; (g) personal trust (testamentary
or living trust); (h) executorship; (i) guardianship; (j) life insurance trust; and (k)
pre-need plans (institutional/individual).
The regular reserve against TOFA – Others shall be maintained as

follows:
a) For universal banks and commercial banks
6%
b) For thrift banks
5%
c) For non-bank financial intermediaries with or without quasi-
banking functions 6%
d) For rural banks
4%
The liquidity reserve required against TOFA-Others is the same as
that required against CTF (please refer to required liquidity reserve against
CTF).
4.Form and Composition of Reserves

Deposits maintained by financial intermediaries authorized to engage in trust
and other fiduciary business with the BSP up to forty percent of the regular
reserves against peso-denominated common trust funds as well as the regular
reserves for TOFA-Others shall be paid interest at four percent per annum
based on the average daily balance of said deposits, to be credited quarterly.
122
Davao del Norte
Inc.
Bookstore, Inc.
accountid=31259
Let’s Check
Activity 1: Explain briefly the factors affecting size of primary reserve
requirements
1. The number of depositors and the diversity of their business interests

________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
2. The confidence of the public on the bank.
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
3. The percentage of legal reserve requirements
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
4. The percentage and quality of the secondary reserve
________________________________________________________________
123
Davao del Norte
________________________________________________________________
________________________________________________________________
________________________________________________________________
.5. The demand for loans
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
In a Nutshell
is done for you.
1. The investment reserve is an economic rather than an accounting term as in
the case of primary and secondary reserves. Assets which do not qualify for the
first two reserves could conveniently be deemed as eligible for the investment
reserve.

2.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
3.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
_______________________________________________________________
4.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
124
Davao del Norte
________________________________________________________________
________________________________________________________________
5.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
Q&AList
1.
2.
3.
4.
5.
Keywords Index
RESERVE
CORPORATION BANK MONITORING
REQUIREMENTS
AUTHORITY FINANCIAL ASSISTANCE DEPOSIT SUBSTITUTES
BOARD OF DEPOSIT CLAIMS PESO DEPOSITS
125
Davao del Norte
DIRECTORS
DUTIES INSURED CURRENCY DEPOSITS
POWERS BANK RESERVES OVERDRAFT LINES
RESERVE
SOURCES OF FUNDS PRIMARY RESERVES
REQUIREMENTS
126
Davao del Norte
Big Picture C
expected to
a. Understand the nature and basic concepts of Loan and Discount

function;
b. Understand the nature and basic concepts of Exchange function; and
c. Understand the nature and basic concepts of Trust function.

concepts of Loan and Discount function.
Metalanguage
LOANS- is a form of debt incurred by an individual or other entity. The lend
usually a corporation, financial institution, or government advances a sum of
money to the borrower. In return, the borrower agrees to a certain set of terms
including any finance charges, interest, repayment date, and other conditions.
DISCOUNT- refers to an amount or percentage deducted from the normal selling
price of something. The noun discount means a reduction in price of a good or
service. You can ask the manager for a discount if the item is damaged.
DEPOSITS- is a financial term that means money held at a bank. A deposit is a
transaction involving a transfer of money to another party for safekeeping.
However, a deposit can refer to a portion of money used as security or collateral
for the delivery of a good
LOAN PORTFOLIO- is listed as an asset on the lender's or investor's balance
sheet. The value of a loan portfolio depends on both the principal and interest
owed and the average creditworthiness of the loans.
Essential Knowledge
127
Davao del Norte
THE LOAN AND DISCOUNT FUNCTION

The largest single source of bank income depends on the amount of its loans.
Such loans are comprised of advances to persons dealing in commerce and
trade/or “swapping of credits.” Hence, this bank function likewise dictates the
degree of success the institution may attain. It would, therefore, do well to look
into the different aspects of the loan function of the commercial banks, which
may be considered as the standard procedure for all other institutions dealing
with credit.
This chapter explains the loan and discount function of a bank. This includes the
relation of loans to deposits, types of loans, lines of credit, loan portfolio, loan
and discount department, procedure for loan application and processing, among
others. The provisions of the General Banking Law of 2000 on the loan limit that
anyone person or entity may obtain from a commercial bank are also cited.
Loans versus Discounts

Loans and discounts, in banking parlance, mean the same thing. These are
amounts extended to persons needing capital or for some other purpose. The
difference lies in the fact that loans are advances on which interest is collected
at maturity. Such loans, however, are treated as discounts when the interest is
deducted in advance.
Furthermore, the term “discount” signifies the accounting term that interest is
paid in advance although not yet earned. Hence, it is entered in the bank’s book
of accounts as unearned interest income. Discount could be also interpreted as
a cash deduction on the regular price of goods as an attraction to buyers. But, as
far as banks are concerned, it is nothing but a fund used to accommodate
borrowers. A bank derives more advantages when it discounts the note rather
than when interest is collected at maturity because the amount of interest
deducted in advance can again be used as available loanable funds.
For example, when a business borrows P100, 000.00 for a period of one year,
and the interest of six percent (6%) is deducted in advance, it becomes evident
that the bank withholds an amount equal to the interest of P6, 000.00. Thus, the
borrower will get only 94, 000.00, that is without considering the service charges.
The withheld amount could then be made available to other borrowers.

Whereas, if the interest is collected at maturity, the businessman would get the
whole of the P100,000.00 (less nominal service charge) and he will pay the
interest as per arrangement with the bank. That is, either interest will be added
to the full amount upon the maturity or to a regular installment paid at scheduled
dates. In such case, there is no appreciable amount withheld except the service
128
Davao del Norte
charges which may be very nominal amount in relation to the total loan.
Relation of Loans to Deposits

Loans and deposits complement each other, as the amount of loans a bank
could extend will depend largely on its ability to attract and retain large deposits.
The earning capacity of a bank will be enhanced when it has a large available
loanable fund. This could, in turn, only happen when bank enjoys the public’s
confidence so much so that big amounts of deposits find their way into bank’s
vaults and eventually into loans and investments.
Types of Loans
For the purpose of establishing the use of loan proceeds, loans may be
classified as follows:
1.As to purpose. Loans may either be commercial, agricultural, industrial,
personal, and other similar classification which will indicate for what purpose the
funds will be employed. So that if there is a program of selective credits it would
be easy for banks to program their loanable funds. If the proceeds are diverted
by the borrowers other than the purpose applied for, the bank reserves the right
to accelerate the loan’s maturity and call for its payment at once.
2.As maturity. Loans may be short term, which would mean that they are
payable within one year. They could also be immediate term, which means that
they are payable over one year but not exceeding five years. Long terms would
be those that are payable for five years or more. Call or demand loans are those
which are payable which are payable upon call or demand of the lending
institution.
Such classification of the length within which a loan is to be paid will serve as a
guide to the different financial institution whether or not they could engage in
such transactions. For instance, commercial banks are limited to servicing short
term loans. However, in the Philippines, some commercial banks give out loans
payable on an intermediate term. On the other hand, savings banks deal long
term loans. Stock brokers specialize in the “call loans”.
3.As to security. Loans are either secured or unsecured. When a mortgage

conveying title to property is used to guarantee the payment of a loan, it is
known to be a secured loan. When no such security or collateral is given by the
borrower but rather the loan is granted due to the person’s good character, the
loan is known to be an unsecured or clear loan. This latter type may in some
cases require a co-maker. But, the main consideration for the granting of the
loan would be on the character of the principal debtor and the guarantor.
Although a loan is secured, it may also need co-maker.
4.As to method of payment. Loans may ether be self-liquidating or non-self-

129
Davao del Norte
liquidating. The first term means that the repayment of the loan will come from
the proceeds of resale or from the income derived from the use of capital goods
bought from the loan proceeds. On the other hand, the loan is non-self-
liquidating when the repayment comes directly from the income of the borrower.
A to purchase inventories which are eventually resold. A personal loan, on the
other hand, would be non-self-liquidating because the proceeds would be used
for personal needs rather than business purposes.
5.As to method of release. A loan of a sizable sum may be released in small

amounts as needed. This known as release on installment. Or the whole amount
is given just once. This termed as “lump sum” release. Sometimes, the
installment release is resorted to in order to control the use of the proceeds.
Otherwise, the money might be diverted to something which it is not meant for.
6.As to source. To determine where the funds borrowed come from, the loans
are classified as bank credit, mercantile credit, private credit, public credit and
others.
Knowing the different types of loans, and others which may not have been
included herein, it might do well to state at this juncture that loans could also
bear a combination of the above classifications. For example, a commercial loan
is a short term, self-liquidating loan paid in lump sum. Or, an industrial loan
would be a long term loan released in installments, secured, and self-liquidating.
Lines of Credits
A “line of credit” is being accorded to a bank customer. A bank uses such favor
as a policy of attraction to big depositors. It must, therefore, be a special
concession given to a select few, for it does offer several conveniences for a
busy businessman.
Besides, the policy of getting small amounts at different times would eventually
entail larger expenses accounts – hence, reduction in profits. So, the
businessman may consolidate his needs into one big amount, as gauged
through experience in his particular business, and apply for a “line of credit”
which will run for a specified period of time.
The bank, for its part, will first make a careful study of the needs of the
businessman. It will, at the same time, ascertain the risk involved. In other
words, credit investigation shall be conducted just as in loan processing. Once
the bank shall have ascertained and been convinced of the businessman’s
capacity to pay and quality performance in business, the bank may accede to
giving him a line of credit. But, the bank, in so doing, is not legally obligated to
honor the borrower’s need when circumstances do not permit advancing of
funds. Neither is the business required to borrow if he does not have need for
funds. The bank, however, has a moral responsibility in filling the businessman’s
needs at the time by virtue of its acceptance to service the borrower’s needs.
130
Davao del Norte
The accommodation will be made subject to the availability of bank funds.
To safeguard its own position and that of the borrower’s, the bank imposes some
regulations to be met with in approving lines of credit. One such regulation is the
use of collaterals. So that if the businessman fails to pay, then the bank could at
least recover from the security given. Another is to make the businessman clear
his accounts periodically to show proof of his capacity to pay. The bank may also
require marginal deposits to establish the liquidity of the borrower to a certain
extent.
Classification. For the purpose of guidance in servicing lines of credit, the

different types mentioned hereunder might give the reader an idea of how they
are administered by banks. They are classified as:
1.Regular line of credit. This usually comprises of an amount granted which is
ascertained from the businessman’s regular needs as well as from the regularity
of payments. It is availed of by promissory notes. It can be utilized over and over
again provided the amount granted is not exceeded and that the specified period
of time has not expired. When the time expires, the line may be renewed. It is
one which seems to go on and on because as payments are made the amount
paid is added again to the outstanding balance available to the borrower, and is
subject to renewal.
For example, a line of credit for P100, 000.00 is accorded to Mr. A, for a
period of one year, from 2 January 2002 to 1 January 2003. The administration
would be as follows:
Total amount available

as of 2 Jan. 2002 ………………………. P100, 000.00
Mr. A signs promissory note
on 5 Jan. 2002 ………………………… 20,000.00 payable
5 Mar. 2002
Amounts available for further
Borrowings …………………………… P 80, 000.00
Mr. A signs another P/N
on 5 Feb. 2002 for ……………………. 20,000.00 payable
5 April 2002
Amount available for further
Borrowings ……………………………… P 60, 000.00
Mr. A clears and pays note due
5 March 2002 ……………………………. 20, 000.00
Amount available for further
Borrowings ……………………………… 80, 000.00
As amounts comprising the maturing promissory notes are paid, they are added
again to the balance available on the line of credit. The line of credit may be
renewed at its expiry date and be availed of for another year as needed. Hence,
131
Davao del Norte
it is sometimes termed as revolving credit line.
2.Maximum loan commitment. This is also similar to the regular line of credit
except that after the amount is drawn upon, the used portion cannot be availed
of again. The customer also uses the line by means of promissory notes
provided the amount is not exceeded and the specified period, it cannot be
renewed nor extended. This is due to its peculiar nature where the amount
granted is based on specific requirements and on the maximum limit the
customer will have to go through the procedure of applying for an entirely new
maximum loan commitment all over again.
In the example given, under the regular line of credit at the point where payment
of the promissory note is made, the amount is not again added to the
outstanding available balance. Instead, the amount available decreases as the
line is availed of by promissory notes until the amount is exhausted. If the entire
amount is not used before the date covered expires, then the bank automatically
withdraws its accommodation to the borrower.
3.Overdraft line. This type is quite popular in the Philippines. It is availed of by

checks rather than promissory notes. When a depositors does not have enough
deposits with the bank and after due credit investigation, he may be allowed to
draw over and above existing deposits. The bank honors the checks by virtue of
an “overdraft line.” This often requires marginal deposits and it is in the nature of
a loan.
Whenever the depositor increases his deposits above the margin, he in effect
reduces the amount made available to him by the bank. The interest charged
shall, therefore, be based on a smaller amount. On the contrary, when he
withdraws money over and above his existing deposits, he in effect uses bank
funds and, therefore, the interest charged shall be based on a bigger amount.
Interest charges are computed according to the bank’s schedule.
It should be borne in mind that the above classifications of the lines of credits
simply serve to delineate one from the other purposes of administering each. It
does not necessarily mean that all banks follow these classifications. What
matters, then, is not the name attached to the credit line but how it is availed of
by the favored few who are accorded this particular accommodation by banks.
LOAN PORTFOLIO
The bank’s loan portfolio means the arrangement of bank loans. Some loans of
short duration given to enterprises with high credit ratings may also be included
in the secondary reserves. The residue of the loans granted by banks, however,
are arranged in such a manner as to assure the bank the maximum safety and
liquidity without sacrificing earnings. Hence, the bank will diversity its loan as to
maturity, as to purpose, or as to location to allow offsetting of losses. The bank
will limit their diversification to the regulatory and supervisory agencies’
132
Davao del Norte
limitations.
Choice of loans will largely depend on the bank’s loan policies. The policies will
spell out in unmistakable terms, with built-on flexibilities, the procedures and
types of loans that the institutions may indulge in and in what desired quantities
and qualities. Hence, the sizes and quality of a bank’s loan portfolio will hinge on
the effectiveness of the offers handling the loans and discounts or the credit
department. To strike a balance in this regard, there is a need for experience in
the field plus perhaps a “sixth sense” on the part of the bankers.
LOAN AND DISCOUNT DEPARTMENT

The department may invariably be dubbed as either the “Loan and Discount
Department” or the “Credit Department” which is further sectioned into
specialized tasks such as processing of loan applications, credit investigation,
preparation of the credit investigation report, loan release, follow up and
collection of loans, and similar credit activities. This department has been
singled as one of the banks training grounds for it is here that bank personnel
get well-rounded inkling on important bank functions. It is in this department that
loan investigators and loan officers get in constant touch with customers of
practically all walks of life, as evidenced by the types of loans granted. Decisions
of importance are also reached and a lot of discretion in thrown in preparing
credit reports. On the analysis of the borrowers’ credit standing will hinge largely
the quality of the loan. And, without proper collection procedures and follow-up,
the bank would meet less success in monetizing the loan.
PROCEDURE FOR LOAN APPLICATION AND PROCESSING

Every now and then, since the credit economy was introduced, a person or a
business in need of funds would seek the help of financial institutions. The
development of the commercial banking system has further enhanced the
chances of businessmen to alleviate their financial needs when they are
temporarily unable to pay in cash. So anyone in need of funds could go to a
bank and apply for a loan.
A particular department will be in charge of the bank’s loaning activities. The

applicant approaches the officer concerned and signifies his intention to borrow
money. He is then given the application form and appraised of other
requirements depending upon on what type of loan he applied for. The
application form will contain questions which the prospective borrower should
answer truthfully and exhaustively as this will be used to gauge his character, his
capacity, and his capital.
The applicant submits the duly accomplished form and the necessary supporting
papers (like income tax returns, sketches, photographs, and others). Upon
submissions, the bank officer will interview the applicant. If properties are used
to secure the loan, the sire is inspected to determine its worth.
133
Davao del Norte
After the interview and ocular inspection of the properties, the credit investigator
makes a report. Such report, together with the supporting data, is analyzed to
determine the extent of risk the bank may assume. A formalized report known as
the Credit Investigation Report (CIR) is then forwarded to the loan officer or
committee who will finally deliberate on the report.
The loan officer or committee then sends its recommendation to the board of
directors if the loan requires the approval of the board or to the president if the
latter’s approval is sufficient. The designation of the party approving loans is
contained in the loan policy of the bank.
If everything is in order, the board or the president, as the case may be, will
approve the loan as evaluated. The same amount applied for or a slashed
amount may be the final verdict. If something else must have to be done, the
loan officer will apprise the applicant before sending the papers for approval.
Should the bank find itself in a position where its interest is jeopardized, then the
board or the president will tactfully disapprove the loan.
In the event of approval, the check is prepared and then given to the customer.
That is, if he wishes to get the proceeds in cash. If the proceeds are to be
transferred to a current account, proper entries are made to signify the transfer
of funds placed at the disposal of borrower-turned-depositors.
The task of granting loans does not end in the release of the proceeds. For the
loans must be eventually collected and paid. Hence, a systematic procedure for
follow-up and collection is adopted by the bank. For only when loans are
collected could the bank boast of realized success in this phase of banking
business.
The matter of extensions or renewal should the debtors find themselves

incapable to meet the scheduled payments form part of the loan processing.
Cursory evaluation may also be necessary to allow extensions or renewals.
Perhaps, adjustments on the loan may also occur during the life of the loan.in
any case, it is the task of the loan and discounts department to service the
particular activities of a bank.
CREDIT INVESTIGATION
Credit Investigation is one of the important functions of the bank’s credit
department. The number of the officers handling this phase of bank practice is
dependent upon the size and volume of business of the institution. In small
organizations, one officer might be sufficient while in larger banks, more persons
are involved in this task. The investigation is conducted to ascertain the credit
risk. The risk may either be a moral risk, or a financial risk.
134
Davao del Norte
In order to render an impartial and exhaustive report, the phases of credit
investigation are divided into three steps, namely, the investigation or gathering
information, the analysis of the data gathered, and the filing and updating of
such information. For a clearer grasp of the different phases, the task
undertaken under each is discussed briefly in the succeeding paragraphs.
1.Investigation. This process is similar to, but not quite the same as, the
sleuthing done by the detective agencies in order to get the necessary
information regarding the applicant. The banks officer-in-charge will be able to
determine with some precision to borrower’s character, capacity, capital, or
collateral. Such details could be obtained from direct or indirect sources.
Direct information comes from the person himself as the bank officer makes it a
point to interview him. The financial statement submitted upon the banks request
in a standard form will also be a direct source.
On the other hand, indirect sources in which the bank could tap are other banks,
mercantile agencies, courts, lawyers, friends and relatives of the borrower, even
his competitors in business, as well as in social and political activities.
Newspaper clippings, ledger information, credit files or folders, and other similar
records could yield a pattern of past performance of the prospective borrower.
All possible ways and means to obtain these information shall be availed of by
young, ingenious but tactful, and patient investigators to minimize risk for their
banks. Utmost care and precaution must be taken before loan is approved as
the business of lending is a perplexing although lucrative one.
2.Analysis. Once all the necessary information shall have been compiled, these
are then analyzed. Tests and measurements, by bank standards, are applied.
The credit equations come in handy at this point. The financials statements of
the borrower are minutely scrutinized and shaved to see if they are genuine as
to quality. Window-dressed statements, in this phase of credit evaluation, come
to light through adjustments in the process of analysis. So that only those
faithfully and truthfully prepared to specifications withstand the critical verdict of
the analyst.
On this analysis will based the degree of risk a bank may face in granting the
loan. It shall be the determining factor on setting the credit limits. After the
information shall have been cut to size for credit purposes, some applicants find
to their dismay that their otherwise impressive statement is deflated to what is
known as the “bank’s loan value,” or they may be pleased to know that they
belong to the category of “excellent credit risks.”
In the process of analysis, not only the particular applicant’s statement will be
used, but also the financial statements of similarly placed individuals or
135
Davao del Norte
businesses. A comparative analysis may therefore take place. Ratios, too, are
used to establish the borrower’s financial strength as well as other desirable
qualities. Even the date of the statement becomes an important item in analysis,
for it may well give away the trend of the business or the conditions affecting it.
3.Filing. While this term may connote the regular meaning of keeping the data in
orderly arrangement for ready reference, it may include the added task of
updating the files. The latter task is important so that the bank does not have
only use the files for its own purpose, but the information may be passed on the
other lending institutions or other departments of the bank itself.
The date filed, however, will always be kept in strict confidence. They are only
given upon given request and are usually in a code adopted for the purpose.
Hence, faithful and accurate recording of details that will either enrich the
information or work adversely on the borrower is methodically and meticulously
undertaken by the personnel in charge of this aspect of credit investigation.
CREDIT INVESTIGATION REPORT

