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COMMERCIAL BANKS
COMMERCIAL BANKS
What is Commercial Bank?
• Commercial Banks grant mainly short-term loans.
• In the beginning, CB extend loans to traders and merchants for the transport of their goods in both domestic and international trade as well as to finance the holding of inventories during the brief period of required of their sale.
• Today, CB are the biggest lenders in commercial and industrial loans.
• The term commercial banks before was applied to an institution that accepted demand deposits [also known as current or checking account] subject to withdrawal by check.
What is Commercial Bank?
• Commercial Bank
Ordinary Commercial Banks
• Commercial Banking is now available not only to existing commercial banks, including government-owned banks but also to other types of banks henceforth so authorized by the Monetary Board.
Present Powers of Commercial Banks
Under BP Blg. 61, the powers necessary to carry on the business of commercial banking are the following:
1. Accepting of drafts2. Issuing letters of credits3. Discounting and negotiating
promissory notes, drafts and other evidences of debt
4. Receiving deposits [demand, time, and savings] including negotiable order to withdrawal account.
5. Buying and selling foreign exchange and gold or silver bullions
6. Lending money against personal securities and against mortgages on improved real estate and insured improvement thereon
Present Powers of Commercial Banks
Organization and Capitalization
• As provided in the Corporation Code, a commercial banks, is organized by at least five but not more than fifteen persons who are known as incorporators.
• The other owners of the bank are also known as corporators or stockholders, or sometimes called subscribers when they initially negotiate to own certain shares of stock of the bank.
• The minimum paid-in capital of a commercial bank is P500 million. Shares of stock owned by a person or a family group shall not exceed 20% of the bank’s voting stock.
Organization and Capitalization
• The operations of the CB are handled by a number of departments, such as, loan and discounts, collection, trust, foreign, money market, accounting, auditing, legal, administrative departments, and such other departments necessary to attain the bank’s objectives.
Organization and Capitalization
Deposit Operation
• CB is authorized to accept or create demand deposits subject to withdrawal by check. Demand deposits, also know as current accounts or checking account, do not earn interest.
• It is also authorized to accept savings deposits which earn interest and are evidenced by a passbook issued by the bank in the name of the depositor.
• It is also authorized to accept time deposits which earn interest and are evidence by a certificate by the bank in the name of the depositor.
• CB may also offer NOW accounts. These are a special type of savings deposit which can be withdrawn by means of a Negotiable Order of Withdrawal [NOW].
Deposit Operation
Borrowing Operations
• CB may borrow from the BSP and other government and private financial institution to augment its working capital and loanable funds. Borrowings from the BSP may take the form of
1. Rediscounting2. Direct Advance
• Rediscounting. This is a made of borrowing whereby the bank assigns in favor of the BSP the eligible borrowers’ papers in accordance with established guideline, terms and condition. These papers consist of the original copies of promissory notes, loan application, inspections report, loan contract, title of property, tax declaration and any other documents that supports the loan granted to a particular borrower.
Borrowing Operations
• Direct Advance or Loan. As a lender of last resort, BSP may grant direct advanced to a commercial bank in times of emergency or when it can no longer be allowed to rediscount its eligible borrowers’ paper.
Borrowing Operations
Deposit Substitute Operations
• This is also known as quasi-banking or money market operations. Any deposit substitute transactions by a bank performing quasi-banking functions – for that matter all CB performs quasi-banking functions, or they can engage in money market operations.
Elements of Quasi-Banking
1. Borrowing funds for the borrower’s own account.
2. Twenty or more lenders at any one time3. Methods of borrowing are issuance,
endorsement, or acceptance of debt instrument of any kind, other than deposit such as acceptances, promissory notes, participations, certificates of assignments and etc.
4. The purpose may be for [a] lending, or [b] purchasing of receivables and other obligations.
• These four elements mentioned must be presented to consider the use of deposit substitute instruments as falling within the sphere of quasi-banking function.
Deposit Substitute Operations
Lending Operations
• Loans granted by a commercial bank may be classified as follows:– As to Collateral• Secured Loans• Unsecured Loans
–As to Purpose• Agricultural• Commercial
• Industrial• Real Estate• Others
–As to accounting treatment• Demand Loans• Bills Discounted• Time Loans
Lending Operations
Trust Operations
• A CB may engage in trust operation or trust business which refers to the administration, holding, and management by a trustee of funds and/or property for the use, benefit or advantage of the trustor or the beneficiaries.
