Instructional Material on Banking and Financial Institutions PDF

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES (Name of Department) (Name of College) (Name of Branch or Campus) FIMA 101 BANKING AND FINANCIAL INSTITUTIONS Cruz, Prince Guillan...

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES (Name of Department) (Name of College) (Name of Branch or Campus) FIMA 101 BANKING AND FINANCIAL INSTITUTIONS Cruz, Prince Guillan Fajilago, Ria Panibio, Bernadette Reyes, Mark Clessdy 0  Instructional Material on Banking and Financial Institutions (FIMA 101) Cruz, Prince Guillan Fajilago, Ria Panibio, Bernadette Reyes, Mark Clessdy ALL RIGHTS RESERVED. No part of this learning module may be reproduced, used in any form, or by any means graphic, electronic, or mechanical, including photocopying, recording, or information storage and retrieval system without written permission from the authors and the University. Published and distributed by: Polytechnic University of the Philippines address website email Tel. No.: 1  The VMPGO (This part is dedicated to the statement of the Vision, Mission, and Philosophy of the University, the Goals of the College/Branch or Satellite Campus, and the Description and Objectives of the Program where the instructional materials are proposed and evaluated.) VISION PUP: The National Polytechnic University MISSION Ensuring inclusive and equitable quality education and promoting lifelong learning opportunities through a re-engineered polytechnic university by committing to: provide democratized access to educational opportunities for the holistic development of individuals with global perspective. offer industry-oriented curricula that produce highly-skilled professionals with managerial and technical capabilities and a strong sense of public service for nation-building. embed a culture of research and innovation. continuously develop faculty and employees with the highest level of professionalism. engage public and private institutions and other stakeholders for the attainment of social development goal. establish a strong presence and impact in the international academic community. PHILOSOPHY As a state university, the Polytechnic University of the Philippines believes that: Education is an instrument for the development of the citizenry and for the enhancement of nation-building; and, That meaningful growth and transformation of the country are best achieved in an atmosphere of brotherhood, peace, freedom, justice and nationalist-oriented education imbued with the spirit of humanist internationalism. 2 SHARED VALUES AND PRINCIPLES 1. Integrity and Accountability 2. Nationalism 3. Sense of Service 4. Passion for Learning and Innovation 5. Inclusivity 6. Respect for Human Rights and the Environment 7. Excellence 8. Democracy GOALS OF THE COLLEGE/CAMPUS A. Ensure the development of globally competitive professionals, managers and leaders in the field of accountancy, finance and other allied disciplines through excellent and relevant and responsive accountancy and finance education accessible to all Filipinos specifically to the socio economically disadvantaged population Ascertain the generation and diffusion of knowledge and technologies in the broad range of disciplines, relevant and allied to accountancy and finance through continuing education and research, information and communication technology, networking, and linkages with local, national and foreign organization Strengthen/enhance its organizational capability to become the leader in advocating reforms and innovations and fulfilling its social responsibility commitment through research and development studies, and extension and consultative services PROGRAM DESCRIPTION The Bachelor of Science in Business Administration Major in Financial Management is a four-year degree program that aims to strengthen students’ communication, critical, creative and analytical skills necessary for sound financial decision making cognizant of a dynamic domestic and global business environment and mindful of their role in nation building It develops students as ethical, innovative, independent, and resilient finance professionals equipped with relevant 21st century skills, adept in financial technology, with strong service orientation and organizational skills, committed to continuing professional development responsive to the requirements of the various careers in financial management and allied fields. 3 COURSE DESCRIPTION This course is designed to develop an understanding of banks and other financial institutions focusing on their role in the functioning and well-being of the economy. It will also discuss topics in details such as the economic analysis of financial structure, the management of banking and financial institutions, and the structure, competition and regulation of the banking industry. INSTITUTIONAL LEARNING OUTCOMES (ILOS) 1. Creative and Critical Thinking 2. Effective Communication 3. Strong Service Orientation 4. Community Engagement 5. Adeptness in the Responsible Use of Technology 6. Passion to Life-Long Learning 7. High Level of Leadership and Organizational Skills 8. Sense of Personal and Professional Ethics 9. Sense of Nationalism and Global Responsiveness PROGRAM LEARNING OUTCOMES (PLOS) 1. Select the proper decision making tools to critically, analytically and creatively solve problems and drive results 2. Express oneself clearly and communicate effectively with stakeholders both in oral and written forms 3. Exhibit positive service mindset and value-driven service approaches 4. Participate in community –based projects that make a difference in the civic life of communities 5. Apply information and communication technology skills as required by the business environment 6. Engage in lifelong learning with a passion to keep current with national and global banking and finance developments 7. Demonstrate interpersonal, team and leadership skills necessary to promote organizational effectiveness 4 8. Exercise high personal moral and ethical standards 9. Employ national and global perspectives to analyze issues COURSE LEARNING OUTCOMES (CLOS). Describe the financial system and the institutions composing it Differentiate banking and non-banking institutions Discuss the functions of different financial institutions Identify the different risks and discuss how financial institutions manage those risks Explain the relationship of banks and other financial institutions with various clients. 5 Preface 6  TABLE OF CONTENTS Title Page 1 The VMPGO 2 Preface 6 Table of Contents 7 OBE Course Syllabus 8 Lesson 1: OVERVIEW OF THE PHILIPPINE FINANCIAL SYSTEM 12 Lesson 2: BANKING INSTITUTIONS 17 Lesson 3: BANK ORGANIZATION AND MANAGEMENT 30 Lesson 4: BANK SUPERVISION AND REGULATION 55 Lesson 5: INSURANCE COMPANIES 61 Lesson 6: INVESTMENT COMPANIES 79 Lesson 7: INVESTMENT HOUSE SECURITIES DEALERS AND BROKERS 88 Lesson 8: FINANCIAL SERVICE COOPERATIVES 101 Lesson 9: FINANCING COMPANIES 104 Lesson 10: PAWNSHOPS 111 Lesson 11: GOVERNMENT FINANCIAL INSTITUTIONS 119 Lesson 12: REGULATORY BODIES FOR BANKS AND NON-BANK INSTITUTIONS 134 7  COURSE SYLLABUS Learning Week Topic Methodology Resources Assessment Outcomes Show interest Orientation Introduction to the course and appreciation Course Syllabus None Review of the Week contents, activities, and of the importance syllabus, 1 requirements. of knowing the learning course. activities and assessment Getting to know activity Describe the Perspective from Recitation Week Overview of the Philippine components of Lecture BSP: Money and Quiz 2 Financial System the Philippine Discussion Banking in the Submitted History Financial System Assignment Philippines assignment Composition www.bsp.gov.ph Money, Banking, Recognize the Recitation Banking Institutions Financial importance of Quiz Markets and banks Submitted Significance of Lecture Institutions Week assignment banks Discussion Brandl, M.W. 3 Differentiate Classifications Assignment 2017 banks and types of banks Perspective from BSP: Money and Banking in the Philippines www.bsp.gov.ph Describe the organizational structure of Perspective from Bank Discussion Week banking BSP: Money and Recitation organization and Assignment 4 institutions Banking in the Quiz management Philippines Submitted Discuss the assignment procedure of www.bsp.gov.ph organizing a banking institution 8  Money, Banking, Discuss the Financial Recitation different Lecture Markets and Different bank Quiz functions Group Institutions functions Submitted performed by reporting Brandl, M.W. assignment banking Assignment 2017 Week Relationship of institutions 5–7 banks with Money and various clients Banking Croushore, Dean 2012 Perspective from BSP: Money and Banking in the Philippines www.bsp.gov.ph Explain the Recitation Philippine importance and Discussion Quiz Week Deposit www.pdic.gov.ph role played by Assignment Submitted 8 Insurance PDIC in the assignment Corporation banking system Week MIDTERM EXAMINATION 9 Classify Non-Banking Instlitutions insurance companies Recitation Classifications based on their Discussion Insurance Code Quiz Week and functions of functions Reporting of the Phil Submitted 10 insurance Assignment assignment companies Discuss the www.ic.gov.ph Products/services functions and of insurance products/services companies of insurance companies Differentiate Classifications types of Investment Recitation and functions of investment Discussion Company Act Quiz investment companies Reporting Week Submitted companies Assignment 11 Code of Ethics – assignment Products/services Discuss the Investment of investment functions and Company Asso. companies products/services of the Phil. of investment companies 9  Discuss the Functions of functions and investment products/services Recitation Discussion The Investment house and of investment Quiz Reporting Houses Law securities house Submitted Assignment Week brokerage firms assignment Securities 12 Products/services Discuss the Regulation Code of investment functions and house and producst/services www.ihap.org securities of securities brokerage firms dealers and brokers Functions of Discuss the Recitation financing functions and