This report is rendered by the Credit Department of a bank. It is used as a guide
by the loaning officer or loan committee in arriving at the loan decision. Such
report is prepared on the basis of the results of the investigation and analysis as
well as other criteria of the credit investigator. It may serve as a deterring factor
to those who seek loans over and above their paying capacity. For in order that
the use of credit will not be abused, the bank credit department exercises control
over the loans allowed by the debtor. In this way, not only will the bank be
assured of regular payments on the loan, but the debtor will also be more
cautious and conservation in the use of credit funds.
When the investigator, therefore, renders a satisfactory credit investigation

report (CIR) , the debtor is almost assured that he will be given a loan. There
may be adjustments as to the final amount or some supporting papers
necessary to clinch the final decision of the board or the president, as the case
may be.
Control of Credit
Control of credit may be affected in many ways and by different agencies. It may
do well, to enumerate a few ways and how these are imposed by the said
agencies.
1. BangkoSentral Restrictions. This covers the regulatory and supervisory

powers of the BangkoSentral as carried out by the Department of Supervision
and Examination. Such controls may also be in form of instruments of monetary
management such as the manipulation of the discounts rate to suit economic
conditions, as well as the changes in the legal reserves.
136
Davao del Norte
For example, in extreme inflation, the BSP may increase the discount rate in
order to decrease money supply. Conversely, it may decrease the discount rate
to relax on credit in order to increase money supply during deflation. Or, in order
to channel loanable funds to productive purposes, it may institute a program of
priorities on the loans granted. This would be tant amount to selective credit
controls, which may also include high marginal requirements on letters of credits.
2. Bank credit control. In order that a bank may aptly implement the
BangkoSentral’s rules and regulations, as well as to safeguard itself from
unnecessary risks, it may institute its own system of controls. For example, a
bank may grant a sizable loan to one person or business but will administer the
release of such loan on installments as applied for, the bank may restrict credit
by imposing the condition that the purchase of such goods shall be undertaken
directly by the bank from the suppliers. Hence, the money will not pass the
hands of the borrower and will therefore minimize the temptation to divert the
funds from it’s original purpose.
3. Credit Limits. The BSP as well as the banks themselves may be set credit
limits which may be temporal or quantitative in nature. The former would be
more of restrictive measures adopted from experience or due to existing
conditions. The latter would be limits on the amount of the loan based on some
other factors.
Such limits have their own purpose. They serve both the creditor and other
debtor.
On the part of the bank, it helps in setting up the loan values and in managing
the loanable funds to a certain extent. The debtor will also be benefited because
he would know exactly what his credit worthiness in pesos and centavos is and
he will, therefore, become adept in using borrowed funds, through the use of
credit limits, will benefit both parties to a credit transaction as these conditions in
themselves will serve to curtail the granting loans.
Credit limits established are influenced by the following factors:
a.Bases of Credit. The bases of credit are usually called the C’s of credit.
These are character, capacity, capital and conditions. Collateral is also
considered the fifth C, in some cases.
A person’s character may be ascertained through credit investigation which shall

be gauged from the applicant’s personal habits, his business associates, his
social dealings as well as political ambitions. Character represents the person’s
willingness to pay.
An applicant’s capacity shall be proven through analyzing his efficiency in the

137
Davao del Norte
control of credit funds which may in turn be measured from his educational
background, his experience in business, and his wise and judicious discretion.
Capacity represents the person’s ability to pay when the loan becomes due.
Capital is the financial strength of the applicant. It is the amount of his assets
less is liabilities, or his net worth, in terms of money. The quality of his assets
would be of importance in the analysis of the risk.
Conditions refer to the status of the company, whether it is stationary,

progressing or retrograding. It may also refer to existing economic conditions.
Ordinarily, this is not a very important factor although it may be the one to “break
the tie”, in some cases. For it happens that while all the other may favor the
granting of credit, BSP requirements or the bank’s position may not permit the
extension of the loan. So, if conditions do not warrant the release of a loan,
nothing could be done except to wait for developments which will favor its
release.
Concerning the above factors to consider in loan granting, creditors have

switched to “capital”, as the most important factor in modern times. In contrast, in
earlier times, “character” was of importance in granting credit. However, the
discretion still lies on the hands of the credit investigator as in his actions lies the
final results. A complete and satisfactory report should take into account the
different factors, and it is up to the investigator to make the desired credit
equations to establish the credit limits.
b. Appraised value. Appraisals may be of different hues. The owner of

course considers his assets as the highest possible value. The tax assessor
may have his own idea of the same property’s value. Current market values may
still affect the worth of the property. And of course, the bank will determine its
loan value. Such appraisal of value by taking into account the use of property;
the location; if it were land; and depreciation methods, in case of buildings.
There are just few samplers on the item of appraisals.
c.Statutory limitations. The new General Banking Law of 2000 (Republic Act
No. 8791) sets the limit on the loans that any one person or entity may obtain
from a commercial bank as contained in Section 35.
Sec. 35. Limit on Loans, Credit Accommodations, and Guarantees

35.1. Except as the Monetary Board may otherwise prescribe for reasons of
national interest, the total amount of loans, credit accommodations and
guarantees as may be defined by the Monetary Board that may be extended by
a bank to any person, partnership, association, corporation or other entity shall
at no time exceed twenty percent of the net worth of such bank. The basis for
determining compliance with single-borrower limit is the total credit commitment
of the bank to the borrower.
138
Davao del Norte
35.2. Unless the Monetary Board prescribes otherwise, the total amount of
loans, credit accommodations, and guarantees prescribed in the preceding
paragraph may be increased by an additional ten percent (10%) of the net worth
of such bank provided the additional liabilities of any borrower are adequately
secured by trust receipt, shipping documents, warehouse receipts, or other
similar documents transferring or securing title covering readily marketable, non-
perishable goods which must be fully covered by insurance.
35.3. The above prescribed ceilings shall include; (a) the direct liability of the
maker or acceptor of paper discounted with or sold to such bank and the liability
of a general endorser, drawer, or guarantor who obtains a loan or other credit
accommodation from or discounts paper with or sells papers to such bank; (b) in
the case of an individual who owns or controls a majority interest in a
corporation, partnership, association or any other entity, the liabilities of said
entities to such bank; (c)in the case of a corporation, all liabilities to such bank
of all subsidiaries in which such corporation owns or control a majority interest;
and (d) in the case of a partnership, association or other entity, the liabilities of
the members thereof to such bank.
35.4. Even if a parent corporation, partnership, association, entity or an

individual who owns or controls a majority interest in such entities has no liability
to the bank, the Monetary Board may prescribe the combination of the liabilities
of such subsidiary corporations or members of the partnership, association,
entity or such individual under certain circumstances, including but not limited to
any of the following situations: (a) the parent corporation, partnership,
association, entity, or individual guarantees the repayment of the liabilities; (b)
the liabilities were incurred for the accommodation of the parent corporation or
another subsidiary or of the partnership, association, entity, or such individual; or
(c) the subsidiaries, though separate entities, operate merely, as departments or
divisions of a single entity.
35.5. For purposes of this Section, loans, other credit accommodations, and
guarantees shall exclude: (a) loans and other credit accommodations secured by
obligations of the BangkoSentral or the Philippine Government; (b) loans and
other credits accommodations fully guaranteed by the government as to the
payment of the principal and interest; (c) loans and other credit accommodations
covered by assignment of deposits maintained in lending bank and held in the
Philippines; (d) loans, credit accommodations and acceptance under letters of
credit to the extent covered by margin deposits; and (e) other loans or credit
accommodations which the Monetary Board may from time to time specify as
non-risk items.
35.6. Loans and other credit accommodations, deposits maintained with, and
usual guarantees by a bank to any other bank or non-bank entity, whether locally
139
Davao del Norte
or abroad, shall be subject to the limits as herein prescribed.
35.7. Certain types of contingent accounts of borrowers may be included among

those subject to those prescribed limits as may be determined by the Monetary
Board.
d.Security for loans. Loans, as mentioned earlier, may be classified as

secured or unsecured. Some borrowers are required by the bank to place a
guaranty for repayment of the loan in the form of real property, chattels, or some
other acceptable collateral. Hence, a loan may be secured by a real estate
mortgage, a chattel mortgage, by the assignment of accounts receivables or
inventories, by assignment of life insurance policies, by pledging stocks and
bonds, or some other way by which the bank lending money is given a lien on
such security or collaterals. The liens may be either senior or junior and in some
instances, even a prior claim on such properties used to further enhance safety
and collectability of the loan. The loan value is then ascertained in a manner
whereby the value of a property or collateral is well above the loan. This was
referred to previously as credit limits.
The security or collateral will serve its purpose when the borrower defaults in his
payment. For then, the bank could appropriate for itself the property by due
process of the law. This means, that the bank could take the necessary action to
ultimately collect the loan through the sale of the property placed as security at
the public auction. Before this happens, however, the bank maintains the
posture of meting out the punitive measure by tempering it with mercy. That is to
say that the borrower is given all the chance to prove his worth before the
institution of foreclosure proceedings.
FOLLOW-UP AND COLLECTION OF LOANS

The matter of follow-up and collection becomes important when a borrower asks
for an extension. For this would be the first signal of impending financial
reversal. Banks follow normal procedures of sending reminders om due dates
and mild letters of reproach for delayed payments. It also takes the necessary
drastic action in case of delinquent debtors. Court action is usually taken care of
by its legal department.
On the matter of collection of or payments on the loan, the borrower usually

goes to the bank to effect payment either in cash or through checks. In some
cases, the bank supplies the borrower with some sort of a passbook similar to
the one given a savings depositor. When payments are made, these are
reflected in the borrower’s loan passbook. This happens when loans are paid on
installment. If the loan is settled in full, the borrower is given his release papers,
including all the collaterals presented on the mortgage conveying properties as
security for the loan.
140
Davao del Norte
Inc.
Bookstore, Inc.
accountid=31259
Let’s Check
Activity 1: Explain the following control credit by giving an actual event or lifelong
experiences.
BangkoSentral Restrictions
1._______________________________________________________________
________________________________________________________________
141
Davao del Norte
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
Bank credit control
2._______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
Credit Limits
2._______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
Let’s Analyze
Activity 1: Read the following passage and write your answer concisely and
briefly.
Visit a bank and try to apply a loan. Check the credit investigation process of the
bank.
Guide question:
1.How bank assess their clients before giving a credit line?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
2. What are the requirements in order for you to get credits or loans?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
142
Davao del Norte
3. If the bank have an in-house credit investigator?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
In a Nutshell
is done for you.
1. On the matter of collection of or payments on the loan, the borrower usually
goes to the bank to effect payment either in cash or through checks. In some
cases, the bank supplies the borrower with some sort of a passbook similar to
the one given a savings depositor. When payments are made, these are
reflected in the borrower’s loan passbook. This happens when loans are paid on
instalment. If the loan is settled in full, the borrower is given his release papers,
including all the collaterals presented on the mortgage conveying properties as
security for the loan.

2.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
3.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
4.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
143
Davao del Norte
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
5.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
Q&AList
1.
2.
3.
4.
5.
Keyword Index
LOAN COLLATERAL GOVERNMENT
144
Davao del Norte
BANKS CREDIT LIMITS CORPORATION
DEBTORS REAL PROPERTY PARTNERSHIP
COLLECTION MARGIN DEPOSITS CONTROLS
CREDIT WAREHOUSE
PAYMENTS
ACCOMMODATIONS RECEIPTS
MORTGAGE FULLY GUARANTEED LIABILITIES

concepts of Exchange function.
Metalanguage
Please proceed directly to the essential knowledge part since the most
essential terms are defined on the said section.
Essential Knowledge
THE EXCHANGE FUNCTION

The exchange function of a commercial bank covers the domestic and
international levels. As far as local exchange is concerned, banks handle the
clearings and collection of checks, drafts, and other items. For foreign exchange,
banks also clear and collect instruments involved in the international network and
provide the means of payment for international buyers and sellers. It would do
well, at this juncture, to look into the facets of a bank’s foreign department.
This chapter discusses the items exchanged, the clearing house of years, and
the clearing house of the present. Also included are the kinds of exchanges the
collection process, and the foreign exchange.
ITEMS EXCHANGED
On the domestic level, checks drawn on banks within the city are the
subject of inter-bank offsetting of balances. This system of settling balances is
145
Davao del Norte
known as the clearing process. Hence, when a depositor deposits his check
instead of enchasing it., the check has to be cleared. The same happens when a
draft or coupons on bonds are deposited or given to a bank for collection. For
banks will present a number of items against one another and only the balances
will eventually be settled.
In international finance, drafts, letters of credit, banker’s acceptance, as
well as other items destined for collection become the subject of interbank
settlements. Sometimes, the whole procedure is terminated simply through the
credit instruments or memoranda from one bank to another without physical cash
involved in the transactions. At other times, if cash has to be provided, only small
sums are needed for the voluminous exchanges undertaken.
THE CLEARING HOUSE

A clearing house is an association of banks that agree to contribute to the
expenses of interbank settlement of items for exchange or collection to minimize
effort and provide safe measures. It could also connote the place itself where the
checks and other items are cleared. By clearing, we mean that through the
process, it will be ascertained whether or not the checks or drafts have funds to
back them up.
The place is usually a one-room affair rather than a whole building. It simply
accommodates the member-banks that grouped together for this purpose. Such
banks are represented by the clerks assigned for this specific job. Each of the
banks shares in the expenses to finance the operations of the clearing house.
The expense is distributed on an equitable basis.
In the clearing house, each clerk representing a bank is given his proper place
and there are facilities provided to affect the exchanges such as the boxes where
the bunch of checks are exchanged. There are also calculating machines of the
most modern styles and efficiency to further facilitate the clearing process.
The floor plan of the room is such that there will be facility in handling over the
checks between the clerks. The chairs and other furniture and fixtures are
conveniently located to avoid too much mobility of the persons involved. For the
work itself requires concentration and accuracy as the clerks reflect the
exchanges in the forms provided for this purpose. Everything in the clearing
house, therefore tends to enhance and improve the process to attain the desired
degree of safety.
ORIGIN OF THE MODERN-DAY CLEARING HOUSE

In the past, the clearing system was a rather slow and expensive process.
Each bank had to send messengers to different banks to present the checks and
ascertain whether they were backed up by funds. For example, X Bank sent its
messengers to Y Bank, and Z bank and in turn these latter two would send their
messengers to X Bank. Messengers, therefore, met each other on the way every
146
Davao del Norte
regular banking day.
At first, they did not know where each was bound to. But, as time went on, these
messengers started to have nodding acquaintance which soon developed to
friendship. Then an idea occurred to them. “What if each messenger just brought
the checks drawn against his bank halfway and exchanged these with the other
messengers?” Then they would return to their respective banks with the checks
they exchanged. The next day, they would again exchange the checks, after
these shall have been presented to their respective banks with the checks they
exchanged. The next day, they would again either cleared or returned for some
reason or another. The messengers tried the system and found the same to be
convenient for them.
Soon their superiors learned about these arranged meetings. Equipped with
more intellectual prowess and ingenuity, the upperclassmen implemented the
idea in a more systematic way.
The plan which was later translated into action was one whereby instead of
sending messengers to different banks, each bank would merely send one or two
messengers each to a designated place of meeting. And so, the modern-day
clearing house was born. After which the other details about the functions and
finances of a clearing house were deliberated upon and eventually implemented.
So that today, the process of a clearing is a far cry from the days of old.
Advantages. The modern system of clearing has some advantages on the part
of the bank as well as the customers. They are the following:
1. A greater amount of work could be accomplished in less time.At
the clearing house, each representative is required to come on time so
that the operations could start at the signal of the manager. Hence if
everyone is at his post at the designated time, the whole process will be
finished in less than one hour. This enables the clerks to devote their
time to other tasks.
2. A lesser number of employees is necessary to accomplish

clearing.At the most, only two clerks are necessary---the delivery clerk
and the settling clerk. However, in the Philippines, only one clerk
doubles up as delivery and settling clerk. This, therefore, eliminates the
employment of several messengers as in the old system.
3. Less amount of money, if at all, is needed to effect the clearing.

There is hardly any cash that changes hands among banks. If there be
any, then this would only represent the balances. For examples, if X
Bank has P600.00 claims against Y Bank and Y Bank P500.00 claims
against X, only the balance of P100.00 in favor of X Bank will be settled.
147
Davao del Norte
4. It is a safer way of settling balances. While it is true that the items are
stamped “Non-negotiable” before they are brought for clearing,
nevertheless, the present system is a safer than what it used to be in
the past. For any misdemeanor on the part of the representatives could
be checked in no time as there is a designated place of meeting.
Responsibility is also pinpointed.
Operation. The process of clearing checks begins from time to time the bank’s
representatives leave their respective banks up to their return after having
exchanged the checks and the proper entries are made in their books.
Sometimes, it involves the next day when some of the items are returned due to
some defect or insufficiency of funds.
Before leaving the bank, the clerk assigned for clearing prepares the checks to
be cleared as well as the settling statement. In assorting the checks, each bank
upon which they are to be presented for clearing and eventual settlement, is
assigned a number. An envelope to contain these checks is then labeled as to
the bank’s number, name, and the total number and amount of checks.
Accompanying the checks will be a list of each one of them where their numbers
and amounts are detailed. The envelope with the list and the checks is sealed.
The items shall have already been stamped “Non-negotiable”.
The settling statement which contains a list of all the banks, excepting the one
preparing the statement, is then made. The bank preparing it will reflect the totals
of the items drawn against the other banks as claims against them and the grand
total as claims the clearing house. This total also reflected in the “credit card”.
Upon arrival at the clearing house, the bank representatives present the credit
card to the clearing house’s settling clerk. The latter enters the amount in his
settling statement. The representatives then enter the room and take their
respective seats. At the signal from the manager of the clearing house, they start
exchanging the envelopes are reflected in the settling statement. When the
signal to stop is given, all the representative heed the order.
In the meantime, some of the clerks shall have gone back to their banks to bring
the exchanged packages of checks for final disposal. Or, they may all wait until
clearing period is over before they go back to their respective banks.
Upon going out, each clerk presents the debit card to be filled out in by the
clearing house settling clerk as to the amount. The balance will then appear to be
either “Due To” or “Due From” as the case may be. If the bank represented has
more claims than payments from the clearing process. But if the reverse situation
happens, the bank loses.
If there are two clearing periods, the checks not cleared in the first clearing
will be taken up in the next clearing.
148
Davao del Norte
Collection of Proceeds. In a sense, the clearing process is also the collections

of checks, although collection may partake of a somewhat different nature in
other cases. The procedure of entering the transaction in the bank`s books,
however, follows similar patterns.
When an item is either for deposit or collection, the clearing process is also the
collection of checks, although the collection may partake of a somewhat different
nature in other cases. The procedure of entering transactions in the bank`s
books, however, follows similar patterns.
When an item is either for deposit or collection, the person expecting the
proceeds is immediately credited in the bank`s books on a deffered basis. Before
these proceeds are realized, however, the item is sent for clearing, as has
already been described. So that if the instrument is dishonored, then the bank
will have to make reversing entries to cancel out the original entries. If the items
are honored, that is, they are not returned in the next clearing period then the
entries become final in favor of the recipient of the proceeds.
If the collection item requires a service charge, as is the normal procedure in

most banks, then the expense is either decuted from the depositor`s account or
the person requesting the collection is charged separately. In either case, the
bank earns a service charge from collections effected through it.
In the collection of checks or other items, another aspect to consider would be
the type of exchange encountered. Hence, the different exchanges might be well
looked into.
This happens when there is a delivery clerk and a settling clerk, or two
representatives from the banks.
At present, there is only one clearing period at the BangkoSentralngPilipinas.
Hence, by virtue of an agreement among the members of the Bankers
association of the Philippines, the banks require seventy-two hours before the
check could be considered cleared,
KINDS OF EXCHANGES
To fully grasp the significance of the clearing and collecting processes, the
following kinds of exchange may bring to light the deviations from the simplest to
the more complicated types.
Simple exchange occurs when the parties involved are depositors of the same
bank in the same locality, of between the main office and its branches. Hence,
the process of clearing and collection is simplified. The only thing to do is to
offset the entries by debiting the account of the check`s issuer and by crediting
the account of the party depositing the check. The check itself is not sent to the
clearing house. The reason for this lies in the fact that the bank is in a position to
149
Davao del Norte
ascertain right away, except in branches outside the locality, whether the check
is backed up by funds or not since it has the subsidiary ledgers of both parties to
the exchange. Hence, through T-accounts, the transaction will appear thus:
Local exchanges take place when the parties are depositors of two different
banks but in the same locality. In this case , the check is sent to the clearing
house, where it will be among thechecks exchanged and finally presented to the
bank on which it is drawn. Upon deposit, the person depositing the check is
credited on a deferred basis, subject to clearance. If the check is good, that is, it
is backed up with funds or other reasons, then a reversing entry is made. These
would be the entries in the individual bank`s books.
150
Davao del Norte
151
Davao del Norte
STEP 5. If a Step $ it is found that Mr. James has only P50.00 instead of
P500.00 the check will be returned to the clearing house the next clearing period
and no debit entry is made against Mr. James’s account.
STEP 6. At the BangkoSentral, reversal entries will be made in the accounts of X
Bank and Y Bank to negate the entries made in Step 3.
STEP 7. Upon receipt of the returned check from the settling clerk of X Bank, the
representative of Y Bank brings the check back of his bank. The bookkeeper
handling Mr. Bond’s ledger will then reverse the entry made in Step 2 to enter the
deposit of P100.00. The check itself will be returned to Mr. Bond by Y Bank’s
teller.
Step 5, 6, and 7 happen only when the check is returned due to insufficiency of
funds or for some other reason like perhaps illegible signature or material
152
Davao del Norte
alterations not properly initialed.
Domestic intercommunication is a little more complicated, and occurs when the
parties to the exchange belong to different banks situated in different localities.
As in local exchange, entries will be made when the recipient of a check deposits
the same or requests the collection of the same. But, because there is no
clearing house in other places, the process of clearing will be done at the
BangkoSentral. The example below will serve to clarify this system of exchange:
International exchange resembles domestic intercommunication, except

that exchange and collection is effected between parties living in different
countries and depositing at different banks. The item will be cleared at the
international clearing house. Another feature added would be the conversion of
one kind of money to another. Hence, exchange rates are involved in the
process. For example, the dollars will be converted to pesos or vice versa.
It must be said, at this point, that not only depositors are privileged to make us of
the bank`s exchange functions but also customers who request banks to collect
items for them. The only possible advantage of a depositor would be the lesser
charge for collection gratis et amore as abd added service of the bank in an effort
to win more depositors and to maintain cordial relations with the old ones.
Communication breakthroughs
One of the major services offered by multinational banks is the movement of
funds across national boundaries. Nonetheless, the service was not developed
adequately until the early 1970s. Prior to that, transfer of funds among countries
could take several days to several weeks, even when cable transfers were used.
This necessitated the development of fast and efficient ways of communicating.
In the effort to eliminate the time lag in carrying out international money transfer
by mail or telex, a number of banks organized the Society for Worldwide Inter-
bank Financial Telecommunication (SWIFT) in 1973. The SWIFT has grown from
an initial membership of 239 banks in fifteen countries to over 1,200 banks in
more than fifty countries. The SWIFT services primarily involve processing
transactions such as customer transfers, foreign exchange confirmations, bank
transfers, and documentary credits. A special message text language allows
bank to “talk” to each other by computer in common language. This added
capability serves to greatly facilitate information transfers.
Another important institution is the Clearing House Interbank Payment System