• However, before the bank can engage in trust operation, it must comply with the following requirements:
1. It is authorized in its articles of incorporation to engage in trust business. The specific duties and responsibilities of the trust committee or trust officers entrusted with the management and supervision of trust operations shall be provided in the bank’s by-laws or in a resolution duly passed by the board of directors of the bank.
Trust Operations
2. Before transacting trust business, the bank shall deposit with the BSP, cash or eligible government securities amounting to at leash P250,000 as security for the faithful performance of trust duties. A deposit of P250,000 shall be required for every additional P35.5 million of trust assets in excess of P142 million.
Trust Operations
Other Operations
1. A CB can finance export and import requirements through letters of credits and other instruments generally used in international transaction and foreign exchange dealing.
2. It may engage in the sale of government securities, such as bonds, treasury bills, and other debt instruments which the government may issue from time to time.
3. Upon prior authority, it may also collect taxes, customs duties, and other government levies as a form of assistance to the Bureau of Internal Revenue and Bureau of Customs.
4. It is authorized to participate in clearing operations which have been transferred from the BSP to the Philippine Clearing House Corporation, where the clearing of checks and settlement of interbank balances pass through.
Other Operations
5. As part of its authority to engage in foreign exchange transactions, a commercial bank can also act as dealer (buy and sell) or foreign currencies which form part of our international reserves.
Other Operations
Expanded Commercial Banks
• Expanded Commercial Banking can be briefly defined as the combination of commercial banking (full domestic and international banking) with the powers of an investment house (underwriting, securities dealership, and equity investment).
• The investment house operations may be discharged by an expanded commercial bank either (a) in-house, that is, by establishing a separate department therefore in the bank, (b) through the establishment of a separate subsidiary.
Expanded Commercial Banks
Organization and Capitalization
• An expanded commercial bank is organized like an ordinary commercial bank, except that the minimum paid-in capital of the former before it starts operations is P1.5 billion.
Scope of Authority
• The authority of an expanded commercial bank shall include, in addition to the commercial banking powers earlier mentioned, the authority to exercise the powers of an investment house as provided in pertinent laws, the authority to invest in the equity (share of stock) of non-allied undertaking, and to own up to 100% of the equity of a financial intermediary other than a commercial bank or a bank authorized to provide commercial banking services, in accordance with applicable laws and regulations.
Equity Investments
• An expanded commercial bank may invest in the equity of other financial institutions under the following regulations:1. It can own up to 100% of the voting stock of a
financial institution performing quasi-banking functions
2. It can invest in the following non-financial allied undertakings:• Warehousing companies
3. The bank’s investment, or of its wholly or majority-owned subsidiary, in any single-non-allied undertaking shall not exceed 35% of the total subscribed capital stock nor shall it exceed 35% of the voting stock of that enterprise.
4. The bank’s total equity investment in, and outstanding loans to, any single enterprise whether allied or non-allied, shall not, at any time, exceed 15% of the net worth of the investing bank,
Equity Investments
• Storage companies• Safe deposit box companies• Companies engaged in the management
of mutual funds but not in the mutual funds themselves•Management corporations engaged in
activities similar to the management of mutual funds
Equity Investments
• Companies engaged in the provision of computer services• Insurance companies• Companies engage in home building
and/or home development• Companies providing drying and/or
milling facilities for agricultural crops, such as rice and corn• Companies engaged in insurance
brokerage
Equity Investments
Objectives of Financial Intermediation
• The financial reforms of 1980 which culminated in the birth of expanded commercial banks have sought the attainment of two objectives in financial intermediation:1. The attainment of greater efficiency thru
increased competition and scale economies, by way of eliminating enforced specialization of certain banks, and the offering of a broader range of financial services by said banks.
2. There is now greater availability and use of longer-term funds to hasten the development process in terms of meeting debt and equity requirements.
Objectives of Financial Intermediation
With the revision of the banking structure and certain administrative regulations, the financial system in our country hopes to reap the benefits of progress and development as expanded commercial banks continue to serve the credit needs of urban and countryside economic activities, side by side with the other types of banking institutions.