Discussion The Financing Quiz Week companies products/services Reporting Company Act Submitted 13 Products/services of financing Assignment assignment of financing companies companies Recitation Functions of Discuss the Pawnshop Discussion Quiz Week pawnshops functions and Regulation Act Reporting Submitted 14 Products/services products/services Assignment assignment of pawnshops of pawnshops BSP Pawnshop Regulations Discuss the Functions of Recitation functions and Discussion Cooperative Week cooperatives Quiz products/services Reporting Code of the 15 Products/services Submitted of cooperatives Assignment Philippines of cooperatives assignment Discuss the Recitation Functions of www.gsis.gov.ph functions and Discussion Quiz Week GSIS and SSS products/services Reporting Submitted 16 Products/services www.sss.gov.ph of GSIS and SSS Assignment assignment of GSIS and SSS Discuss the role Regulatory played by Recitation bodies for banks Week different Discussion Quiz and non-bank 17 government Assignment Submitted financial institutions/ assignment institutions agencies Week FINAL EXAMINATION 18 10 Class Standing 70% Quizzes Attendance Recitation Projects/Reports Assignments/Seat works Midterm / Final Examinations 30% 100% Midterm Grade + Final Term Grade = FINAL GRADE 2 11  Lesson 1 OVERVIEW OF THE PHILIPPINE FINANCIAL SYSTEM INTRODUCTION This section discusses the Components of the Financial System, key services provided by the financial system, functions of the Financial System and the role and importance of the financial system in the economy LEARNING OBJECTIVES 1. Describe the components of the Philippine Financial System 2. Explain the services provided by the financial system 3. Recognize the role and functions of the financial system LECTURE DISCUSSION THE FINANCIAL SYSTEM Financial System Composed of the myriad markets and institutions through which funds flow between lenders and borrowers Financial Market Refers to a marketplace, where creation and trading of financial assets, such as shares, debentures, bonds, derivatives, currencies, etc. take place. It plays a crucial role in allocating limited resources, in the country's economy. 12 Money Market Money Market refers to all institutions and procedures that provide for transactions in short-term debt instruments that are generally issued by borrowers with good credit ratings Capital Market Capital market refers to all institutions and procedures that provide for transactions in long-term financial instruments Primary Market The primary market is where securities are created. It's in this market that firms sell (float) new stocks and bonds to the public for the first time. An initial public offering or IPO, is an example of an instrument traded in the primary market. 13 Secondary Market A secondary market is a marketplace where already issued securities – both shares and debt – can be bought and sold by the investors. It is a market where investors buy securities from other investors, and not from the issuing company. Capital Market Primary Market Secondary Market Primary beneficiary is the issuing Primary beneficiary is the corporation investor/shareholder Objective is to raise funds Objectives is capital appreciation Includes new securities such as Initial Includes the trading of securities already Public Offerings (IPOs) offered to the marketplace Financial Institutions Intermediaries that channel the savings of individuals, businesses and governments into loans and investment Banking Institutions Include all financial institutions engaged in the lending of funds obtained from the public primarily through the receipt of deposits of any kind. Non-banking Institutions Financial institutions other than banks whose principal functions include lending, investing or placement of funds or evidence of indebtedness or equity deposited with or otherwise acquired by them, either for their own account or for the account of others Key Services Provided by the Financial System Risk Sharing The financial system provides risk sharing by allowing savers to hold diversified assets. Risk – general uncertainty, doubt or chance of loss (the chance that the value of financial assets will change relative to what you expect Portfolio – a collection of assets which may consist of investment holdings 14 Diversification The spreading of wealth into many assets to make up a portfolio (the principle of efficient diversification holds that bundles of assets should be combined to mitigate market risks) Liquidity Manifested by the ease with which an asset can be exchanged for money to purchase other assets, goods and services. Financial assets created by the financial system, such as stocks, bonds, checking accounts are more liquid than cars, machinery or real estate. Savers view liquidity as a benefit since they can exchange their assets easily when they need them for their own consumption or investment. In general, the more liquid an asset, the easier it is to exchange the asset for another asset or for goods and services. With liquid assets, an individual or firm can easily and quickly respond to new opportunities or unexpected events. Financial markets and intermediaries provide trading systems for making financial assets more liquid. The efficiency of the financial system can be measured by the extent to which an investor can easily transform illiquid assets into liquid claims Information The financial system provides market players more access to vital information about borrowers’ and lenders’ expectations, and what they have to offer. Providing better access to information embraces the system’s role of collecting and communicating information. Gathering or collecting information includes finding out about prospective borrowers and what they will do with borrowed funds. Obtaining such information would be costly and time-consuming for savers who of course want all the facts before lending their money. The financial system, in providing market players more access to relevant and useful information should also perform the role of effectively disseminating information. Savers and borrowers receive the benefits of information from the financial system by looking at asset returns. The information works its way into asset returns and prices as long as financial market participants are informed. The incorporation of available information in asset returns is a manifestation of well-functioning financial markets. Functions of Financial System The basic function of the financial system is to provide channels to transfer funds from savers with an excess of funds to spenders facing a shortage of funds Direct Lending 15 Involves the transfer of funds from the ultimate lender to the ultimate borrower, most often through a third party Indirect Lending Indirect lending involves lending by the ultimate lender to a financial intermediary who pools the funds of many lenders in order to relend at a mark-up over the cost of funds. The ultimate borrowers are normally unknown to the ultimate lenders. A lender faces less risk because as a specialist in the field, the intermediary normally has a well-established credit standing Role of Financial Institutions Term Transformation Proceeds when banks finance long-term loans to companies through the short-term deposit liabilities. Banks profit from this practice because the funding costs from demand and savings deposits are lower than those for time deposits and long-term borrowing by the bank. The disadvantage is that depositors at any time might withdraw funds tied up as loan to companies, thus resulting in a liquidity risk for the bank. Economies of scale and diversification in the use of funds Banks can use the combined savings of the small depositors to finance the large-scale investments of corporations. By achieving economies of scale in lending, banks can pay higher interest rates on the savings deposits of individual savers and keep part of the profits to sustain their growth. A financial intermediary pool all funds and allocates them to many different corporate borrowers, thus, decreasing the risk of individual savers. Technical Expertise Financial institutions maintain personnel who are knowledgeable in their business activities. These knowledgeable personnel are skilled in the screening of borrowers, project evaluation and fund management among others The specialized expertise in financial institutions assures savers that the bank will invest their funds at high yields with low transaction costs. Left to their own devices, individual savers may not develop the necessary technical skills to identify and screen prospective investment project 16  Lesson 2 BANKING INSTITUTIONS INTRODUCTION This section discusses the nature of Banking Business, banking in the Philippines, the different roles banks play in the economy, basic principles of banking and the classifications of banks LEARNING OBJECTIVES 1. Recognize the importance of banks 2. Define banking terms 3. Identify and acquaint with the basic principles of banking operations 4. Differentiate banks LECTURE DISCUSSION THE NATURE OF BANKING BUSINESS Bank is an institution which deals in money and credit. It accepts deposits from the public and grants loans and advances to those who are in need of funds for various purposes. Banking is an activity which involves acceptance of deposits for the purpose of lending or investing. In addition to accepting deposits and lending funds, banking also involves providing various other services along with its main banking activity. These are mainly agency services, but include several general services as well. The main operation of a bank involves financial intermediation. Transactions are created between individuals, business firms, government institutions and foreign investors-the suppliers and users of funds. Below is a diagram that showshow financial intermediation mechanism works. A bank act as a financial intermediary that serves as a middleman for different parties in a financial transaction. It facilitates the channeling of funds between lenders and borrowers indirectly. 