(CHIPS), an international electronic check transfer system that moves money
between major US banks, branches of foreign banks, and Edge Act subsidiaries
of out-of-state banks. The system handles a large volume of transactions per day
and most of the foreign exchange trade and Eurodollar transactions. The CHIPS
has speed up the settling of its transactions to the close of each business day
rather than the next business day as was the custom.
153
Davao del Norte
In the Philippines, there is the Philippine Clearing House Corporation (PCHC)

Which is co-equally owned by the members of the Bankers Association of the
Philippines (BAP). It is a corporation with eleven board of directors. The direct
participants to the PCHC are the commercial banking institutions. The non-
commercial banks are the indirect participants through a Conduit Clearing
Agreement with director clearing participants. All participants to the PCHC must
be banking institutions that operate under a charter, or certificate of authority
granted by the BangkoSentral. All commercial and universal banks, both foreign
and local that are members of the Bankers Association of the Philippines (BAP),
were required to own equity holdings with the PCHC. Eventually, PCHC admitted
the thrift banks into its membership.
The PCHC was born for the purposes of automating the clearing system of
checks and checking transactions. Hence, clearing of checks is now done
through Electronic Clearing System (ECS). The system enhances the timing,
prioritizing, and updating of bank accounts. It provides online communication
linkage between the clearing banks and the PCHC. This results in the on-the-
spot transmission of electronic check data to a host computer within time limits to
fully expedite clearing transactions. Banks have access to the host for the
retrieval of clearing information immediately after the netting process, which
takes two hours after bank cut-off time.
In addition the PCHC, there is the BangkoSentral Regional Clearing System that
caters to the regional banks.
THE COLLECTION PROCESS

The collection process involves the clearing of checks or drafts. The collection
items may be classified as to how the payment will be effected, and they are
known as the clean and documented items. The differences between them are
briefly cited below:
1. Clean items. When the check, drafts, or other items given for collection is
free of any documents or conditions relating to its final payment, it is
termed as clean collection.
2. Documented items. When the payment of the items for collection is

predicatedon certain conditions contained in the contract of credit, such as
the term “sight draft with bill of lading” (SD/BL) or where the other
documents must be presented before payment is effected, the process is
known as documented collection. In such a case, the bank assigned to
collect the item should strictly follow the conditions set forth in order to
avoid liability or loss on its part.
So that the bank may be guided accordingly upon payment of the documented
154
Davao del Norte
collection item, it prepares a tickler which is used as some sort of filing system to
determine the maturities of drafts. The tickler is referred to when a maturing item
is presented for payment. Among the important aspects of the preparation of this
filing system is the entry of the conditions to be followed regarding the collection.
This becomes very important in case of time drafts or collection items maturing
after a certain period of time.
The collection procedure may also be effected by the use of demand or sight
drafts and time drafts, as follows:
1. Demand items. These are collection items which are payable on demand
upon presentation. If dishonored, they should be immediately referred to
the issuing party so that the necessary correction on the instrument may
be made to facilitate payment. Or the necessary protest could be likewise
presented verbally or in writing according to law, as mentioned in the
chapter on bank credit instruments.
2. Time items. Time items are those whose payment is effected after a
certain period of time upon presentation. Such items are presented first for
acceptance and then at maturity for payment. The time items are also
usually documented and therefore require the setting up of a tickler to
keep track of the maturities and the instructions for payment.
As in the case of demand items, they are to be protested when dishonored either
for acceptance of for payment. Or they may just be referred to the parties issuing
them for correction or any other remedy to facilitate their negotiation and final
payment.
FOREIGN EXCHANGE
Foreign exchange may include several interpretations. It could mean the
exchange of goods and services between international buyers and sellers. Or it
may refer to the means of payment international trading.
The banks deal mostly in transfer of funds without the physical use of cash
from the simplest to the most complicated type of exchange in this chapter to
focus on the bank`s foreign exchange function relating to the means of payment
and the instrument used therein.
Exchange Rates. Exchange rates are prices and are, therefore, determined by
supply of and demand for foreign exchange. The date of payment is of utmost
importance in determining these rates. Hence, it becomes evident that the
method of transferring the funds would be a matter of importance. Payment
transmitted by cable rather than by mail would spell a significant difference in the
rate of exchange.
In the matter of the instruments themselves, a demand draft would be more

advantageous than a time draft. For although a duly accepted draft could be
155
Davao del Norte
easily negotiated. It requires the discounting process. The bank, however, earns
more in discounting time drafts.
In quoting prices, either the “rate of the day” or some other price prevailing
in the money markets, the cost of transmission is usually excluded since such
cost may vary according to the method of transmission-either by cable or by mail.
In case of by cable for instance, the night letter (NLT) would be the least
expensive.
The Balance of Payment.The balance of payments (BOP) would reflect the

economic transactions one country has with other nations of the world. It is
statistical statement that summarizes, for a specific period (typically a year or
quarter), the economic transactions of an economy with the rest of the world. It
covers all the goods, services, factor income, and current transfers and economy
receives from or provides to the rest of the world; and capital transfers and
changes in an economy`s external financial claims liabilities. Transactions are
generally between residents and non-residents. The exceptions are the
exchange of transferable foreign financial assets between residents and
transferable foreign financial liabilities between non-residents. For purposes of
the BOP, residency relates to the economic territory of a country, not nationally.
An international unit is a resident unit when it has a center of economic interest in
the economic territory of a country.
In Philippines, our balance of payments would be the statement of transactions

entered into between our country and the other foreign countries with which we
trade at a given point of time. This, therefore, would necessitate foreign
exchange to supply the means of payment. The demand for and the supply of
foreign exchange would then become doubly significant considering the items
entering into the balance of payments transaction.
The items are:
1. Visible items. These consist of the merchandise exports and imports
recorded in the customs for ascertaining the duties on them. In effect
exchange of visible items would be barter and only balance would be
actually settled. The need, therefore to measure the monetary value
requires a unit of account and also the exchange rate.
2. Invisible items. These consist of the money payments used in
international transactions such as the salaries of diplomatic
representative, expenses of tourists, students` pension, and other such
payments may not be recorded accurately. Included here would also be
the balancing item which is used to settle the deficit in the balance of
international payments.
Besides the above mentioned items, there are also the unilateral transfers which
do not of necessity require cash, but by international accounting procedure, must
be entered on both sides of the balance of payments.
156
Davao del Norte
When a deficit exists at the end of the period, such is settled either by means of
physical gold or silver transfers or by foreign exchange. The deficits are usually
settled in dollars which might be covered by foreign balances the Philippines
holds abroad or may be sent by any of the methods of transfer. This latter
alternative is availed of if our dollar holdings abroad are not enough to meet the
deficit. It is for this very reason that or BangkoSentral maintains a sizable amount
of dollar reserves both locally and abroad.
It would be noticed, therefore, that instances, clearing processes would suffice in

the settlement of the balance of international payments. For when a country
enjoys a surplus position, it is credited with the amount in foreign exchange. So
that when the same country needs this surplus to pay off merchandise or other
items, then the account representing a surplus will merely be debited to effect
payment. Only when the deficit cannot be absorbed by foreign balances does the
country suffering a deficit send the actual payment in physical cash, in the ofrm
of foreign exchange. This rarely happens as the common usage is merely the
offsetting of entries among correspondent banks in the international network.
BOP Major accounts. There are three major accounts in the BOP, namely,
current, capital, and official reserves. Current account records net flow or goods,
service, and unilateral transfers. Capital account records public and private
investment and lending. Transactions here are classified as portfolio, direct, short
term. Official reserves account measures changes in international reserves
owned by central banks and reflects surplus/deficit of current account and capital
account; and these reserves consist of gold and convertible securities.
Methods of transfers. Foreign exchange may be transferred from one country

to another by following methods of transmission:
1. Wire or Cable transfer.This is accomplished by one party (a local bank)

ordering another party (a bank in another country) through cable or
telephone to pay a sum of certain in money to a specified beneficiary. The
cost of transmission is included in the payment.
The cable sent is usually coded and in such a type of transfer, the party receiving
the order may not receive any credit instrument but merely a confirmation of the
transaction, depending upon the wordings of the cable.
In availing of the cable transfer, it may be therefore be either an order to pay or

simply for the purpose of informing payment. Hence, the tenor of the cable may
be “cable proceeds” or “advice by cable” In the first case, the proceeds or
payment is effected upon receipt of the message. In the first case, the
information to pay is relayed by cable but the proceeds may be sent by mail in
the form of a draft or some other credit instrument.
2. Mail transfer. This is also an order to pay from one party to another,
157
Davao del Norte
except that it is sent through the mail---most often, if not always, by
airmail. It is resorted to in order to minimize the expenses since cable
rates vary according to the time element. An instrument representing the
order to pay is sent by mail with covering letter.
Whether the method of transmission is by cable or by mail, there is necessity for

presentment to effect final payment. If the instrument is a time item, then it must
be, as in the regular course of clearing and collection, presented for acceptance
first and later on for payment.
Sometimes, payment are made be offsetting of book entries and therefore, only
credit and debit memoranda are sent through the mail for confirmation. Or the
message to confirm may be cabled and the confirming memoranda are sent by
mail for record purposes.
LETTER OF CREDIT FINANCING
A letter of credit represents a bank’s commitment to substitute its credit for an

applicant after due investigation and analysis of the credit risk. Such initial
acceptance to stand by for credits will further involve other banks in the
international network for foreign financing purposes. However, letters of credit
are also utilized for domestic financing purposes.
This chapter discusses the matter of letter of credit financing as this seems to be
quite common in effecting payments for imports and exports. It examines the
laudable and peculiar nature of the letter of credit and the related aspects in its
negotiation. And while it is indeed a part of the bank’s foreign exchange
department activities, it requires separate treatment due to the intricacies in the
mechanics of this type of financing.
HOW TO APPLY FOR A LETTER OF CREDIT
The basis for applying for a letter of credit is an impending importation of goods.
Hence, the applicant shall have already made a preliminary contacts leading to a
contract to consummate sale through the shipment of the goods from the
exporter to the importer.
The importer approaches a bank and arranges for a letter of credit financing. He
presents the evidence of the projected importation, and the bank gives him a
form to fill out. In this form, he can detail the nature of the importation, the
documents necessary, and the extent of credit the bank will undertake on the
applicant`s behalf. This application form should be prepared with utmost care as
it will be the basis to spell out the importer`s obligation as well as that of the
bank issuing the letter of credit.
158
Davao del Norte
The bank will then investigate the credit standing of the applicant and determine
to what extent he may be allowed credit. If the bank finds the credit risk to be
satisfactory, then it will agree to open a letter of credit. Otherwise, other
measures will be resorted to, such as the putting up of additional collateral. Or
the bank may entirely deny the issuance of the letter of credit if the applicant is
not worthy of the same.
OPENING THE LETTER OF CREDIT ITSELF
Assuming that the credit risk is acceptable and all rules and regulations allow the
issuance of the letter of credit, then the applicant either opens the same by mail
or by cable.
If it is opened by mail, the importer will be given the printed of credit together
with sufficient copies to supply all parties with a record of the same. The importer
then sends the original accomplished form to the exporter and distributes the
copies to all concerned. One is kept for his own files, The bank, too, must have a
copy duly signed by the importer as this will represent the contract between the
importer and the bank.
If the letter of credit is opened by cable, the bank cables its correspondent in the
domicile of the exporter to notify the latter of the letter of credit and its terms and
conditions.
The cable expense is borne by the importer. Then the written confirmation is
sent by mail to the exporter. The copy of the cable and the written confirmation is
also supplied the importer.
As a matter of policy, some banks may waive payment of cable charges in

notifying the exporter, when the letter of credit is in foreign exchange. They do
this for and in consideration of their commission in negotiating the drafts.
However, the common practice nowadays is for banks to charge nominal service
fees for such notification by cable.
PARTIES TO A LETTER OF CREDIT
Essentially, the letter of credit is a bi-partition agreement because it represents a

debtor-creditor relationship. However, in its transmission and negotiation, the
following are parties concerned:
1.The Accredited Buyer. The applicant for a letter of credit to whose credit
standing the bank adds its own is known as the accredited buyer. He is also
known as the importer, the account, the consignee, and, of course, the debtor.
To appreciate this position of the accredited buyer, it should be mentioned in
passing that the letter of credit financing originated from a merchant-to-merchant
159
Davao del Norte
basis. A third party, who was usually known and trusted by both buyer and seller
acted as an intermediary in the settlement of the exchange transactions, With
the introduction of the banking system and banks it became evident that banks
could better perform the work of acting as the link between buyers and sellers for
numerous reasons, especially on an international basis, Hence, banks today
substitute their credit for that of the importer to enhance the latter`s credit
standing in foreign trade.
2.The beneficiary. The person whom the proceeds of the letter of credit shall be
paid is called the beneficiary. He is also the seller, the exporter or the consignor
of goods shipped to the importer. It is the duty of the beneficiary to follow the
conditions set forth in the letter of credit in order to obtain payment to avoid
litigation arising from non-compliant. He is usually makes good use of the
contingency clause.
3.The Opening Bank. The bank which substitutes its credit for that of the
accredited buyer is known as the opening bank. It is also referred to as the
issuing bank. The opening bank undertakes the substitution of credit after it has
made the necessary investigation and determination of the extent of credit buyer
may be allowed. To serve satisfactorily, the bank must have a credit standing,
par excellence, because the exporter will be more concerned with the bank`s
reputation in international circles rather than that of the buyer himself.
4.Notifying Bank. Since dealers in foreign trade belong to different countries,

there is a need for another bank to relay message indicating the opening of the
letter of credit and its terms and conditions. The information may be relayed by
cable or by telephone. However, the bank requested to advise the seller may be
given the authority to notify only without further instruction. In such a case, the
bank is known as the notifying or advising bank. This is resorted to when the
buyer opens a letter of credit by cable. Otherwise, the advice is sent directly to
the exporter by the importer.
5.The Confirming Bank. In as much as the buyer is almost always far from the
domicile of the seller, the latter may prefer to be served by a bank close at hand
which will assume the liability for and in the name of the opening bank. The bank
which holds itself responsible to the beneficiary for the payment of drafts drawn
under the terms of the letter of credit is referred to as the “confirming bank”. This
bank is usually a correspondent of the issuing ban and has instructions from the
latter to assume such responsibility as mentioned. Hence, if the instruction from
the issuing bank include confirmation besides advice, the bank is known as an
advising and confirming bank.
6.The Negotiating Bank. When the notifying bank, or any other bank situated in
the domicile of the seller, honors the draft drawn under the letter of credit, it is
referred to as the “negotiating bank”. The beneficiary will then have a contingent
160
Davao del Norte
liability to the negotiating bank. In return, the opening bank will be liable to the
negotiating bank as a holder in due course.
When the bank notifies and, through its own volition, assumes the negotiation of
drafts, it is both a notifying and negotiating bank. Usually, the negotiating bank is
not a correspondent of the opening bank. The delineation of the rights and
obligations of the different assumed by the parties becomes doubly significant
due to the liabilities attached to the part played by each in the letter of credit
financing.
PURPOSES OF THE LETTER OF CREDIT

The purpose or advantages of the letter of credit may be viewed from different
angles, that is, on the part of the beneficiary, the accredited buyer. as well as the
manufacturer and the banks..
1.To the beneficiary. On the beneficiary`s part, the letter of credit serves the
following purposes:
a.To enable him to finance the transaction during the transit of the
merchandise.
This becomes possible because even if a time draft is drawn in favor of the
beneficiary, upon acceptance of the bank to honor the same at maturity, the
seller may negotiate the draft and receive the proceeds for financing the
merchandise in transit which is the object of the contractual obligation.
b.To safeguard the credit risk it serves as the evidence of the existence of the
granting of credit and the stipulations laid down describe precisely the rights of
the parties of the contract.
2.The Manufacturer. The manufacturer or producer is also served by the letter

of credit because he could use it to get money in order to facilitate the production
of the goods ordered by the importer. This sometimes happens when the
producer finds itself momentarily out of cash to finance further production.
Of course, indirectly, the beneficiary also benefits from such because the object
of importation is the merchandise. Any delay in shipment may lead to loss of
sale or loss of confidence, or both, for future transactions, not to mention the
attendant liabilities for breach of contract.
3.To the buyer. The buyer, on the other hand, may be served as follows:
a.It affords the buyer a means of using his purchases as security for obtaining
the credit necessary to finance the transaction. Through the use of trust receipt
financing, the buyer may be given the privilege of selling the goods without
obtaining title to the goods retaining the profits arising from such sale.
b.It will eventually lead to the obtaining of funds for financing the cheapest
markets since the accepted draft shall become salable at one. In arbitrage, that
is, the selling and buying or foreign exchange at the most advantageous rates,
this time is of the essence. So that if time drafts are negotiated before maturity,
161
Davao del Norte
the time lag between actual payment and the date of acceptance might mean
either loss or profit.
4.To the banks. The banks obtain an advantage in issuing or negotiating drafts
through the use of letters of credit. Not only do the individual banks gain
pecuniary remuneration for their inter mediation, but it also strengthens the
position of the banking business.
MECHANICS OF LETTER OF CREDIT FINANCING
Letter of credit financing is best demonstrated by showing the relationship

among sellers, the banks, and other parties incidental to the process. Typical
steps taken are as follows:
1.The buyer and seller agree upon the terms of sale. The sale contract may
indicate the quality, price, consignment, packaging and other terms, and that a
letter of credit is to be used to finance transaction
2.The buyer completes an application for a letter of credit and forwards it ta bank
that will issue the letter of credit.
3.The bank investigates the credit standing of the buyer and examines details of
sale. If satisfied, it (issuing bank) approves and issues the better of credit (L/C).
4.The issuing bank then forwards the L/C to a correspondent bank (advising
bank) in the seller`s country.
5. The advising bank relays the approval of the L/C to the seller.
6.If the seller is not the manufacturer, the L/C is assigned (if assignable) to the
manufacturer. The manufacturer may use the L/C for a loan to finance the
production of goods.
7.Having received the assurance of payment, the seller prepares the documents
required under the L/C and delivers them to the advising bank.
8.The seller also makes arrangements to ship the goods, including its insurance
coverage.
9.The goods, which has been prepared earlier, are then delivered for
shipment/air freight and the bill of lading is released by the shipper/carrier.
10.If the L/C specifies that drawings can be made upon presentation of the bill of
lading, the seller may draw a draft against the confirming bank. If it is a time
draft, it may be presented first for acceptance.
11.In the meantime, the advising bank examines the documents at hand. If it
finds these in order, it sends these back to the issuing bank, and if named the
paying bank ( at the same time the advising bank), it pays the seller in
accordance the letter of credit.
12.Acceptance may be negotiated in the bill or money market.
13.While the goods are in transit, notification and documents evidencing the
shipment are sent to the issuing bank and the buyer.
14.The issuing bank, on the other hand, having received documents, examines
documents to these. If in order, the issuing bank will charge the buyer`s account,
162
Davao del Norte
and sends the documents to the buyer. The issuing bank then reimburses the
advising bank.
15.Upon arrival of the goods, these are brought to the Customs Office for
assessment and payment of duties.
16.The buyer arranges for the release of goods. If he does not have the
necessary cash to pay the issuing bank, he arranges for trust receipt financing.
17.When the goods are paid and release, the bank cancels the L/C.
18.In case of trust receipt financing, cancellation occurs after the buyer fully
settles his account with the issuing bank.
19.Foreign banks that pay drafts to the issuing bank are reimbursed through
bookkeeping entries, if they are correspondent banks.
LETTERS OF CREDIT CLASSIFIED

