Page-1-

PART ONE
ORGANIZATION, MANAGEMENT & ADMINISTRATION


Chapter 1
ESTABLISHING A BANK

Pursuant to the provisions in the General Banking Act, as well as the rules and regulations
promulgated by the Bangko Sentral Ng Pilipinas, the following are the guidelines for the
establishment of a Commercial Bank.

An application for the opening of a new bank shall be filed with the Bangko Sentral ng
Pilipinas, with the following pertinent information:

(a) The proposed name of the bank;

(b) The type of bank that is proposed to be established, (that is Commercial Bank or an
Expanded Commercial Bank, Rural Bank, Thrift Bank, Development Bank or Coop Bank.)

(c) The proposed Capital and Paid-up capital shall be disclosed.

(d) The articles of Incorporation shall be disclosed showing the names of the Incorporators.

(e) An alphabetical list of stockholders that shows the number of stocks and the corresponding
percentage of voting stocks that is owned by them.

(f) A Separate list containing the names of persons who owned voting stocks in banks and who
are related to each other within the 3
rd
degree of consanguinity or affinity, with proper
indication of the combined percentage of voting stocks held by them in the particular bank.

(g) All other information which the Monetary Board shall specifically require.

Upon acknowledgment and receipt of the application, the Monetary Board shall send an
examiner to conduct a survey of the economic and financial condition of the community where the bank
is propose to be established. The Articles of Incorporation &/or its amendment, can not be registered in
the Securities and Exchange Commission without the Certificate of Authority issued by the Monetary
Board of the Bangko Sentral ng Pilipinas.

The following are the guidelines for the issuance of a Commercial Banking Authority:

1. The following factors must first be met in the grant of authority.

A. Minimum Capital Requirement;

B. Financial Resources, Past Performance and General Compliance with Banking Laws and
Regulations;

Applicant bank shall have sufficient valuation reserves to cover estimated losses. For
those applying for an expanded commercial banking authority, it shall not have incurred any


2
deficiency in the required Capital to Risk Assets ratio of ten percent (10%) under Section 22 of
R.A. No. 337, as amended, for the year preceding the filing of application. It must show
satisfactory financial resources, liquidity, solvency and profitability as a result of a good
performance in the management of the banks operation. General compliance with banking
laws, BSP rules and regulations and policies and instructions of the Monetary Board, must be
adhered to.


C. Banking Facilities, Managerial Capability, Competence, Experience and Integrity of Directors,
Principal Officers and Key Personnel.

In the case of an applicant bank who is applying for an expanded commercial banking
authority, managerial reorganization or potential capacity to provide international banking
expertise must be provided for, and adequate staffing, equipment and other facilities must
meet its expanded functions, including international correspondent bank relationship, where
applicable.

2. Submission of a Feasibility Study with the following information:

A. Capitalization and Ownership. The following shall be required:

(1) A schedule showing the computation of the applicant banks capital accounts.
(2) A list of direct and indirect loans to DOSRI which are unsecured, indicating the original
amount, date granted, outstanding balance and classification (whether current or past
due) of each DOSRI loan.
(3) A summary of holdings of stockholders classified as to citizenship and family/business
group indicating the number of shares subscribed in the applicant bank and the
corresponding percentage of holdings to total.
(4) A list of individual stockholders grouped according to family/business group, indicating
the TIN, citizenship, type of shares held (whether voting or non-voting, common or
preferred), number of shares subscribed and percentage of holdings to total of each
shareholder.
(5) A list of individual stockholders in the applicant bank with equity investment in other
financial institutions, indicating the type and number of shares held in the other
institution and the corresponding percentage of holdings to total of each shareholder.

B Organization and Management. The following shall be disclosed:

(1) The names of the members of the board directors and principal officers of the
applicant bank.
(2) For the applicant bank applying for an expanded commercial banking authority: the
proposed organizational chart of the department within the applicant bank that will
be responsible for the investment banking functions, (indicating the designation of
officers and other key positions and the names of persons proposed for appointment
to those positions) shall be disclosed.

C. Financial Capability and Previous years operation, if feasible. A brief
discussion of the applicant banks general financial condition, operating performance,
solvency and liquidity position, that are supported by appropriate financial ratios as seen
from the latest condensed balance sheet and income statement is also required.



3
D. Corporate Strategy. The following shall also be required:

(1) The statement of corporate strategy of the proposed Commercial Bank, its immediate
and long-term goals and objectives.
(2) The lending program and special policies lined up for the first (5) years including details
on guidelines and standards to be established on exposure limits, portfolio
diversification, collateral requirements, geographical expansion, assistance to pioneer
and priority areas of economic activities and relationship with clients.
(3) The investment policies and programs to be implemented within the first five (5) years
of operation. These includes broad categories of undertakings in which the proposed
Expanded Commercial Bank will invest, the portfolio mix to be observed, the extent of
control over subscribed capital stock and voting stock to be exercised in financial allied
undertakings, quasi-banks and non-financial allied undertakings.
(4) The fund generation program for the first five (5) years of operation to support the
expansion in loans and investment.
(5) The quarterly underwriting program for one year stating industry of issuer, the volume
of underwriting business classified into equity and debt, public offering and private
placement and other information.

E. Financial Projections. The following data must be made available:
(1) The detailed statement of underlying assumptions made in projecting the financial
statements and ratios.
(2) The detailed projected statement of income and expenses for the first five (5) years of
operation shall be shown.
(3) The projected operating ratios for the first five (5) years of operation.
(4) The actual statement of condition of applicant bank at month-end before filing of
application and the projected statement of condition as of the first five (5) year-end of
operation for those applying for an expanded commercial bank.
(5) The projected balance sheet ratios as of the first five (5) years-end of operation.
(6) The projected funds flow for the first five (5) years of operation.

3. Public Offering and Listing of Bank Shares. The applicant bank, shall as a condition to the
approval of its application, make a public offering of at least ten percent (10%) of such required
minimum capital. This condition must be complied with, before it can be granted the license for
authority to operate as a Commercial Bank or an Expanded Commercial Bank, as the case maybe.

PUBLIC STOCKHOLDERS shall refer to all stockholders, but excluding the banks directors,
shareholders owning twenty percent (20%) or more of the banks subscribed voting stock together
with those of their relatives with the third degree of consanguinity or affinity and corporations
controlled by or affiliated with them. The following must be met:

(1) The shares to be publicly offered may be voting or non-voting shares and may come from the
banks existing authorized and un-subscribed stock or from an increase in its authorized
capital stock.
(2) The offering bank shall accept offers to buy or invest in its publicly offered shares of stock
from new investors or from existing stockholders whose stockholdings constitute less
than twenty percent (20%) of the banks subscribed capital stock.


4
(3) The publicly offered shares of stock shall be sold to at least twenty-one (21) qualified buyers
or group of buyers. The total shares of stock which may be purchased by any qualified
buyer or group of buyers shall not exceed ten percent (10%) of the publicly offered shares
of stock.
(4) The bank shall fix the price of the shares of stock.
(5) The bank shall cause the publication of the public offering in a newspaper of general
circulation at least twice within a period of one month prior to the offering.

A bank whose shares of stock are already listed in the Philippine Stock Exchange (PSE) at the
time of filing of its application for an Expanded Commercial Bank Authority shall be deemed to have
complied with the public offering requirement.

As soon as the Certificate of Authority has been issued, the newly opened bank may register
its Articles of Incorporation or its amendments thereto with the Security and Exchange Commission.




























EXERCISE 1
TEST I ESSAY:
(1) Discuss the procedures or guidelines on how to establish a bank including the
different agencies to go.

TEST II ENUMERATION & IDENTIFICATION:

FACTORS TO BE CONSIDERED IN THE GRANT OF AUTHORITY
(1)


5


(2)


(3)


INFORMATIONS CONTAINED IN THE FEASIBILITY STUDY TO BE
SUBMITTED BEFORE ONE IS GRANTED THE AUTHORITY
(4)
(5)
(6)
(7)
(8)

(9)

What is the ratio of Capital to Risk Asset required
under Section 22 of RA 337.

(10) A document needed before an application of an
establishment of a bank can be registered in the
SEC.





























6
Chapter 2

SCOPE OF AUTHORITY OF BANKS

THE DIFFERENT CLASSIFICATION / TYPES OF BANKS:

1) Commercial Banks (KBs)
2) Expanded Commercial Banks (EKBs)
3) Thrift Banks (TBs)
4) Rural Banks (RBs)
5) Cooperative Banks (Coop Banks)

1) Commercial Banks (KBs). A Commercial Banking Corporation shall have, in addition to the
general powers incident to corporations, all such powers as shall be necessary, to carry on the
business of commercial banking as follows:

A. By accepting drafts & issuing letters of credit
B. By discounting & negotiating promissory notes, drafts, bills of exchange & other
evidences of debts
C. By receiving deposits
D. By buying & selling Foreign Exchange & gold and silver bullion
E. By lending money against personal security or against securities consisting of personal
property or mortgages on improved real estate & insured improvements thereon.
F. May accept or create demand deposits subject to withdrawal by check
G. May offer (NOW account) Negotiable Order of Withdrawal accounts
H. May invest to the extent allowed under existing applicable laws and regulations in
equities of allied undertaking, whether financial or non-financial
I. May acquire readily marketable bonds and other debt securities.

2) Expanded Commercial Banks ( EKBs). An expanded commercial banking authority shall
include, in additional to commercial banking powers enumerated above, the following:

A. The authority to exercise the powers of investment houses as provided in pertinent laws,
B. The authority to invest in the equity of non-allied undertakings and to own up to 100% of
the equity of a financial intermediary other than a commercial bank.

3) Thri ft Banks (TBs). Savi ngs and mortgage banks, stock savi ngs and l oan
associ ati ons and pri vate devel opment banks, herei nafter col l ecti vel y referred
to as TBs, may perform any or al l of the fol l owi ng:

A. Grant loans, whether secured or unsecured
B. 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.
C. Issue domestic letters of credit


7
D. Extend credit facilities to private and government employees
E. 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 & time deposits
G. Rediscount paper with the Land Bank of the Philippines, Development Bank of the
Philippines and other government-owned or controlled corporations.
H. Accept foreign currency deposits as provided for under R.A. No. 6426 as amended
I. Act as correspondent for other financial institutions
J. Purchase, hold and convey real estate under the same conditions as those governing
commercial banks as specified under Section 25 of R.A. No. 337 as amended
K. Offer other banking services as provided in Section 72 of R.A. No. 337 as amended with
prior approval of the Monetary Board such as:

(1) Open current or checking accounts and NOW accounts.
(2) Engage in trust, quasi-banking functions and money market operations
(3) 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)
(4) Act as official depository of national agencies and of municipal, city or
provincial funds in the municipal, city or province where the TB is located.
(5) 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
(6) To invest in the equity of allied undertakings.

4) Rural Banks (RBs). A Rural Bank may perform any or al l of the fol l owi ng
servi ces:

A. 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.
B. Accept saving s& time deposits
C. Act as correspondent of other financial institutions
D. Rediscount paper with the Land Bank of the Philippines, Development Bank of the
Philippines 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.
E. Act as a collection agent.

With prior approval of the Monetary Board, RBs may perform any or all of the following:

(1) Accept current or checking account, provided RB has net assets of at least P5
Million.
(2) Accept NOW Accounts.


8
(3) Act as trustee over estates or properties of farmers and merchants
(4) Act as official depository of municipal, city or provincial where it is located
(5) Sell domestic drafts
(6) Invest in allied undertakings

5) Cooperati ve Banks (Coop Banks). A Coop Bank i s organi zed pri mari l y to
provi de fi nanci al and credi t servi ces to cooperati ves and may perform any or
al l of the servi ces offered by RBs.


Expansion of Commercial Banking Authority

With prior approval of the Monetary Board, Commercial Banks, Thrift Banks, Rural Banks and
Coop Banks, may operate under an expanded banking authority








































9


EXERCISE 2
TEST I ESSAY:

(1) Differentiate the different classes of banks by giving at least 5 distinguishing
features.
(2) What are the similarities in the operation of the different classes of banks.

TEST II ENUMERATION & IDENTIFICATION:


Functions of Commercial Banks:
1
2
3
4
5
6
7
8
Functions of Thrift Banks:
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.



Functions of Rural Banks:
19.
20.
21.
22.
23.
Functions of Expanded Commercial Banks:
24.
25.
26.
27.
28.
What kind of services do cooperative banks offer?
29.
30.



10



Chapter 3

CAPITALIZATION

Bank Capi tal . The following provisions shall govern the capital requirements for banks.
The term capital shall be synonymous to unimpaired capital and surplus, combined capital accounts
and net worth and shall refer to the total of the unimpaired paid-in capital, surplus and undivided
profits, less:

(1) Un-booked valuation reserves and other capital adjustments as may be required by the BSP
(2) Total outstanding unsecured credit accommodations, both direct and indirect, to directors,
officers, stockholders and their related interest (DOSRI);
(3) Deferred income tax
(4) Appraisal increment reserve (revaluation reserve) as a result of appreciation or an increase in
the book value of bank assets
(5) Equity investment of a bank in another bank or enterprise, whether foreign or domestic, if
the other bank or enterprise has a reciprocal equity investment in the investing bank
(6) In the case of RBs/Coop Banks, the government counterpart equity, except those arising
from conversion of arrearages under the BSP rehabilitation program.