17 Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities. As such, financial intermediaries channel funds from people who have extra money or surplus savings (savers) to those who do not have enough money to carry out a desired activity (borrowers). That is, savers (lenders) give funds to an intermediary institution (such as a bank), and that institution gives those funds to spenders (borrowers). Essentially, banking is about confidence or trust—the belief that the bank has the money to honor its obligations. Any crack in that confidence can trigger a run and potentially a bank failure, even bringing down solvent institutions BANKING IN THE PHILIPPINES The Philippine banking system has evolved gradually over the span of more than a century, starting from one bank in 1851 to a multi-faceted system which supplies credit to the growing financial requirements of every sector in the country’s economy. During the Spanish Period, prior to the establishment of formal banking in 1851, the Obras Pias was organized by Fr. Juan Fernandez de Leon in 1594. The Obras Pias was a religious foundation that accumulated large funds from the legacies of wealthy individuals who made out wills before going out on dangerous expeditions, bequeathing their estates to the Church or to lay confraternities. The funds of this foundation were first invested in loans to traders to finance the galleon trade in Acapulco, Mexico. Formal banking started in the country with the establishment of the El Banco Español Filipino de Isabel II (later changed to El Banco de las Islas Filipinas) which is now known as the Bank of the Philippine Islands. This is the first commercial bank organized in the Far East. It was during the Spanish time that the country’s first savings bank was established. The Monte de Piedad y Caja de Ahorros de Manila was founded by Fr. Felix Huertas. During the American Period, those banks which were already existing were allowed to continue operations. More banks were opened to finance the increasing demand of trade in the country. The Philippine Bank of Commerce, which was the first private commercial bank in the country wholly owned by Filipinos, was opened for business in 1938. The bank was absorbed by the Philippine Commercial and Industrial Bank. 18 At the outbreak of World War II, the Philippines was occupied by the Japanese Imperial Forces. During the Japanese Occupation, three domestic banks were allowed to resume operation. They were the Philippine National Bank, Bank of the Philippine Islands, and the Philippine Bank of Commerce. The Japanese occupation left the banking system in a state of almost total collapse. Most banks had worthless Japanese notes in hand. Immediate rehabilitation of the banking system was made through the creation of the Rehabilitation Finance Corporation. In 1948, upon the enactment of R.A. 265, The Central Bank Act, the banking system in the country continued to grow and expand. The structure of the Philippine Financial System had grown in size, became complex, and more sophisticated. Together with these developments, there were still some aspects of the financial system that needed improvement. Congress called for the review of the banking laws and in November of 1971, the Monetary Board created the Banking Survey Commission to conduct an overall review of the financial sector of the economy. The findings of the study were as follows: 1. The Philippine Banking System had become “unnecessarily complicated and over-fragmented”. There were too many kinds of banks with different objectives and specialization. They enjoy different privileges and benefits which at the end did not give any advantage to the Philippine economy. 2. The emergence of new forms of financial intermediation had affected the price of money and the distribution of financial resources within the economy. 3. The Philippine Banking System is still deficient to support the financial requirement of a growing economy. Another thing is that the financial intermediation is either doubled to be in full force or is being maximized. Based on the foregoing findings the Commission recommended that the establishment of new commercial banks must be stopped, and that the classifications of banks be reduced so that the monetary and fiscal policies can be equally applied and equal benefits be enjoyed by banks. The Commission also recommended that the authority of the Central Bank including its responsibilities be expanded over the financial system. Flexibility in the exercise of the Central Bank’s power and the bank’s responsibility must be redefined primarily as the maintenance of monetary stability in the Philippines 19 These recommendations resulted in the amendments to the General Banking Act, the Central Bank Act, and other pertinent laws contained in P.D. Nos. 71, 72, 113 to 123 and 129. These amendments gave focus on the structure, operation and growth of the financial system. With these amendments, consolidation and merges of banks were resorted to. In 1979, another mission was formed to make a further study of the Philippine financial system with the end in view to update the system with the dynamic pace of a growing society. The group was composed of representatives from the International Monetary Fund and the World Bank and was called to Joint IMF/WB Mission. Both 1972 and 1980 missions have the objective of maintaining a financial system that could provide the needs of a growing and developing economy. The 1980 survey, however, was more particular about a more efficient financial intermediation of new and small business enterprises. This concern of the mission is believed to improve the system and to make it more relevant to the needs of a complicated society. The findings of the study were as follows: 1. The legislated specialization in the Philippine banking system prevents banks from responding to the needs of the growing economy and thus hampers them from meeting the demands of their clientele. 2. There is more preference for short-term lending and slow growth of long-term deposits. Based on the findings, the mission recommended the following: 1. The legislated specialization in the Philippines should be removed. Banks should be given the chance to offer a wide range of financial services to the public. 2. Financial institutions were to be encouraged to extend more of long-term funds. This is referred to as term transformation. The financial institutions may also invest in equities of business firms. 3. An active capital market was to be developed and the lender-of-last resort facility of the Central Bank should be fully utilized to maintain the liquidity of banks. 20 These findings and recommendations were submitted to the Batasang Pambansa, which resulted to the passing of the seven amendatory laws namely, BP Nos. 61 to 67, and the Implementing Circulars Nos. 739-742 as issued by the Central Bank of the Philippines. These laws intend to develop increased competition within the system and more use of long-term funds for debt and equity financing. These amendatory laws affected the Banking Reforms of 1980. The Banking Reforms of 1980 effected a revision in the Philippine banking structure including the administrative regulations. A new concept of banking called expanded commercial banking or universal banking was introduced. This type of banking involves a combination of commercial banking (full domestic and international banking) with the powers of an investment house (underwriting, securities dealership and equity investments). An expanded commercial bank or any unibank may acquire 100% of the equity of an investment house, thrift banks, rural banks and other financial undertakings. It may also invest in equities of commercial banks and non related undertakings with certain limitations. This new concept in banking which is known as “one-stop banking” or “department store banking” enables the clientele to avail all banking services they need from only one bank. With the introduction of the universal banking concept, it was hoped that the financial system would contribute to the economic growth and development of the country. PHILIPPINE BANKING TODAY The banking system in the Philippines has indeed made great strides through the years. A clear indication of this would very well be justified by the fact that we see banks to the right and to the left of us not only in commercial centers but also in the remote areas of the country. The business of banking has changed irreversibly and banks must step up to meet clients’ higher expectations for greater safety, for better returns, and for more choices. Developments in technology have more contributions in these irreversible changes in the banking system. Technology has brought us to e-banking, the provision of banking services over the Internet or other electronic networks. Banks wishing to turn to e-banking must seek approval from the Monetary Board of the BSP. They must follow the procedures and requirements stipulated in BSP Circular No. 269, the new guidelines concerning electronic banking services. 