These are various ways of classifying letters of credit, and as a matter of fact, to
one letter of credit alone may be attached a kilometric description to indicate the
multifarious distinctions. Some of the most common classifications are as
follows:
1.According to the method of transmission, we have the circular and the

specially advised.
a.Circular. A letter of credit is termed a circular when the opening bank issues a
letter addressed generally to persons or companies indicating its intention to
honor the drafts of the beneficiary under the terms specified therein.
b.Speciallyadvised. On the other hand , when opening bank directly notifies the
beneficiary or through a notifying bank (usually a correspondent bank), the letter
of credit is known as “specially advised”.
2.According to the duration of the substitution of credit, it may either be a

revocable or irrevocable letter of credit.
a.Revocable. Whenever the bank reserves the right to withdraw or modify the
credit substituted for the buyer by such phrases as “good until cancelled” or
good until( a certain period of time)”, then it is known as revocable letter of
credit.
b.Irrevocable. When the bank waives its right to cancel the credit or revoke the
same prior to date specified, it is known as irrevocable letter of credit. It has a
binding effect since it cannot be revoked as long as the exporter fulfills his part of
the conditions specified in the letter of credit.
3.According to obligations assumed by the bank, a bank either confirms the

credit or does not do so.
a.Confirmed. When the notifying or advising bank, upon instructions of the
opening bank, assumes the obligation to perform the undertaking stipulated in
the letter of credit it is termed “Confirmed”.
b.Unconfirmed. When the advising bank does not assume any other obligation
except that of notifying beneficiary, then it is known as an unconfirmed letter of
163
Davao del Norte
credit”
4.According to the method of reimbursement, there is what is known as the

simple and the reimbursement.
a.Simple. When the opening bank carries an account in the currency to be paid
with paying bank, the reimbursement is simply done by book entries including
the service charge.
b.Reimbursement. When the paying bank prefers to receive the reimbursement
by draft, or when the two banks have no inter-bank account, the method is called
“reimbursement”. The amount of reimbursed shall include the commissions and
interest, as the case may be.
5.According to the method of payments, a letter of credit may either be termed

as negotiation, straight, sight, acceptance, local currency or foreign currency,
indicating how payment is going to be effected.
a.Negotiation. If it is a circular letter of credit, payment is termed as “negotiation”.
b.Straight. A specially advised payment is called “straight”
c.Sight. If payments are to be made with sight or demand drafts.
d.Acceptance. If payments are to be effected with time drafts subject to
acceptance.
e.Local Currency. If the payment directs that the drafts be paid in the currency of
the seller.
f.Foreign Currency. If the payment should be made in foreign currency, whether
that of the buyer`s or not.
6.Other Classifications. We also often hear of the assignable, back-to-back, red

clause, and revolving letter of credit. It may, therefore, be appropriate to
incorporate these types and to describe them briefly.
a.Assignable. In view of the fact that the exporter is not always the same as the
manufacturer, it becomes necessary that the letter of credit should be
assignable. For the reasons, the importer may request for a letter of credit that
the exporter could transfer through assignment to a third party. Hence, the
manufacturer (other than exporter) avails of the letter of credit to finance the
production of the goods involved.
b.Back-to-Back. When a provision for assignment is not present in the original
letter of credit, the back-to-back letter of credit becomes useful. The exporter’s
bank issues a domestic letter of credit in favor of the company supplying the
goods bought. The bank, in issuing the back-to-back letter of credit, may require
from the exporter some security of in some instances, merely a signed
undertaking.
c.Red-clause. When the importer has complete confidence in the exporter, the
latter may be allowed to withdraw funds to purchase the goods under the terms
of an irrevocable confirmed letter of credit. However, the beneficiary undertakes
to deliver the shipping documents on or before the expiration of the date of the
credit. In this case, the exporter is most often a purchasing agent of the importer.
164
Davao del Norte
d.Revolving. In order to effect control in use of credit, a revolving letter of credit
is used. A certain limitation in the amount of credit is placed. For example, a
letter of credit is established for $50,000.00 in favor of an exporter. He will then
make the necessary shipments as specified within a certain period of time.
When the amount is exhausted, it is automatically replaced by the same amount,
and goes on and on until the whole negotiations are terminated.
A letter of credit may, therefore, be all at the same time termed as irrevocable,
confirmed, local currency, back-to-back, revolving. The different classifications
will spell out the conditions attached to it or the tenor of the letter of credit. It
should be borne in mind that not all banks use the same classifications
uniformly. A bank may deviate from the common terms specified herein and may
adopt a system of its own in setting apart one letter of credit from another.
ESSENTIAL FEATURES OF THE LETTER OF CREDIT

Some of important features of a letter of credit are the following.
1.Advice Number. Each letter of credit is given an advice number for ready
reference and identification.
2.Issuing Bank. The name of the issuing bank is usually stated. This is
important in order to know who is obligated to the advising and confirming bank.
3.Amount .The amount is clearly stated and should be adequate- not too much
above the actual amount of goods, nor too much below the same.
4.Name of Importer. The letter of credit must specifically state the name of the
importer.
5.Tenor of the Letter of Credit. The letter of credit must specify how it is going
to be paid, and how long it will last.
6.Type of the Letter of Credit. It should be expressly stated whether the letter
of credit is irrevocable or not or whether it is confirmed or not, as the case may
be.
DOCUMENTS REQUIRED WITH LETTERS OF CREDIT

In as much as the letter of credit is a contractual obligation and since the
exporter (beneficiary) must meet the conditions specified therein, the following
documents are normally required to accompany letters of credit:
1.Commercial Invoice. The commercial invoice describes the merchandise, the
identifying marks for shipment, the unit price and the total amount, and such
other details.
2.Insurance Certificate. This is a certification by an insurance company to the
effect that the goods are insured in accordance with the terms of sale.
3.Consular Invoice. This is similar to the commercial invoice except that it is
issued by consular establishments.
4.Forwarding Receipts. These receipts would indicate the position of the goods
for shipment. These may be composed of the bills of lading as evidences that
the merchandise is already in the hands of the transporter for shipment. The bill
of lading may evidence shipment by mail. By air cargo, by express or freight, and
165
Davao del Norte
most often by ship. They may also either be “on board” or “endorsed” bills of
lading.
5.Export License. A license is issued when the exports are restricted or by
quotas.
6.Import License. This is similar to the export license, except that it would
indicate import controls perhaps through a system of priorities.
7.Exchange License. When there are restrictions in the movement of foreign
exchange, such license would be necessary to accompany the letter of credit.
ACCEPTANCE CREDIT
Banker`s acceptances are also popular, if not more desirable sometimes, than
letters of credit. These are also used for financing imports and exports. It might
do well to look into the difference between the two types of credit:
An acceptance is the annotating of a bank`s or a merchant`s acquiescence to

the performance of the obligation-usually the payment of a duly accepted draft.
When a bank, a trust company, or a person authorized to do so accepts the
obligationit is termed a banker`s acceptance; and when a merchant does the
same, it is termed as trade acceptance.
Acceptances are used widely in trade transactions and they represent a means
by which the seller may immediately obtain cash although he sells his goods on
credit. The underlying principle is much the same as the letter of credit, which is
the substitution of the acceptance; the credit substituted is that of the seller.
Acceptance also strengthens the position of the holder of a time draft because
he is assured that the accepted or will honor the same at maturity. Since the
time element is in effect advanced due to the acceptance being negotiated prior
to maturity, it benefits the persons engaged in arbitrage and foreign exchange.
BANK`S POSITION BEFORE AND AFTER ACCEPTANCE
In assuming the obligation to honor the drafts at maturity, the banks add to the
acceptability of the draft or bill of exchange.
The most fundamental distinction between the position of the bank as an issuer
of a letter of credit and the bank as an acceptor of a draft drawn under the terms
of a letter of credit is that the letter of credit is not negotiated whereas the
acceptance is fully negotiable. Of course, there might be some exceptions to
permit the negotiability of the letter of credit but in an acceptance, it becomes not
only implied but effective.
The letter of credit partakes of the nature of the contractual relationship between
the bank and the person to whom it is directed. For this reason, there might be
still be room for interpretation. An acceptance, on the other hand, is a negotiable
166
Davao del Norte
instrument, which in the hands of a holder in due course, is precisely in the same
category as a promissory note which has been negotiated. In such a case, there
seems to be no room for interpretation or avoidance of the liability.
CREATION OF ACCEPTANCE CREDIT
As in all cases regarding credit transactions, the BangkoSentral has its own
regulations as far as the “power to accept”by the banks is concerned. Such
limitation is contained in the New Central Bank Act.
Some of the most common sources of drafts for acceptance are as follows:
1.Importation and exportation of goods;
2.Domestic shipment of goods;
3.Drafts secured by documents conveying or securing titles to readily marketable
staples; and
4.Drafts drawn by foreign banks or bankers for the purpose of furnishing dollar
exchange. The draft, of course, is either “time date” or “time sight” bills.
Inc.
167
Davao del Norte
Bookstore, Inc.
accountid=31259
Let’s Check
1. What describes the merchandise, the identifying marks for shipment, the unit
price and the total amount, and such other details?
2. This is a certification by a protection company to the effect that the goods are
insured in accordance with the terms of sale.
3. This is similar to the commercial invoice except that it is issued by consular
establishments.
4. These receipts would indicate the position of the goods for shipment.
5. What is issued when the exports are restricted or by quotas.
6.This is similar to the export license, except that it would indicate import
controls perhaps through a system of priorities.
7. When there are restrictions in the movement of foreign exchange, such
license would be necessary to accompany the letter of credit
A. EXPORT LICENSE.
B. CONSULAR INVOICE.
C. IMPORT LICENSE.
D. INSURANCE CERTIFICATE.
E. FORWARDING RECEIPTS.
F. COMMERCIAL INVOICE.
G. EXCHANGE LICENSE.
Let’s Analyze
Activity 1: Give an actual event showing the advantages of the modern system of
clearing.
A greater amount of work could be accomplished in less time.
1.______________________________________________________________
168
Davao del Norte
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
A lesser number of employees is necessary to accomplish clearing.

2.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
Less amount of money, if all, is needed to effect the clearing

3.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
It is a safer way of settling balances

4.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
In a Nutshell
is done for you.
169
Davao del Norte
1. The most fundamental distinction between the position of the bank as an
issuer of a letter of credit and the bank as an acceptor of a draft drawn under the
terms of a letter of credit is that the letter of credit is not negotiated whereas the
acceptance is fully negotiable. Of course, there might be some exceptions to
permit the negotiability of the letter of credit but in an acceptance; it becomes not
only implied but effective.
2.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
3.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
4.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
5.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
Q&AList
170
Davao del Norte
1.
2.
3.
4.
5.
Keyword Index
REAL PROPERTY COLLATERAL GOVERNMENT

MARGIN DEPOSITS CREDIT LIMITS COLLECTION
CREDIT
LOAN PAYMENTS
ACCOMMODATIONS
FULLY GUARANTEED BANKS MORTGAGE
CORPORATION CONTROLS DEBTORS
PARTNERSHIP WAREHOUSE RECEIPTS LIABILITIES

concepts of Trust function.
Metalanguage
171
Davao del Norte
TRUST RECEIPT- is a financial document attended to by a bank and a business

that has received delivery of goods but cannot pay for the purchase until after
the inventory is sold.
LETTER OF CREDIT- is a letter from a bank guaranteeing that a buyer's
payment to a seller will be received on time and for the correct amount. In the
event that the buyer is unable to make a payment on the purchase, the bank will
be required to cover the full or remaining amount of the purchase.
IMPORTATION- the process or business of bringing goods into a country from
another country
DIRECT REMITTANCE - is an electronic payment service. When the company
registers incoming invoices and makes salary payments, the payment
transactions are sent to nets in a file
Essential Knowledge
THE TRUST RECEIPT
One of the most important documents used in connection with letter of credit
financing is the trust receipt. This is availed of when the buyer or importer is
momentarily out of cash and arranges to have the goods released under trust
receipt. There is, therefore, created a fiduciary relationship. The title of the
property is retained by the bank and the buyer is allowed to dispose of goods.
However, the buyer obligates himself to turn over the proceeds of sale to the
bank. Upon full payment of the goods, the importer is released from his liability
under trust receipt.
BSP`S CURRENT POLICIES ON LETTER OF CREDIT
In line with Section 8 of the BangkoSentral`s Circular No. 1389, as amended,

sale of local foreign exchange for trade transactions must be supported by the
following minimum documentary requirements:
172
Davao del Norte
1.Importation under Sight L/C (Reimbursing bank debits the account of the
local banks on negotiable date):
a.Copy of import L/C;
b.Original transmittal letter of foreign negotiating bank to local bank covering the
import documents;
c.Relex from negotiating bank of cable negotiation done;
d.Proof of debit to the local bank`s account abroad;
e.Copy of original commercial invoice;
f.Copy of original first bill of lading; and
g.Copy of report to BSP on L/C opening and L/C negotiation
2.Importation under Sight L/C but with documentary discrepancies which

are sent on collection basis (Local bank remits payment to the negotiating
bank after obtaining the client`s conforme to the discrepancies.);
a.Copy of the import L/C.;
import documents;
c.Copy of authenticated letter of foreign negotiating bank to local bank covering
the import documents;
d.Copy of authenticated/tested message of outgoing remittance;
e.Copy of original commercial invoice;
f.Copy of report to BSP on L/C opening and L/C negotiations; and
g.Proof of debit to the local bank`s account abroad.
3.Importation under Issuance L/C;

a.Copy of import L/C;
import documents;
c.Copy of the accepted draft;
d.Copy of original commercial invoice;
e.Copy of original first bill of lading;
f.Copy of authenticated/tested message of outgoing remittance;
g.Proof of debit to the local bank`s account abroad; and
h.Copy of report to BSP on L/C opening and L/C negotiation.
4.Importation under OA/DA:

a.For DA accepted drafts;
b.Copy of original commercial invoice;
c.Copy of original first bill of lading;
d.Copy of BSP registration of OA/DA;
e.Original transmittal letter of foreign bank to local bank covering the import
documents for DA transactions;
f.Copy of report BSP on OA/DA transactions booked.
g.Copy of authenticated/tested message of outgoing remittance; and
h.Proof of debit to the local bank`s account abroad
173
Davao del Norte
5.Importation under DP:

a.Original transmittal letter of foreign collecting bank to localbank covering the
import documents;
b.Copy of original commercial invoice;
c.Copy of original first billing of lading;
d.Copy of authenticated/tested message of outgoing remittance; and
e.Proof of debit to the local bank`s account abroad.
6.Importation under Direct Remittance (prepayments not allowed):

a.Copy of original commercial invoice;
b.Copy of original first bill of lading (foreign exchange sale should not be beyond
15 calendar days from BL date);
c.Copy of authenticated/tested message of outgoing remittance; and
d.Proof of debit to the local bank`s account abroad.
REMITTANCE OF PAYMENT TO THE BENEFICIARY SHOULD BE MADE

IMMEDIATELY AFTER SALE OF FOREIGN EXCHANGE.
The bank must indicate the amount of foreign exchange sold below the phrase
FX SOLD which should be stamped on the face of all original copies of the
negotiable bill of lading and duly signed by the bank`s notarized certification, in
the attached format, signed by the importer-client`s responsible officer and the
bank`s officer with the tank of at least vice-president, respectively.
Where the importer buys foreign exchange as payment for importations made
through another (opening/booking) bank, the importer-client must submit to its
foreign exchange selling bank(s) a notarized applications purchase foreign
exchange, together with the requirement proved under Circular Letter dated 31
March 1998.
THE TRUST FUNCTION
The trust function is not really an original function of a commercial bank. As a

matter of fact, even today, this activity is segregated from purely commercial
banking operations. Hence, it is the trust department of banking institutions
which take care of this particular activity because of its rather peculiar, delicate
as well as personal nature of operations. If, however, the charter is primarily to
deal in trust, then the institution is called a trust company and will only have
secondary banking functions such as the receipt of deposits and lending of
funds.
This chapter presents the nature of trust, the origin of the trust companies, the
trust department and its activities, kinds of trust, investment of trust funds, and
174
Davao del Norte
advantages of agency services. It also answers the question why banks are
better trustees. The regulations of trust companies or trust department of
banking institutions as contained in Chapter IX of the New General Banking Act
are quoted for the purpose of having a well-rounded discussion on the trust
function.
NATURE OF TRUST
The nature of a trust agreement implies the presence of complete faith and
confidence among the parties. For one party, the creator of the trust (known
either as the trustor, grantor, donor, testator) transfers the title of the property to
another person (known as the trustee) for the benefit of a third person or himself
(known as the beneficiary). The trustee is expected to assume the obligation of
faithfully administering the property as if it were his own and to thus exercise the
prudent man principle. This principle suggests the fact that a trustee would take
care of the property and see to it that it is well preserved and make investments
that would bring in reasonable profits, and in no way jeopardize the trustor’s or
beneficiary’s interest.
In the past, because of the personal nature of trusts, trustees named are either
close friends, relatives, the family’s lawyer, or any person who could be implicitly
trusted. But there were pitfalls in naming individuals as trustees. Hence, with the
advent of corporate business and the development of trust companies as well as
banks, trusteeships are now almost commonly created by naming either trust
companies or banks as trustees.
Origin of Trust Companies
The concept of trusteeship dates back to the thirteenth century, although it is

evident that the institution itself originated in America about a hundred years
ago. New York City has the distinction of having the very first trust company
which was known as the Farmer’s Fire Insurance and Loan Company and later
changed to Farmer’s Loan and Trust Company.
Trust activities came from the diversion of insurance funds for investment
purposes. It probably became a synthesis in the propriety of investing funds
accruing to persons entitled to ultimately receive such amounts at some future
dates. So as an inducement for taking out insurance, or as an added attraction,
the insurance company saw `to it that the funds accruing to beneficiaries were
invested in order to have more earnings.
Since dealing with such funds was of fiduciary nature, it was evident that a
separate organization had to be established to deal exclusively in trust functions.
With the development of bank departmentalization, the trust company is now
delineated from the trust department of a bank dealing in trust activities. Both,
however, whether a trust company or a trust department, concentrate on the
175
Davao del Norte
handling of trusteeships and allied services.
BANK’S TRUST DEPARTMENT
In a commercial bank, the trust department is entrusted with securities, funds,

and properties by a trustor for a beneficiary. As trustees, bank are generally
exempt from putting up bond for the faithful performance of their duties; but the
court may require them to post a bond for the protection of funds or property
confided to them.
All activities of a fiduciary nature are coursed to and disposed of by the bank’s
trust department. The books of accounts and any cash deposits are kept
separate and distinct from the regular banking functions. The department is
usually split in order to attain division of labor. It may, therefore, have the
following main divisions:
1.Legal Estate Administration, Guardianship and Administering Trust. This
division would handle matters of legal import, manage and administer properties
under trust, act as executor of last wills and testaments or administer estates.
2.Agency Services. This division handles agency services such as that of
safekeeping, custodianship, and escrows. It serves either individuals or
corporations. For example, it acts as transfer agent or registrar of stocks and
bonds for corporate entities. Or it may be the paying agent for a wealthy
individual.
3.Accounting Division. This division takes care of recording and analyzing all
trust transactions. It prepares the tickler for trust accounts. It also takes care of
computing the tax payments due on trusteeships, as well as prepares the
necessary financial statements required by the regulatory and supervisory
agencies.
4.Asset Management Division. This division manages outstanding and
foreclosed accounts of both institutional and individual clients.
5.Fund Management or Investment Division. This division is in charge of coming
up with products and services offered to its diverse clientele. It also handles the
Investment Management Accounts (IMA) of clients by syndicating or pooling of
funds for the investments. For clients who provide no instruction on the use of
their funds, this division also looks for the appropriate investment media.
TRUST ACTIVITIES OF BANKS