Mi ni mum Capi tal i zati on of Banks. The minimum capital of banks shall be as follows:

Expanded Commercial Banks - P4.5 Billion each

Commercial Banks - P2.0 Billion each

Thrift Banks
1. With Head offices within Metro Manila P250 Million each and
2. With head offices outside Metro Manila P40 Million each

Rural Banks

1.) An RB may be established in any city or municipality, except in the cities of Manila,
Kalookan, Quezon, Pasay, Mandaluyong & Makati; in the Municipalities of Malabon,
Navotas, San Juan and Paranaque and in the cities of Cebu and Davao with minimum
capital requirements as follows:

(a) P 5 Million for 1st, 2nd and 3
rd
class cities and first class municipality
(b) P 3 Million for 4
th
, 5
th
and sixth class cities and 2
nd
, 3
rd
and 4
th
class municipality.
(c) P 2 Million for 5
th
and 6
th
class municipalities

2.) Existing RBs within the excepted cities and municipalities shall maintain the following
minimum capital requirements:

(a) P 20 Million each for RBs in Manila, Kalookan, Quezon, Pasay, Mandaluyong and
Makati; and in the municipality of Malabon, Navotas, San Juan and Paranaque
(b) P 10 Million each for RBs in the cities of Cebu and Davao



11
Cooperative Banks. Coop Banks that may be established shall have a minimum
authorized capital of:

1) P 200 million for national Coop Banks divided into such number of shares with a
minimum par value of P1,000 per share, with a private paid-in capital of at least P20M.
2) P 20 million for local Coop Banks divided into such number of shares, with a private
paid-in capital of at least P1.25 million except:

(a) P 20 million minimum private paid-in capital for Coop Banks to be established in
Metro Manila.
(b) P 10 million minimum private paid-in capital for Coop Banks to be established in
the cities of Cebu and Davao;
(c) P 5 million minimum private paid-in capital for Coop Banks to be established in
other cities.

EXERCISE 3

TEST I ESSAY:

(1) How do one compute for capital requirements for banks?
TEST II IDENTIFICATION:

1. What is the Minimum Capital requirement for
Commercial Banks?
2. What is the Minimum Capital requirement for
Expanded Commercial Banks?
3. What is the Minimum Capital requirement for
National Cooperative Banks?
4. What is the Minimum Capital requirement for
Local Cooperative Banks?
5. What is the Minimum Capital requirement for
Rural Banks located in Manila ?


6. What is the Minimum Capital requirement for
Thrift Banks located within Metro Manila?
7. What is the Minimum Capital requirement for
Thrift Banks located outside Metro Manila?
8. What is the Minimum Capital requirement for
Rural Banks located in Cebu?
9. What is the Minimum Capital requirement for
Rural Banks in first class municipality?
10. What is the Minimum Capital requirement for
Rural Banks in 5
th
& 6
th
class municipalities?










12

Chapter 4

LIBERALIZED ENTRY AND SCOPE OF OPERATION OF FOREIGN BANKS


In accordance with the Manual of Regulation for Banks, the following rules shall govern the
liberalized entry and scope of operation of foreign banks. With prior approval of the Monetary
Board, foreign banks may operate in the Philippines through any one of the following modes:

1.) By acquiring, purchasing or owning up to sixty percent (60%) of the voting stock of an
existing domestic bank (including banks under receivership or liquidation, provided no final
court liquidation order has been issued;
2.) By investing in up to sixty (60%) of the voting stock of a new banking subsidiary incorporated
under the laws of the Philippines;
3.) By establishing branches with full banking authority

Interested foreign banks shall file with the Office of the Governor, BSP, an application for
authority to operate in the Philippines through any of the modes of entry mentioned above.

The following are the requirements in the establishment of a new banking subsidiary or
branch with full banking authority:

1.) It must be widely-owned and publicly-listed (listed in any stock exchange authorized by the
government of the country of origin) The bank is considered as widely-owned if it has at least
fifty (50%) stockholders without any stockholder owning more than fifteen percent (15%) of
its capital stock
2.) It must be among the top 150 banks in the world or the top five (5) banks in the country of
origin.

The following are the factors in selecting the foreign bank which will be allowed to invest in
majority of the voting stock of an existing domestic bank or to establish a subsidiary or branch in the
Philippines.

1.) Geographic representation and complementation. Representation from the different
parts of the world and/or the international financial centers shall be ensured.

2.) Strategic trade and investment relationships between the Philippines and the country of
incorporation of the foreign bank. Consideration shall be given to the countries of origin
of applicant foreign banks-

(a) With substantial financial assistance to and loans and investments, past and present,
in the Philippines and
(b) With which the Philippines has significant volume of trade especially to those with
which the country has substantial net exports.

3.) Relationship between the applicant bank and the Philippines.


13

4.) Demonstrated capacity, global reputation for financial innovations and stability in a
competitive environment of the applicant.

5.) Reciprocity rights enjoyed by Philippine banks in the applicants country. Philippine banks
shall enjoy reciprocity rights in the applicants country.

6.) Willingness to fully share technology.

Capital Requirements for Foreign Banks

a) For locally incorporated subsidiaries. Capital Requirements for Foreign Banks is the
same as that prescribed by the Monetary Board for domestic banks of the same category.

b) For Foreign bank branches with full banking authority, it shall inwardly remit and
convert into Philippines currency, as permanently assigned capital, the U.S. Dollar equivalent
of P210 Million at the exchange rate prevailing on June 5, 1994. ( P26.979 to US$ 1.00) The
Foreign bank shall thereby be entitled to establish three (3) branches in locations of its
choice.

The same foreign bank may open three (3) more additional branches ( but not to exceed 6) in
locations designated by the Monetary Board by inwardly remitting and converting into Philippine
currency, as additional permanently assigned capital the U.S. Dollar equivalent of P35 Million for
every additional branch.

Factors to be considered in determining the location of the next three (3) branches:

(a) Development requirement of the region
(b) The contribution of a bank branch to regional development
(c) Expansion of basic financial services
(d) Enhanced access to credit by small and medium-scale enterprises






















14

EXERCISE 4
TEST II ENUMERATION:

WAYS THROUGH WHICH FOREIGN BANKS MAY OPERATE IN THE PHILIPPINES:
1)
2)
3)
REQUIREMENTS IN THE ESTABLISHMENT OF A NEW BANKING SUBSIDIARY OR BRANCH:
4)
5)
FACTORS IN SELECTING FOREIGN BANK TO BE ALLOWED TO INVEST IN EXISTING BANK
IN THE PHILIPPINES.
6)
7)
8)
9)
10)
11)
FACTORS TO BE CONSIDERED IN DETERMINING THE LOCATION OF THE NEXT THREE
FOREIGN BRANCH OF AN EXISTING FOREIGN BANK.
12)
13)
14)
15)




























15

Chapter 5

STOCK, STOCKHOLDERS AND DIVIDENDS

Shares of Stock of Commercial Banks

Stockholders affiliated to each other through a common interest termed as business group
or any corporation or association majority or all of the equity of which is owned by a business group
may not control more than one (1) COMMERCIAL BANK.

Any natural person or a family group, who together, with any corporation, majority or all of
the equity of which is owned by such person or family group, owns more than twenty percent (20%)
of the voting stock of any Commercial Bank is included in this provision in the Manual of regulation
for banks. This is so, even if the shares of stock are being acquired from a natural person in a single
transaction and the stockholding is in excess of twenty percent (20%) of the banks voting stock.

Stockholders shall be deemed as affiliated to each other through common business interest
or a business group in cases where the holdings of such stockholders altogether constitute a
majority or control in one (1) or more enterprises.

Private development banks may also issue ordinary preferred shares of stock to private
persons, other than the preferred stock representing government counterpart capital contribution.
Preferred shares of stock of private development banks (held by DBP/ LBP and sold thereafter to
private persons) may at the option of the purchasers, be retained with the same rights as when
such shares of stock were held by DBP/LBP, or converted at not less than par to common shares or
to ordinary preferred shares of the class issued to private shareholders.

Requirements on the Declaration of dividends. The following are the requirements on
the declaration of dividends for banks:

(1) Minimum capitalization requirement and Net Worth to Risk Assets ratio
(2) Legal reserves
(3) Liquidity floor
(4) EFCDU / FCDU cover

Net amount available for dividends. The net amount available for dividend shall be the
total of unrestricted or free earned surplus and undivided profits less:

(1) Bad debts against which valuation reserves are not required to be set up;
(2) Unbooked valuation reserves and other unbooked capital adjustments required by the BSP
(3) Deferred income tax
(4) Accumulated profits not yet received but already recorded by a bank representing its share in
profits of its subsidiaries under the equity method of accounting
(5) Amount required to be transferred to Surplus Reserves Reserve for Trust Business account.

Recording of Dividends.The liability for dividends declared shall be taken up in the books
upon receipt of BSP approval. Dividends of all kinds, whether on common or on preferred shares of
stock, should not be treated as interest expense, and only irredeemable stock may be issued by
banks.



16




EXERCISE 5

1) Do all commercial banks have the same procedure in the issuance of stocks?
2) How often do banks distribute dividends to its stockholders?
3) Give examples of banks that given the same type of shares of stock.
4) Do all banks follow the rule on the requirements in declaring dividends?














































17

Chapter 6

DIRECTORS, OFFICERS and EMPLOYEES

Definition of the term Directors. Directors shall include:

(1) Directors who are named as such in the articles of incorporation
(2) Directors duly elected in subsequent meetings of the banks stockholders
(3) Those elected to fill vacancies in the board of directors.

Minimum Qualifications of a Director:

(1) He shall be at least twenty five (25) years of age at the time of his election or
appointment.
(2) He shall be at least a college graduate or have at least (5) years experience in business,
or have undergone training in banking acceptable to the appropriate supervising and
examining department of the BSP.

Definition of Bank Officers. Officers shall include:
(1) President
(2) Executive Vice President
(3) Senior Vice President
(4) Vice President
(5) General Manager
(6) Secretary
(7) Treasurer
(8) Trust Officer and others mentioned as officers of the bank.
(9) A person holding a position of Chairman, vice-chairman or any other position of the
board who also performs functions of management.
Minimum Qualifications of a Bank Officer. The following are the minimum qualifications
of a bank officer:

1) He shall be at least twenty one (21) years of age at the time of his election or appointment.
2) He shall be at least a college graduate.
3) Must have at least (5) years experience in banking or trust operations or related activities or
in a field related to his position and responsibilities.
4) Must have undergone training in banking or trust operation acceptable to the appropriate
supervising and examining department of the BSP.

Persons disqualified to become Directors. Persons who have been convicted judicially
or administratively of an offense involving moral turpitude or judicially declared insolvent,
spendthrift or incapacitated to contract
1) Persons disqualified by the Monetary Board
2) Persons refusing to disclose the extent of their business interest to the appropriate supervising
and examining department of the BSP. Disqualification shall apply as long as the refusal persists


18
3) Those who have been absent for more than 50% of the regular meetings of the board of directors
during their incumbency.
4) Those who are delinquent in the payment of obligations.

Disqualification Procedure. The following are the disqualification procedure of the
banks directors and officers:
a) Upon establishment of the grounds for disqualification, the bank shall cause the removal of a
disqualified director or officer. Except in the case of delinquency in the payment of an
obligation, wherein he shall be given 30 days within which to restore the obligation in current
status.
b) All cases of disqualification, reported to the board of directors of a bank, shall be acted by
the board not later than the following board meeting. Within seventy-two (72) hours
thereafter, the corporate secretary shall report to the appropriate supervising and examining
department of the BSP, the name of the director or officer involved, the ground for his
disqualification and the action taken by the board.
Bio-data of Directors and Officers. All banks shall submit to the appropriate supervising
and examining department of the BSP a bio-data of their directors and officers after their election or
appointment. It shall be updated in any of the following instances:

(a) Change in educational attainment, experience or additional qualification in banking that will
enhance his competence or will qualify him to his present position
(b) Promotion
(c) Transfer to other banks

The bio-data shall be submitted only once. For purposes of updating, only the pertinent
sections and pages shall be submitted to the BSP.
Interlocking Directorship and/or Officership. In order to safeguard against the exercise
by the same person or group of persons of undue influence over the policy-making, and/or
management functions of similar financial institutions,( that could have an adverse effect on
competition or which could result in conflict of interest situations to the detriment of others), the
following regulations shall govern the interlocking directorships and/or officership within the
financial system:
a) There shall be no concurrent directorships between banks and non-bank financial intermediary
except upon authorization by the Monetary Board.
b) Concurrent directorships between entities not involving an investment house shall be allowed
without prior approval of BSP on the following:

1. Banks not belonging to same category and with only one (1) bank having quasi-
banking functions
2. Non-bank financial intermediary, other than an investment house, not performing
quasi-banking functions and a bank
3. A bank not performing quasi-banking function and an NBQB
4. A bank and one (1) or more financial institutions in each of which majority interest is
held by the bank.