21 There have been significant legislations passed into law that govern the present Philippine banking system. On May 23, 2000, the passage into law of R.A. 8791, otherwise known as the General Banking Law of 2000, institutionalized a certain mass of banking reforms in the Philippines. It provides the regulation of the organization and operations of banks, quasi-banks and trust entities. Among the more important features of the new law are the following: ▪ Greater foreign participation in the system, thus inducing competition. Foreign banks 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 enterprises owned or controlled by said DOSRI. ▪ 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 the BSP to regulate electronic banking to ensure adequate protection of banks’ depositors and other clients. Republic Act 9160, otherwise known as the Anti-Money Laundering Act of 2001 was passed into law on September 29, 2001. There are five salient features of AMLA: ▪ Money laundering is now a crime in the Philippines It identifies the forms of business institutions or “covered institutions” which are required to submit reports about suspicious or “covered transactions” to authorized persons The creation of an Anti-Money Laundering Council that will administer the implementation of RA 9160 ▪ The amendment of the Bank Secrecy Law 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 preserve the integrity and confidentiality of bank accounts. ▪ The institution of procedures and arrangements that facilitate cooperation between the Philippines and foreign governments in the investigation and prosecution of money launderers 22 In the commercial banking industry, which will continue to be the core of the banking industry the country is steadily moving to a scenario in which there are fewer but more financially powerful main banks that are better able to compete in a borderless world. That is the most compelling force behind the current wave of banks mergers and acquisitions. Merger is the absorption of one or more corporations by another existing corporation which retains its identity and takes over the rights, privileges, franchises and properties and assumes all liabilities and obligations of the absorbed corporation(s) in the same manner as if it had itself incurred such liabilities or obligations. The absorbing corporation continues its existence while the life or lives of the other corporation(s) is/are terminated. Consolidation is the union of two or more corporations into a single new corporation, called the consolidated corporation. All the constituent corporations thereby cease to exist as separate entities. The consolidated corporation shall thereupon and thereafter possess all the liabilities and obligations of each of the constituent corporations in the same manner as if it had itself incurred such liabilities or obligations. On April 19, 2000, the Monetary Board approved the issuance of Circular No. 237, consolidating and clarifying all existing rules and regulations on mergers and acquisitions of banks and other financial institutions as well as improving the incentive package. This was done to foster banks, bring about more and better financial services at lower cost, and promote stability and efficiency in the Philippine banking sector. FUNDAMENTAL FORCES OF CHANGE The basic theme is that increased competition has encouraged banks to assume increased portfolio risks in order to earn acceptable returns. As bank regulators have tried to reduce overall risk by raising capital requirement, banks have moved assets off their balance sheets and tried to replace interest income with fee income. In these efforts, banks attempt to be more like insurance brokers, realtors and investment bankers competing with a broader range of firms in more product markets. As capital becomes increasingly costly or impossible to obtain, individual firms are forced to merge to continue operations. Increased Competition Today, the world of banking is quite different. Banks are basically free to set the price for their services and the type of services they offer as are other companies are also free to 23 offer banking-type services at competitive prices. Bankers now compete directly in price, product offerings and service. Competition for Deposits The range of deposit products is much broader than what was previously available. Advances in technology means that businesses and consumers have substantially greater choices than before. The vast amount of information available on the Internet means that customers can quickly and easily obtain rate quotes from financial institutions. Deposit services are often priced to encourage customers to conduct the bulk of their banking business with one firm. Competition for Loans As bank funding costs increased, competition for loans put downward pressure on loan yields and interest spreads over the cost of bank funds. High quality corporate borrowers have always had the option to issue commercial papers or long-term bonds rather than borrow from banks. Banks pursue different strategies. Small- to medium-sized banks continue to concentrate on loans but seek to strengthen customer relationships by offering personal service. They have also rediscovered the consumer loan. Competition for Payment Services Once the exclusive domain of banks and other depository institutions the nation’s payment system has become highly competitive. The real challenge in the delivery of payment processing services is emerging electronic payment systems. Why is Microsoft considered a threat to banks? Many analysts argue that the future delivery of banking services will not take place in the brick and mortar branches of a bank building but rather through smart cards, ATM networks (which the banks control) and the Internet (which banks do not control). No individual owns the Internet and any business can offer services over the Internet. The payment system is highly dynamic and constantly changing. Competition for Other Bank Services Banks and their affiliates offer many products and services in addition to deposits and loans. A partial list includes trust services, brokerage, securities underwriting, real estate appraisal, personal financial counseling. 24  FINANCIAL INNOVATION Financial innovation is the catalyst behind the evolving financial services industry and the restructuring of financial markets. It represents the systematic process of change in instruments, institutions and operating policies that determine the structure of our financial system. Innovations take the form of new securities and financial markets, new products and services, new organizational forms, and new delivery systems. Financial institutions change the characteristics of financial instruments traded by the public and create new financial markets which provide liquidity. Bank managers change the composition of their banks’ balance sheets by altering the mix of products and services offered and by competing in extended geographic markets. Financial institutions form holding companies, acquire subsidiaries and merge with other entities. Institutions may modify the means by which they offer products and services. Recent trends incorporate technological advances with the development of cash management accounts, including the use of automated teller machines, home banking via computer and the Internet and shared national and international electronic funds transfer system. Innovations have many causes. Times may need to stop the loss of deposits, enter new geographic or product markets, deliver services with cheaper and better technology, increase their capital base, alter their tax position, reduce their risk profile, or cut operation costs. In virtually every case, the intent is to improve their competitive position. The external environment, evidenced by volatile economic conditions, new regulations and technological developments, creates the opportunity for innovation Innovation in delivery systems normally takes the form of new technological development to facilitate funds transfers. Banks popularized ATMs and POS terminals in retail outlets. More recent innovations include the development of debit cards, home banking networks and Internet banking. Different Roles Banks Play in the Economy Intermediation Role Transforming savings received primarily from households into credit (loans) for business firms and others in order to make investments in new building, equipment and other goods Payments Role 25 Carrying out payments for goods and services on behalf of customers (such as issuing and clearing checks, wiring funds, providing a conduit for electronic payments, and dispensing currency and coin Guarantor Role Standing behind their customers to pay off customer debts when those customers are unable to pay (such as issuing letters of credit) Risk Management Role Assisting customers in preparing financially for the risk of loss to property and persons Savings/Investment Advisor Role Aiding customers in fulfilling their long-range goals for a better life by building, managing and protecting savings Agency Role Acting on behalf of customers to manage and protect their property or issue and redeem their securities (usually provided through a trust department) Safekeeping/Certification of Value Role Safeguarding a customer’s valuables and appraising and certifying their true market value Policy Role Serving as conduit for government policy in attempting to regulate the growth of the economy and pursue social goals Basic Principles of Banking Principle of Liquidity Deposits are the life blood of the bank. Depositors are repayable on demand or after expiry of a certain period. Everyday depositors either deposit or withdraw cash. To meet the demand for cash, all banks have to keep certain amount of cash in their custody. Principle of Profitability The driving force of commercial enterprise is to generate profit. So, it is true in case of banks 26 Principle of Solvency Banks should be financially sound and maintain a required capital for running the business. Principle of Safety While investing the fund, banks are to be cautions because bank’s money is depositor’s money. Unless the money lent out is safe, the banks can’t pay depositors money back. Therefore, the banks are considering very seriously the aspects of safety of the lent-out money. Principle of Collection of Savings This is a very important principle for today’s banking business. Banks always seek huge amount of idle money from the clients. Now a day’s banks fix up the target for their employees to generate more savings from the people. 