The trust department has the following functions:
1.To act as trustee for a corporation’s assets under mortgage/bond issue.
In a corporate mortgage, the trustee is charged with the responsibility of
protecting the mortgagee’s or bondholder’s interest. In so doing, the trustee
reviews and examines the mortgage bond indenture; issues the mortgage
participation (MPC) bond; and takes care of the sinking fund. In general, it sees
to it that the claims of the bondholders are well established and protected. Titles
of the properties mortgaged are usually transferred to the trustee for the duration
176
Davao del Norte
of the mortgage.
2.To act as transfer agent or registrar of stocks and bonds.The transfer of
ownership of stocks and bonds necessitates an accurate record to protect the
interest of the owners. The function of a transfer agent is to see to it that proper
transfers are duly recorded int= the stick and transfer book and to assure a clear
title to the new owner.
On the other hand, the registrar checks on the work of the transfer agent and
certifies to the fact that the outstanding stocks do not exceed the issued and the
authorized stocks. Thus, the transfer agent is usually distinct and separate from
the registrar of stocks and bonds.
3.To act as guardian of a minor’s interest. When the property of a minor,
through a will or through court order, is left in the hands of a bank as a trustee, it
sees to it that such interests are safeguarded and are properly managed. This
would assure the minor of security in income until he reaches the age whereby,
he could ably administer his own property.
4.To act as executor of last wills and testament. When the trustor leaves a
will, banks assist in the execution of the last will and testament. Hence, the
trustee should, among other things, prepare an inventory of the properties and
make necessary publications.
5.To act as administrator of estates. Sometimes, the owner of a property or
the court appoints a trustee a take over the management and administration of
his estate. The trustee sees to it that the property is well managed and that it
brings in a reasonable income.
6.To act as depository for escrow deposits, valuables, or other securities. In
some transactions, one party may require the other party to deposit in escrow
property or cash to insure the performance of an obligation. In such a case, the
banks trust department takes charge of such deposit in accordance with terms
and conditions of the agreement.
The agency services division of the bank’s trust department also receives
deposits in the form of properties or valuables and safe keeps the same for
individuals or companies.
7.To act as assignee, receiver, or depository. In case of corporation or individual
business which are on the brink of bankruptcy or are being mismanaged, it may
be necessary for a third party to take over management to insure the interest of
the creditors. In such a case, the trustee may act either as an assignee, a
receiver or a depository.
8.To act as an advisor. The trust department provides expert advice to
institutions and individuals on investment decisions.
KINDS OF TRUST
Trust activities are undertaken for individuals and for institutions. Thus,
trust may be generally divided into individual and corporate trusts.
Individual trusts are those which would pertain to trust functions where the
welfare and interest of the individual is safeguarded. Hence, the creator of the
trust is an individual. This type of trust may be in the form of:
177
Davao del Norte
1.Voluntary or Living Trust. Under the set-up, the owner transfers the title of
the property to a trustee and gives instructions how to dispose of the income or
how to reinvest the funds. It may be either be revocable or irrevocable. A
revocable voluntary trust means that the person may retain the right to modify or
amend the original trust agreement. An irrevocable trust means that the trustor
cannot in any manner change the agreement, except with the consent of the
beneficiary. The beneficiary may either be a third person, an institution or the
trustor himself.
A voluntary trust (sometimes also called personal trust) may be created due to
manifold reasons. It may be that the person is unfit or incompetent to administer
his own property; or the owner may want to go on vacation; or he simply wants
relief from his work; or perhaps he wants to retire from work altogether due to
sickness or old age.
2.Testamentary Trust. When an individual appoints a trustee though a will, it is
known as a testamentary trust. Hence, the administration of the property or the
disposition thereof shall be made upon the death of the testator. The trustee will
then act as an executor of the last will and testament, if it is so named to act as
such in the will.
In case the testator fails to name the executor in his will or when he leaves no
will, the court appoints an administrator who will perform the same duties as an
executor.
3.Insurance Trust. This service is rendered whenever the Trust Department of
a ban k is appointed as trustee under insurance trust agreements. Under these
agreements, the trustor makes his insurance policies payable to the bank, who
shall manage and distribute the proceeds in accordance with the dispositive
provisions of the agreement.
4.Employee Benefit Trust. This involves a creation and design of a plan to
provide economic security and benefits to employees. The following
areexamples of employee benefit trusts:
a.Fixed Benefit (Standardized Benefit Fund) – A fixed benefit plan designed
for small and medium-scale firms who wisely wish to comply with the payment of
employee retirement benefits as prescribed by law. Only the employer
contributes to the fund. Employees are paid a fixed sum of benefits in one lump
sum or on a staggered basis in accordance with the provisions of the retirement
plan
b. Variable Benefit (Contributory of Provident) – A plan established and
maintained by an employer who is committed to contribute a fixed percentage of
his employees’ compensation regardless of whether the employees choose to
contribute or not.
c.Profit-Sharing Fund – It is a plan established and maintained by an employer
whereby employees and their beneficiaries may participate in the sharing of the
company’s profits as a retirement incentive.
d. Stock Bonus Fund – A plan established and maintained by an employer to
provide benefits for his employees in the form of stocks or shares of the
178
Davao del Norte
company, which may be set aside and distributed to the employees.
5.Investment Management Services. Banks manage investment portfolios. It
allows a client’s assess to grow in a disciplined manner according to their goals,
time frame, and comfort level. Rather than letting portfolio’s success rely too
much on chance or the performance of narrowly chosen investments, banks
provide a more sophisticated approach.
Corporate trusts are those which are created by corporations. They cover
activities relating to financial matters such as bond financing, depository in
escrow and similar activities. Besides these, we also have the following:
1.Collateral Trust. In this case, the title of the collaterals placed behind a
mortgage is transferred to a trustee for the interest of the bondholders. The
collaterals are composed of stocks and binds held by parent companies.
2.Sinking Fund Trust. The trustee is usually assigned to enforce the provisions
for a sinking fund connected with bond financing.
WHY BANKS MAKE BETTER TRUSTEES

The banks today are allowed by the central bank engage in trust functions.
Likewise, trust companies are sanctioned to engage in commercial banking
functions. Thus, banks provide many advantages to act as trustee as against an
individual acting as such. Some notable aspects are:
1.Banks, being corporate entities, have perpetual lives, and therefore, have the
possibility of renewing their charter upon expiration after a period of time. This is
not quite the case for an individual.
2.Because of the continuity of existence, this would lead to stable policies and
uniform procedures attuned to current trends, which are relatively impossible in
the case of individuals.
3.Banks are in a better position to exercise prudence in administering trust and
investing funds due to constant state supervision.
4.Banks have an impersonal, and therefore, impartial relationship with the
beneficiaries under trust agreements.
5.In the investments of funds, the bank officers can make good use of their wide
and diverse experience and also of their good judgment.
6.Banks have a definite place and hours to transact business for the
convenience of those they serve.
7.Banks are required by law to put an amount at least equal to the securities,
properties, or money held in trust by them.
8.Banks are governed by laws, rules, and regulations regarding their operations.
ADVANTAGES OF AGENCY SERVICES

Trust services are usually what we may call “personalized” services because of
the distinct feature of serving one’s interest and needs. The bank’s trust
department, as already stated, also acts as depository for individuals and
corporations. Some of the advantages derived from such services are as follows:
179
Davao del Norte
1.The securities are comparatively safer because banks have a fire-proof and
burglar-proof vaults to keep them in.
2.Bank officers handling trust services are properly bonded.
3.If the customer wishes to negotiate a loan, he could easily do so by referring to
the securities held in trust. He would them be rid of the undue delay in loan
processing.
4.Whenever the owner wishes to sell his securities, he can do so with the least
delay and without loss because they are kept in good delivery condition. As
mentioned earlier, banks act also as transfer agents and registrars of stocks and
bonds, hence, this position of the bank as keeper of securities.
5.In the collection of dividends on coupon bonds, the customer is relieved of
looking after such coupons. He also derives the convenience of being free from
the mechanics of collecting interest payments.
6.The owner of the securities---whether to sell or to buy if there is any
appreciation or depreciation in value.
INVESTMENT OF TRUST FUNDS

The investment of trust funds must be done in conformity with the wishes of the
trustor as explicitly spelled out in the trust agreement. Hence, the terms of the
will of a testator, the bond indenture, the court order, or the deed of trust should
be followed when investing the funds. But, in some cases, discretion is given to
the bank-trustee and it is expected to use good judgment based on experience
and some sound principles of investment. Because of the fact that the bank must
maintain the trust of the trustor, as well as to invite future trust business, it
almost always invests the funds cautiously and judiciously. Speculative
investments are ruled out and investments are chosen on the basis of safety,
certainty of income, marketability and sometimes, stability. In order for the bank
or a trustee to find its way clear in making worthy investments and to set a
policy, it takes into consideration the size of trust funds.
In cases of doubt as to the investment, the trust company or trust department of

a bank only invests in investment allowed by law. To further enhance the safety,
the investments are diversified either as to kind, to maturity, and in some other
ways. In no event must the personal advantage of the trustee be the guide in the
investment of trust funds. Of course, in the case of banks, the personal element
is minimized due to its corporate structure.
In the Philippines, a bank or trustee administering a Common Trust Fund (CTF)

shall not have any interest in such fund other than in its capacity as trustee of
the CTF, nor grant any loan on the security of a participation in such fund. A
trustee who administers funds representing employee benefit plans under trust
or investment management may invest funds in VTF. In case of employee
benefit under trust belonging to employees of entities other than that of the
trustee, the trustee may invest such funds in its own CTF only on a temporary
basis.
180
Davao del Norte
Banks may not receive, or hold as trustee, agent, administrator, financial

manager, or other similar capacity, any fund or money from the government and
government entities. The government-owned banks may receive, or hold as
trustee, agent, administrator, financial manager, or other similar capacity, the
following:
1.Funds of local government units (LGUs) which are expected to be available
for investment purposes for a relatively long period of time. The amounts held in
trust or otherwise managed/advised for and in behalf of the LGUs shall be
invested only in government securities, specifically, evidences of indebtedness
of the national government, the servicing and repayment of which are fully
guaranteed by the national government; and
2.Funds of government and government entities which are authorized by
special laws to be placed in trust.
REGULATIONS OF TRUST COMPANIES

The regulations governing trust companies, or trust departments of banking
institutions operating in the Philippines, are quoted hereunder as contained in
Chapter IX of the New General Banking Act thus:
Sec. 79. Authority to Engage in Trust Business. Only a stock corporation or a

person duly authorized by the Monetary Board to engage in trust business shall
act as a trustee or administer any trust or hold properly in trust or on deposit for
the use, benefit, or behalf of others. For purposes of this Act, such a corporation
shall be referred to as a trust entity.
Sec. 80. Conduct of Trust Business. A trust entity shall administer the funds or
property under its custody with the diligence that a prudent man would exercise
in the conduct of an enterprise of a like character and with similar aims.
No trust entity shall, for the account of the trustor or the beneficiary of the trust,
purchase or acquire property from, or sell, transfer, assign or lend money or
property to, purchase debt instruments of, any of the departments, directors
officers, stockholders, or employees of the trust entity, relatives within the first
degree of consanguinity or affinity, or the related interests, of such directors,
officers and relationship of the trustee and the other party involved in the
transaction is fully disclosed to the trustor of beneficiary of the trust prior to the
transaction.
Sec. 81. Registration of Articles of Incorporation and By-Laws of a Trust

Entity. The Securities and Exchange Commission shall not register the
articles of incorporation and by-laws or any amendment thereof, of any trust
entity, unless accompanied by a certificate of authority issued by the
BangkoSentral.
Sec. 82. Minimum Capitalization. A trust entity, before it can engage in trust or
other fiduciary business, shall comply with the minimum paid-in capital
181
Davao del Norte
requirement which will be determined by the Monetary Board.
Sec. 83. Powers of a Trust Entity. A trust entity, in addition to the general
powers incident to corporations, shall have the power to:
83. 1. Act as trustee on any mortgage or bond issued by any municipality,
corporation with the law;
83. 2. Act under the order or appointment of any court as guardian, receiver,
trustee, or depository of the estate of any minor or other incompetent person,
and as receiver and depository of any moneys paid into court by parties to any
legal proceedings and any of property of any kind which may be brought under
the jurisdiction of the court;
Sec 83. 3. Act as executor of any will when it is named the executor thereof;
83. 4. Act as administrator of the estate of any deceased person, with the will
annexed, or as administrator of the estate of any deceased person when there is
no will;
83. 5. Accept and execute any trust for the holding, management, and
administration of any estate, real or personal, and the rents, issues and profits
thereof; and
83. 6. Establish and manage common trust funds, subject to such rules and
regulations as may be prescribed by the Monetary Board.
Sec 84. Depositor for the Faithful Performance of Trust Duties. Before
transacting trust business, every trust entity shall deposit with the BangkoSentral
as security for the faithful performance of its trust duties, cash or securities
approved by the Monetary Board in an amount equal to or not less than five
hundred thousand pesos (P500,000.00) or such higher amount as may be fixed
by the Monetary Board. Provided, however, that the Monetary Board shall
require every trust entity to increase the amount of its cash or securities on
deposit with the BangkoSentral whenever in its judgment increase is necessary
by reason of the trust business of such entity must at least equal to the amount
required to be deposited with the BangkoSentral in accordance with the
provisions of this paragraph. Should the capital and surplus fall below said
amount, the Monetary Board shall have the same authority as that granted to it
under the provisions of the fifth paragraph of Section 34 of this Act.
A trust entity, so long at shall continue to be solvent and comply with laws or
regulations, shall have the right to collect the interest earned on such securities
deposited with the BnagkoSentral and, from time to time, with the approval of
BangkoSentral, to exchange the securities for others. If the trust entity fails to
comply with any law or regulation, the BangkoSentral shall retain such interest
on the securities with it for the benefit of rightful claimants. All claims arising out
of the trust business of a trust entity shall have priority over all other claims as
regards the cash or securities deposited as above provided. The monetary board
may not permit the cash securities deposited in accordance with the provision of
this Section to be reduced below the prescribed minimum amount until the
depositing entity shall discontinue its trust business and shall satisfy the
Monetary Board that it has complied with its obligations in connection with such
182
Davao del Norte
business.
Sec. 85. Bond of Certain Persons for the Faithful Performance of Duties.
Before an executor, administrator, guardian, trustee, receiver, or depositary
appointed by the court enters upon the execution of his duties, he shall, upon
order of the court, file a bond in such sum as the court may direct.
Upon the application of any executor, administrator, guardian, trustee, receiver,
depositary or any other person in interest, the court may, after notice and
hearing, order that the subject matter of the trust or any part thereof be
deposited with a trust entity. Upon presentation of proof to the court the subject
matter of the trust has been deposited with a trust entity, the court may order
that the bond given by such persons for the faithful performance of their duties
be reduced to such sums as it may deem proper. Provided, however, that the
reduced to such sums as secure adequately the proper administration and care
of any property remaining under the control of such persons and proper
accounting of such property.
Property deposited with any trust entity in conformity with this section shall be
held by such under the orders and direction of the court.
Sec. 86. Exemption Trust Entity from Board Requirements. No bond or other
security shall be required by the court from a trust entity for the faithful
performance of its duties as court appointed trustee, executor, administrator,
guardian, receiver, or depositary. However, the court may, upon proper
application with its showing special cause thereof, require the trust entity to post
a bond or other security for the protection of funds or property confided to such
entity.
Sec. 87. Separation of Trust Business from General Business. The trust
business and all funds, properties or securities received by any trust entity as
executor, administrator, guardian, trustee, receiver, or depositary shall be kept
separate and distinct from general business including all other funds, properties,
and assets of such trust entity. The accounts of all such funds, properties or
securities shall likewise be kept separate and distinct from the accounts of the
general business of the trust entity.
Sec. 88. Investment Limitations of a Trust Entity. Unless otherwise directed by
the instrument creating the trust, the lending and investment of funds and other
assets acquired by a trust entity as executor, administrator, guardian, trustee,
receiver, or depositary of the estate of any minor or other incompetent person
shall be limited to loans or investment as may be prescribed by law, the
Monetary Board or any court of competent jurisdiction.
Sec. 89. Real Estate Acquired by a Trust Entity. Unless otherwise specifically
directed by the trustor of the nature of the trust, real estate acquired by a trust
entity in whatever purpose shall likewise be covered by the relevant provisions of
Section 52 of this Act.
Sec. 90. Investment of Non-Trust Funds. Investment of funds other than trust
funds of a trust entity which is a bank, financing company, or an investment
house shall be governed by the relevant provisions of this Act and other
183
Davao del Norte
applicable laws.
Sec. 91. Sanctions and Penalties. A trust entity or any of its officers and
directors found to have willfully violated any pertinent provisions of this Act, shall
be subject to the sanctions and penalties provided under section 66 of this Act
as well as Sections 36 and 37 of the New Central Bank Act.
Sec. 92. Exemption of Trust Assets from Claims. No assets held by entity in
its capacity trustee shall be subject to any claims other than those of the parties
interested in the specific trust.
Sec. 93. Establishment of Branches of a Trust Entity. The ordinary business
of a trust entity shall be transacted at the place of business specified in its
articles of incorporation. Such trust entity may, with prior approval of the
Monetary Board, establish branches in the Philippines, and the said entity shall
be responsible for all business conducted in such branches to the same extent in
the same manner as though such business had all been conducted in the head
office.
Inc.
Bookstore, Inc.
184
Davao del Norte
accountid=31259
In a Nutshell
is done for you.
1.In the Philippines, a bank or trustee administering a Common Trust Fund
(CTF) shall not have any interest in such fund other than in its capacity as
trustee of the CTF, nor grant any loan on the security of a participation in such
fund. A trustee who administers funds representing employee benefit plans
under trust or investment management may invest funds in VTF. In case of
employee benefit under trust belonging to employees of entities other than that
of the trustee, the trustee may invest such funds in its own CTF only on a
temporary basis.

2.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
3.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
4.______________________________________________________________
________________________________________________________________
________________________________________________________________
185
Davao del Norte
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
5.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
Q&AList
1.
2.
3.
4.
5.
186
Davao del Norte
Keyword Index
CORPORATION MORTGAGE GOVERNMENT

PARTNERSHIP DEBTORS COLLECTION
REAL PROPERTY LIABILITIES PAYMENTS
MARGIN DEPOSITS COLLATERAL BANKS
CREDIT ACCOMMODATIONS CREDIT LIMITS CONTROLS
WAREHOUSE RECEIPTS LOAN FULLY GUARANTEED
Big Picture D
expected to
a. Understand the nature and basic concepts of Philippine deposit insurance
corporation; and
b. Understand the nature and basic concepts of international financial
institution.

concepts of Philippine deposit insurance corporation.
Metalanguage
FINANCIAL SYSTEM- is a set of institutions, such as banks, insurance
companies, and stock exchanges, that permit the exchange of funds
REGULATORY AUTHORITY- a governmental agency that regulates businesses
in the public interest, regulatory agency, administrative body, administrative unit
a unit with administrative responsibilities.
SAVINGS- a governmental agency that regulates businesses in the public
interest. regulatory agency. administrative body, administrative unit a unit with
administrative responsibilities.
187
Davao del Norte
Essential Knowledge
THE PHILIPPINE FINANCIAL SYSTEM
The financial system has a complex structure and operation involving every
individual and business organization in a civilized society. It comprises the
financial institutions such as banks, pawnshops, credit unions, money markets,
investment houses, financing companies, securities dealers, and other non-bank
financial institutions. Thus, the Philippine financial system is a network of various
institutions which generates circulates, and controls money and credit. Its
policiesand programs, therefore, support the country`s social and economic
development.
This chapter presents the Philippine banking instituitions, both private and
government; as well as private and government non-banking financial
institutions. The BangkoSentralngPilipinas is presented ahead of the banking
and financial institution since it is the country`s central monetary authority.
THE BANGKO SENTRAL NG PILIPINAS

The BangkoSentralngPilipinas (BSP) was created by the Republic Act No. 7653,
otherwise known as the New Central Bank Act of 1993, as part of the
restructuring of the old Central Bank of the Philippines (CBP), which was
originally established in 1949. It was initially capitalized at P5 billion that was
fully subscribed by the government. The BSP is now the Philippines`central
monetary authority that provides policy directions in the areas of money, banking
and credit. It is empowered to exercise supervision and regulation on the
operations of banks.
The BSP`s power and functions are exercised by its Monetary Board, consisting
of seven members appointed by the President of the Philippines. One of the
government sector members of the Monetary Board must be a member of the
Cabinet designed by the President of the Republic, which position is currently
held by the secretary of Finance, The New Central Bank Act establishes certain
qualifications for the members of the Monetary Board and also prohibits
members from holding certain positions with other governmental agencies and
private institutions that may give rise to conflicts of interest. With the exception of
188
Davao del Norte
the members of the cabinet, the governor and other members of the Monetary
board serve terms of six years and may only be renowned for cause. The New
Central Bank Act authorizes the Governor of BSP to appoint up to three Deputy
Governor subjects to the approval of the mandatory board. The Governor is the
chief executive officer of the BSP and is required to direct and supervise the
operations and internal administration of BSP. However, the Governor may
delegate certain administrative responsibilities to other officers of BSP; such as
Deputy Governor and the managing director of departments within the BSP
As governing bank and the banking industry`s regulatory authority, the BSP was
able to maneuver the country safely through domestic and international waters.
It facilitated the Philippines` recovery from the effects of the 1997 financial crisis.
The BSP has sought the enhancement of its regulatory capabilities. It is adopting
a risk-based framework in the exercise of this function, by enabling banks not
merely to be compliant with banking laws and requirements but empowering
them to detect, evaluate, and respond more positively to their risk exposures
independently and self-reliantly, In this respect, the BSP is aided in its bank
monitoring and examination processes by credit rating agencies and financial
conglomerates.
The BSP is also into the upgrading of its domestic prudential standards in the
areas of capitalization, connected or pooled lending, loan provisioning, data
disclosure, and qualifications of owners and managers. It sets the level of banks`
capitalization. The institutions it supervise now carry different levels of capital
that are commensurate to the risk they assume in their respective lending
portfolios.
The BSP likewise imposes the requirements on the operations of e-bankers. It

issued two Circulars, BSP Circular 240 in May and Circular 287 in December
2000, to ensure that banks providing e-banking service have risk-management
mechanisms in place so they could detect and control risks that are associated
with the practice. The BSP is facilitated the exchange of information and
promoted the security of electronic transactions.
The passage into law of the General Banking Act of 2000 gave the BSP more
flexibility in supervising banks and upgrading the country`s law to meet
international standards. It is even pushing for amendments to the new bank act
that will enable it to attain greater independence in the management of the
country`s internal and external threats,
THE BANKING INSTITUTIONS

The banking institutions in the Philippines can be categorized as private banking
and government banking. The private banking institutions are comprised of
commercial banking such as universal banks and ordinary commercial banks;
189
Davao del Norte
thrift banks like savings and mortgage banks, private development banks, and
stock savings and load association; and the rural banks. The government
banking institutions, on the one hand, consist of Philippine National Bank,
Development Bank, Land Bank of the Philippines, and the Philippine Amanah
Bank.
PRIVATE BANKING INSTITUTIONS