19

EXERCISE 6
TEST I ENUMERATION:
THE DEFINITION OF DIRECTOR SHALL INCLUDE THE FF.:
1.
2.
3.
MINIMUM QUALIFICATION OF A DIRECTOR:
4.
5.
THE DEFINITION OF A BANK OFFICER SHALL INCLUDE THE FF.:
6.
7.
8.
9.
10.
11.
12.
13.
14.
MINIMUM QUALIFICATION OF A BANK OFFICER:
15.
16.
17.
PERSONS DISQUALIFIED TO BECOME DIRECTORS:
18.
19.
20.
21.
22.
WHAT ARE THE TWO DISQUALIFICATION PROCEDURE:
23.
24.
INSTANCES WHEN THE BIO-DATA OF DIRECTORS & OFFICERS ARE UPDATED:
25.
26.
REGULATIONS GOVERNING INTERLOCKING DIRECTORSHIP WITHIN FINANCIAL
SYSTEM:
27.
28.
29.
30.
31.
32.












20
Chapter 7

BANKING OFFICES, RECORDS and REPORTS

Establishment, Relocation, Voluntary Closure of Branch. No bank operating in the
Philippines shall establish, open or operate branches or transact business outside the premises of its
duly authorized principal office without the prior approval of the BSP. An application for authority to
establish a branch shall be assigned by the president of the bank and shall be accompanied by the
following information:
a) Certified true copy of the resolution of the banks board of directors authorizing the
establishment of the additional branch and indicating its proposed site
b) Banking facilities and services to be offered
c) Organizational set up of the proposed branch showing the proposed branch showing the
proposed staffing pattern
d) Certification signed by the President or the executive vice president that the bank has
complied with all the other requirements.

After a banks application to establish a branch has been approved, it may open the same
subject to the following conditions:

1. Submission of the bio-data of the proposed manager and other officers of the branch at least
30 days prior to the intended date of opening
2. A certification that installation of the required security device have been complied with, duly
signed by the officer in charge of the branches with the rank of a vice president

Transfer of branches shall only be allowed within the same city or municipality where the
branch to be transferred is located. Such transfer shall not require prior BSP approval but shall be
subject to the following conditions:

a) Notice of transfer to depositors and other creditors shall be sent by registered mail and
posters be placed in conspicuous place in the premises of the banking office to be
transferred at least three (3) months prior to the transfer
b) Written notice to the appropriate supervising and examining department of the BSSP not
later than five (5) banking days from the date of such transfer.
c) A certification signed by the officer in charge of the branches with the rank of a vice
president, that the above requirements have been complied with. The same shall be
submitted to the BSP.

Voluntary closure of branches may be effected only with prior approval of the BSP.

Banking Days and Hours. All banks, including their branches, agencies and extension office,
doing business in the Philippines, shall observe a minimum five-day banking week in the conduct of
their business. The banking days during which each banking unit may be opened will have to be
selected by the bank concerned. However, subject to the compliance with other relevant laws, at
their discretion, they may open and transact regular banking business for more than five (5) days a
week or even during Saturdays and Sundays.



21
All banks including their branches and other offices doing business in the Philippines shall
transact business for not less that six (6) hours a day, between 8:00 Am and 8:00 PM with the
exception of banks located in any international airport and any major fish port like Malabon and
Navotas fish ports.

For purposes of servicing deposits and withdrawals, banks may, at their discretion, remain
open beyond the minimum 6 hours and for as long as they find it necessary, even before 8:00 AM or
after 8:00 PM.

Manual of Accounts. Banks shall have a true and accurate account, record or statement of
their daily transactions, particularly those referring to their deposit liabilities.

Banks shall strictly adopt the Manual of Accounts prescribed by the BSP for recording daily
transactions including reportorial and publication requirements.

Local branches of foreign banks may continue using their parent banks general ledger
accounts. The mathematical formulas for reconciling such published statements and submitted
reports with the general ledger account of the bank are to be submitted to the appropriate
supervising and examining department of the BSP.

Statement of Financial Accounting Standards. Bank shall adopt the Statements of
Financial Accounting Standards (SFAS) which are in accordance with the generally accepted
accounting principles in recording transactions and in the preparation of financial statements and
reports to the BSP. However, in cases where there are differences between BSP regulations and
SFAS as when more than one (1) option are allowed or certain maximum or minimum limits are
prescribed by BSP regulations shall be adopted by all banks. The SFAS shall refer to the issuance of
the Accounting Standards Council and approved by the Professional Regulation Commission.

Reconciliation of Head Office and Branch Transactions. Banks shall prepare
reconciliation statements covering transactions between the head office and all its branches within
thirty (30) banking days after the end of each month. All items which are un-responded or out-
standing in the reconciliation statement for more than (6) months as of reconciliation statement
date shall be reported, with explanations/reasons for their being outstanding, to the appropriate
supervising and examining department of the BSP in such frequency and within the deadline set.

Publication / Posting of Statement of Condition. Banks shall accomplish the prescribed
form and publish their quarterly statements of condition as of the cut-off date indicated in the call
letter of the appropriate supervising and examining department of the BSP. They shall publish their
Consolidated Statement of Condition (bank & its financial subsidiaries) side-by-side with the
Statement of Condition (Head Office and its branches/other offices), in a newspaper of general
circulation in the city/province where the bank has its head office.


Exercise

1. Summarize the policy of the BSP on the Establishment, Relocation, Voluntary Closure of
Bank Branch.
2. What is the Banks policy on its Banking Days and Hours?
3. How do banks reconcile Head Office and Branch transactions?




22
Chapter 8
INTERNAL CONTROL

Internal Control System

BSP shall provide for the minimum internal control standards for banks to help
promote effective control system. For this purpose, the following records/data shall be
compiled and made available for the inspection of BSP examiners:

a) Records showing compliance with independent balancing procedures. These records should
indicate the accounts and the periodic balancing procedures performed.
b) Statements of actual duties of persons assigned to handle cash and securities.
c) All internal control audit reports or their equivalent.
d) Information/data on the direct and/or indirect equity holdings and/or connection with any
firm, partnership or corporation organized for profits, of all the bank directors, officers and
major stockholders should be maintained.
e) Information/data pertaining to the electronic data processing (EDP) department or EDP
server of the bank ( particularly on organization, input controls, processing controls, output
controls, software controls, program and documentation standards, logs on the operation of
mainframes and peripherals, hardware controls and such other EDP internal control
standards ) prescribed by the BSP in separate rules and regulations must be maintained.
Proper Accounting Records

a) All banks shall maintain proper and adequate accounting records.
b) These records should be kept up-to-date and shall contain sufficient detail so that an audit
trail is established.
c) All tickets shall bear official approval and should be initiated by the person originating and
another person by checking them.
Independent Balancing

Independent balancing shall mean that records posted by a person or cash held by a teller or
cashier shall be balanced or counted by another person. The following minimum independent
balancing procedures shall be adopted:

A. Monthly reconciliation of general ledger balances against respective subsidiary and
supporting records and documentation by someone other than the bookkeeper or the
person handling the records.
B. Irregular and unaccounted count of tellers cash and checks and other cash items at least
twice a month and vault cash including Automated Tellering Machines (ATM) cash
dispensers at least once a month by the auditor/control officer or by an officer not connected
with cash department.
C. Monthly reconciliation of Due From/To Head Office/Branches by someone other than the
person handling the records or posting the general ledger entries.
D. Periodic verification of securities and collateral by someone other than their custodian.
E. Periodic verification of the accuracy of the interest credits to deposit liability accounts.
Division of Duties and Responsibilities


23

A. The duties of all the officers and employees shall be segregated, clearly defined, understood,
documented and written in the manual. No individual shall have complete authority and
responsibility for handling all phases of any transaction from beginning to end, without some
check or balance from some other part of the organization.
B. Extensive background checking of persons intended to be assigned to handle cash and
securities shall be conducted. Frequent follow-up checking after their employment shall also
be made.
C. The physical handling of a transaction shall be separated from its recording and supervision
as follows:

(1) A person handling cash shall not be permitted to post the ledger records nor should
posting the general ledger be performed by an employee who posts the depositors
subsidiary ledgers
(2) A lending officer shall never be allowed to disburse proceeds of notes, accept note
payment nor post loan ledger
(3) The function of issuing, recording and signing of drafts/checks shall be separated
(4) Checks and other cash items shall be maintained either by an employee not handling
cash or by the
(5) Rack/Distributing Department provided that adequate control as to custody and
disposition of funds are properly maintained.
(6) The receipt of statements from depository bank shall be assigned to an employee
other than with one connected with the preparation, recording and signing of bank
drafts
(7) Custodians of securities shall not be allowed to handle security transactions
(8) Collateral appraisal shall be done by an employee/officer who does not approve loans
(9) Incoming checks and other cash items shall be recorded chronologically in a register
by an employee other than the bookkeeper before they are forwarded for posting
purposes
(10) Credit report shall be obtained by someone other than lending officers
(11) Mailing of customer statements and delinquent notices shall be done by an
employee other than the one who granted the loan or the one handling the records
(12) Dispatching and delivery of current account statements shall be done by someone
who is not involved in current account operations.

Joint Custody. Joint Custody shall mean the processing of transactions in the presence of and
under the direct observation of a second person. Both persons shall be equally accountable for the
physical protection of the items and records involved. Physical protection shall be deemed
established through the use of two (2) locks or combinations on a file chest or vault compartment.
Two (2) or more persons shall be assigned to each half of the control so that operating efficiency is
not impaired if one (1) person is not immediately available. Persons who are related to each other
within the third degree of consanguinity or affinity shall not be made joint custodians.

The following shall be under joint custody:

1.) Cash in Vault and in ATM Cash dispensers
2.) All accountable forms


24
3.) Collateral
4.) Securities
5.) Documents of Title and/or Ownership of Properties or Fixed Assets
6.) Dormant or inactive deposit ledgers/EDP print-outs and corresponding signature cards
including on-line posting of dormant/inactive accounts
7.) Import documents
8.) Trust receipts
9.) Collection Items
10.) Duplicate keys, Safe deposit spare locks and keys and keys to unrented safe deposit
boxes
11.) Safekeeping items
12.) Vault door and safe combinations
13.) Un-issued specimen signature books
14.) Correspondents and banks own telegraphic and/or electronic fund transfer system or
cable test keys currently in use
15.) Test key fixed numbers un-issued
16.) Un-issued and captured ATM cards and similar devices
17.) Access locks and keys to on-line EDP terminals and similar devices
18.) Access locks and keys to EDP mainframes and peripherals.

Signing Authorities. Signing authorities for the different levels of officers to sign for and in behalf
of the banks shall be approved by the board of directors and the extent of each level of authority
shall be clearly defined. These signing authorities shall include but need not be limited to the
following:

(a) Lending
(b) Investment
(c) Approval of Expense
(d) Various supervisory reports
(e) Bank Draft. Managers/cashiers check, bank money orders and certificates of time
deposit.

Dual Control. Dual Control shall mean the work of one (1) person is to be verified by a
second person to ensure that the transaction is properly authorized, recorded and settled. The
routine and completion of each transaction shall involve at least two (2) or more individuals.

The following accounts/transactions shall be under dual control:

1. Cashiers/Managers checks, telegraphic transfers (TTs) and electronic fund
transfer. The signature of at least two (2) officers should be required in the issuance of
cashiers/managers checks and payment orders (incoming and outgoing) of TTs and EFTs. The
board of directors may, however, prescribe a predetermined amount by which one (1) senior
officer can sign check or payment orders, subject to appropriate control measures.
2. Certificates of Time Deposit. The board of directors of a bank is given the discretion to
determine the number of signatories for the issuance of certificates of time deposit (CTD).


25
3. Bank Drafts. The signature of two (2) authorized officers should be required in the issuance
of bank draft.
4. Borrowings. The signature of at least two (2) authorized officers should be required.
5. All Transactions giving rise to Due to or Due from accounts and all instruments of
remittances evidencing these transactions particularly those involving substantial amounts
should be approved by two (2) authorized officers.

Number Control. Sequence number controls shall be incorporated in the accounting system and
should be used in registering notes, in issuing official checks and in other similar situations. Bank
management shall designate a person who is detached from the banking operations involved to
monitor said sequence number controls.