27 Principle of Loan and Investment Policy The main earning sources of banks are lending and investing money to the viable projects. Banks always try to earn profit through sound investment. Principle of Economy Banks never go for any unnecessary expenditure. They always try to maintain their functions with economy that increase their yearly profit. Principle of Providing Services Commercial bank thinks that customer service should be done efficiently and promptly. A better service brings great reputation for the bank Principle of Secrecy Bank maintains and keeps the clients’ accounts secretly. Nobody except the authorized person is allowed to see the accounts of the clients. Principle of Modernization It is the age of science and technology. So to cope up with the advanced world the bank has to adopt modern technical services like online banking, credit card etc. Principle of Specialization It is an age of specialization. Banks segments their whole functions into various parts and place their human resources according to their efficiency. Principle of Location Banks choose a suitable site where the availability of customers is large. Principle of Relation Banks always try to maintain a good relation with their clients and potential customers. Principle of Publicity It is an age of publicity. If you would like to earn more money, you have to give more advertisement through various media. In that case, banks follow this kind of principle to increase their customers. Classifications of Banks Banks are classified into the following subject to the power of the Monetary Board to create other classes or kinds of banks: 28  ▪ Universal banks (UBs) ▪ Commercial banks (KBs) ▪ Thrift banks (TBs), as defined in Republic Act (R.A.) No. 7906, which shall be composed of: savings and mortgage banks, stock savings and loan associations, and private development banks ▪ Rural banks (RBs)as defined in R.A. No. 7353 ▪ Cooperative banks (Coop Banks) ▪ Islamic banks (IBs) ▪ Digital banks Universal and commercial banks represent the largest single group, resource-wise, of financial institutions in the country. They offer the widest variety of banking services among financial institutions. In addition to the function of an ordinary commercial bank, universal banks are also authorized to engage in underwriting and other functions of investment houses, and to invest in equities of non-allied undertakings. The thrift banking system is composed of savings and mortgage banks, private development banks, stock savings and loan associations and microfinance thrift banks. Thrift banks are engaged in accumulating savings of depositors and investing them. They also provide short-term working capital and medium- and long-term financing to businesses engaged in agriculture, services, industry and housing, and diversified financial and allied services, and to their chosen markets and constituencies, especially small- and medium- enterprises and individuals. Rural and cooperative banks are the more popular type of banks in the rural communities. Their role is to promote and expand the rural economy in an orderly and effective manner by providing the people in the rural communities with basic financial services. Rural and cooperative banks help farmers through the stages of production, from buying seedlings to marketing of their produce. Rural banks and cooperative banks are differentiated from each other by ownership. While rural banks are privately owned and managed, cooperative banks are organized/owned by cooperatives or federation of cooperatives. Islamic Banks promote and accelerate socio-economic development by performing banking, financing and investment operations and establish and participate in agricultural, commercial and industrial ventures based on the Islamic concept of banking Digital banks are the newest type of banks that offer broad range of financial services, such as deposits, loans, payment services and money transfer, to the poor and low- income households for their micro-enterprises and small businesses 29  Lesson 3 BANK ORGANIZATION AND MANAGEMENT INTRODUCTION This section discusses the different bank functions and relationship of banks with various clients, as well as it powers and scope of authority. LEARNING OBJECTIVES 1. Describe the organizational structure of banking institutions 2. Discuss the procedure of organizing a banking institution 3. Recognize the similarities and differences of the powers and scope of authority of the different kinds of bank LECTURE DISCUSSION Establishment of Banks Consistent with relevant laws, rules and regulations, the licensing framework of the Bangko Sentral encompasses the assessment of the transparency of ownership and control structure; suitability of shareholders, including the ultimate beneficial owners (UBOs); fitness and propriety of directors and senior management; and adequacy of capital, including sources of initial capital and ability of shareholders to provide additional financial support, where needed. The assessment shall likewise cover the strategic and operating plan, including an appropriate system of corporate governance, risk management and internal controls, projected financial condition, consumer assistance mechanism, and compliance with anti-money laundering (AML) and combating the financing of terrorism (CFT) regulations. Basic Guidelines in Establishing Domestic Banks A new banking organization must have 30  ▪ suitable/fit shareholders, including the ultimate beneficial owners (UBOs) ▪ adequate financial strength ▪ a legal structure in line with its operational structure ▪ a board of directors and senior management with sufficient expertise and integrity to operate the bank in a safe and sound manner The authority to establish a bank shall be automatically revoked if the bank is not organized and opened for business within one (1) year from receipt by the organizers of the notice of Monetary Board approval of the application. Such authority may likewise be revoked if the Bangko Sentral has determined that the organizers provided false or misleading information during the processing of the application. Organizers of a bank found to have willfully certified or provided such false or misleading information shall be subject to the applicable administrative sanctions under Section 37 of Republic Act (R.A.) No. 7633, as amended. The imposition of the said administrative sanctions is without prejudice to the filing of appropriate criminal charges as provided under Sections 35 and 36 of R.A. No. 7653, as amended Certificate of Authority to Register The SEC shall not register the articles of incorporation and by-laws of any bank, or any amendment thereto, unless accompanied by a certificate of authority issued by the Bangko Sentral, under its seal. The certificate shall not be issued unless the Monetary Board is satisfied from the evidence submitted 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 ▪ The public interest and economic conditions, both general and local, justify the authorization ▪ The amount of capital, the financing, organization, direction and administration, as well as the integrity and responsibility of the organizers and administrators reasonably assure the safety of deposits and the public interest Business Name Universal Bankss/Commercial Banks (UBs/KBs) Only a bank that is granted universal/commercial banking authority may represent itself to the public as such in connection with its business name. Thrift Banks (TBs) 31 TBs may be allowed to adopt and use any name: Provided, That the words A Thrift Bank, A Savings Bank, A Private Development Bank or A Stock Savings and Loan Association, as the case may be, are affixed after its business name. Rural Banks/Cooperative Banks (RBs/Coop Banks) RBs/Coop Banks may adopt a corporate name or use a business name/style with the word Rural or Coop, as the case may be. Said banks may also adopt a name without such words provided that the identifying phrase, A Cooperative Bank or A Rural Bank, as the case may be, is affixed after its business name: Provided, further, that where the name of the bank is shown on letterheads, billboards and other advertising materials, the size of the letters of such phrase shall be at least one-half (½) the size of the business name. Digital Banks Only a bank that is granted a digital banking license may represent itself to the public as such in connection with its business name. Minimum Required Capital 32 Establishment of Digital Banks. The Bangko Sentral recognizes the role of digital platforms in driving greater efficiency in the delivery of financial products and services and in expanding reach into the unserved and underserved market segments. In this light, the Bangko Sentral endeavors to promote an enabling regulatory environment that allows responsible innovation to flourish, promotes cyber resilience, and contributes to advancing the digitalization of the financial industry. Towards this end, the Bangko Sentral has developed a framework for “digital banks” as a distinct classification of banks. The Bangko Sentral is cognizant that the adoption of a digital banking business model should be underpinned by sound digital governance, robust, secure and resilient technology infrastructure, and effective data management strategy and practices. Digital banks are exposed to the same set of risks identified in the Bangko Sentral Risk Management Framework; thus, are expected to have effective governance structures and risk management processes that appropriately identify, measure, monitor and control the risks attendant to its business model, strategies, processes and products. ln this respect, digital banks shall be subject to the same standards on corporate governance, risk management, compliance, internal control and audit, and reporting governance, among others, that are applicable to other bank categories. The following guidelines shall govern the establishment of digital banks: Definition A digital bank offers financial products and services that are processed end-to-end through a digital platform and/or electronic channels with no physical branch/sub-branch or branch-lite unit offering financial products and services. Capitalization The minimum capitalization of digital banks shall be P1.0 billion. Conduct of Business A digital bank shall be subject to the prudential requirements set out by the Bangko Sentralincluding corporate governance and risk management, particularly on information technology and cyber security, outsourcing, consumer protection and anti-money laundering (AML) and combating the financing of terrorism (CFT), as provided under existing regulations. 