Commercial Banks Commercial Banks grant mainly short-term loans. In the beginning,commercial Banks extended loans to traders and merchants for the transport of their goods in both domestic an international trade as well as to finance the holding of an inventories during the brief period required for their sales. To day,commercial banks are the biggest lenders in commercial and industrial loans. They supply loan funds to business firms as well as to consumers , government agencies, universities, among others. Commercial banks possess a unique character among the financial intermediares.
The debts of commercial banks circulate as money, and they have the power to create and destroy money through their savings and loan operation. Commercial bank was applied to an institution that accepted demand deposits(also known as current or checking account) subject to withdrawal by check. This definition is no longer valid since other types of banks are now permitted to exercise the power to accept demand deposit under certain terms and condition. The classification of banks and recognition of other organize financial institutions introduced by the financial reforms in 1972 are basically the same.
With the financial reform of 1980, there are 12 universal banks in the country which perfom expanded commercial banking function . Commercial Banks:1. Ordinary commercial bank 2. expanded commercial banks ORDINARY COMMERCIAL BANKS Commercial Banking is now available not only to existing commercial banks, including government-owned banks and phil. Branches of foreign banks, but also to other types of bank hencefort so authorized by the Monetary Board of the BSP after they have met the terms and condition laid down by law and administrative regulations.
PRESENT POWERS OF COMMERCIAL BANKS Batas pambansa Blg. 61 , the powers necessary to carr y on the business of commercial banking are the ff. 1. accepting of drafts 2. issuing letters of credits 3. discounting and negotiating promissory notes, drafts, bills of exchange, and other evidence of debts. 4. receiving deposits 5. buying and selling foreign exchange. 6. lending money against personal securities Add. Power available in commercial Banks: 1. Investing the equity 2. Purchasing , holding and conveying real estate 3. Establishing branches 4. Acquiring readily marketable bonds 5.
Receiving in custody funds, documents, valuable objects, and renting safety deposit boxes safeguarding such effects. 6. Acting as financial agent in buying and selling 7. Making collection or payment for acct. Of others. 8. Performing such other services for their customers. ORGANIZATION AND CAPITALIZATION A commercial bank, like any other corporation, is organize by at least 5 but not more than 15 person who are known as incorporators. the other owners of the bank are known as comparator or stock holder sometimes called subscribes when they initially negotiate to own certain shares of stacks in the banks.
ff. information : 1. The name of the bank 2. The purpose for which the bank is organized 3. The location of the head office of the banks 4. The term of existence of the banks which is usually 50 years and renewable for a series of 50 years. 5. The names, residence and citizenship of the incorporators 6. The names, residence , and citizenship of the directors, the no. Of which shall be not less than 5 nor more than 15. 7. The capital stock of the bank which may consist of preferred and common stock. 8. The amount of preferred and common stock subscribes and paid. 9.
The name of the treasurer elected by the incorporators. 10. The incorporators shall also adopt a code of By-laws which shall contain among other things ,the key officers who will manage the affairs of the bank, the diff. Working and standing committees and the members thereof; the time, date, and the place of the regular and special meetings of the board of directors and officers; the compensation and per diems; and the basis, date and the manner of dividend payment. DEPOSIT OPERATION A commercial banks is authorized to ace or create demand deposits subject to withdrawal by check.
Demand deposists, also known as current accounts or checking accounts, do not earn interest. It is also authorized to accept savings deposits which earn interest and are evidence by a passbook issued by the bank in the name of the depositor. It also authorized to accept time deposits which earn interest and are evidence by a certificate issued by the bank in the name of the depositor. The minimum period of time deposits is 30 days. Borrowing Operations 2 forms of borrowing from BS 1. Rediscounting 2.
Rediscounting- this is a mode of borrowing whereby the bank assigned in favour of the BS the illegible borrowers papers in accordance with establish guidelines, terms and condition. Direct Advance or loan- the BS may grant direct advances to a commercial bank in times of emergency or when it can no longer be allowed to rediscount its illegible borrowers paper. Deposits Substitute Operation This is also known as quasi-banking or money market operation. Elements of Quasi- banking 1. Borrowing funds for the borrowers own account. 2. 20 or more lenders at any one time.
3. Methods of borrowing are issuance, endorsement, or acceptance of debt instrument of any kind, 4. The purpose may be for a. ) relending or b. ) purchasing of receivables and other obligations. Features of Negotiable Promissory note Negotiable Promissory note acquired by a commercial bank in connection with each quasi-banking function shall not be negotiated by mere delivery or endorsement Other borrowings A commercial bank may issue short and long term commercial papers, including bonds, in accordance with law, rules and regulations being enforce by the BS and SEC.
Lending Operation 1. As to collateral a. Secured loans- These loans are secured by real estate mortgage. b. Unsecured loans- these loans are granted against personal security. Before this type of loan is granted, the bank must exercise proper caution by a ascertaining that the borrowers, co-makers, endorsers, sureties and/or guarantor possess good standing and are financially capable of fulfilling their commitments to the bank. 2. As to purpose a. Agricultural – these loans are granted to finance agricultural productions.
b.Commercial- these loans are granted to finance the purchase of goods, commodities, or merchandise for resale. c. Industrial- these loans are granted to finance the purchase and processing of raw materials and manufacture of goods including the marketing of such goods. d. Real estate- these loans granted to finance and/ or refinance the construction, acquisition, expansions and/ or urban and rural properties. e. Others- these loans are granted for purposes other than agricultural/ commercial/ industrial and real estate. 3. As to accounting treatment a.