The following are the forms, instruments and accounts that shall be number-controlled:

(1) Bank Drafts
(2) Managers and cashiers checks
(3) Promissory notes
(4) Savings deposit accounts
(5) Demand deposit accounts
(6) CTDs
(7) Letters of Credit
(8) Collection items
(9) Official and provisional receipts
(10) Certificate of Stocks
(11) Loan Accounts
(12) Expense vouchers
(13) Payment orders (incoming and outgoing) of TTs and EFTs
(14) Transfer request through EFTS involving banks accounts abroad
(15) EDP batch transmittal slips of documents and
(16) Due To/From head office/branches tickets.

Rotation of Duties. The duties of personnel handling cash, securities and bookkeeping records
shall be rotated. Rotation assignment shall be irregular, unannounced and long enough to permit
disclosure of any irregularities or manipulations. Tellers/cashiers shall be temporarily relieved of their
duties during the actual count of their cash accountabilities by BSP examiners or by internal/external
auditors.

Independence of the Internal Auditors. The by-laws shall provide for the position of internal
auditor together with the duties and responsibilities, scope and objectives of internal auditing. The
internal auditor shall report directly to the board of directors or to an audit committee composed of
directors who do not hold executive positions in the bank. The internal auditor shall not install nor
develop procedures, prepare records or engage in other activity which he normally reviews or
appraises.

Confirmation of Accounts. At least once a year, the internal auditing staff shall confirm by direct
verification with bank clients the following:

A. Balances of loans and credit accommodations of borrowers
B. Deposit account balances particularly new deposit accounts, inactive or dormant
accounts and closed accounts
C. Outstanding balances of borrowings and other liabilities
D. Outstanding balances of receivables/payables


26

Bank Service Contract. A bank may engage a bank service bureau or corporation to perform the
following services:

a. Data processing systems development and maintenance
b. Deposit and withdrawal recording
c. Computation and recording of interests, service charges, penalties and other fees
d. Check clearing/processing, such as the transmission and receipt of check-clearing
items/tapes to and from the BSP, collection and delivery of checks not included in the
Philippine Clearing House System, as well as recording of the same.
e. Printing and delivery of bank statements, without violating the bank secrecy law.

Other Internal Control Standards

Internal Control Standards For Deposit Accounts:

(1) Entries to dormant account ledgers shall be verified and approved by a designated officer.
His initials shall be placed next to the entry on the ledger sheet.
(2) Dormant accounts shall be segregated from active account ledgers with a separate
subsidiary control.
(3) Signature cards for dormant accounts shall be removed from active files.
(4) A designated officer shall approve all new current accounts.
(5) Signature cards and deposit ledger sheets shall be authenticated by some form of validation.
Subsequent changes also shall be validated.
(6) Signature cards and deposit ledger sheets shall be accessible only to authorized persons.
(7) Deposit tickets shall be occasionally examined at irregular intervals to determine that
postings are made on the actual date deposits are received.
(8) Checks shall be cancelled as soon as they have been paid and posted.
(9) Reports on closed accounts and returned checks shall be prepared daily.
(10) All current account statements shall be mailed direct to the depositors. Undelivered
statements shall be retained by an organizational unit not responsible for demand deposit
account processing.
(11) An officer shall be designated to attend to customers who report difference on their
statements.
(12) Checkbooks shall be issued only against requisition forms signed by an authorized signatory
to the account.
(13) Banks shall adopt a system to establish the identity of their depositors.

Other Internal Control Standards on Miscellaneous Transactions

1.) Loan applications and related documents shall be verified to ensure their authenticity
particularly the name, residence, employment and current reputation of the borrower.
2.) Tellers paying checks to strangers shall obtain positive identification of the person and
the account on which the checks are drawn should be verified.


27
3.) No employee shall be permitted to process transaction affecting his own account.
Tellers and other employees having contact with customers shall be prohibited from
preparing deposit ticket, withdrawal slip or other forms for the customer.
4.) All banks shall have a sound recruitment policy.

EXERCISE 8

TEST I ENUMERATION

RECORDS/DATA THAT SHALL BE COMPILED AND MADE AVAILABLE FOR THE
INSPECTION OF BSP EXAMINERS
1.
2.
3.
4.
5.
STATE THE MINIMUM INDEPENDENT BALANCING PROCEDURES ADOPTED BY BANKS.
6.
7.
8.
9.
10.
ITEMS & RECORDS HELD UNDER JOINT CUSTODY
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.

ACCOUNTS / TRANSACTIONS HELD UNDER DUAL CONTROL.
26.
27.
28.
29.
30.
ACCOUNTS, INSTRUMENTS AND FORMS THAT SHALL BE NUMBER-CONTROLLED.
31.
32.
33.
34.


28
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
ACCOUNTS THAT NEED ANNUAL CONFIRMATION BY AN INTERNAL AUDIT STAFF BY
DIRECT VERIFICATION WITH BANK CLIENTS.
46.
47.
48.
49.
OTHER INTERNAL CONTROL STANDARDS APPLICABLE TO DEPOSIT ACCOUNT
TRANSACTIONS.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.























29
PART TWO
DEPOSIT AND BORROWING OPERATION

Chapter 9
DEPOSIT OPERATIONS

Demand, Savings, NOW and Time Deposits

Bank deposit is defined as the sum of money or credit left with a bank to be used according
to banking practice. The deposits that are received by the bank come in different forms such as:

1.) Money 5.) Checks issued by banks
2.) Travelers Check 6.) Drafts
3.) Promissory Notes 7.) Money Orders
4.) Proceeds of loan discounts left on
deposit
8.) Items for collection from
banks & others


A depositor may come to the bank to open a Savings Account or a Current Account and
entrusts his funds in the form of cash or checks. Deposits which arise out of the deposit of checks or
currency at a bank are called Primary Deposits. Those deposits which result from a loan or
investment by the bank are termed as Derivative Deposits.

There are five channels through which deposit are received by a bank:

1) Receiving Tellers 2) Telegraphic Transfers
3) Mail and special messengers 4) Bank Inter-Department credits
5) ATM Deposits

The general classification of deposits:

A. According to the Source of deposit:
1. PRIVATE SECTOR 2. GOVERNMENT SECTOR
B. According to the Terms of withdrawal
1 Demand Deposit- 2 Time Deposit
It is one in which the customer has
the right to withdrawal at any given
time upon demand.
It is one wherein the customer
could withdraw his funds
subject to a certain specified
date.

Upon opening of an account, depositors shall always be required to accomplish a Signature
Card for which shall be used always as reference in checking the genuineness/authenticity of
signatures affixed in withdrawal slips or authorizations for withdrawal. Identification Card with
picture and signature of the applicant is required to establish the identity of the applicant.

Demand Deposits / Current Account. Banks may accept or create demand deposits subject to
withdrawal by check. Commercial Bank and Expanded Commercial Bank may accept or create
demand deposits subject to withdrawal by check, without prior authority from the BSP. A Thrift


30
Bank and Coop Bank may accept or create demand deposits upon prior authority of the BSP. Checks
that were accepted by banks for deposit to an account have to be cleared through the Philippine
Clearing House. Exchanges of clearing items among banks shall be conducted in the BSP-designated
clearing centers at 4:00 pm on each banking day. Settling clerks of the banks head office and its
branches shall represent the bank in delivering and receiving the items to be exchanged in
accordance with the required internal control procedure such as facsimile signatures and NBI
clearances of these clerks with their respective ID cards.

In general, a clearing house is a type of association usually formed by banks as a central
agency where members can settle accounts. In virtually every region of the Philippines, regional
clearing houses serve banks in the area. Each member bank sends a representative to the clearing
house every banking day to clear checks drawn on other member banks. At the clearing house, each
representative presents checks received that represent claims against other banks, and in turn,
receives the checks that represent claims against his or her own bank. The clearing house then
prepares a tally sheet listing the claims of each bank against every other bank. If the total of the
claims of a bank exceeds the total of the claims against it, the balance is paid to the bank or credited
to the account of that bank by the clearing house; if the total of the claims against a bank exceeds
the total of its claims, the bank pays the clearinghouse or its account is debited.

The different types of items for clearing are:

1. Regular clearing items are items for clearing composed of all checks and documents payable on
demand and drawn against a bank/branch that were allowed to participate in the exchange.

2. Out-of-Town Clearing Items are out-of town demands presented in a clearing center against a
bank without any branch in that particular clearing area.

3. Inter-Regional Clearing Items are demand items for clearing consisting of checks and/or other
documents drawn against banks/branches located in each of the regional clearing areas.
Regional Clearing units are located in Bacolod, Cagayan De oro, Cebu, Davao, Iloilo, Tacloban and
Zamboanga.

4. Special Clearing items are demand items presented directly to the drawee bank/branches
concerned at times other than that specified in the regular clearing procedure.

5. Returned Items are items which should be returned for any reason whatsoever and should be
presented not later than the next regular clearing for local exchanges. Items misdirected or mis-
sorted shall also be returned at the next clearing session.

6. Treasury Warrants Type A and Type B in Manila and in areas served by the BSP Regional
Clearing Offices are governed by the rules issued by the National Treasury. These shall be
accepted as regional clearing items in areas served by the BSP Regional Clearing Offices.

Temporary Overdrawing; Drawings Against Uncollected Deposits. Temporary
overdrawing against current accounts shall not be allowed, unless caused by normal bank charges
and other fees incidental to handling such accounts. Banks which violate these regulations shall be
subject to a fine of one-tenth of one percent ( 1/10 of 1%) per day of violation, computed on the basis
of the amount of overdrawing.

Technical over drawings arising from force posting in-clearing checks shall be debited by
banks under Returned Checks and other Cash Items Not in Process of Collection which is part of


31
other Assets in the Statement of Condition. Items to be lodged under this account shall consist
only of in-clearing checks which may result in technical overdrawn accounts and shall be
immediately reversed the following day.

The checks lodged under Returned Checks, etc. shall either be returned or honored the
following day before clearing. The items to be used as cover for the honored checks shall only
consist of any of the following:

1.) Cash 4.) Duly funded On Us checks
2.) Bank Draft 5.) Postal Money Order
3.) Treasury Warrant 6.) Cashiers, Managers or Certified Checks
a) Fund transfer \ credit memos within the same bank representing proceeds of loans
granted under existing regulations.
b) Peso demand deposit accounts maintained by foreign correspondent banks with
commercial banks shall be not subject to the above mentioned regulations. The
maintenance of non-resident correspondent banks peso checking accounts and over
drawings therefrom are covered by reciprocal arrangement. Temporary over
drawings are covered within fifteen (15) days from the date over drawings are
incurred. Such accounts are credited only through foreign exchange inward
remittance.

Drawings Against Uncollected Deposits. DAUD or drawn against uncollected deposits
means- temporary overdrawing against the current account of the depositor where the available
balance in the account is not sufficient to cover for the amount drawn possibly caused by check that
were deposited to the account and were not cleared yet. Example of DAUD is a P1, 000 check drawn
from a total account balance of P200, 000 and the available balance is only P 900.00. Checks
amounting to P199, 100.00 deposited to the account are not yet available due to checks were not yet
cleared.

DAUDs shall be prohibited except when the drawings are made against uncollected deposits
representing managers/cashiers/PMO and duly funded On Us checks which may be permitted at
the discretion of each bank.

Drawings Against Insufficient Funds. DAIF or drawn against insufficient funds means-
overdrawing against the current account of the depositor where the total and available balance of
the account is not sufficient to cover for the amount drawn. Example: A P 1,000 check drawn from
the balance of an account of P 20.00.
Checks without sufficient funds. To complement the provisions of Batas Pambansa Blg.
22 ( An Act Penalizing the Making or Drawing and Issuance of a Check Without Sufficient Funds or
Credit ), the following procedure has been implemented by banks:

a) The bank shall stamp, write or print on a dishonored check or on a paper attached thereto the
date the check is presented for payment and the reason for the refusal to pay the same to the
holder thereof.


32
b) The bank shall indicate the pertinent details, such as the names of the drawer, the payee and the
drawee bank, the date and amount of the check, the check number and the date it was
dishonored.
c) The drawee bank shall use only the remark or notation Drawn Against Insufficient Funds, No
Funds or Insufficient Funds stamped, written or printed on or attached to the check
dishonored or returned by reason of insufficient of funds or credit.
d) The bank shall also indicate receipt of a stop payment order.
e) The returned check shall be returned to the negotiating bank not later than the next regular
clearing.

Current Accounts of Bank officers and Employees. The following officers & employees
of banks are prohibited from maintaining demand deposits or current accounts with the banking
office in which they are assigned:

a) All officers
b) Employees of the banks cash department or cash units
c) Other employees who have direct and immediate responsibility in the handling of
transactions and/or records pertaining to demand deposits or current accounts.

The above mentioned prohibition shall include the spouses and relatives within the second
degree of consanguinity and affinity of the officers and employees, their spouses and relatives with
the second degree of consanguinity and affinity, in single proprietorships, or partnerships or
corporations in which such officers and employees, individually or as a group, own or control at least
a majority of the capital of the partnership or the outstanding subscribed capital stock of the
corporation.