33 Physical Touchpoints Digital banks shall be required to maintain a principal/head office in the Philippines to serve as the main point of contact for stakeholders, including the Bangko Sentral and other regulators. The registered principal/head office of the digital bank shall house the offices of management and other support operations. It may also serve as the central hub for receiving and resolving customer complaints. Digital banks may offer financial products and services through cash agents and other qualified service providers subject to the guidelines provided under Secs. 275 and 112, respectively Powers and Scope of Authorities Universal Banks (UBs) A UB shall have the authority to exercise, in addition to the powers and services authorized for a KB and those provided by other laws, the following: ▪ the powers of an investment house (IH) as provided under existing laws ▪ the power to invest in non-allied enterprises ▪ the power to own up to one hundred percent (100%) of the equity in a TB, a RB, a financial allied enterprise, or a non-financial allied enterprise ▪ in case of publicly-listed UBs, the power to own up to 100% of the voting stock of only one (1) other UB or KB. A UB may perform the functions of an IH either directly or indirectly through a subsidiary IH; in either case, the underwriting of equity securities and securities dealing shall be subject to pertinent laws and regulations of the Securities and Exchange Commission (SEC): Provided, That if the IH functions are performed directly by the UB, such functions shall be undertaken by a separate and distinct department or other similar unit in the UB: Provided, further, That a UB cannot perform such functions both directly and indirectly through a subsidiary. Commercial Banks (KBs) In addition to the general powers incident to corporations and those provided in other laws, a KB shall have the authority to exercise 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 34  ▪ 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 ▪ 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. It may also exercise or perform any or all of the follow ▪ invest in the equities of allied enterprises as provided in Sections 31 and 32 of R.A. No. 8791 ▪ purchase, hold and convey real estate as specified under Sections 51 and 52 of R.A. No. 8791 ▪ receive in custody funds, documents and valuable objects ▪ act as financial agent and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and all types of securities ▪ make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business ▪ upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/ advisory/consultancy accounts ▪ rent out safety deposit boxes ▪ engage in quasi-banking functions Thrift Banks (TBs) In addition to the powers provided in other laws, a TB may perform any or all of the following services: ▪ grant loans, whether secured or unsecured ▪ invest in readily marketable bonds and other debt securities, commercial papers and accounts receivable, drafts, bills of exchange, acceptances or notes arising out of commercial transactions ▪ issue domestic letters of credit ▪ extend credit facilities to private and government employees ▪ extend credit against the security of jewelry, precious stones and articles of similar nature, subject to such rules and regulations as the Monetary Board may prescribe; (f) accept savings and time deposits ▪ rediscount paper with the Land Bank of the Philippines (LBP), Development Bank of the Philippines (DBP), and other government-owned or -controlled corporations ▪ accept foreign currency deposits as provided under R.A. No. 6426, as amended 35  ▪ act as correspondent for other financial institutions (FIs) ▪ purchase, hold and convey real estate as specified under Sections 51 and 52 of R.A. No. 8791 ▪ offer other banking services as provided in Section 53 of R.A. No. 8791 ▪ buy and sell foreign exchange. With prior approval of the Monetary Board, and subject to such guidelines as may be established by it, TBs may also perform the following services: ▪ open current or checking accounts ▪ engage in trust, quasi-banking functions and money market operations ▪ act as collection agent for government entities, including but not limited to, the Bureau of Internal Revenue (BIR), Social Security System (SSS) and the Bureau of Customs (BOC) ▪ act as official depository of national agencies and of municipal, city or provincial funds in the municipality, city or province where the TB is located ▪ issue mortgage and chattel mortgage certificates, buy and sell them for its own account or for the account of others, or accept and receive them in payment or as amortization of its loan ▪ invest in the equity of allied undertakings ▪ issue foreign letters of credit ▪ pay/accept/negotiate import/export draft/bills of exchange. Rural Banks (RBs) In addition to the powers provided in other laws, a RB may perform any or all of the following services: ▪ extend loans and advances primarily for the purpose of meeting the normal credit needs of farmers, fishermen or farm families as well as cooperatives, merchants, private and public employees ▪ accept savings and time deposits ▪ act as correspondent of other Fis ▪ rediscount paper with the LBP, DBP or any other bank, including its branches and agencies. Said banks shall specify the nature of paper deemed acceptable for rediscount, as well as the rediscount rate to be charged by any of these banks ▪ act as collection agent ▪ acquire readily marketable bonds and other debt securities ▪ offer other banking services as provided in Section 53 of R.A. No. 8791 ▪ buy and sell foreign exchange. With prior approval of the Monetary Board, an RB may perform any or all of the following services: 36  ▪ accept current or checking accounts: Provided, That such RB has net assets of at least P5.0 million ▪ accept negotiable order of withdrawal (NOW) accounts ▪ act as trustee over estates or properties of farmers and merchants ▪ act as official depository of municipal, city or provincial funds in the municipality, city or province where it is located ▪ sell domestic drafts ▪ invest in allied undertakings Cooperative Banks (Coop Banks) A Coop Bank shall primarily provide financial, banking and credit services to cooperatives and their members, although it may provide the same services to non-members or the general public. Manual of Regulations for Banks – Part One Page 3 In addition to the powers granted to Coop Banks under existing laws, any A Coop Bank may likewise perform any or all of the banking services offered by rural banks as well as any or all of the banking services offered by other types of banks, subject to prior approval of the Bangko Sentral. Islamic Banks (IBs) In addition to the general powers granted to corporations, IBs shall have such powers as shall be necessary to carry out the business of a bank in accordance with Shari’ah principles. IBs may perform the following services: ▪ accept or create current accounts ▪ accept savings accounts for safekeeping or custody with no participation in profit and loss except unless otherwise authorized by the account holders to be invested ▪ accept investment accounts ▪ accept foreign currency deposits ▪ act as correspondent of banks and institutions to handle remittances or any fund transfers ▪ accept drafts and issue letters of credit or letters of guarantee, negotiate notes and bills of exchange and other evidence of indebtedness ▪ act as collection agent in so far as the payment orders, bills of exchange or other commercial documents ▪ provide financing contracts and structures 37  ▪ handle storage operations for goods or commodity financing secured by warehouse receipts presented to the Islamic Bank ▪ issue shares for the account of institutions and companies assisted by the Islamic Bank in meeting subscription calls or augmenting their capital and/or fund requirements as may be allowed by law ▪ carry out financing and joint investment operations by way of mudarabah partnership, musharakah joint venture or by decreasing participation, murabahah purchasing on a cost-plus financing arrangement, lease (ijara) arrangements, construction and manufacture (istisna'a) arrangements, and other Shari'ah compliant contracts and structures, and to invest funds directly in various projects or through the use of funds whose owners desire to invest jointly with other resources available to the IB on a joint mudarabah basis in accordance with the foregoing arrangements, contracts and structures ▪ undertake various investments in all transactions allowed by Shari'ah principles ▪ subject to the guidelines as may be prescribed by the Bangko Sentral, IBs may invest in equities of Shari'ah compliant undertakings that directly support the delivery of Islamic banking and financing services ▪ such other banking services as may be authorized by the Monetary Board. Digital Banks A digital bank may perform any or all of the following services ▪ grant loans, whether secured or unsecured ▪ accept savings and time deposits, including basic deposit accounts as defined under Sec. 213 ▪ accept foreign currency deposits, as defined under R.A. No. 6426, as amended ▪ invest in readily marketable bonds and other debt securities, commercial papers and accounts receivable, drafts, bills of exchange, acceptances or notes arising out of commercial transactions ▪ act as correspondent for other financial institutions ▪ act as collection agent for non-government entities ▪ issue electronic money products subject to the guidelines provided under Sec. 702 ▪ issue credit cards ▪ buy and sell foreign exchange ▪ present, market, sell and service microinsurance products subject to the guidelines provided under Sec.113-B. With prior Monetary Board approval and subject to such guidelines as may be established by it, digital banks may perform other activities not covered by the foregoing enumeration. 