1. Commercial Banking Institutions. The banks that fall under commercial
banking institutions are the ordinary commercial banks or non-expanded
commercial banks and the universal banks or expanded commercial banks.
These banks continue to account for the bulk of the total resources of the
banking industry. They are, indeed, the major financial system of the country.
2. The Thrift Banks. Thrift banks are primarily engaged in mobilizing the small
savings of the people. They encourage the habit of thrift and savings, and
provide loans at reasonable interest rates. They have motivated the low-income
groups and school children to save their money in the bank. They provide funds
for agriculture and industry at reasonable interest rates. The small producers like
farmers, fisherman, craftsmen, and poor consumer can rely on such banks for
financing their production and consumption inputs. The following banks fall
under the category of thrift banks:
a. The Savings and Mortgage Banks. The primary function of a savings and
mortgage bank is to receive time deposits of different types and to invest its
funds in long term investment. It is a corporation organized primarily for the
purpose of accumulating the small savings of depositors and investing them,
together with its capital, in bonds or in loans secured by bonds, real estate
mortgage, and other firms if security as provided for by law.
The scope of operations of a savings and mortgage bank, as well as the
organization, supervision, and examination of such institution are embodied in
the New General Banking Ac, the Thrift Bank Act, and the rules and regulation
promulgated by the Monetary Board from time to time.
There are differences between opening and maintaining demand deposits as
against savings or time deposits. The administration of these different types of
deposits also differs. The banks have a better advantage in keeping time
deposits in relation to their loan function. For because of its very nature, time
deposits are kept for longer periods and thus could be programmed for longer
term loans, not to mention the potentiality of turning over the money several
times during the life of the deposits. Decidedly, because interest is paid on time
deposits, some people would rather open savings accounts rather that current
accounts. But, where the use of funds is needed frequently, especially for
business, it is apparent that one should avoid the use of time or with the right to
require a written notice of withdrawal which might cause undue delay when
funds are needed urgently. In such a case then, a current account suits the
purpose.
b. The Savings and Loan Association. Very similar to the savings and
190
Davao del Norte
mortgage banks are the savings and loan associations organized nowadays.
However, these institutions may either be stock or non-stock corporations. Their
scope of operations is covered by a special law. This law meets the need for a
better faith in previous institutions which were organized but were not under the
BangkoSentral`s supervisory and regulatory powers. The hue and cry of some of
the victims of the banking malpractices engaged in by the past associations led
to the approval on 22 June 1963 of Republic Act 3779 of the Fifth Congress,
otherwise known as the Savings and Loan Association Act. Pertinent provisions
of the law are incorporated here as a means of showing the similarities and
difference between savings and loan associations and savings and mortgage
banks.
Republic Act 3779 defines a savings and loan association as “any corporation
engaged in the business of accumulations, together with its capital in the case of
a stock corporations, for loans and/or for investment in the securities of
productive enterprises or n securities of the Government, or any of its political
subdivision, instrumentalist, or corporations.”
As far as organization is concerned, section 4 (a) of the law states that savings
and loans associations may be organized either as stock or non-stock
corporations. If organized as stock corporations, they should start with at least
one hundred thousand pesos (P100,000.00) fully paid capital. In which case,
they could commence receiving deposits from and lending funds to the public.
Furthermore, a savings and loan association which has been in operation as
non-stock for at least three (3) years may be converted into a stock corporations.
Such conversion would require a paid-up capital of fifty thousand pesos
(P50,000.00).
In case of non-stock corporations, membership should be confined to a “well-

defined group.” Such institution should not have a transaction with the general
public but rather confine its activities among its members. It is prohibited from
soliciting membership fees without first securing permission from the Monetary
Board.
Whether a stock or non-stock corporation, the fees collected should not exceed
“one percent of the amount deposited, contributed, or otherwise paid-in by the
particular shareholder, stockholder, or member,” as provided for by Section 4 (d)
of Republic Act 3779.
A more exhaustive study of savings and loan association, as they exist and
operate in the Philippines, may be obtained from the provisions of Republic Act
3779.
c.The Private Development Banks. A new addition to the family of banks in the
Philippines is the private development bank. This is quite different from the
191
Davao del Norte
government institution of the same name . For the Development Bank of the
Philippines (DBP) is a government entity, formerly the Rehabilitation Finance
Corporation. Thus, the scope of operations and everything concerning private
development banks fall under this institution as well as the BangkoSentral. The
law creating DBP is Republic Act 85. Due to the additions to its scope of
operations and to include private development banks, the law was amended and
not of the provisions governing the private institutions are contained in Republic
Act 2081.
Private development banks are of three categories, namely: Class A, Class B,

and Class C. Since these banks, which are organized as stock corporations,
have for their main function the investment of their funds in medium and long
term loans for economic projects of significant magnitude, they need a greater
amount of capital; The Government, contributes capital by way of preferred
shares.
For better appreciation of the capital need of such banks, it might be well to cite
the requirement imposed by law. Class A banks are required to have at least P4
million paid –up capital before they can operate; Class B, at least P2 million’ and
Class C. at least P1 million.
As to incorporation, private development of the capital needs of such banks are

formed as stock corporations similar to that of mortgage banks provided for in
the New General Banking Act, the private development banks as provided for in
the New Banking General Act, the Private Development Act, the Thrift Banks
Act, and the Corporation Code of the Philippines.
d.The Rural Banks. Rural banks fulfill the investment function by allowing small
farmers to finance their needs through the granting of loans for capital or other
uses. A rural bank caters to the needs of small farmers, small businessman and
cottage industries.
The organization, operation, and management of a rural are governed by

Republic Act 7353. A rural bank is quite separate and distinct from a savings
institution or a commercial bank because it is an admixture of both. Hence, it has
its own personality in the banking business world. The objective of the law is to
have banks of a miniature stature, although of somewhat impressive functions,
be organized in the various towns and provinces of the Philippines. It thus brings
the business of banking to the doorstep or the rural areas.
The rural bank primarily receives saving deposits, but it also possible for it to
engage in the receipt of demand deposits. This latter position is granted only
after it is proven that the bank can manage its affairs efficiently and that it has
available funds no protect demand deposits.
Loans granted by it are mostly for financing agricultural needs, without prejudice
192
Davao del Norte
to entertaining commercial, industrial, and personal loans. It goes on better than
a commercial or savings bank because it enjoys tax exemption to a certain
extent. It is also permitted to do business on a comparatively smaller amount of
paid-up capital. Besides, the government batches peso for peso the capital
contribution of private investors. It does so in the form of shares preferred as tp
assets.
Rural banks also enjoy re-discounting facilities from the BangkoSentral and
other governmental institutions named bu law. It is no wonder then that at this
writing the handful of previously existing rural banks has now grown into a legion
of rural banks in practically all important towns and provinces.
GOVERNMENT BANKING INSTITUTIONS

The role of the Philippine government in the banking industry is to supplements
the credit facilities of the private financial institution. The private banks have
been reluctant to operate in some areas of the economy because of poor
economic returns. For this, the government had to establish banks for the
socioeconomic development of the small farmers, the Moslem regions, and the
rural areas, among others. Moreover, the government institutions can effectively
render provisions of social goods and service. Thus, the government institution
operate to render service while private financial institution exist basically for
profit. The following are Government-owned banks:
1.The Philippine National Bank. The Philippine National Bank (PNB) operates
under the provision of Executive Order No. 80, the 1996 revised charter of PNB.
The bank has an authorized capital stock of P10 billion which is divided into
P100 million common shares at a par value of P100.oo per share. The
government`s paid –up subscription is P2.5 billion. The PNB is universal bank.
The PNB`s operations and affairs are governed by a Board of Directors which
has nine members elected by the stockholders annually. The members of the
Board of Directors are natural-born citizens of the Philippines. They must be at
least 35 years old, of good moral character, with proficiency, expertise and
recognized competence in banking, finance, economics, law, agriculture,
business, management, public utility or government administration. The
chairman of the Board is appointed by the President of the Philippines. The
president, who is elected from among the members of the Board of Directors,
with the advise and consent of the President of the Philippines, is the bank`s
chief executive.
The powers and purposes of the PNB as a corporation are contained in
Executive Order No. 80.
2.The Development Bank of the Philippines. The Development Bank of the

Philippines (DPB) started operating in 1935 as the National Loan and Investment
Board. Its first mission was to coordinate and manage funds. In 1939, it became
the Agricultural and Industrial Bank that managed government resources until
193
Davao del Norte
the outbreak of the war. In 1947, it was renamed the Rehabilitation Finance
Corporation (RFC) that provided credit facilities for the development
of agriculture, commerce, and industry and the reconstruction of properties
damaged by the war. In 1958, it was reorganized into the DBP. In 1995, the
bank was granted an expand bank license attaining universal banking status.
Under R.A 8523, amending Executive Order No. 81 the 1986, Revised Charter
of DBP, the bank is capitalized at P35 billion, divided into 350 million common
shares with a par value of P100 per share. These shares are subscribed by the
national government.
The affairs and business of the bank are directed, including the exercise of its
power and management of its properties, by a Board of Directors consisting of
nine members appointed by the President of the Philippines. The chairman and
vice chairman are appointed by the President of the Philippines. The chairman is
the bank`s chief executive.
The members of the Board of Directors are natural-born citizen of the

Philippines; at least 35 years old, of good moral character, and have recognized
competence in banking, finance, economics, law, agriculture, business
management, public utility, or government administration.
The Primary purpose of the DBP is to provide banking service principally to

service the medium and long term needs of agricultural and industrial
enterprises, particularly in the countryside and preferably for small and medium
size enterprises. As a body corporate, DBP`s powers are contained in Executive
Order No. 81
3.The Land Bank of the Philippines. The Agrarian Reforms Code created the
Land Bank of the Philippines (LBP) to finance the acquisition and distribution of
agricultural estates for division and resell these to small landholders. It likewise
financed the purchase of landholdings by agricultural lessees.
The authorized capital stock of the bank is P3billion divided into 180 million
common shares at a par value of P10 per share. These shares are fully
subscribed by the government. Another 120 million preferred shares with a par
value of P10 each are non-voting. The LBP is a universal or expanded
commercial bank.
The affairs and business of the bank are directed by a Board of Directors
consisting of seven members composed of the Secretary of Finance as
chairman, the president of the bank as vice-chairman, the Secretary of Agrarian
Reform and the Secretary of Labor as ex-official members. The Board members
who represents agrarian reform beneficiaries is appointed by the President of
the Philippines, while the two remaining members are elected by the
stockholders in their annual meeting.
194
Davao del Norte
4.The Al-Amanah Islamic Investment Bank of the Philippines. The Al-
Amanah Islamic Investment bank of the Philippines (Islamic Bank) was created
under Republic Act No. 6848 for the purpose of promoting and accelerating the
socio-economic growth and development of Mindanao, particularly the
economically depressed provinces of Cotabato, Lanao del Sur, Lanao del Norte,
Zamboanga del Sur, Zamboanga del Norte, and Sulu.
The operation of the Islamic Bank is based on the Islamic concept of banking
following the no-interest and partnership principles. The authorized capital stock
of the bank is P1 billion, divided into 10 million shares at a par value of P100
each. The affairs and business of Islamic Bank are directed, including the
management and preservation of its properties, by a Board of Directors
consisting of nine members who are elected by the stockholders. The chief
executive officer is the chairman who is chosen by the Board of Directors from
among themselves.
NON-BANK FINANCIAL INSTITUTIONS

These are other financial institutions which engage in specific functions. They
Provide service related to claims, financial information and advice, manage
portfolios of financial assets on behalf of other economic units, buy and sell
claims on institutions from clients, and assist in finding sources for those
economic units seeking loans. These are either private or government non0bank
financial institutions.
Private Non-Bank Institution
1.Investment House/Bank. The term “investment house’ is defined to mean as
“any enterprise which engages in the underwriting of securities of other
corporations. “Underwriting is the act or process of guaranteeing the distribution
and sale of securities of any kind issued by another corporation. Securities are
written evidences of ownership, interest, or participation in any enterprise, or
written evidences of indebtedness of a person or enterprise. It includes, but is
not limited to the instruments enumerated in the Securities Act.
The establishment, operation, and regulation of investment houses are governed
under the provisions of Presidential Decree No. 129, otherwise known as the
Investment Houses Law. Investment houses are formed as stock corporations
registered at the Securities and Exchange Commission. The minimum initial
paid-in capital of any investment house is P300 million. At least 40 percent of the
voting stock of any investment house must be owned voting stocks, the basis for
the computation is the citizenship of each stockholder, and with respect to
corporate owners of voting stock, the citizenship of the individual owners of
voting stock in the corporation holding shares in that investment house. Majority
of the members of the Board of Directors must be citizens of the Philippines.
An investment bank is significant in the sense that it deals in lending operations
which is only one phase on the banking business. It does not receive deposits
but engages in the underwriting of the capital needs of new or expanding
corporations and government entities. An investment bank aggregates capital
funds for such purpose mostly through the sale of stocks and bonds. Hence, it is
195
Davao del Norte
sometimes argued that it is a misnomer to call it a bank.
The main feature of investment banking is the underwriting contract. This refers
to the advancing of funds needed by new or expanding entities. The investment
banker enters into this contract which results in the absorption of securities to be
eventually marketed. The investment banker may invite others to undertake this
task of underwriting. If such is the case, a syndicate is formed, and is known as
the purchase group. The group then commits to buy the whole issue either on
proportionate basis or on an “all-for-one” basis. That is, they do it jointly and
severally. Two contracts are signed, one from the originating house by the
manager of the syndicate, and the other between the syndicate and its
members. The syndicate then sells the securities to the investing public so that it
could repay its member the funds advanced.
Sometimes, it becomes necessary that aside from the purchase group, there is
still another group composed of small investment bankers who form the sales
correspondents in other parts of the country.
2.Securities brokers/dealers. Pursuant to the provisions of the Revised
Securities Act, no broker, dealer, or salesman must engage in business in the
Philippines as such broker, dealer, or salesman or sell any securities, including
securities exempted under the said law, except in exempt transactions, unless
he has been registered as a broker, dealer, or salesman. As part of SEC
requirements, as surety bond in the amount of P200,000 for a stock broker, and
P100,000 in the case of a dealer in securities is needed. A minimum paid-up
capital in the amount of P1 million is required of every applicant for license as
stock broker or dealer in securities.
3.Building and Loan Associations. A building and loan association is a special
type of saving institution. Because of its very nature, however, it falls under this
category in view of the fact that it also receives savings from members and lends
fund to them. Hence, it is basically a mutual aid organization.
Building and Loan Association are corporations whose capital stock is required
or is permitted to be paid in by the stockholders in regular, equal periodical
payments. Its purpose is to accumulate savings and profits upon surrender of its
stockholder shares; to encourage industry, frugality, and home building among
its stockholders; and to loan its funds, and funds borrowed for the purpose, to
stockholders on the security of unencumbered real estate and with the pledge of
words “mutual building and loan association” shall form part of the name of every
such association. Furthermore, each share has a matured or par value of
P200.00 as provided by law. Certificates of stock are issued only upon payment
of a membership fee of at least P1.00 together with the first installment on the
share if paid on installment basis. If paid in full, the amount covering the par
value and the membership fees should be paid.
For the purpose of extending full benefits to every member, there are limitations
imposed by law as to the use and amount of the loan.
4.Credit Unions. A credit union is another type of savings institution. It also has
for its purpose the inculcation of the habit of thrift, frugality, and the idea of
helping one another. A credit union is also a membership institution. In some
196
Davao del Norte
instances, it also does banking functions, although its operations are under the
supervision and control of the Cooperative Administration Office, it being one of
the different types of cooperatives existing in this country.
A credit union almost approximates a building and loan association in the
payment of membership fees. Together with the membership fee, however, the
member pays the fixed deposit which serves as his share of the credit union’s
capital. It is, however, a non-stock corporation which emphasizes service rather
than profit. The loans granted by a credit union are in cash and used to finance
provident and other member’s needs.
A significant feature which differentiates a credit union from other savings
institution is its management. It has a Board of Directors, a credit committee and
a supervisory committee. The board sets the policies, the credit committee
passes judgment and approval on loans, and the supervisory committee sees to
it that its operations are within the law as well as public policy.
The board and committee members are elected on the basis of the democratic
principle of “one-man, one-vote” and no proxy voting is allowed. Payment of the
membership fee and the fixed deposits entitles be the member to vote.
Besides the fixed deposit which can only be withdrawn upon separation from the
union and which ears dividends, there is also the savings deposit which a
member must put in regularly. This latter type of deposit, however, can be
withdrawn upon due notice or on demand sometimes, and also earns interest.
Members who borrow receive patronage dividends aside from the earnings on
both the fixed and savings deposits.
In view of its main purpose of helping its members who run out of funds
temporarily, the credit union imposes nominal rates of interest on the loans
granted.
5.Private Insurance Companies. Private insurance companies contribute to the
country’s socioeconomic development as well as to the insured. They provide
loans, funds, and are engaged in the business of investments. The operations
and business transactions of insurance companies are governed by the
Insurance Code.
The different institutions engaged in insurance business in the Philippines are
classified as public and private. Private insurance companies, both domestic and
foreign, are subject to the provisions of the Insurance Code.
6.The Pawnshops. Pawnshops provide credit to small borrowers who are not
qualified to obtain small loans from other financial institutions. In pawnshops, the
cost of borrowing and the terms of payment are generally fair. Thus, as one of
the component of the country’s financial system, pawnshops play a vital role in
socioeconomic development.
The business operation of pawnshops is governed under the provisions

contained in the Pawnshop Regulation Act and Rules and Regulations for
Pawnshops. The pawnshop business may either be in the form of single
proprietorship, partnership, and or corporation. Whatever the form of business
organization may be, Philippine citizenship with regard to ownership is of
197
Davao del Norte
paramount importance. As to single proprietorship, only Filipino citizens may
own and operate. For partnership, 70 percent of its capital is required to be
therein is required to be owned by Filipinos. The Pawnshop has a required
minimum paid-in capital of P100,000.00.
A duty organized and licensed pawnshop has, in general, the power to engage
in the business of lending money on the security of personal property within the
framework and limitations of the Pawnshop Regulation Act and the Rules and
Regulations for Pawnshop.
7.Trust Companies. A trust company is any corporation formed or organized for

the purpose of acting as trustee or administering any trust or holding property in
trust or on deposit for the use, benefit, or behalf of others. Such corporation, with
the approval of the Monetary Board of the BangkoSentral, may engage in
commercial banking business separate and distinct from its trust business.
An entity engaged in the trust business should be organized in the form of a
corporation. It must carry on deposit with the BangkoSentral, either cash or
securities approved by the Monetary Board. Such deposit serves as security for
a trust company in transacting trust business. Its capital trust funds may be
loaned or otherwise invested as its trust business, the investment of its funds
other than banking corporations. Before it can be declared dividend, it is required
by law to carry to surplus ten percent (10%) of its net profits accruing since the
last preceding dividend until the surplus amounts to twenty percent (20%) of its
authorized capital stock.
8.Non-stock Savings and Loan Association. A non-stock savings and loan
association is a corporation engaged in the business of accumulating the
savings of its members. The membership of a savings and loan association
organized as a non-stock corporation is confined to a well-defined group of
persons. Such entity is not authorized to transact business with the general
public.
Under R.A. 8367, the articles of incorporation and by-laws of a proposed non-
stock savings and loan association will not be acted favorably by the Securities
and Exchange Commission unless accompanied by a certificate of approval by
the Monetary Board.
The association shall accept deposits from and grant loans only to its members,
subject to such rules and regulations as the Monetary Board may promulgate to
ensure sound, stable, and efficient operation. Provided, that no deposits shall be
sourced or deducted from the loans granted to a member without his or her
written consent.
The loans shall not exceed the member’s deposits and contributions in the
association, plus twelve (12) months of his regular salary as the association may
allow or seventy percent (70%) of the fair market value of any property
198
Davao del Norte
acceptable as collateral on first mortgage that he may offer as security.
Provided, that no loan shall have a maturity of more than five years, except
loans on the security unencumbered real estate for the purpose of home
building and home development, which may be granted with maturities not
exceeding twenty-five (25) years, and medium and long-term loans to finance
agricultural projects, subject to regulations prescribed by the Monetary Board.
Provided, further, that in the case of a borrower who is a permanent employee or
wage earner, the treasurer, notwithstanding the provision of any existing law,
rule and regulation to the contrary, to make deductions from his salary, wage,
income, or retirement pension pursuant to the term of his loan, and all other
deductions authorized by the member, to remit such deductions to the
association concerned, and to collect such reasonable fee for his services as
may be authorized by rules promulgated by Monetary Board.
9.Financing Company. Financing companies are corporations or partnerships.
Except those regulated by the BangkoSentral, the Insurance Commissioner, and
the Cooperative Administration Office which are primarily organized for the
purpose of extending credit facilities to consumers and to industrial, commercial,
or agricultural enterprises. Finance companies operate by discounting or
factoring commercial papers or accounts receivable, or by buying and selling
contracts, leases, chattel mortgages, or other evidences of indebtedness, or by
leasing motor vehicles, heavy equipment and industrial machinery, business and
office machines and equipment, appliances, and other movable property.
There are three governing laws regulating the business and operations of
financing companies, namely, Republic Act No. 5980, as amended, otherwise
known as the Financing Company Act; the New Central Bank Act; and The New
General Banking Act.
Financing companies are organized in the form of stock corporations or general
partnerships, sixty percent (60%) or their capital is owned by citizens of the
Philippines.
10.Other Non-Bank Financial Institutions. These are financial institutions that
are unknown to many people. Fund managers, lending investors, and venture
capital corporations are among these institutions. Though unpopular, they
perform important functions and services, particularly in the financial system
and, generally, in the economy. One function of a fund manager, which is a
corporation, is to take care of pension, retirement, and provident funds. Its
efficient management of funds greatly benefits employees and workers. For
venture capital corporations, they develop, promote, and assist small and
medium scale industries. With these industries, more production, employment,
and income are generated. As to lending investors, they operate as money
brokers. They receive funds from one group of persons and then lend the money
to others. Their lending policies are less rigid than the banking institutions, thus,
favoring the poor borrowers who cannot borrow from the banks.
Government Non-Bank Financial Institutions