Savings Deposits. Savings Deposit Account refers to interest-bearing accounts in which deposits
are made for an indeterminate period of time and covered by a passbook or accessible through the
Automated Teller Machine (ATM). A passbook confirms your Savings Deposit in a bank. Your Savings
Account earns interest regulated by the Monetary Board. For the depositor, a passbook serves as a
miniature ledger of all the deposits and withdrawals he made. It also serves as an evidence of
contract between the depositor and the bank.

Every bank and its branches maintain a registry of valid account numbers to control the
issuance of account numbers. In almost every bank, the New Accounts Section shall have custody
and control over the account number register. Any assignment of new account number to a client
shall be logged in the register by entering the date opened, the account name, address and initial
deposit. Closed account numbers will not be re-issued. Original account number of a client will be
retained when changes involve the following: reclassification from individual to joint; additions to,
deletions from or changes in account designation; and change in name through marriage. New
Signature Card and/or documents should be accomplished /submitted as applicable. For changes
such as (1) reclassification from joint account to individual account; (2) reclassification from joint
account into another joint account with one or more names that is different from the original names;
(3) addition, deletion or change in particular account designation such as Agent, Ltd, Co.,
Inc..



33
Signature Cards. At least two specimen Signature Cards shall be maintained for Savings
Account, one filed numerically and the other alphabetically. Access to Signature Card file shall be
restricted to authorized individuals only. It shall be updated every five (5) years or sooner.

Passbook / Ledger. A Savings Account Passbook and a Ledger Card shall be used for
savings account. The SA Passbook shall indicate the terms and conditions governing savings
account, including the provision for maintaining balance, service fees and other charges. Each bank
office/branch maintains its own series of Passbook control numbers. The main supply of unused SA
Passbooks and Ledgers shall be kept under joint custody. These forms shall be kept in a dually-
controlled compartment. For inventory purposes, a Stock Card shall be maintained for each form.
An annual inventory of the main supply of Passbooks and Ledgers shall be conducted by the Audit
Department and the results verified against the Stock Card. Depending on the banks procedure, a 2-
week working supply of Passbooks and Ledgers to be used for new accounts shall be kept under the
control of the New Accounts Clerk. A separate working supply of Passbooks and Ledgers to replace
filled books and ledgers shall be kept by the Cash Manager or Branch Accountant as authorized by
the bank in accordance with internal control procedure. A Savings Account Passbooks Issued
Register shall be maintained by the New Accounts Clerk, Accountant and a Supervisor authorized for
the transaction, where all additions to and/or reductions from the working supply shall be recorded.
Issuance from the working supply shall be made upon the presentation of filled Ledgers/Passbooks if
to be used for existing accounts. A monthly review of this Register shall be conducted by an
authorized officer of the bank other than the Passbook Custodian designated to establish the
accuracy of inventory as well as determine the issuance of Passbook to new or existing accounts.
Any discrepancies should be investigated immediately.
Ledger shall be grouped into separate controls and a Control Card shall be maintained for
each group. Where necessary, caution cards, jackets or different colored Ledgers will be prepared
for accounts with special instructions, duly approved by an authorized officer of the requesting
department. Special instructions shall be reviewed at least annually or as often as required by policy
for a specific type of instruction to determine if they are still applicable and must be retained.
As a general rule, passbooks should not be held for customers. When unavoidable, such
passbooks shall be kept in the custody of the Cashier, who maintain a logbook where all receipts and
disposition of passbooks are recorded. Under no circumstances should customers passbook be held
by anyone connected with Savings Account processing in a bank.

Deposits. Deposits shall be made through presentation of Passbook and duly-accomplished
Deposit Slip. Tellers should ensure that each check entry in the deposit slip is properly categorized as
to clearing type. He should ensure that clients account number, complete bank code is written at
the back of each check deposit to facilitate debiting the account in case the check is returned. As a
general rule, other banks/out-of-town checks for local/regional clearing or collection shall be credited
in accordance with banks policy on clearing and collection that is applicable to the type of check.
However, at the discretion of the bank, it may purchase such checks subject to existing credit
policies on check/bill purchases for its valued clients.

Withdrawals. Banks are prohi bi ted from i ssui ng/ accepti ng wi thdrawal sl i ps or
any other si mi l ar i nstruments desi gned to effect wi thdrawal s of savi ngs depos i ts
wi thout requi ri ng the deposi tors concerned to present thei r passbook and
accompl i shi ng the necessary wi thdrawal sl i ps except for banks authori zed by BSP
to adopt the no passbook wi thdrawal system.

For Over-the-Counter withdrawals, withdrawals maybe made in person or through an
authorized representative upon presentation of duly accomplished Withdrawal Slip and Savings
Passbook. For some banks, withdrawals without passbook shall be authorized by the banks officer


34
who shall initial on the Withdrawal slip and Ledger Card. Signature of depositor/s shall be verified
before any withdrawal is allowed. Joint and/or savings deposits may be withdrawn by any or all of
the named depositors. Joint and deposits may be withdrawn only against a Withdrawal Slip
signed by all joint depositors. Deposits made by a corporation, partnership or club/association and
other organizations may be withdrawn by such officer or employee designated in the by-laws or
resolution of the Board of Directors of such corporation, partnership, association, club or
organization.

Lost Passbook. An affidavit of Lost Passbook shall be filled out by client in case he loses
his Passbook. The affidavit should be notarized if the outstanding balance of the account is within
the required minimum balance. As a general rule, a new account number should be assigned to the
client subject to the usual account opening procedure. The replaced number shall be closed. If client
claiming the loss and making a withdrawal against the account is not known to the banks officer, the
following safeguards maybe taken at the discretion of said officer: (1) if there are sufficient grounds
to doubt the identity of the person claiming the loss, required that a written confirmation be sent to
the clients last recorded address. Until a reply is received confirming loss of Passbook, withdrawals
against the account and replacement of the lost passbook shall not be allowed. (2) require
authentication of clients signature by the clients employer, in case of payroll accounts. (3) require
the latest acceptable ID from claimant and/or require identification by a banks officer/ staff member.
Withdrawal shall be allowed only against the cleared deposits or available/clean balance ( free from
liens or holds) of the account. A notation that Passbook was lost and the date it was replaced shall
be made on the old and new (if new account opened) SA Ledger Cards, Signature Cards and on the
replacement Passbook. The affidavit of Lost Passbook shall be kept by the New Accounts Supervisor
or Cashier in a permanent file.

Alterations on Deposit/Withdrawal Slips. As a general rule, deposit/withdrawal skips
with alterations shall not be accepted and client/representative shall be requested to fill out a new
deposit/withdrawal slip. Where filling out a new deposit slip is not practical, as in the case where the
volume of check deposits is numerous, client or his authorized representative may authenticate the
alteration. Where the alteration is material, as determined by the banks authorized officer, the
clients signature shall be verified / alteration confirmed with the depositor. Representatives
authentication shall require approval by a Branch Officer. Authentication shall be by way of a full
signature beside the alteration.

Accounts Assigned or Pledged As Collateral (Guaranty Accounts). A separate
subsidiary ledger account shall be established for accounts assigned or pledged to the Bank as
collateral against loans or other credit accommodations. Hold-out amount based on Notice of Hold-
out shall be noted in bold figures in the corresponding SA Ledger and authenticated by the
Bookkeeping Supervisor, evidenced by his initials beside the hold-out amount. The Notice of Hold-
out may likewise be attached to the SA Ledger. Passbook for such accounts shall be stamped
HOLD-OUT and hold-out amount indicated in bold figures. Passbook with balance equivalent to
the Hold-out amount shall be held for safekeeping inside the loans security folder by the Loans
Section or other section performing the function. Withdrawal, transfer or cancellation of the hold-
out amount shall be processed only after approval of the authorized bank manager. Whenever
possible and if depositor shall permit, the amount of any balance in excess of the amount pledged
shall be transferred to a new account. Monthly outstanding guaranty accounts shall be reviewed for
the required authorization and approval of movements during the month (withdrawal, cancellation,
transfer).

Accounts with Legal Attachment ( Garnished Accounts). Accounts attached under
court orders pending final disposition of the cases involving the depositor shall be transferred to a


35
separate subsidiary ledger account - Savings Deposits Garnished. Ledgers of these accounts shall
be properly noted as such to prevent withdrawal there from until final disposition of the court case.
Movements on these accounts shall require prior approval of an authorized bank officer. Monthly,
outstanding garnished accounts shall be reviewed for the required authorization and approval of
movements during the month (withdrawal, cancellation, transfer).

Servicing Deposits Outside Bank Premises. Banks may be authorized by the BSP to
solicit and accept deposits outside their bank premises, subject to the following conditions:

(1) The financial condition of the bank applying for authority to solicit and collect savings deposits
outside its bank premises is Sound & the operations and quality of management could assure
the safety of funds entrusted to its deposit collectors.
(2) The proposed area where applicant bank intends to solicit shall be clearly defined.
(3) Solicitation of deposit shall be confined within a locality where there are no other banks in
operation or with deposit potentials that are still untapped.
(4) All deposit solicitors shall be bonded for at least P1,000 subject to increase thereof to
approximate their daily collections, and must be provided with proper Identification cards with
photograph and signature of solicitor and certified by appropriate bank officer. Ids must be
worn at all times when soliciting deposits.
(5) Adequate insurance coverage for funds in transit must be secured from insurance companies
not included in the list of companies blacklisted by the Insurance Commissioner.
(6) Deposit slips shall be in booklet form, pre-numbered, in triplicate copies and in three (3) colors
Original to depositor; 2
nd
copy for posting; 3
rd
to be retained in the booklet.
(7) All collections shall be turned over to the cashier at the end of each day accompanied by a
Collection Summary Report to be accomplished in duplicate which shall contain the
following minimum information:
A) Date of the report
B) Name & addresses of depositors
C) Deposit Slip Numbers
D) Amount of deposit
E) Savings account and passbook number
F) Name and signature of solicitor.
8) The bookkeeper or any ledger clerk, except any bank solicitor, shall record Deposits/
withdrawals, in the depositors ledger cards and passbook, on the same day it was accepted
for deposit. Passbooks shall be returned not later than the following business day.
9) At the end of each month, depositors shall be advised in writing of the balances of their
deposits with the bank. The advise slips should not be hand-carried by the solicitors
themselves.
10) Places of assignments of bank solicitors shall be rotated at least quarterly.

Rental Deposits of Leases. The following guidelines shall govern the opening and
handling by banks of deposits made by lessees under Batas Pambansa Blg. 25, otherwise known as
the Rent Control Law:

1. The deposit made by the lessee shall only be accepted by the bank under a special savings
account in the name of the lessor;


36
2. The bank shall require the lessee to submit a copy of the written notice sent to the lessor for
the deposit made, stating the date and amount of the deposit and the name and address of
the lessor;
3. The bank, at its option, may require the lessee to submit any supporting document, such as
the lease contract or official receipts of previous rentals paid, which will show the specimen
signature of the lessor, or other papers to identify the lessor;
4. The bank shall segregate from its regular savings deposit accounts and maintain a separate
subsidiary control ledger for deposits made under this category.
5. Any withdrawal can be only allowed in favor of the lessee concerned before the amount
deposited under consignation has been accepted by the lessor, or when authorized by the
lessor;
6. The expenses, which may be incurred by the bank with respect to such rental deposits, shall
be charged against the lessor.

Dormant Accounts. A Savings account is classified as dormant when no transactions have
been received for the past two years. Passbook update is considered a transaction and will
therefore move the date of last transaction. Deposit accounts with outstanding hold-outs shall not
be considered dormant. A review and segregation of Dormant Ledger and Signature Cards are made
semi-annually. A list of dormant names and account numbers ( segregated as to those with balances
falling within and those falling below the required minimum) shall be prepared. The list shall be the
basis of the Signature Verifier/Signature Card Custodian in retrieving affected Signature Cards.
Accounts transferred to dormant status shall require reclassification entries to the proper account.
Depositors whose accounts have become dormant shall be notified in writing immediately after
reclassification of their account to dormant status. The dormant account ledgers and Signature
Cards shall be kept in a locked box inside the vault room under the joint custody of an authorized
Banks Officer. In accepting the Ledger and/or Signature Cards of dormant accounts, the Custodian
should check completeness of the same. Two control cards shall be set up for dormant accounts
one for account with balances within the minimum and the other for those whose balances are
below the requirement. Any transfer of ledger from current to dormant or vice-versa shall be
reflected on the control cards. This is to facilitate computation and accrual of interest on dormant
accounts.