38  THE DEPOSIT FUNCTION Deposits constitute the lifeblood of a banking institution. It is for this reason that a bank must have substantial amounts 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 depositors. Bank Deposits ▪ Consist of money placed into banking institutions for safekeeping. The account holder has the right to withdraw deposited funds, as set forth in the terms and conditions governing the account agreement. The deposit itself is a liability owed by the bank to the depositor. Motives of Depositors When depositors entrust their money to the banks, each of them may have one or more motives for doing so. Safety The depositors place their excess funds in the bank because they are aware that modern banks have fireproof and burglarproof safes and vaults to keep money in. Compared to keeping the money at home, the bank is considered to be a safe place. Besides, bank funds are duly protected by proper safeguards and regulations imposed by the state. Convenience When the depositor is prompted by the convenience 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, carry large amounts of money safely and portably, 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. Earnings or Income A person places his money as deposit if he is after earnings or income Accommodation Businessmen deposit their money because of the special favors they want from banks. Lines of credit may be accorded them upon proper arrangements. They could also deal in trade by having the bank as a guarantor through the issuance of letters of credit 39 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 investments. Increase in the earnings or income of stockholders will 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 Sources of Deposits ▪ Individuals ▪ Businesses ▪ Government Institutions ▪ Foreign Investors Bank Deposit Accounts A. Savings Deposit Accounts Accounts maintained by banks that pay interest and let customers keep liquid assets while still earning a monetary return. The advantages of saving account are as follows: ▪ Encourages savings habit among salary earners and others who have fixed income. ▪ Enables the depositor to earn income by way of saving bank interest ▪ Saving account helps the depositor to make payments ▪ Saving account passbook acts as an identity and residential proof of the account holder. ▪ It provides a facility such as electronic fund transfer (EFT) to other people's accounts ▪ It helps to do online shopping via facility like internet banking ▪ It aids to keep records of all online transactions carried on by the account holder ▪ It provides immediate funds as and when required through ATM 40 Basic Deposit Account Refers to interest-or non-interest-bearing account designed to promote financial inclusion. This account will enable Filipinos, especially the unserved and underserved, to receive and make payments, as well as have a facility for store of value. It will have the basic functionalities that will characterize ease, accessibility, convenience, and reasonable cost for both banks and customers. In offering the basic deposit account, banks shall adopt clearly-defined written policies, procedures and controls to ensure due diligence and compliance with applicable rules and regulations Banks shall be given the liberty to customize their product offerings based on the needs of the identified market provided that they adopt the following minimum key features of a basic deposit account: B. Demand Deposit Accounts A deposit account held at a bank or other financial institution, for the purpose of securely and quickly providing frequent access to funds on demand, through a variety of different 41 channels. Because money is available on demand these accounts are also referred to as demand accounts, demand deposit accounts or checking deposit account ▪ Banks may accept or create demand deposits subject to withdrawal by check. ▪ A UB/KB may accept or create demand deposits subject to withdrawal by check, without prior authority from the Bangko Sentral. ▪ A TB/RB/Coop Bank may accept or create demand deposits upon prior authority of the Bangko Sentral. C. Time Deposit A time deposit is an interest-bearing bank deposit that has a specified date of maturity. A deposit of funds in a savings institution is made under an agreement stipulating that (a) the funds must be kept on deposit for a stated period of time, or (b) the institution may require a minimum period of notification before a withdrawal is made. The rate of return is higher than for savings accounts because the requirement that the deposit be held for a pre-specified term gives the bank the ability to invest it in a higher- gain financial product class. However, the return on a time deposit is generally lower than the long-term average of that of investments in riskier products like stocks or bonds How to Open a Bank Account Step 1 - Choose a bank in which you want to open your account Step 2 - Visit the bank branch or its website Step 3 - Choose a suitable banking product Step 4 - Provide relevant information and documents Step 5 - Agree to the terms and conditions of the bank Requirements for Individual Bank Accounts ▪ At least two (2) valid IDs such as: - New SSS/GSIS ID - Driver’s License - Company ID - School ID - Passport - PRC ID Postal ID 42  - Marriage contract (original copy) - Credit Card of a Reputable Company - License to Carry Firearms ▪ Two (2) copies of most recent 1 x 1 ID Picture ▪ Proof of Billing (Meralco, MWSS, PLDT, etc.) ▪ Tax Identification Number Requirements for Company, Corporate or Commercial Bank Accounts ▪ Articles of Incorporation ▪ Certificate of Registration with the Securities and Exchange Commission ▪ Corporate By-Laws ▪ Board Resolution duly notarized incorporating the following: - Authority to open a bank account - List of officers authorized to sign and the nature and extent of such authority - Notarized List of Officers, Board of Directors, and Stockholders - Two (2) valid identification cards of signatories Know Your Customer (KYC) Compliance Know Your Customer / Know Your Client (KYC) The mandatory process of identifying and verifying the client's identity when opening an account and periodically over time. In other words, banks must ensure that their clients are genuinely who they claim to be. It is designed to ensure banks always verify identities, assess risks adequately, and provide customers with no prohibited lists. Further, KYC laws help combat fraud schemes, money laundering, and the financing of terrorism KYC brings transparency to AML by using its verifications, monitoring, and flagging activities to draw out suspicious activities that may involve money laundering. When banks take steps to verify consumer identities and understand their spending habits, banks can then have more data on their side to flag suspicious activities. The only way people can launder money or finance terrorism is by opening anonymous accounts. KYC gives banks the ability to detect these types of activities better. A typical KYC identification process involves 43  ▪ gathering of identification information (e.g. full name, date of birth, sex, citizenship, address, contact details and specimen signatures or biometric information ▪ presentation/submission by the customers of original and clear copy of at least one (1) identification document (ID), which refers to any evidence of identity specifically enumerated in the AMLA IRR (e.g. IDs issued by the Philippine government, including its political subdivisions, agencies and instrumentalities). Valid Identification (ID) Cards for Financial Transactions Circular No. 564, Series of 2007 Pursuant to Monetary Board Resolution No. 310 dated 15 March 2007, the following guidelines governing the acceptance of valid identification cards are issued for all types of financial transactions by banks and non-bank financial institutions, including financial transactions involving overseas Filipino workers (OFWs), in order to promote access of Filipinos to services offered by formal financial institutions, particularly those residing in the remote areas, as well as to encourage and facilitate remittances of OFWs through the banking system: a) Clients who engage in a financial transaction with the covered institutions for the first time shall be required to present the original and submit a copy of at least two valid photo- bearing identification documents issued and signed by an official authority. Valid IDs include the following: ▪ Passport ▪ Driver’s license ▪ Professional Regulations Commission (PRC) ID ▪ National Bureau of Investigation (NBI) clearance ▪ Police clearance ▪ Postal ID ▪ Voter’s ID ▪ Barangay certification ▪ Government Service and Insurance System (GSIS) e-Card ▪ Social Security System (SSS) card ▪ Philhealth card ▪ Senior Citizen Card ▪ Overseas Workers Welfare Administration (OWWA) ID ▪ OFW ID ▪ Seaman’s Book ▪ Alien Certification of Registration/Immigrant Certificate of Registration ▪ Government office ID (e.g. Armed Forces of the Philippines (AFP), Home Development Mutual Fund (HDMF) IDs) 44  ▪ Certification from the National Council for the Welfare of Disabled Persons (NCWDP) ▪ Department of Social Welfare and Development (DSWD) Certification ▪ Other valid IDs issued by the Government and its instrumentalities b) Students who are beneficiaries of an OFW and who are not yet of voting age shall also be required to present two IDs. For transactions involving remittance claims, a photo- bearing school ID signed by the principal or head of school is considered as one of the two acceptable IDs. Other IDs may include birth certificate, library ID, and membership IDs duly issued by any association or organization within the college or university and signed by the pertinent authority issuing the ID. c) Banks and non-bank financial institutions shall require their clients to submit clear copies of the two valid IDs on a one-time basis only, or at the commencement of a business relationship. They shall require their clients to submit an updated photo and other relevant information whenever the need for it arises. For purposes of this Circular, financial transactions may include remittances, among others, as falling under the definition of transaction. Under the Anti-Money Laundering Act of 2001, as amended, a financial transaction is “any act establishing any right or obligation or giving rise to any contractual or legal relationship between the parties thereto. It also includes any movement of funds by any means with a covered institution.” Fees on Deposit Accounts ▪ Maintenance Fee Banks may impose maintenance fees on a deposit account, whether active or dormant, subject to the following conditions: - The required minimum monthly average daily