The government non-bank institutions, such as GSIS, SSS, PEFLG, and
199
Davao del Norte
NHMFC, have a very vital part not only to the whole financial system but also to
the country`s economy. They have large financial resources. They provide
essential socio-economic services to the people.
1.The Government Service Insurance System. On 13 May 1937, the

Government Service Insurance System (GSIS) started its operations, with an
initial capital of P200,000 for operating expenses and a personnel force of fifty
(50) employees. The GSIS was entrusted first with the administration of a Life
Insurance Fund. It then extended life insurance coverage and benefits to
government employees. Presently, the GSIS administer the following: Life
Insurance Fund, Retirement Fund, Health Insurance Fund/Medicine, State
Insurance Fund/Employees` Compensation, General Insurance Fund/Property
Insurance, and Barangay Officials` Life Insurance Fund.
2.The Social Security System. On 1 September 1957, the Social Security

System (SSS) started its operations with 211 personnel and assets of P6,372. At
first, SSS granted only death, disability, sickness, and old-age benefits under its
social security program for the workers/employees in the private sector. As its
capacity for funding and administrative experience grew, other benefits have
been added to the program such as hospitalization benefits under the Medicare
program, employees` compensation benefits, and maternity benefits.
3.Philippine Export and Foreign Loan Guarantee Corporation. The

Presidential Decree No. 1080 entrust the Philippine Export and Foreign Loan
Guarante5e Corporation (PEFLGC) to undertake the following
a.To guarantee approved foreign loans, in whole or in part, granted to any

domestic entity, enterprise, or corporation, majority of the capital of which is
owned by citizens of the Philippines.
b.To guarantee Philippine banking and financial institutions against loss that may
be incurred connections with:
(1). The grant of loans/credit accommodation to exporters, producers of export
products, or products, or contractors with approved service contracts abroad,
provided that such exporters, producers or service contractors are Filipinos or
entities major of the capital of which are owned by citizens of the Philippines;
and
(2). The issuance of standby letters of credit or of letters of guarantee, as the
case may be, to secure the performance of approved service contracts abroad
entered into by any domestic entity, enterprise, or corporation, majority of the
capital of which are owned by citizens of the Philippines.
4.The National Home Mortgage Finance Corporation. The National Home

Mortgage Finance Corporation`s (NHFMC) primary purpose is to develop and
provide for a secondary market for home mortgages granted by public and/or
private home financing institutions.
200
Davao del Norte
Under Section 5 of Presidential Decree No. 1267, the NHMFC is authorized to
exercise the following powers and functions.
a.To purchase, acquire, sell, discount, refinance, or otherwise deal in home
mortgage or participation therein under such terms and conditions. As may be
prescribed by the Board of Directors of the corporation.
b.To borrow funds from domestic or foreign private or public financial institutions
as may from time to time required for its operations, and to issue bonds,
promissory notes, debentures, and other debt instrument in local or foreign
currency.
c.To own, lease, purchase or otherwise acquire, sell or otherwise dispose of
property, real or personal, as may be necessary and appropriate for the conduct
of its business.
d.To invest the funds or monies of the corporation not invested in mortgage
loans in securities issued by the national government, BangkoSentral and other
government entities, including government-owned and controlled corporations,
the servicing and repayment of which are full guaranteed by the Republic of the
Philippines.
e.To enter into and perform such contracts with any person or entity, public or
private, as may be necessary, proper, or conducive to the attainment or
furtherance of the objectives and purposes of the corporation.
f.To adopt, alter, and use a corporate seal; to sue and be sued; and generally, to
exercise all the powers of a corporation under the Corporation Code of the
Philippines which are not inconsistent with P.D. 1267.
g.To promulgate such rules and regulations and to perform any and all things as
may be necessary and proper to carry out its responsibilities, power, and
functions under P.D. No. 1267.
As a complementary move, from the aforementioned powers of the corporation,

the banks are empowered to grant medium and long term loans for housing and
home development with maturity period not exceeding thirty (30) years.
Moreover, the BangkoSentral is authorized to extend loans and advances to the
NHMFC, subject to such terms and conditions as may be prescribed by the
Monetary Board.
Finally, in furtherance of the objectives of P.D. NO. 1267, and whenever

prevailing conditions warrant, the Monetary Board may direct and require
banking institutions to set aside or allocate a part of their savings and time
deposits for loans to finance the purchase and/or acquisition, construction,
repair, improvement, or development of houses and/or loans used for the
construction of residential houses.
In winding up this chapter, it might be said in conclusion that while the other
institutions emphasize the idea of thrift, frugality, and mutual benefits and the
others stress the investment functions, all of them singly and collectively deal in
banking functions of receiving deposits and lending out funds. It might not be
201
Davao del Norte
amiss to state therefore that they also uniformly abide by the creed of good
investors that is, to chose investments which offer the best as far safety,
marketability, diversity, and profitability are concerned. And certainly, anyone of
these institution has, to a certain degree, imbibed in the Filipino people the
habits of industry, thrift, and wise spending
Inc.
Bookstore, Inc.
accountid=31259
Let’s Check
202
Davao del Norte
Activity 1: Give one local and one international financial institution of each non-
bank financial institution.
Local International
1.Investment House/Bank
2.Securities brokers/dealers
3.Building and Loan Associations
4.Credit Unions
5.Private Insurance Companies
6.The Pawnshops
7.Trust Companies
8.Non-stock Savings and Loan Association
9.Financing Company
10.Other Non-Bank Financial Institutions.
In a Nutshell
is done for you.
1. The government non-bank institutions, such as GSIS, SSS, PEFLG, and
NHMFC, have a very vital part not only to the whole financial system but also to
the country`s economy. They have large financial resources. They provide
essential socioeconomic services to the people.
203
Davao del Norte

2.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
3.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
4.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
5.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
Q&AList
204
Davao del Norte
1.
2.
3.
4.
5.
Keyword Index
CORPORATION MORTGAGE GOVERNMENT

PARTNERSHIP DEBTORS COLLECTION
REAL PROPERTY LIABILITIES PAYMENTS
MARGIN DEPOSITS COLLATERAL BANKS
CREDIT ACCOMMODATIONS CREDIT LIMITS CONTROLS
WAREHOUSE RECEIPTS LOAN FULLY GUARANTEED

concepts of international financial institution.
Metalanguage
205
Davao del Norte
FINANCIAL INSTITUTIONS- (FI) is a company engaged in the business of
dealing with financial and monetary transactions such as deposits, loans,
investments, and currency exchange. Virtually everyone living in a developed
economy has an ongoing or at least periodic need for the services of financial
institutions.
INTERNATIONAL BANKING- international banking is a type of banking that has
presence across international borders. It is a financial entity that offers financial
services like lending opportunities and payment accounts to foreign clients.
Basically, the clients of the these banks can be both individuals and companies.
BANKING INSTITUTIONS - means any bank, stock savings bank, mutual
savings bank, building and loan association, or savings and loan association,
which is now or may hereafter be organized under the laws of this state.
MONETARY FUND-a reserve of money set aside for some purpose. Fund.
mutual fund - the pooled money that is invested in assets. Revolving fund - a
fund which, if borrowed or used, is intended to be replenished so it may be
loaned or spent repeatedly
Essential Knowledge
THE INTERNATIONAL FINANCIAL INSTITUTIONS

The International financial institution play very important roles in the world of
financial system. They are, indeed, the prime movers of the whole system. They
encourage the formulation and implementation of strong, domestic economic
policies to establish a stable socioeconomic and political set-up before granting
loans. This is more prevalent in the Third World or developing economics; for
these countries do not have enough funds to finance their own developments.
As developing countries, they have to lay the social and economic foundations of
the economy such as education, health, housing, irrigation, transportation,
communication and electrification, among others. To realize their aspiration for
development, they rely heavily on the international financial institutions for
funding. They borrow money to finance their major development programs.
Among the international financial institutions that are the biggest lenders to the
poor countries are the World Bank (WB), the International Monetary Fund (IMF),
and the Asian Development Bank (ADB).
206
Davao del Norte
Other international financial institutions are the transnational or multinational
banks. They are doing business in many countries in the World. Their customers
are giant international companies, governments, and wealthy people.
This chapter presents the international financial institutions. These are the
multinational banks, World Bank, International Monetary Fund, Bank for
International Settlements, Export-Import Bank, Asian development Bank,
European Bank for Reconstruction and Development, Development bank of
Japan, and the US Agency for International Development.
THE INTERNATIONAL BANKING INSTITUTIONS

The beginning of the twentieth century marked the emergence of giant
companies in international business. These companies operated internationally
through their subsidiaries which function mainly export agencies. Headquarters
of these subsidiaries are located in the United States, Canada, Great Britain,
France and Germany. In the developing countries, their presence was felt
through the operations of their warehouses, service offices and sales agencies.
But these companies went through restructuring of management shortly after
World War II to meet the needs of international operations, in which vice
presidents for international operations were appointed to act as contracts and
liaisons with the various subsidiaries.
From there, evolved the global companies in the 1960s. Their foreign operations
were integrated into a single organizational structure. They are now known as
the transnational corporation or multinational corporations. These corporations
are owned by highly industrialized countries like the United States, Great Britain,
France, Germany and Japan. The perform business activities such as
production, marketing, finance, and personnel management within many
countries while their headquarters are maintained in one country.
The rapid growth of the multinational companies and their control over
production and trade all over the world served as the catalyst for the proliferation
of the multinational banks. These banks support multinational corporations in
their global manufacturing and trade activities. Vis-à-vis these multinational
corporations provide good business to multinational banks.
There are other factors that contributed to the expansion of the international
banking of global banking of the multinational banks. For one, the growth of the
Eurodollar marker, where banks accept US dollars for deposits and lend them to
borrowers outside United States. Later, other currencies were also traded.
Another factor is the great dependency of the developing counties on developed
countries. The developing counties are exporters of raw materials for the
industries of the highly industrialized countries. Then they import finished
products like machines or equipment for their agricultural and small-scale
industries. They also import oil from oil-producing countries. Unfortunately, the
prices of their exports are very low while prices of their import are very high. This
happens as a result of the manipulation of the industrial countries on the prices
207
Davao del Norte
of both exports and imports in the world market. Being merely exporters of raw
materials which are abundant in the world market, the developing countries have
a very weak position in international trade – they cannot dictate the prices of
their products.
As such, developing countries always suffer balance of payment difficulties.

Consequently, they resort to borrowing money from international financial
institutions and the government of the rich countries to finance their development
programs. The IMF, the WB, and the government of industrial countries were the
lenders before the 1970s. In recent years, however, multinational banks have
been among the creditors of the poor countries. Furthermore, the development
of the information highway has accelerated the expansion of international
baking. The new technologies enable a faster and more efficient movement of
capital resources throughout the world.
THE WORLD BANK

The World Bank (WB) was founded when a group of 45 allied nations convened
the United Nations Monetary and Financial conference at Bretton Woods. New
Hampshire, USA. Initially, the WB’s mission was to rebuild Europe after World
War II. In fact, its first loan $250 million was granted to France in 1947 for the
country’s post-war reconstruction.
Reconstruction has remained an important focus of the WB’s work, considering

the natural disasters, humanitarian emergencies, and post-conflict rehabilitation
needs that affect development and transition economies. But the WB has
sharpened its focus on poverty reduction as the overreaching goal of its entire
works. Before, it only had a homogeneous staff of engineers and financial
analysts who were based in Washington, D.C. Now, it has a multidisciplinary and
diverse staff which include economists, public policy experts, sector experts, and
social scientist. Forty percent (40%) of its staff is now based in country offices.
The World Bank is owned by more than 180 members-countries whose views
and interests are represented by a Board of Governors and a Washington-based
Board of Directors. Member countries are shareholders who carry ultimate
decision-making power in the WB.
From the initial authorized capital of $10 billion which was increased to $152.25
billion in 1992, the WB has become one of the world’s largest sources of
development assistance. The WB, which provided US$17.3 billion in loans to its
client countries in fiscal year 2001, is now working in more than 100
development economies, bringing a mix of finance and ideas to improve living
standards and eliminate poverty. For each of its clients, the WB works with
government agencies, non-governmental, and the private sector to formulate
assistance strategies. Its country offices worldwide deliver its program in
208
Davao del Norte
countries, liaise with government and civil society and work to increase
understanding of development issues.
The WB has become a Group, consisting of five closely associated development

institution. These are the International Bank for Reconstruction and
Development (IBRD), the International Development Association (IDA), the
international Finance Corporation (IFC), the Multilateral Investment Guarantee
Agency (MIGA), and the International Center for Settlement of Investment
Dispute (ICSID)
1.The International Bank of Reconstruction and Development. Established in

1945, the International Bank for Reconstruction and Development (IBRD) now
has 183 member countries. As of 2001, it has a cumulative lending of $360
billion.
The IBRD aims to reduce poverty in middle-income and credit worthy poorer
countries by promoting sustainable development through loans, guarantees, and
non-lending including analytical and advisory services. The IBRD does not
maximize profit but has earned a net income each year since 194. Its profits fund
several developmental activities and ensure financial strength, which enables
low-cost borrowing in capital markets, and good terms for borrowing clients.
Owned by member countries, the IBRD links voting power to members capital
subscriptions in turn, based on a country’s relative economic strength.
2.The International finance corporation. Established In 1960, the International

Development Association (IDA) today has 162 member countries with a
cumulative lending of $127 billion as of 2001.
Contribution to IDA enable the World Bank to provide $6 to 7 billion a year in
interest-free credits to the world’s 78 poorest countries, home to 2.4 billion
people. This support is vital because these countries have little or no capacity to
borrow on market terms. In most of these countries, income average under just
$500 a year per person and many people survive on much less. The IDA helps
provide access to better basic services (such as education, health care, and
clean water and sanitation) and supports reforms and investments aimed at
productivity growth and employment creation.
3.The International Finance Corporation. Established in 1956, the International

Finance Corporation’s (IFC) membership has reached to 175 countries. Is has
committed a portfolio of $21.8 billion as of 2001.
The IFC’s mandate is so further economic development through the private
sector working with business partners. It invests in sustainable private
enterprises in developing countries and provides long-term loans, guarantee,
and risk management and advisory services to its clients. The IFC invests in
projects in regions and sector not deserved by private investment and finds new
ways to develop promising opportunities in markers deemed too risky by
209
Davao del Norte
commercial investors in the absence of the IFC participation.
4.The Multilateral Investments Guarantee Agency. Established in 1988, the

Multinational Investment Guarantee Agency (MIGA) now has a 154 member
countries and cumulative guarantees issued of $9.1 billion as of 2001.
The MIGA helps encourage foreign investment in developing countries by
providing guarantees to foreign investors against losses caused by non-
commercial risks. Such as expropriation currency incontrovertible and transfer
restrictions, and civil disturbances. Furthermore, the MIGA provides technical
assistance to also offer investment dispute mediation upon request.
5.The International Center of Settlement of Investment Disputes. The

International Center of Settlement of Investment Disputes (ICISID was
established in 1966 it how has a 134 member-countries. It registered a total of
87 cases as of 2001.
The CISID helps to encourage foreign investment by providing international
facilities for conciliation and arbitration of investment disputes. In this way, it
helps to foster an atmosphere of mutual confidence between starts and foreign
investors. Many international agreements concerning investment refers to
ICISID’s arbitration facilities. The ICISID also has research and publishing
activities in the areas of arbitration law and foreign investment law.
THE INTERNATIONAL MONETARY FUND
In conjunction with the World Bank establishment, the International Monetary

Fund (IMF) was also conceived in July 1944 at a United Nations Monetary and
Financial Conference held at Bretton Woods. New Hampshire, USA, the same
group 45 allied nations who drafted the articles of Agreements of the World Bank
agreed on a framework for economic cooperation. The said framework was
designed to avoid a repetition of the disastrous economic politics that had
contributed to the Great Depression of the 1930’s. Thus, the IMF was born for
the following purposes:
1.Promoting international monetary cooperation;
2.Facilitating the expansion and balanced growth of international trader;
3.Promoting exchange stability;
4.Assisting in the establishment of a multilateral system of payment;
5.Making its resources available (under adequate safeguards) to members
experiencing balance of payments difficulties; and
6.Ensuring the stability of the international financial system.
The IMF is the central institution of the international monetary system— the
system of international payments and exchange rates among national currencies
that enables business to take place between countries.
210
Davao del Norte
The IMF is owned by 183 member-countries, with headquarters in Washington,
DC. The Board of Governors, on which all member-countries are represented, is
the highest authority governing the IMF. It usually meets once a year, at the
Annual Meeting of the IMF and the World Bank. Each member-country appoints
a Governor usually the country’s minister of finance or the governor of its central
bank and an Alternate Governor. The Board of Governors decides on major
policy issues but has delegated day-to-day decision-making to the Executive
Board. The Executive Board consists of 24 Executive Directors, with the
Managing Director as Chairman.
The IMF’s resources come mainly from the quota (or capital) subscriptions that
countries pay when they join the IMF, or following periodic reviews in which
quotas are increased. Countries pay 25 percent of their quota subscription in
Special Drawing Rights (An international reserve asset or sometimes known as
“paper gold”). Although it has no physical form, it has been allocated to member
countriesas bookkeeping entries (as a percentage of their quotas.) or major
currencies, such as US dollars or Japanese yen. The IMF can call on the
remainder, payable in the member’s own currency, to be made available for
lending as needed. Quotas determine a country’s voting power, amount of
financing that it can receive from IMF, and its share in Special Drawing Right
allocations.
Quotas reflect members’ relative size in the world economy. The larger a
country’s economy in terms of output, and the larger and more variables its
trade, the higher its quota tends to be. The biggest contributor to the IMF is the
USA, the world’s largest economy, with 17.6 percent (17.6%) of total quotas.
The IMF’s operations have developed to meet the changing need of its member-
countries in an evolving world economy. These involve surveillance, financial
assistance, and technical assistance.
1.Surveillance. The IMF maintains a policy dialogue with each of its member
through a process known as surveillance. Once a year, it appraises members’
exchange rate policies within the overall framework of their economic policies in
what is known as an Article IV consultation. Surveillance is based on the
conviction that strong and consistent domestic economic policies will lead to
stable exchange rates and a growing and prosperous world economy.
2.Financial Assistance. The IMF provides credits and loans to member-
countries with balance of payments problems to support policies of adjustment
and reform.
3.Technical Assistance. The IMF offer technical assistance and training to help
countries strengthen their human and institutional capacity, and design and
implement effective macroeconomics and structural policies. Technical
assistance is offered in several broad areas, including fiscal policy, monetary
policy, and statistics.
211
Davao del Norte
The IMF has developed a number of loan instrument, or facilities, that are
tailored to address the specific needs of its members. These are:
1.Stand-By Arrangement. This forms the core of the IMF’s lending policies. It
provides assurance to a member-country that it can draw up to a specific
amount, usually over 12-18 months, to deal with short-term balance of payments
problem.
2.Extended Fund Facility. IMF support for members under the Extended Fund
Facility provides assurance that a member-country that it can draw up to a
specific amount, usually over three to four years, to help it tackle structural
economic problems that are causing serious weaknesses in its balance of
payments.
3.Poverty Reduction and Growth Facility. This is a low-interest facility to help
the poorest member-country facing protracted balance of payments problems.
The cos tot borrowers is subsidized with resources raised through past sales of
IMF-owned gold, together with loans and grants provided to the IMF for the
purpose by its members.
4.Supplement Reserve Facility (SRF). This provides additional short-term
financing to member-countries experiencing exceptional balance of payments
difficulty because of a sudden and disruptive loss of market confidence reflected
in capital outflows. The interest rate on SRF loans include a surcharge over the
usual lending rate.
5.Contingent Credit Lines. This is a precautionary line of defense enabling
members pursuing strong economic policies to obtain IMF financing on a short-
term basis when face by a sudden an disruptive loss of market confidence
because of contagion from difficulties in other countries.
6.Emergency Assistance. This was introduced in 1962 to help members cope
with balance of payments problems arising from sudden and unforeseeable
natural disasters. This form of assistance was extended in 1995 to cover certain
situations in which members have emerged from military conflicts that have
disrupted institutional and administrative capacity.
THE BANK FOR INTERNATIONAL SETTLEMENTS
The Bank for International Settlements (BIS), which is based in Basle,