Reactivation of Accounts. A deposit, withdrawal, internal debit/credit and passbook
update shall reactivate a dormant account. The Custodians shall approve the reactivation on the
Deposit Slip/Withdrawal Slip/Authority to Reactivate Dormant Account and on the Ledger Card and
Signature Card. The Authority to Reactivate Dormant Account shall be strictly required for all types
of transaction including non-financial transactions such as passbook update. Only Bank-initiated
entries may be accepted without the authority. If clients signature can not be obtained
immediately, the signature card shall not be removed from dual custody in the vault, until an
Authority to Reactivate or a Withdrawal Slip duly signature-verified has been received. To keep the
Signature Verifier aware of the reactivation process, a dummy card with account name and number
of the activated account shall be given to him for his file, with the notation Signature Cards with
Custodians duly initialed and dated by the Custodians. The dummy card shall be disposed of by the
Custodians upon issuance of the Signature Cards based on a duly signature-verified Authority to
Reactivate Account and Withdrawal Slip. Upon the release of the Ledger and/or Signature Cards of
reactivated accounts from the Custodians of Dormant Accounts, the receiving Bookkeeper/Verifier
shall be required to acknowledge receipt of the items in the Register of Dormant Accounts. The
Custodians shall update the control total by deducting there from the balance of the deposit account
being activated. In case of passbook update only, the Custodian shall note the date of reactivation


37
on the Ledger to have a reckoning of the date for possible future dormancy. Proper reclassification
entries to SL levels shall be required for reactivation. All inquiries on dormant accounts shall be
referred to the authorized Branch Officer/Bank Officer who shall obtain sufficient identification from
the inquirer to assure that he is entitled to the information.

Closing of Account. Savings Accounts may be closed voluntarily or involuntarily. The
former is initiated by the client while the latter is initiated by the Bank. Ledger and Specimen
Signature cards of closed accounts shall be held in the custody of the New Accounts
Supervisor/Cashier for1 year after which they shall be transferred to the record center of the bank.
Savings Accounts closed voluntarily by clients within 30 days from date of opening shall be subject to
a service change to be deducted from the outstanding balance of the accounts. Interest accruing to
the account from the last credit date to the date of closure shall be paid to the depositor.
Computation of interest shall require verification and approval by the authorized officer. Closed
accounts may not be reopened. A new account shall have to be issued from the SA Register if the
client wishes to continue with a savings account.
Reasons for involuntary closure of an account are due to mishandling and fraud. It shall not
be allowed to reopen.

Negotiable Order of Withdrawal Account. The Negotiable Order of Withdrawal (NOW)
Accounts are interest-bearing deposit accounts that combine the payable on demand feature of
checks and investment feature of savings accounts. Commercial Banks and Expanded Commercial
Banks may offer NOW Accounts without prior authority of the Monetary Board. A Thrift Bank and
Coop Bank may accept NOW Accounts only upon prior approval of the Monetary Board.

Rules on Servicing NOW Accounts:

1. Prior to or simultaneous with the opening of a NOW Account, the bank shall inform the
depositor of its terms and conditions.
2. The bank shall be responsible for the proper identification of its depositors, requiring them
to submit (2) two specimen signatures and such other pertinent information.
3. Deposits shall be covered by deposit slips, in duplicate. It must be duly validated and initialed
by the teller receiving the deposit. The second copy will be furnished to the depositor.
4. NOW Accounts shall be kept and maintained separately from the regular savings deposits.
5. Blank NOW forms shall be pre-numbered and shall be controlled as in the case of un-issued
blank checks.
6. A bank statement shall be sent to each depositor at the end of each month for confirmation
of balances.
7. Banks must use the form prescribed by present rules for NOW Account.

Clearing of NOW. Any NOW which may be deposited with a bank other than the drawee
bank may be cleared through the PCHC in Manila and the Regional Clearing Units in regional clearing
centers designated by the BSP accordance with the clearing procedures.

Time Deposits

Time Deposit Account is an interest bearing accounts with specific term of maturity. Thus a
time depositor can not withdraw his money anytime he wants and the agreed interest that goes with
it. No Time Deposit shall be accepted for a term of less than thirty (30) days.



38
Authority shall be automatically granted to any accredited banking institution which may
participate in the supervised credit program to accept special Time Deposit from the Agrarian
Reform Fund Commission with interest lower than the rate allowed on time deposits accepted from
the general public. Such deposits shall be exempted from the legal reserve requirements, as an
exception to the existing policies on the matter.

Commercial Banks and Expanded Commercial Banks may issue Negotiable Certificates of
Time Deposits (NCTD) without the approval of the BSP. Thrift Banks and Coop Banks may issue
NCTD upon the prior approval of the BSP.

The NCTDs shall be insured with the PDIC. Banks issuing bearer certificates shall imprint on
the instrument the following:

For purposes of deposit insurance by the PDIC, the holder shall have his name registered in
the books of the issuing bank.

DEFINITION OF TERMS:

1. Crossed Check is a check drawn with the purpose of depositing the check to the account of the
payee named in the check.
2. Post Dated Check is a check the date of which is in the future.
3. On-us Check is a check drawn by a depositor of the same bank the check was negotiated.
4. Inactive or dormant account is an account which has no activity ( no deposit or no withdrawal)
for a period of time no less than one year.
5. Cashiers check is a check drawn by a bank against itself, signed by its cashier or authorized
officer, purchased by a client for some purpose and is always backed by the banks fund.
6. Draft is a written order for the payment of money drawn by one person, directing a second
person or financial institution to pay a third person. A draft is called a check when it is drawn on a
bank. When money is transferred between institutions in different countries, a draft is called a bill of
exchange. Whereas bills of exchange are always negotiable, drafts may be nonnegotiable. A draft is
payable on sight or on demand; however, in some transactions drafts are often payable at a stated
date in the future.
7. Travelers Check is a draft note purchased from a bank or directly from a Travelers Check issuing
company such as American Express. It could be redeemed for goods or services in many businesses
around the world.
8. Promissory Notes is a promise to pay that is negotiable by endorsement if it is specifically made
payable to the order of a person.
9. Money Order is a draft note purchased from a bank (or in the case of Philippine postal money
order, it is purchased from the Post Office) and can be redeemed only in banks or post offices,
which distinguished them as exceptionally reliable Travelers Check / draft notesor certificates
negotiable as moneyfor a variety of personal and business transactions









39
EXERCISE 9
TEST I ENUMERATION

ITEMS TO BE USED AS COVER FOR HONORED CHECKS
1.
2.
3.
4.
5.
6.
FORMS BY WHICH DEPOSITS ARE RECEIVED BY BANKS
7.
8.
9.
10.
11.
12.
13.
14.
CHANNELS THROUGH WHICH DEPOSITS ARE RECEIVED BY BANKS
15.
16.
17.
18.
19.
GENERAL CLASSIFICATION OF DEPOSITS
20.
21.
CLASSIFICATION OF DEPOSITS ACCDG TO SOURCE OF DEPOSIT
22.
23.
CLASSIFICATION OF DEPOSITS ACCDG TO TERMS OF WITHDRAWAL
24.
25.
PROCEDURE IN HANDLING CHECKS WITHOUT SUFFICIENT FUNDS
26.
27.
28.
29.
30.
CONDITIONS AT WHICH BANKS MAYBE AUTHORIZED BY BSP TO SERVICE
DEPOSITS OUTSIDE THEIR PREMISES
31.
32.
33.
34.
35.
36.
37.
INFORMATION CONTAINED IN THE COLLECTION SUMMARY REPORT THAT
ACCOMPANIES ALL COLLECTIONS FROM SERVICES OUTSIDE BANK PREMISES
38.


40
39.
40.
41.
42.
43.
GUIDELINES ON LEASE UNDER THE RENT CONTROL LAW
44.
45.
46.
47.
48.
49.
RULES ON SERVICING NOW ACCOUNTS
50.
51.
52.
53.
54.
55.
56.
57.
THE 2 KINDS OF BANK ALLOWED TO ISSUE NCTD WITHOUT THE APPROVAL OF
THE BSP.
58.
59.
GIVE AT LEAST 1 OF THE 2 KIND OF BANK ALLOWED TO ISSUE NCTD UPON
PRIOR APPROVAL OF THE BSP.
60.

























41

Chapter 10
DEPOSIT-SUBSTITUTE OPERATION, GOVERNMENT DEPOSIT-SUBSTITUE OPERATION,
GOVERNMENT DEPOSITS AND INTEREST

Quasi-Banking Functions

Non-bank Financial Institution performing quasi-banking functions is a company
that is engaged in the borrowing of funds through the issuance, endorsement or assignment with
recourse or acceptance of deposit substitutes for the purpose of re-lending or purchasing of
receivables and other obligations.

THE ESSENTIAL ELEMENTS OF QUASI-BANKING:

1. Borrowing funds for the borrowers own account.
2. Twenty (20) or more lenders at any one time
3. Methods of borrowing are issuance, endorsement, or acceptance of debt instruments of
any kind, other than deposits, such as acceptances, promissory notes, participation,
certificates of assignments or similar instruments with recourse, trust certificates,
repurchase agreements and such other instruments as the Monetary Board may
determine.
4. The purpose of which is re-lending or purchasing receivables or other
obligations.


Transactions not considered Quasi-Banking. The following shall not constitute quasi-
banking:
(1) Borrowing by commercial, industrial and other non-financial companies through any of the
means listed above for the limited purpose of financing their own needs or the needs of their
agents or dealers;
(2) The mere buying and selling without recourse of instruments, provided that the institution
buying and selling without recourse shall indicate in print the phrase without recourse or
Sans Recourse conveying the absence of liability or guarantee by said institution
(3) That any of the following practices is hereby prohibited:
a.) Issuance of postdated checks by a financial intermediary whether for its own account
or as an agent of the debt instrument issuer, in payment of the debt-instrument-sold
assigned or transferred without recourse
b.) Issuance by a financial intermediary of any form of guaranty on sale transactions or
on negotiations or assignment of debt instruments without recourse.
c.) Payment with its own funds by a financial intermediary which assigned, sold, or
transferred the debt instrument without recourse, unless the financial intermediary can show
that the issuer has with the said financial intermediary funds corresponding to the amount of
the obligation.






42

Deposit-Substitute Instruments. Any deposit substitute transaction by a bank
performing quasi-banking functions shall be limited to its own promissory notes, repurchase
agreements, and certificates of assignment/participation with recourse.

Acceptances, bills of exchange, and trust certificates shall not be used by banks as evidence
of deposit substitute liabilities in connection with their quasi-banking functions. This prohibition shall
not apply to the acceptance or negotiation of bills of exchange in connection with trade
transactions, or to the issuance of trust certificates creating trust relationships.

Negotiation of Promissory Notes. Negotiable Promissory Notes acquired by banks in
connection with their quasi-banking functions shall not be negotiated by mere endorsement and/or
delivery, if they do not conform with the minimum features provided for below.

Deposit substitute instruments issued by entities performing quasi-banking function shall
have the following minimum features:

The Present Value, Maturity Value, principal amount and interest rate and other information
needed to enable to determine the cost or yield of the borrowing or placement shall be
specified.
The date of issuance shall be indicated at the upper right corner of the instrument and
directly below which shall be the maturity period or the word demand, if it is a demand
instrument.
The payee as identified by his trust account/deposit account number in both negotiable and
non-negotiable instruments.
Securities, which are the subject of a repurchase agreement or a certificate of
assignment/participation with recourse, shall be particularly described on the face of said
instruments or on a separate instrument attached and specifically referred to therein and
made an integral part thereof as to the maker, value, maturity, serial number and such other
particulars as, shall clearly identify the securities.
The instrument shall provide for the payment of liquidated damages, in addition to stipulated
interest, in case of default by the maker or issuer, as well as attorneys fees and costs of
collection in case of suit.
A notice purporting that the transaction is not insured by the PDIC shall be indicated.
The corporate name of the issuer shall be printed at the upper center margin of the
instrument and directly below which shall be a designation of the instrument such as
Promissory Note or Repurchase Agreement.
The words duly authorized officer shall be placed directly below the signature of the
person signing for the maker or issuer.
Each instrument shall be serially pre-numbered.

The original shall delivered to the payee, the duplicate shall be retained by the issuer.
Only security paper with adequate safeguards against alteration or falsification shall be used.






43
Minimum Trading Lot and Minimum Term of Deposit Substitute. The minimum size
of any single deposit substitute transaction shall be P50,000.00. No bank performing quasi-banking
shall issue deposit substitute instruments in the name of (2) two or more persons or accounts,
except for a) husband & wife b) persons related to each other within the second degree of
consanguinity c) in trust for (ITF) arrangements.

The minimum term of any single deposit substitute transaction shall be fifteen (15) days
except inter-bank borrowings that shall not be subject to this limitation.


Money Market Placements. Money Market Placements shall include investments in debt
instruments, including purchase of receivables with recourse to the lending institution, except
purchase of government securities on an outright basis.

Government Securities shall include evidences of indebtedness of the Republic of the
Philippines, the BSP and other evidences of indebtedness or obligations of government entities the
servicing and repayment of which are fully guaranteed by the R.P.