balance (ADB), as well as the imposition and the rate/amount of maintenance fee, are properly disclosed among the terms and conditions of the deposit - The deposit account balance has fallen below the required minimum monthly ADB for at least two (2) consecutive months - Banks must ensure that clients are notified of any change in the required minimum monthly ADB and amount of dormancy fee at least sixty (60) days prior to implementation 45  ▪ Dormancy Fee Banks may only impose dormancy fee on a dormant deposit account five(5) years after the last activity therein provided that - The balance falls below the minimum monthly ADB, if any - The monthly dormancy fee shall not exceed thirty pesos (P30.00) Miscellaneous Rules on Deposits Banks shall also be governed by the following miscellaneous rules on deposits. Specimen signatures or biometrics, identification photos For opening an account/establishing relationship under the true and full name of the depositor, all banking institutions are required to obtain a minimum of three (3) specimen signatures, simultaneously executed, or biometrics from their depositors and to update the same based on risk and materiality. Banks may, at their option, require their depositors to submit clear ID photos together with the specimen signatures or biometrics. Insurance on Deposits All banks shall indicate the coverage of the PDIC in each passbook, certificate of time deposit and/or cover of checkbook for demand deposit/NOW accounts stating, among other things, the maximum amount of insurance Certification of Compliance with Subsection 55.4 of R.A.No. 8791 Banks shall submit to the appropriate supervising department of the Bangko Sentral, through the Deputy Governor, a statement within seven (7) banking days after end of June and December, signed solely by the Vice-President for Administration or Human Resource or Personnel, or by any officer assuming equivalent responsibility, certifying their institution’s compliance with Subsection 55.4 of R.A. No. 8791,which prohibits banks from employing casual, non-regular personnel or too lengthy probationary personnel in the conduct of its business involving bank deposits. Reserve Requirements Refer to the percentage of bank deposits and deposit substitute liabilities that banks must set aside in deposits with the BSP which they cannot lend out, or where available through 46 reserve-eligible government securities. Changes in reserve requirements have a significant effect on money supply in the banking system, making them a powerful means of liquidity management by the BSP. Reserve requirements are imposed on the peso liabilities of universal/commercial banks (UBs/KBs), thrift banks (TBs), rural banks (RBs) and cooperative banks (Coop Banks), and non-bank financial institutions with quasi-banking functions (NBQBs). Reservable liabilities include demand, savings, time deposit and deposit substitutes (including long- term non-negotiable tax-exempt certificates of time deposit or LTNCTDs) 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 Bangko Sentral. Reserve requirements shall be applied to all banks of the same category uniformly and without discrimination. Purposes of Imposing Reserve Requirements ▪ As a monetary device for credit expansion and contraction. During inflation, the objective is to decrease the volume of money supply. It will increase the percentage of the legal reserve required on banks. During deflation, when money supply is insufficient, the percentage of legal bank reserve is decreased to induce greater credit expansion. ▪ To protect the interest of depositors by not allowing the bank to use all the deposits for lending operations ▪ The pool of legal reserve may be used by the Bangko Sentral to help banks in financial distress ▪ The pool of legal bank reserve deposit may also be used by banks in their “interbank call loan system”. A bank with deficiency in its bank reserve deposits could borrow from a bank with excess reserve deposits ▪ The pool of bank reserve deposit is also utilized in the settlement of bank claims and counter claims against each other arising from the operation of checking account system where the Bangko Sentral acts as the clearing house 47  THE LOAN/LENDING FUNCTION Bank Credit Bank credit consists of the total amount of combined funds that financial institutions advance to individuals or businesses. It is an agreement between banks and borrowers where banks make loans to borrowers. By extending credit, a bank essentially trusts borrowers to repay the principal balance as well as interest at a later date. Whether someone is approved for credit and how much they receive is based on the assessment of their creditworthiness. Banks and financial institutions make money from the funds they lend out to their clients. These funds come from the money clients deposit in their checking and savings accounts or invest in certain investment vehicles such as certificates of deposit (CDs). In return for using their services, banks pay clients a small amount of interest on their deposits. As noted, this money is then lent out to others and is known as bank credit. Types of Loan Banks typically offer loans in two categories: (1) consumer loans, and (2) commercial loans. Consumer Loans A consumer loan is a type of loan available to individuals so that they can finance specific types of expenses, e.g., the purchase of a real estate property, the acquisition of a vehicle, and the like. The bank acts a creditor for loans that are either secured (backed by collateral, like the borrower’s existent assets) or unsecured (without need for collateral). Personal Loans Among the consumer loans available in the country, personal loans are the most flexible. A personal loan is a multipurpose loan that can be used for just about any daily need, such as paying for electricity, water, and telecommunications bills; paying for groceries or medicines; or settling outstanding debts. Some personal loans, like salary loan programs, are facilitated by employers; the employees need only to apply to their company’s loan program with the issuing bank, and the repayment is deducted from their salaries. 48 Student Loans Student loans are now offered by select universities in partnership with banks like the Development Bank of the Philippines, one of the country’s foremost state-owned banks. In the case of student loans, it is the universities who oversee the students’ application process for the loan. Students who are deemed eligible for the program, who are in good academic standing, and who are in need of the extra funding can use the loan to pay for tuition and other school-related expenses. Home Loans or Mortgages Home loans can be used for the purchase of one’s own house and lot, for a vacant lot, or for a condominium or small townhouse unit. The money from a home loan can also be directed towards home construction or renovation efforts, or to establish home equity (the homeowner’s interest in their property). These home loans prove extremely valuable as the markets for housing and real estate are often very tenuous, and it can sometimes be hard to put a roof over one’s head. Auto Loans Auto loans enable the borrower to purchase a brand-new vehicle, purchase a second vehicle, or refinance a vehicle that they have already bought. The amount of money that a borrower has to put aside for the vehicle’s amortization depends on the down payment, the type of vehicle, and the number of months included in the payment term. Motorcycle Loans Similar to auto loans, motorcycle loans allow for the purchase of a motor vehicle on flexible terms. Motor scooters and Vespa-type motorcycles aren’t the only motor vehicles that can be financed, however; some banks also allow for the financing of big bikes, tricycles, and non-conventional two-wheeler or three-wheeler vehicles as well. Commercial Loans On the other hand, a commercial loan is a type of loan that is used exclusively for business purposes. Business entities can opt to apply for loans in order to garner capital for their day-to-day operations, to keep company bills paid on time, or to fund the purchase of equipment for facilities, among others. Banks take on bigger risks from 49 commercial loans than consumer loans, so they can be quite stringent on the business’ eligibility and documentation requirements. Revolving Line of Credit Revolving line of credit is a financial arrangement in which a bank issues a maximum credit limit to a business. So long as they do not exceed this limit, the business can use the credit to fund purchases at any time and then borrow that amount again after repayment—much like how an individual would use a credit card. This kind of arrangement proves appealing to businesses for its open-ended nature; the credit can be used to buy essential business goods, or just to ensure that there is a consistent cash flow. Accounts Receivable Financing This type of arrangement allows a business to borrow money from the bank against its outstanding invoices, or amounts that have yet to be paid to them by their customers. When receivable financing is in place, it’s as if a business has access to “early payments” from their customer transactions. That, in turn, means spending doesn’t have to slow down even if there’s no immediate cash yet from customers. Fixed-rate Loans In a fixed-rate loan or a term loan, a business can expect to pay the same amount of interest until the loan comes to maturity. Both the principal amount on the loan and the rate of interest are set in contract by the borrower and the lender, and the borrower need only to meet the payment schedule. Many businesses opt for fixed-rate loans because they make expenditures more predictable. They see it as a big advantage to know exactly how much interest they’ll be paying until the loan ends, and they can therefore set the rest of the business budget accordingly. Bills Purchase Line Through this arrangement, a business can liquidate checks deposited to their name prior to local or regional clearing. This saves businesses time on waiting for their checks to clear, which means that big amounts of money paid to them via check can be used im