Commercial Banks PDF

LESSON Commercial 5 Banks  Commercial Bank A commercial bank is a kind of financial institution that carries all the operations related to deposit and withdrawal of money for the general public, providing loans for investment, and other such activities. These banks are pr...

LESSON Commercial 5 Banks  Commercial Bank A commercial bank is a kind of financial institution that carries all the operations related to deposit and withdrawal of money for the general public, providing loans for investment, and other such activities. These banks are profit-making institutions and do business only to make a profit. Functions of a commercial bank: 1. Deposit Function - a commercial bank primarily receives demand deposits which can only be withdrawn by means of checks. It may also receive time deposits. 2. Loan Function - it advances sums of money for relatively short period of time to persons engaged in commerce and trade. It charges interest on such loans at legal rates. 3. 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 credit. 4. Trust Function - engage in fiduciary such as administrators of estates, guardians of minor’s interest, registrars and transfer agent of stocks and bonds; executors of last wills and testaments, and other similar functions. 5. Advisory Function - commercial banks, through their experienced officers, given expert advice to clients on their business dealings.  Bank Services 1. Rental of safe deposits boxes - valuables are kept in specially constructed vaults to allow maximum safety from fire, burglary and other risks. 2. Sale of drafts and cashier‘s checks - commercial banks also undertake the sale of drafts and the cashier’s checks. The bank charges a small fee for this service. 3. Safe of traveler‘s checks - a traveler is provided a safe medium of exchange through this service of commercial banks. The traveler is made to sign twice, once when buying the checks (when he signs all of them) and again when he uses the check for payment ( when he signs each one as it is 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 to be 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. 6. Payrolls - bank employees are also assigned to prepare payroll payment by inserting the correct amounts in envelopes to cover salaries of employees of business concerns. General Banking Law of 2000 (R.A 8791) under Chapter IV, Articles II and Articles 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 letters of credit; discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; accepting or creating demand deposits; receiving other types of deposits and deposit substitutes; buying and selling foreign exchange and gold or silver bullion; acquiring marketable bonds and other debt securities and extending credit, 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 conditions stated in the succeeding paragraphs, invest only in the equities of allied enterprises 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: 30.1. The total investment in equities of allied enterprises shall not exceed thirty-five percent (35%) of the net worth of the bark; and 30.2. The equity investment in any one enterprise shall not exceed twentyfive percent (25%) of tile 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 investment.(2lA-a; 21-Ca) 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 a 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 Investments of a Commercial Bank in Non-Financial Allied Enterprises - A commercial bank may own up to one hundred percent (100%) of the equity in a non-financial allied enterprise. Universal Banks - is also a commercial bank. A UB exercises the power and services authorized for KB. Required minimum capital is P4,950(in million pesos) Also called an expaned commercial bank (EKB). Sec.23 Powers of a Universal Bank -A universal bank shall have the authority to exercise the power authorized for a commercial bank in 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 enterprises as may be determined by the Monetary Board. Allied enterprises may either be financial or non-financial. Except as the Monetary Board may otherwise be prescribe: 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 nonallied, shall not exceed twenty-five percent (25%) of the net worth of the bank. Sec.25 Equity Investments of a Universal Bank in Financial Allied Enterprises 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 percent (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 quasibanks. This rule shall also apply in the case of commercial banks Take Note! A universal bank may perform the functions of an investment house either directly or indirectly through a subsidiary investment house. The underwriting of equity securities and securities dealing shall be subject to pertinent laws and regulation of the Securities Exchange Commission (SEC). 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 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 home building and home development. 7.Insurance agencies/Brokerages. 8.Companies engaged in home building and home development. 9.Companies providing drying and/or milling facilities for agricultural crops. 10.Service Bureaus organized to perform for and in behalf of banks and non-bank financial institutions as the services be outsourced under Circulation No. 268. Provided, that data processing companies may be allowed to invest up to 40% in the equity service bureaus. 11. Philippine Clearing House Corporation (PCHC) and the Philippine Deposit Insurance Corporation (PDIC). 12. Such other similar activities as the Monetary Board may declare as non-financial allied undertakings of banks. Financial Allied Undertakings 1. Leasing companies including leasing of stalls and spaces in a commercial establishments; provided that bank investment in/acquisition of shares of such leasing company shall be limited/applicable only in cases of conversion of 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 UB’s may invest in the following as financial allied undertakings: a. Insurance Companies b. Holding companies, provided that the investment of such holding company are confined to the equities of allied undertakings and/or non-allied undertakings of the UB’s allowed under the BSP regulations.  Departmentalization 1. Cash department - which will take care of the deposit function of the bank and allied activities. It may be sub-divided into New Accounts, Signature Controls, Safe Deposit Boxes, and Armored Car Services. 2. Loan and discount department - headed by a loan officer. 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 - headed by a trust officer who is well versed in trust functions. It deals more on legal officer’s work and a lawyer would be ideal for this job. The divisions will be line with the fiduciary activities. 4. Foreign department - deals in exchange 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 5. Accounting department - takes care of all the transactions of the bank. It puts in order all the books, proof sheet, financial statements, and other accounting procedures used in the bank. 5. Auditing department - takes care of seeing to it that disbursement are in order by conducting pre-audits, spot checks on the transactions and physical assets, and institutes general control on the activities of the bank. 6. 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. 7. Administrative department - the general administration of the bank falls under this department. Personnel recruiting, hiring, training, and the like may be undertaken by it.  Forms of Bank Credit Bank credit - represents the bank’s trust and the confidence in the borrowers willingness and ability to pay a loan when due. It could also mean the depositors trust in the bank which makes him put his money for safe keeping. It may be in the form of banknotes, deposits, letters of credit, lines of credit, acceptances, and notes payable. Sources of Bank Funds The major primary source of bank funds is the contribution of stockholders and sizable deposits. The banks will try their best to outdo one another to attract depositor. While the stockholders are required to put 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. Furthermore, earning money on borrowed funds is the very nature of banking business.  -END- Thank you! Prepared by: -Buagas, Catherine -Noble, Kiarra Lee Fave -Villela, Ma. Betty Mae