With out recourse transactions are prohibited unless such receivables, notes, loans, debt
instruments and financial assets or claims are registered with the SEC. This prohibition includes
transactions between a bank and its trust department. Unregistered commercial papers may be
sold, discounted, assigned or negotiated by banks to other financial intermediaries with quasi-
banking functions.

Issuance of Bonds

Government Securities shall refer to evidences of indebtedness of the Republic of the
Philippines or its instrumentalities or of the BSP, and must be freely negotiable and regularly
serviced.

Net book Value shall refer to the acquisition cost of property or accounts plus additions
and improvements thereon less valuation reserves, if any.

Current Market Value shall refer to the value of the property as established by a duly
licensed and independent appraiser.

Bonds issued by banks shall have the following minimum features:
(1) Form; Issue Price; Denomination.
The trust indenture and the name of the indenture trustee shall be indicated on the
face of the bond certificate. The SEC-assigned bond registration number and expiry
date, if any, shall likewise be indicated, stamped on the face of each bond certificate
issued. Bond may be issued at face value, at a discount or at a premium. Minimum
denomination shall be P 20,000.00.
(2) Term
The minimum term of the bonds shall be four (4) years. No optional redemption
before the fourth year shall be allowed.


44
(3) Interest; manner; form of payment
The bonds shall not be subject to interest rate ceilings prescribed by the Monetary
Board or Act No. 2655, as amended.
(4) Trust indenture; collateral; sinking fund
A trust indenture shall be executed between the issuer and a qualified trust corporation
as trustee, which shall neither be an affiliate nor a subsidiary of the issuer.
(5) Bond Registry.

The bonds shall be fully registered as to principal and interest. The issuer, its trustee,
agent or underwriter must maintain a bond registry duly approved by the SEC for
recording initial and subsequent transfers the names of transferees, date of transfer,
purchase price and serial numbers of bonds transferred.

Government Deposits. As a general policy, cash balances of the Government, its political
subdivisions and instrumentalities as well as government owned or controlled corporations, shall be
deposited with the BSP, with only minimum working balances to be held by government-owned
banks and such other banks incorporated in the Philippines as the Monetary Board may designate.

Interest. Demand Account, Savings Account, NOW Accounts, Time Deposits Accounts and
Deposit Substitutes shall not be subject to interest ceilings. Interest or yield on Time
Deposit/Deposit Substitute maybe paid at maturity or upon withdrawal or in advance. The interest or
yield paid in advance shall not exceed the interest for one (1) year.

Treatment of Matured Time Deposit / Deposit Substitutes. A Time Deposit not
withdrawn on its due date shall be treated as a savings deposit and shall earn interest from maturity
to the date of actual withdrawal or renewal at a rate applicable to savings deposits.

A deposit substitute instrument not withdrawn or renewed on its maturity date shall from
said date become payable on demand and shall earn an interest or yield from maturity to actual
withdrawal or renewal at a rate applicable to a deposit substitute with a maturity of fifteen (15) days.
Banks performing quasi-banking functions shall continue to consider matured and un-withdrawn
deposit substitutes as such and subject to reserves.

Disclosure of Effective Rates of Interest. Banks are required to disclose to depositors the
following information on interest computation and payments ( in accordance with the Truth in the
Lending Act ):

1.) Type/kind of deposit
2.) Nominal rate of interest and period covered
3.) Manner of interest payment, ie., whether credited in advance or otherwise
4.) Basis of interest payment i.e., whether based on average daily balance compounded
quarterly or otherwise;



45
5.) Effective rate of interest expressed as a simple annual rate, on the basis of the
information above given and indicating the formula used to arrive at the effective rate
of interest.
6.) Illustration of basis of computing interest on a hypothetical deposit account.

Reserves Against Deposits and Deposit-Substitute Liabilities

Composition of Reserves:

a) Deposits with the BSP. At least twenty-five percent (25%) shall be in the form of
deposits with the BSP.
b) Government securities and cash in vault; Provided, the securities must bear an
interest rate of not more than four percent (4%) per annum, must be non-negotiable
and shall carry BSP support and the amount, maturity date and rate of interest must
be definite and stated in the certificate itself.

Allowable drawings against reserves shall be limited to:

a) settlement of obligations with BSP b) withdrawals to meet cash requirements.

Definition of Terms and Phrases.

Borrowing. It shall refer to all forms of obtaining or raising funds through any of the
methods and for any of the purposes enumerated above whether the borrowers liability thereby is
treated as real or contingent.

For the borrowers own account. It shall refer to the assumption of liability in ones own
capacity and not in representation, or as an agent or trustee, of another.

Purchasing of receivables or other obligations. It shall refer to the acquisition of
claims collectible in money, including interbank borrowings or borrowings between financial
institutions or of acquisition of securities, of any amount and maturity, from domestic or
foreign sources.

Re-lending. It shall refer to the extension of loans by an institution with antecedent
borrowing transactions. Re-lending shall be presumed, in the absence of express
stipulations, when the institution is regularly engaged in lending.

Regularly engaged in lending. It shall refer to the practice of extending loans, advances,
discounts or rediscounts as a matter of business, as distinguished from isolated lending
transactions.

Government-owned or controlled corporations. It shall refer to government-owned or
controlled corporation which are created by special laws. It shall exclude government
financial institutions such DBP, LBP and Al-Amanah Islamic Investment Bank of the
Philippines, corporations which are created under the provisions of the Corporation Law (Act
No. 1459) or the Corporation Code (BP Blg. 68) and private corporations which are taken
over by government-owned or controlled corporations.




46
Minimum working balances. It shall represent the minimum amounts necessary to enable
the government instrumentality/political subdivision making the deposit to transact business
efficiently as determined by the Department of Finance.

EXERCISE 10

TEST I ENUMERATION

ESSENTIAL ELEMENTS OF QUASI-BANKING
1.
2.
3.
4.
TRANSACTION NOT CONSIDERED QUASI-BANKING
5.
6.
MINIMUM FEATURES OF DEPOSIT SUBSTITUTE INSTRUMENTS ISSUED BY
ENTITIES PERFORMING QUASI-BANKING FUNCTIONS.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
MINIMUM FEATURES OF BONDS ISSUED BY BANKS.
17.
18.
19.
20.






















47
Chapter 11

SUNDRY PROVISIONS ON DEPOSIT OPERATIONS

Booking of Deposits and Withdrawals.As a general rule, all deposits and withdrawals
during regular banking hours shall be credited or debited to deposit liability accounts on the date of
receipt or payment thereof. A bank may set a clearing cut-off time for its head office not earlier than
two(2) hours before the start of clearing at the BSP, and not earlier than three and one-half (3 )
hours before the start of clearing for all its branches in the Philippines, after which time, deposits
received shall be booked as hereinafter. Banks which are located in areas where there are no BSP
regional/clearing arrangements may set a clearing cut-off time nor earlier than (2) two hours before
the start of their local clearing after which time, deposits received shall be booked likewise as
hereinafter provided.

Regular Banking Hours shall refer to the banking hours reported to the BSP including
the extended banking hours reported for servicing deposits and withdrawals.

Clearing cut-off time shall mean the banks closing time for the acceptance of deposits in
the form of checks, bills and other demand items for clearing on the day of their receipt.

Booking of Cash Deposits. Cash deposits received after the selected clearing cut-off
time until the close of the regular banking hours shall be booked as deposits on the day of receipt.

Booking of Non-Cash Deposits. Deposits of checks including on us checks,
managers/cashiers/treasurers checks and demand drafts, which are drawn against the depository
bank and all its offices, as well as Treasury warrants and postal money orders,( received after the
selected clearing cut-off time until the close of regular banking hours), may, at the option of the
bank, be booked as deposits on the day of receipt.

Booking of Deposits after Regular Banking Hours. Deposits, whether cash or non-
cash, received after the close of the regular banking hours shall be treated as contingent accounts on
the day of receipt and shall be booked as deposits the following banking day.

Specimen Signatures, and ID Photos. All banking institutions are required to set a
minimum of three (3) specimen signatures to be simultaneously required from each of their
depositors and to update the specimen signatures of their depositors every five (5) years or sooner,
at the discretion of the the bank. Banks, may at their option, require their depositors to submit ID
photos together with the specimen signatures.

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.


Unclaimed Balances. All unclaimed balances, which include credits or deposits of
money, bullion, securities or other evidences of indebtedness of any kind, and interest thereon,
already reported to the Treasury of the Philippines in accordance with the Unclaimed Balances Act (
Act No. 3936, as amended) shall be transferred/reclassified from the deposit liability/other credit
accounts to the liability account, Due to the Treasurer of the Philippines, until they are deposited
with or turned over to the Treasurer of the Philippines upon order of the court that the same have


48
been eschewed in favor of the Government of the Republic of the Philippines and as such, the
unclaimed deposit liabilities shall no longer be covered by reserves required of deposit liabilities.

Acceptance, Encashment or Negotiation of Checks drawn in favor of the
Commissioner / Collector of Customs. All checks payable to the Commissioner/Collector of
Customs shall be accepted for deposit only to the account of the Commissioner/Collector of
Customs. Banks where the Commissioner/Collector of Customs has no account, shall not encash,
accept nor negotiate checks payable to the Commissioner/Collector of Customs.

Any attempt to defraud the government or the bank ( through the irregular or unauthorized
encashment or deposit of these checks, to accounts other than that of the Commissioner/Collector
of Customs), shall be reported immediately by the head of the banking office to the Bureau of
Customs, copy furnished the BSP.

Deposit Pick-up Services. As a general bank policy, deposit pick-up service shall be
limited to the following:

(1) To service the need of valued clients whose daily average deposit amounts to: P 500 thousand
for Metro Manila and Metro Cebu depositors and P 300 thousand for outside Metro Manila
and Metro Cebu depositors.
(2) To be serviced during regular banking hours and days only, unless the nature of the business
and the volume of the deposits would warrant servicing beyond regular banking hours and
days.
(3) Pick up deposits shall be made with the use of armored cars which, shall not be operated as a
mobile bank used in soliciting deposits from the general public, or in any manner in carrying
out banking transactions/services other than to afford security of deposit items in transit.
(4) The risk of loss involved in the pick-up deposit shall be adequately covered by insurance and
the armored car to be used will be provided with at least two (2) armed guards and supervised
by two (2) officers of the bank.
(5) The deposit transactions shall be booked in accordance with existing regulation
(6) Pick up of deposits shall not be allowed on days other than the banks regular banking days
(7) The strictest measures of safeguards, control and confidentiality will be adopted in
implementing the services
(8) A record/log book shall contain the information on the deposit pick-up activities of the
armored car to be supported by trip tickets signed by responsible officer of the bank

Operation of Armored Cards. Banks shall use armored cars to afford security in collecting
and/or delivering cash or securities and other valuables from or to their clients, branch or extension
offices or the BSP, provided such armored cars are not operated as mobile banks.

Automated Teller Machines. There are two types of ATMs:

a) OFF-SITE AUTOMATED TELLER MACHINES (ATMs)

Banks may establish off-site ATMs, subject to the following conditions:

(1) Banks shall submit a report to the appropriate department of the BSP on ATMs which
they establish


49
(2) The off-site ATMs shall be installed only in centers of activity like shopping centers,
supermarkets, hospitals, university campuses, provided that adequate internal
control and security measures shall be adopted and submitted to the BSP
(3) Only banks which have shown general compliance with laws, rules and regulations
shall be allowed to open off-site ATMs

b) MOBILE ATMs.

Banks may also establish mobile ATMs, subject to the following conditions:

(1) The mobile ATMs should be allowed to visit only centers of activity as mentioned
above and should confine their itinerary to Metro Manila until further notice;
(2) Banks shall secure insurance coverage or adopt a self-insurance scheme to protect
itself against losses of whatever nature in its mobile ATM operations
(3) The bank shall notify the supervising and examining department of the BSP of the
actual date a mobile ATM becomes operational and when no longer in
operation.


































50
Chapter 12

BORROWINGS FROM THE BANGKO SENTRAL

The Credit examination of all borrowing banks shall be undertaken regularly by the
Department of Loans and Credit at which time Promissory Notes used as collateral for loans with
the BSP are examined together with the supporting documents.

a) Pre-Audit System. The amount allowable for each loan application is determined after
deducting all items that have been found ineligible or unacceptable as collateral.
b) Post Audit (automatic) System. In case of loans granted before actual credit
examination, the loan value of all collateral promissory notes found to be ineligible or
unacceptable for rediscounting, plus accrued interest, must be remitted immediately by the
bank to the BSP. The BSP may also debit the reserve account of the bank without prior
notice in an amount corresponding to the loan value of papers found to be ineligible or
unacceptable plus accrued interest.

Eligibility of Papers. Credit instruments offered as collateral by banks shall be subject to
the eligibility requirements provided under Section 82 of RA No. 7653.