Demand loans- these loans are granted w/o fixed maturity date but w/c become due and payable upon call or demand at the option of the lending bank. b. Bills discounted- these loans are those in the interest of which is collected in advance or discounted from the face of the covering promissory notes, usually matured w/n 1 year. c. Time loans- these loans are payable on a fixed date or w/n specified period of time, usually more than 1 year. MISCELLANEOUS PROVISION ON LENDING •The total liabilities of nay person , company, corporation or firm, to a commercial bank shall at no time exceed 15% of the unimpaired capital and surplus of such bank.
• The total outstanding direct credit accommodations to each of the banks directors, officers, stockholders , and their related interests shall not exceed, at any time, an amount equivalent to his outstanding deposits and book value of his paid-in capital contribution in the lending bank. •The total outstanding borrowings of thr director, officers, or stockholders, whether direct or indirect, shall not exceed 15% of the total loan portfolio of the bank or 100% of the combines capital accounts.
•Each banks shall set aside an amount equivalent to atleast 25% of its loanable funds for agricultural credit in general, of which an amount equivalent to atleast 10% of the loanable funds shall be made available for agrarian reform credit. •A commercial banks may grant loans under the sopervised credit financial program of the gov’n. •At least 75% of the total deposits accumulated by branches, agencies, extension officers and/or head offie of the commercial banks in a particular region(out side metro manila) shall be invested therein as a means to develop that region.
• The banks invested in real estate, eqiuipment and other chattels, ( personal properties) which shall used in its operation and property classified as fixed assets shall not exceed 50% of its paid-in capital and surplus. •Assets acquired in settlements of loans shall be disposed of within five years from the date of their acquisition by the bank. TRUST OPERATION A commercial bank may engage in trust operation or trust business which refers to the administration, holding , and a management by a trustee of funds and/ or property for the use , benefit or advantage of the trustor or beneficiaries.
OTHER OPERATION 1. A commercial banks can finance export and imports requirements through letters of credit and other instrument generally use in international and foreign exchange dealing. 2. In may engage in the sale of gov’n securities. 3. It may also collect taxes, customs duties, and other gov’n levies as aform of assistance to the bureau of internal revenue and bureau of customs. 4. It is authorized to participate in clearing operation which have been transfer to BS to the phil. Clearing house corporation.
5. As part of its authority to engage in foreign exchange transaction. EXPANDE COMMERCIAL BANKS Expanded commercial banking can e briefly defined as the combination of commercial banking ( full domestic and international banking) with the powers of a investment house( underwriting , securities, dealership, and equity investment). The investment house operation may be discharge by an expanded commercial bank either a) in house, that is, by establishing a separate department thereof in the banks b). Through the establishments of a separate subsidiary. ORGANIZATION AND CAPITALIZATION
An expanded commercial bank is organized like an ordinary commercial bank, expect that the minimum paid –in capital of the former before it starts operations is P 1. 5 billion. SCOPE OF AUTHORITY The authority to exercise the power of an investment house as provided in pertinent laws, the authority to invest in the equity ( share of stock) of non-allied undertakings and to own up to 100% of the equity of an financial intermediary other than a commercial Bank or a bank authorized to provide commercial banking services, in accordance with applicable laws and regulations. EQUITY INVESTMENT 1.
It can own up to 100% of the voting stock of a fin’l institution performing quasi-banking functions (money market operation) 2. Invest in the ff. Non-financial allied undertakings: a. Ware housing companies b. Storage companies c. Safe deposits box companies d. Companies engage in the management of mutual funds e. Management corporation engage in activities f. Companies engage in the provision of computer services g. Insurance agencies h. Companies engage in home building and/or home development i. Companies providing drying and/or milling facilities for agricultural crops, j.
Companies engage in insurance brokerage
3. the banks invested, or of is wholly of majority owned subsidiary, 4. the banks total equity investment in, and outstanding loans, UNDERWRITING AND DEALERSHIP IN SECURITIES Underwriting is the act or process of guaranteeing the distribution and sale of securities of any kind issued by another corporation. Securities are written evidence of ownership, interest or participation, in an enterprise, of indebtedness of a person or enterprise. Types of underwriting arrangement: 1. The guarantee basis where the underwriting bank guarantees the disposition of the securities t has received from the issuing corporation.
2. Best-effort basis where the underwriting bank simply tries its best to dispose of the securities without any guarantee. Dealership Is distinguished from brokerage in that the latters rafers to the act performing by aperson or institution where it arranges the meeting of a seller and a buyer of securities. OBJECTIVES OF FINANCIAL INTERMEDIATION 1. The attainment of greater efficiency thru increase competition and scale economics. 2. There is now greater banking availability and use of longer term funds to hasten the development process in terms of meeting dept and equity requirements.