Switzerland, is the world’s oldest international financial institution. It was
established in the context of the Young Plan in 1930, which dealt with the issue
of the reparation payments imposed on Germany by the Treaty of Versailles.
The new bank was to take over the functions previously performed by the Agent
General for Reparations in Berlin and to act as a trustee for the Dawes and
Young Loans.
The BIS to this day is the principal center for international central bank
cooperation. The reparations issue had faded into the background as the BIS
has been focusing its activities entirely on cooperation among central banks and,
increasingly, other agencies in pursuit of monetary and financial stability. Hence,
212
Davao del Norte
the BIS now serves as a bank for central banks.
Under the BIS Statutes, the governance of the bank is entrusted to the General
Meeting and the Board of Directors, which is responsible for the administration of
the bank.
The General Meeting is held annually. Fifty central banks or monetary authorities
have the rights of voting and representation at the General Meetings.
The Board of Directors has seventeen members. It has six ex-official directors,
comprising the Governor of the central banks of Belgium, Germany, Italy, and
the United Kingdom and the Chairman of the Board of Governors of the US
Federal Reserve System. Each of the ex-official member appoints another
member of the same nationality. The statutes also provide for the election to the
board of not more than nine Governors of other member central banks. The
Board of Directors elects a chairman from among its member and appoints the
president of the BIS for a three-year term. Since 1948 the tow offices have been
vested one person. The board also elects a vice-chairman and appoints a
general manager, the deputy general manager and the three heads of
department.
Two subcommittees, both made up of board members and chaired by the vice-
chairman, report to the board. The Consultative Committee prepares the board’s
discussion of administrative matters, such as the bank’s annual budget. The
Audit Committee acts as a conduit between the banks’ internal and external
auditors on the one hand and the Board of Directors on the other.
The BIS’s authorized capital is 1,500 million gold francs, divided into 600,000
shares of equal nominal value (2,500 gold francs per share), of which 529m125
shares are issued. They are paid up to the extent of 25 percent of their nominal
value (625 gold francs per share). When the bank’s initial capital was issued,
part of the Belgian and French issues and the whole of American issue were
sold to the public. However, an Extraordinary General Meeting on 8 January
2001 amended the statutes to restrict ownership of BIS shares exclusively to
central banks, shares held by private shareholders were withdrawn against
payment of composition.
The BIS’s main tasks, as they have developed over the past 70 years, can be
summarized as follows:
1.The BIs provides a forum for central bank cooperation. It acts as the prime
forum for information exchange and cooperation among central banks worldwide
through regular meeting. Central bank cooperation at the BIS aimed at
defending the Bretton Woods system in 1960s and early 1970s, and managing
capital flows following the two oil crises and the international debt crisis in the
1980s. More recently, the thrust has been to foster financial stability in the wake
213
Davao del Norte
of economic integration and globalization.
2.Within the framework of international cooperation, the BIS conducts
research contributing to monetary and financial stability, collects and publishes
statistical material on international finance and—through committees of national
experts— formulates recommendations to the financial community aimed at
strengthening the international financial system. Thus, for example, the Basel
Committee on internationally active banks that has become an international
standard.
3.The BIS performs traditional banking functions, such as reserve
management and gold transactions, for the account of central bank costumers
and international organizations. The total currency deposits placed with the BIS
amounted to US$ 128 billion as of 31 March 2000, representing around 7
percent of world foreign exchange reserves. In addition, the BIS has performed
trustee and agency functions. Thus, the BIS was the agent for the European
Payments Union, helping the European currencies restore convertibility after the
Second World War. Likewise, the BIS has acted as the agent for various
European exchange rate arrangements, including the European Monetary
System which precede the move to a single currency.
4.Finally, the BIS has also provided or organized emergency financing to
support the international monetary system when needed. During the 1931-1933
financial crisis. The BIS organized support credits for both the Austrian and the
German central banks. In the 1960s, the BIS arranged special support credits for
the Italian lira (1964) and for the French franc (1968) and to so-called Group
Arrangement (1968 and 1969) to support the sterling. More recently, the BIS has
provided finance in the context of IMF-led stabilization programs (e.g., for
Mexico in 1982 and for Brazil 1998)
THE EXPORT-IMPORT BANK

The Export-Import Bank of the United States (Eximbank) is an independent US
government agency established in 1934 to create jobs through exports. Its
creation was spurred by the economic conditions of the 1930s when export was
viewed as a stimulus to economic activity and employment. The primary aim of
Eximbank was to foster trade between the United States and the Soviet Union.
During the post-World War II era. Eximbank helped US companies participate in
the reconstruction of Europe and Asia.
The Eximbank is a government help corporation managed by a Board of

Directors consisting of a chairman, vice chairman, and three additional board
members. Members serve for staggered terms and are chosen and serve at the
discretion of the president of the United States.
The Eximbank provides guarantees of working capital loans for US exporters,

guarantees the repayment of loans or makes loans to foreign purchasers of US
goods and services, and provides credit insurance against non-payment by
foreign buyers for political or commercial risk. It is focusing on critical areas such
214
Davao del Norte
as emphasizing exports to developing countries, aggressively countering trade
subsidies of other governments, stimulating small business transactions,
promoting the export of environmentally beneficial goods and services, and
expanding project finance capabilities.
It offers a number of insurance and financing programs that are supposed to

increase US exports. These are as follows:
1.Working capital guarantees that cover 90 percent of the principal and interest
on commercial loans to credit-worthy small and medium-sized companies
needing funds to buy or purchase US goods or services for export.
2.Export credit insurance policies that protect against both the political (e.g.,
non-payment as a result of war, expropriation, cancellation of an export or import
license) and commercial (non-payment due to unanticipated competition or
deterioration or markets) risks of a foreign buyer defaulting on payment.
3.Guarantees of commercial loans (including both principal and interest) to
foreign buyers of US goods or services.
4.Direct loans that provide foreign buyers with fixed-rate from the United States.
To qualify for Eximbank support, a product or service must have at least 50

percent US content and not affect US economy adversely. The Eximbank has
also con-finance projects with the US Agency for International Development, the
World Bank, and regional development banks.
THE ASIAN DEVELOPMENT BANK

The Asian Development Bank (ADB) was founded in 1966 by the United Nations
Economic Commission for Asia and the Far East (ECAFE), now known as
United Nations Economic and Social Commission for Asia and the Pacific
(ESCAP. It only had 31 member-countries. Over the years, its membership has
grown to 61 countries from within and outside Asia and the Pacific region. Its
headquarters is in Manila, and it has 23 other offices around the world.
The ADB is a multilateral development finance institution dedicated to reducing

poverty in Asia and the Pacific. It is owned by the 61 member-countries. It is
managed by a Board of Governors, a Board of Directors, a president, three vice-
presidents, and the Alternate Governor to vote on its behalf. The Board of
Governors elects the 12 directors (each with an alternate). The Board of
Governors elects the president for a term of five years, with the possibility of
reelection. The president chairs the Board of Directors and follows its directions
in conducting the business of the ADB.
The ADB’s main sources of funds are members’ contributions and bond issues
on the world’s capital markets. The Asian Development Fund (ADF), the ADB’s
“concessional” or “soft-load” window, is funded by its donor member-countries.
On the other hand, the Japan Fund for Poverty Reduction (JFPR) was
established in 2000.
215
Davao del Norte
The major sectors covered by the ADB’s support are agriculture, rural
development, energy, transport and communications, industry, finance, social
infrastructure which include health, education, and water supply. Although most
lending is in the public sector and to governments, the ADB also provides direct
assistance to private enterprises of developing member-countries through equity
investments and loans.
The ADB’s business and operations are premised by its overarching goal which
is poverty reduction. It continues to carry out activities to promote economic
growth, develop human resources, improve the status of women, and protect the
environment. These strategic development objectives now serve its poverty
reduction agenda. Its other key development objectives, such as law and policy
reform, regional cooperation, private-sector development, and social
development. Also contribute significantly to this main goal.
The European Bank for reconstruction and Development
The European Bank for Reconstruction and Development (EBRD) was

established in 1991 when communism was crumbling in Central and Eastern
Europe and ex-Soviet countries needed support to nurture a new private sector
in a democratic environment. It is owned by 60 member/shareholder
countriesthese are European and non-European countries which are member of
the International Monetary Fund— and the European Investment Bank.
The EBRD’s share capital is provided by its members. Voting power is in

proportion to the number of shares. It is managed by a Board of Governors, a
Board of Directors, a president, and one or more vice-presidents.
The EBRD uses the tools of investments to help build market economies and
democracies in 27 countries from Central Europe to Central Asia. It is now the
largest single investor on the region and mobilizes significant foreign direct
investment beyond its own financing. With a subscribed capital totaling EUR 20
billion (EUR 5 billion paid-in and EUR 15 billion callable), The EBRD has a solid
capital base. The strength of the Bank’s capital and its prudent operational and
financial policies are reflected in the EBRD credit rating of AAA from Standard &
Poor’s and Aaa from Moody’s.
It provides project financing for banks, industries and business, both new
ventures and investments in existing companies. It also works with publicly
owned companies, to support privatization, restructuring state-owned firms and
improvement of municipal services. The EBRD uses its close relationship with
governments in the region to promote policies that will bolster the business
environment.
The mandate of the EBRD stipulates that it must only work in countries that are
committed to democratic principles. Respect for the environment is part of the
216
Davao del Norte
strong corporate governance attached to all EBRD investments. Every EBRD
investment must help move a country closer to a full market economy (the
transition impact): take risk that support private investors and does not crowd
them out; and apply sectoral reforms; competition, privatization and
entrepreneurship; stronger financial institutions and legal system; infrastructure
development needed to support the private sector, and adoption of strong
corporate governance, including environmental sensitivity.
THE DEVELOPMENT BANK OF JAPAN

The Development Bank of Japan (DBJ) was created under the provision of the
Development Bank of japan law in 1999. The DBJ is the successor to all rights
and obligations of the Japan Development Bank and Hokkaido- Tohoku
Development Finance Public Corporation. The finance functions of the Japan
Regional Development Corporation and the Japan Environment Corporation
were also transferred to DBJ.
The DBJ is capitalized at 1,039.4 billion yen which is wholly owned by the
Japanese government. It is managed by a Governor, who is appointed by the
Prime Minister; two Deputy Governors, who are appointed by the Governor with
the approval of the Prime Minister; twelve senior executive directors, who are
appointed by the Governor. The Governor and the Deputy Governor have a term
of four years while the senior executive directors stay in office for two years.
The DBJ provide long-term financial and related services to qualified projects as
a supplement and inducement to the lending and other services provided by
ordinary financial institutions. In so doing, it promotes the energy and
sustainable development of the economy and society; the realization of enhance
quality of life; and the creation of self-reliant regions.
THE US AGENCY FOR INTERNATIONAL DEVELOPMENT

The US Agency for International Development (USAID) was established in 1961.
The USAID’s history goes back to the Marshall Plan reconstruction of Europe
after World War II and the Truman Administration’s Point Four Program. In 1961,
President John F. Kennedy signed the Foreign Assistance Act into law and
created the USAID by executive order.
Since that time, the USAID has been the principal US agency to extended
assistance to countries recovering for disaster, trying to escape poverty, and
engaging in democratic reforms.
The USAID is an independent federal government agency that receives overall

foreign policy guidance from the Secretary of State. The agency works to
support long-term and equitable economic growth and advancing US foreign
policy objective by supporting: a) economic growth, agricultural, and trade; b)
217
Davao del Norte
global health; and c) democracy, conflict prevention, and humanitarian
assistance.
The USAID provides assistance to four regions of the world:
1.Sub-Saharan Africa;
2.Asia and the Near East;
3.Latin American and the Caribbean; and
4.European and Eurasia.
The USAID is headquartered in Washington, DC, but USAID’s strength is its

offices around the world. It works in close partnership with the private voluntary
organizations, indigenous organizations, universities, American business,
international agencies, other governments, and other US government agencies.
The USAID has working relationships with more than 3,500 American
Companies and over 300 US-based private voluntary organizations.
The agency is headed by an Administrator and Deputy Administrator, both

appointed by the US President and confirmed by the Senate. In Washington, the
USAID’s major organization units are called bureaus. Each bureaus houses the
staff responsible for major subdivisions of the agency’s activities. It has both
geographic bureaus (which are responsible for the overall activities in the
countries where it has programs) and functional bureaus (that conduct agency
programs that are world-wide in nature or that cross geographic boundaries). In
addition, certain major headquarters functions are also assigned to bureaus.
Each bureau is headed by an assistant administrator, appointed by the US
President and confirmed by the Senate.
Inc.
218
Davao del Norte
Bookstore, Inc.
accountid=31259
Let’s Check
1. This forms the core of the IMF’s lending policies. It provides assurance to a
member-country that it can draw up to a specific amount, usually over 12-18
months, to deal with short-term balance of payments problem.
2. IMF support for members under the Extended Fund Facility provides
assurance that a member-country that it can draw up to a specific amount,
usually over three to four years, to help it tackle structural economic problems
that are causing serious weaknesses in its balance of payments.
3. This is a low-interest facility to help the poorest member-country facing
protracted balance of payments problems. The cost of borrowers is subsidized
with resources raised through past sales of IMF-owned gold, together with loans
and grants provided to the IMF for the purpose by its members.
4. This provides additional short-term financing to member-countries
experiencing exceptional balance of payments difficulty because of a sudden
and disruptive loss of market confidence reflected in capital outflows. The
interest rate on SRF loans include a surcharge over the usual lending rate.
5. This is a precautionary line of defense enabling members pursuing strong
economic policies to obtain IMF financing on a short-term basis when face by a
sudden an disruptive loss of market confidence because of contagion from
difficulties in other countries.
A. CONTINGENT CREDIT LINES.

B. SUPPLEMENT RESERVE FACILITY (SRF).
C. STAND-BY ARRANGEMENT.
D. POVERTY REDUCTION AND GROWTH FACILITY. 219
E. EXTENDED FUND FACILITY.
Davao del Norte
Let’s Analyze
Activity 1: Explain briefly and concisely the function of each bank by giving an
actual event.
THE DEVELOPMENT BANK OF JAPAN

________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
THE ASIAN DEVELOPMENT BANK
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
THE EXPORT-IMPORT BANK

________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
THE WORLD BANK

________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
In a Nutshell
is done for you.
1. The agency is headed by an Administrator and Deputy Administrator, both
220
Davao del Norte
appointed by the US President and confirmed by the Senate. In Washington, the
USAID’s major organization units are called bureaus. Each bureaus houses the
staff responsible for major subdivisions of the agency’s activities. It has both
geographic bureaus (which are responsible for the overall activities in the
countries where it has programs) and functional bureaus (that conduct agency
programs that are world-wide in nature or that cross geographic boundaries).

2.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
3.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
4.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
5.______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
Q&AList
221
Davao del Norte
1.
2.
3.
4.
5.
Keywords Index
Economic Significance of
Stock Corporation Perspective on Bank
Bank
Commercial Bank Branch Banking Banking Business
Trust Company Chain Banking Foreign Banks
Saving Bank Group Banking Acquisition of Voting
Unit Bank State Supervise the Bank Foreign Stock Holdings
222
Davao del Norte
Activity Date Where to submit

Big Picture A: ULOa-c. Let’s Check
November 3, 2020 Quipper
and Analyze Activities
Big Picture A: ULOa-c. In a Nutshell November 3, 2020 Quipper
Big Picture A: ULOa-c. Q and A List November 4, 2020 via Messenger app
First Examination November 6, 2020 Quipper
Big Picture B: ULOa-e. Let’s Check
Big Picture C: ULOa-e. In a
November 17, 2020 CF’s email
Nutshell
Big Picture C: ULOa-e. Q and A
List
Big Picture C: ULOb Let’s Check
Second Examination
Big Picture B: ULOa-c. Let’s Check
December 1, 2020 Quipper
Big Picture C: ULOa-c. In a Nutshell December 1, 2020 CF’s email
Big Picture C: ULOa-c. Q and A List December 2, 2020 Quipper
Third Examination December 4, 2020
Big Picture D: ULOa-b Let’s Check
December 15, 2020 Quipper
Big Picture D: ULOa-b In a Nutshell December 15, 2020 Quipper
Big Picture D: ULOa-b. Q and A List December 16, 2020 Quipper
Final Examination December 17-18, 2020 Quipper
Online Code of Conduct
 All teachers/Course Coordinators and students are expected to abide by an

honor code of conduct, and thus everyone and all are exhorted to exercise
self-management and self-regulation.
 Faculty members are guided by utmost professional conduct as learning
facilitators in holding DED conduct. Any breach and violation shall be dealt
223
Davao del Norte
with properly under existing guidelines, specifically on social media conduct
(OPM 21.15) and personnel discipline (OPM 21.11).
 All students are likewise guided by professional conduct as learners in
attending DED courses. Any breach and violation shall be dealt with properly
under existing guidelines, specifically in Section 7 (Student Discipline) in the
Student Handbook.
 Professional conduct refers to the embodiment and exercise of the
University’s Core Values, specifically in the adherence to intellectual honesty
and integrity; academic excellence by giving due diligence in virtual class
participation in all lectures and activities, as well as fidelity in doing and
submitting performance tasks and assignments; personal discipline in
complying with all deadlines; and observance of data privacy.
 Plagiarism is a serious intellectual crime and shall be dealt with accordingly.
The University shall institute monitoring mechanisms online to detect and
penalize plagiarism.
 All borrowed materials uploaded by the teachers/Course Coordinators shall
be properly acknowledged and cited; the teachers/Course Coordinators shall
be professionally and personally responsible for all the materials uploaded in
the online classes or published in SIM/SDL manuals.
 Teachers/Course Coordinators shall devote time to handle DED courses and
shall honestly exercise due assessment of student performance.
 Teachers/Course Coordinators shall never engage in quarrels with students
online. While contentions intellectual discussions are allowed, the
teachers/Course Coordinators shall take the higher ground in facilitating and
moderating these discussions. Foul, lewd, vulgar and discriminatory
languages are absolutely prohibited.
 Students shall independently and honestly take examinations and do
assignments, unless collaboration is clearly required or permitted. Students
shall not resort to dishonesty to improve the result of their assessments (e.g.
examinations, assignments).
 Students shall not allow anyone else to access their personal LMS account.
Students shall not post or share their answers, assignment or examinations to
others to further academic fraudulence online.
 By handling DED courses, teachers/Course Coordinators agree and abide by
all the provisions of the Online Code of Conduct, as well as all the
requirements and protocols in handling online courses.
 By enrolling in DED courses, students agree and abide by all the provisions of
the Online Code of Conduct, as well as all the requirements and protocols in
handling online courses.
Monitoring of OBD and DED
 The Deans, Asst. Deans, Discipline Chairs and Program Heads shall be
responsible in monitoring the conduct of their respective DED classes through
224
Davao del Norte
the LMS. The LMS monitoring protocols shall be followed, i.e. monitoring of
the conduct of Teacher Activities (Views and Posts) with generated utilization
graphs and data. Individual faculty PDF utilization reports shall be generated
and consolidated by program and by department.
 The Academic Affairs and Academic Planning & Services shall monitor the
conduct of LMS sessions. The Academic Vice Presidents and the Deans shall
collaborate to conduct virtual CETA by randomly joining LMS classes to
check and review online the status and interaction of the faculty and the
students.
 For DED, the Deans and Program Heads shall come up with monitoring
instruments, taking into consideration how the programs go about the conduct
of DED classes. Consolidated reports shall be submitted to Academic Affairs
for endorsement to the Chief Operating Officer.
Course prepared by:
RIZZA MAE DUMLAO-CATUNGAL,LPT

Course Facilitator/Faculty
Course reviewed by:
REGI C. AARON, MBA

Financial Management Program Head
Approved by:
GINA FE G. ISRAEL, Ed.D

Dean of College
225

FM 213

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

FM 213

Uploaded by

Copyright:

Available Formats

DEPARTMENT OF BUSINESS ADMINISTRATION EDUCATION

FINANCIAL MANAGEMENT PROGRAM

Department of Business Administration Education

Physically Distanced but Academically Engaged

Self-Instructional Manual (SIM) for Self-Directed

Course/Subject: FM 213 - Banking and Financial Institutions

Name of Teacher: Rizza Mae Dumlao-Catungal

THIS SIM/SDL MANUAL IS A DRAFT VERSION ONLY;

Part 1. Course Outline and Policies ...................................................... 4

Big Picture B: Unit Learning Outcomes……………………………… 42

Big Picture D: Unit Learning Outcomes ………………………………. 105

Part 3. Course Schedule ......................................................................... 220

Course Outline: FM 213 - Banking and Financial Institutions

Course Coordinator: Rizza Mae Dumlao-Catungal

Course Outline Policy

Areas of Concern Details

Mersun Faith A. Delco, RPm

Alfred Joshua M. Navarro

Big Picture in Focus: ULOa. Understand the nature and basic

Historical Perspective Worldwide

Philippine Banking History

Philippine Banking Today

Access Device- Access Device needs an Automated Tellering Machine (ATM),

 Grant authority to the Monetary Board to adopt internationally accepted

Perspective on Bank or Banking and Nature of Banking Business

Loans and Discount 100,000.00

4.2.3. In loan transaction it must have an interest which serves as an

Principles of Banking and Types of Banks

Privately Owned: owned and organized by the private citizen to acquire

Economic Significance of Bank and State Supervise the Bank.

Self-Help: You can also refer to the sources below to help

Loans and Discount 100,000.00

Luigi is a depositor of a bank his current savings is 120,000. He

1. Banking industry is old as time which is develops overtime by

Now it’s your turn!

Big Picture in Focus: ULOb. Understand the nature and basic

General Aspects in Establishing Banks

Determination of the Amount of Capital to be Raised. After the determination

Organization, Management, and Administration

The meeting of the board directors may be conducted through modern

That the majority of the incorporators are residents of the Philippines

A bank authorized to establish branches or other offices shall be responsible for

Licensing of Foreign Banks

Section 73. Acquisition of Voting Stock in a Domestic Bank. Within seven

In the absence of the agent or head or should there be no person authorized by

Section 77 Laws Applicable. In all matters not specifically covered by special

Bank Location and Bank Organizational Structure

The required organizational structure of nay bank, must be corporation, under

1. The economy is needed to determine the type of bank applicable in one

Now it’s your turn!

Big Picture in Focus: ULOc. Understand the nature and basic

Board Directors- the duty of the chairman is to be a head of the company,

The following is an additional qualification:

The proposed directors a bank shall be subject to qualification and other

Section 55 Prohibited Transactions.

Bank Operation - the bank operation is the implementation of policies of the

Activity1. True or False. In the space provided, write T if the givenstatement is

Activity 2: Identification: Identify the following terms, articles, section, or

2. The economy is needed to determine the type of bank applicable in one

Now it’s your turn!

Bank Management Responsibilities Bank Officers

Big Picture in Focus: ULOa. Understand the nature and basic42