For non-traditional exports under Documents on Acceptances (D/A) and Documents on
Payments (D/P) arrangements authorized by the BSP, the required letter of credit shall be dispensed
with. In lieu thereof, a deed of assignment of export proceeds shall be submitted in addition to the
usual shipping documents and the promissory note of the borrowing bank concerned. Papers
presented for rediscounting with the BSP, by banks pertaining to firms and/or principal stockholders
and officers thereof, with outstanding loans with DBP, LBP, the GSIS, and/or SSS may be accepted.
Acceptance will be made on the basis of a certification of the borrower/firm, duly endorsed by the
bank concerned that it or its stockholders and/or officers have no arrearages on their loan accounts
with these government institutions.

Maturities. The maturity of BSP loans or advances/rediscounts for commercial credit shall
not exceed 180 days form the date the proceeds of such loans or advances/rediscounts are released
to the applicant bank. Those for production credit shall not exceed 360 days from the date the
proceeds for such loans or advances/rediscounts are released to the applicant bank.

Advances against Treasury Bills and other government eligible securities shall not be more
than 180 days from date of rediscounts.

The maturity date of the loan from the BSP, which shall be indicated in the promissory note
of the applicant bank, shall be the maturity date of the collateral paper with the latest maturity.
Should any amount remain outstanding on that date, the BSP shall debit the borrowing banks
clearing account on such date for that amount plus accrued interest due.









51

PART THREE
LOANS, INVESTMENTS AND SPECIAL CREDITS

Lending Policies

It shall be the responsibility of the board of directors of a bank to formulate written policies
on the extension of credit and risk diversification and to set the guidelines for evaluation of risk
assets. Well-defined lending policies and sound lending practices are essential if a bank is to perform
its lending function effectively and minimize the risk inherent in any extension of credit. The
responsibility should be approached in a way that will provide assurance to the public, the
stockholders and supervisory authorities that timely and adequate action will be taken to maintain
the quality of the loan portfolio and other risk assets.

Loan Portfolio and other Risk Assets Review System. Each bank shall establish a
system of identifying and monitoring existing or potential problem loans and other risk assets and of
evaluating credit policies vis-avis prevailing circumstances and emerging portfolio trends. This will
ensure that timely and adequate management action is taken to maintain the quality of the loan
portfolio and other risk assets. Adequate loss reserves shall be set up and maintained at a level
sufficient to absorb the loss inherent in the loan portfolio and other risk assets. Management must
also recognize that loss reserve is a stabilizing factor and that failure to account appropriate for
losses or make adequate provisions for estimated future losses may result in misrepresentation of
the banks financial condition.



Chapter 13

LOANS IN GENERAL

Loan Limit to a Single Borrower. The total liabilities of any person, company,
corporation or firm, to a bank for money borrowed, shall at no time exceed twenty five percent (25%)
of the unimpaired capital and surplus of the bank. This excludes the following:

A. Loans secured by obligations of the BSP or the Philippine Government.
B. Loans fully guaranteed by the government as to the payment of principal and interest
C. Loans to the extent covered by the hold-out on or assignment of, deposits maintained in the
lending bank and held in the Philippines.
D. Loans and acceptances under letters of credit to the extent covered by margin deposits.
E. Other loans or credit which the Monetary Board may, from time to time specify as non-risk
F. Discounted / Rediscounted papers.- The liabilities of borrowers to the bank, whose papers
were discounted and/or rediscounted by banks with the BSP or any other institution
shall not be deemed as having been extinguished by the discount and/or rediscount,
but shall be considered as still existing and shall be included in determining the SBL
until such papers are paid by the borrowers.
G. Contingent liabilities Outstanding foreign and domestic standby and deferred letters of
credit less margin deposits; and outstanding guarantees, the nature of which requires
the guarantor to assume the liabilities/obligations of their parties in case of their


52
inability to pay, shall be included in the determination of the SBL, except those fully
secured by cash, hold-out on deposits/deposit substitutes or government securities.

The additional liabilities are adequately secured by shipping documents, warehouse receipts
or other similar documents transferring or securing title covering readily marketable, non-perishable
staples, which staples must be fully covered by insurance and must have a market value equal to at
least 125% of such additional liabilities. That is the case of Thrift Banks, the additional indebtedness is
for the purpose of financing subdivision or housing development, medium and low-income
borrowers and agriculture on a fully secured basis.

Loan accommodations granted by banks to any other bank, as well as deposits maintained by
them in any bank licensed to do business in the Philippines, shall be subject to the loan limit to any
single borrower as herein prescribed.

Deposits of Rural Bank and Coop Bank with government owned or controlled financial
institutions like the LBP and the DBP shall not be covered by the single borrowers limit (SBL)In
municipalities or cities where there is no government bank, the deposits of Rural Banks and Coop
Banks in private banks in said areas shall not be subject to the SBL.

Deposits in private banks located in other municipalities/cities shall be covered by the SBL.

Definition of Terms:

Liabilities. These shall mean the direct liability of the maker or acceptor of paper
discounted with or sold to such bank and the liability of the endorser, drawer or guarantor who
obtained a loan from or discounts paper with or sells paper under his guaranty to such bank and shall
include in the case of liabilities of a co-partnership or association, the liabilities of the several
members thereof, and shall include in the case of liabilities of a corporation, all liabilities of all
subsidiaries thereof, in which such corporation owns or controls a majority interest.

Money borrowed. These shall include the direct liability of the maker or acceptor of paper
discounted with or sold to such bank, commercial or business paper actually owned and discounted
by the person negotiating the same. These are either past due or renewed at maturity. Also
included are bills of exchange which exempt the drawer from liability and hold only the acceptor
liable.

Readily marketable non-perishable staples. It shall mean articles of commerce,
agriculture or industry of such uses as to make them the subject of constant dealings in ready
markets with such frequent quotations as to make their prices easily and definitely ascertainable, or
which lend themselves easily to disposal by sale at any time to pay the obligations secured by the
said staples and which are non-perishable in character, and reasonably sure of maintaining their
values as security at least for the duration of the obligation secured by the said staples or the use of
the draft drawn against them. A staple is not considered readily marketable, if it is imported not for
resale, but for the exclusive use of the buyer or the importer such as machinery, equipment and
construction materials which are to be used exclusively for the construction of the factory or
building belonging to the buyer or importer of the said staple.

Bills of Exchange drawn in good faith against actually existing values. It shall mean
one, which is drawn by a seller on the purchaser for the purchase price of commodities sold. A bill of
exchange is a bill drawn against existing values only when it is accompanied by shipping documents,
warehouse receipts or other papers, securing title to the goods sold.


53

Commercial or Business Paper actually owned by the person negotiating the
same. It shall mean a paper arising from an actual business transaction. A trade acceptance or
promissory note actually owned by the person negotiating the same is a commercial or a business
paper. Past due Commercial/business papers or with maturity extended , which are actually owned
and discounted by the person negotiating the same, shall be considered as money borrowed and
shall be subject to the limitation of twenty-five (25%).

Exclusions from Loan Limit. The following loans or liabilities shall be excluded in
determining the Single Borrower Limit described above:

(a) The discount of bills of exchange drawn in good faith against actually existing values, and the
discount of commercial or business paper which are actually owned by the person, company,
corporation or association negotiating the same;
(b) The unused portion of letters of credit which is issued for the purpose of financing
importation of goods;
(c) The portion of the special time deposit loans covered by IGLF guarantee shall be excluded in
the determination of the maximum aggregate loans which a bank may grant to a person,
company, corporation or firm
(d) The total liabilities of a commercial paper issuer for commercial paper held by an expanded
commercial bank as a firm underwriter shall not be counted in determining compliance with
the SBL within a period of 180 days from the acquisition of the commercial paper by the
Expanded Commercial Bank.
(e) The portions of the peso loans covered by guarantees of international/regional institutions
where the Philippine Government is a member/shareholder, such as the International Finance
Corporation and the Asian Development Bank.
(f) Credit accommodations to finance the importation of rice and corn to the extent of 100 % of
the unimpaired capital and surplus of the bank concerned, subject to the following:
1. The importation shall be made in pursuance of a national policy duly enunciated by
the National Government;
2. The importation shall have been approved by the National Economic Development
Authority (NEDA);
3. The letter of credit shall specify that importation shall be made with certification
from the National Food Authority (NFA), or the consular establishment of the
Philippine government at the source of any such shipment to the effect that the
commodity being imported is either rice or corn; and
4. The related bills of lading shall specify in addition to the name of the importer
corned, that the NFA shall be the consignee of the shipment;

Loan Proceeds. Before granting a loan, banks shall ascertain the purpose of the loan
which shall be clearly stated in the contract between the bank and the borrower. The proceeds of a
loan shall be utilized only for the purpose(s) stated in the loan contract; otherwise, the bank may
terminate the loan and demand immediate repayment of the obligation. The proceeds of a loan may
be utilized by the borrower, the purpose(s) of which is other than that originally stated in the loan
contract; provided that such purpose(s) is/are among those for which the lending bank may grant
loans under existing laws and regulations and provided further that utilization shall be with prior


54
written approval of duly authorized officer(s)/committee/board of directors of the lending bank and
such written approval shall form part of the contract between the bank and the borrower.

Banks are prohibited from requiring their borrowers to acquire shares of stock of the lending
bank out of loan proceeds from the same bank.

Interest and Other Charges. The rate of interest, including commissions, premiums, fees
and other charges on any loan, or forbearance of any money, goods or credits, regardless of maturity
and whether secured or unsecured shall not be subject to any regulatory ceiling. The rate of interest
for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the
absence of expressed contract as to such rate of interest, shall be twelve percent (12%) per annum.

Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may
stipulate that the rate of interest agreed upon may be increased in the event that the applicable
maximum rate of interest is increased by the Monetary Board. Such stipulation shall be valid only if
there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in
the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board.
The adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the
increase or decrease in the maximum rate of interest.

The rate of interest on a floating rate loan during each interest period shall be stated on the
basis of Manila Reference Rates (MRRs), T-Bill Rates (TBRs) or other market based reference rates
plus a margin as may be agreed upon by the parties.

The MRRs for various interest period shall be determined and announced by the BSP every
week and shall be based on the weighted average of the interest rates paid during the immediately
preceding week by the ten(10) commercial banks with the highest combined levels of outstanding
deposit substitutes and time deposits, on promissory notes issued, and time deposits received by
such banks, of P100,000 and over per transaction account, with maturities corresponding to the
interest periods for which such MRRs are being determined.

Accrual of Interest earned on Loans. Banks are allowed to accrue interest earned on
loans, subject to the following guidelines and/or procedures:

A. No accrual of interest income is allowed if a loan have become past due. Interest income shall
not accrue for unmatured loans/receivables with indications that collectibility thereof has
become doubtful. These indications shall include declaration of bankruptcy, insolvency,
cessation of financial difficulties or inability to meet financial obligations.
B. Interest earned on extended or renewed loans may be accrued, provided that there is no
previously accrued but uncollected interest thereon.
C. Interest on past due accounts shall be taken up as income only when actual payments thereon
are received.
D. Accrued interest earned but not yet collected/received shall not be considered as profits and/or
earnings eligible for dividend declaration and/or profit sharing.
E. A contra account to be designated Allowance for Uncollected Interest on Loans shall be set up
if accrued interest receivable on loans and loan installments as set up above is still uncollected
after six (6) months from the date such loans or loan installments have matured or have
become past due.


55
F. The amount representing Allowance for Uncollected Interest on Loans may be chargeable
against the excess of outstanding valuation reserves for loans and other risk assets as
appearing in the banks book, over those recommended by the appropriate supervising and
examining department of the BSP. The balance shall be chargeable against operations.

Interest on restructured loans may be accrued under the following conditions:

(1) That the loan is on current status at the time of interest accrual
(2) That there is no previously accrued and/or capitalized but uncollected interest on such loan.

Past Due Accounts. Past due accounts of a bank shall, as a general rule, refer to all
accounts in its loan portfolio, all receivable components of trading account securities and other
receivables, as defined in the Manual of Accounts for Banks, which are not paid at maturity.

Accounts Considered Past Due. The following shall be considered as past due:

1. Loans or receivables payable on demand If not paid on the date indicated on the
demand letter, or within six (6) months from date of grant, whichever comes earlier;

2. Bills discounted and time loans, whether or not representing availments against a
credit line If not paid on the respective maturity dates on the promissory notes;

3. Customers liability on drafts under letters of credit/trust receipts such as:

i. Sight Bills
ii. Trust Receipts
iii. Bills and other negotiable instruments purchased
iv. Loans/Receivable payable in installment
v. Credit card receivables
vi. All items in litigation

Banks shall, in case of non-payment of a demand loan, make a written demand within six (6)
months following the grant of such loans. The demand shall indicate a period of payment which shall
not be later than six (6) months from date of said demand.

No loan shall be renewed or its maturity date extended unless the corresponding accrued
interest receivables shall have been paid.

Restructured loans whose terms of payments have not been complied with, and with have
become past due in accordance with this Section, shall be reverted to past due status and
classification.

Writing-off of Loans as Bad Debts. The term loans and advances shall include all types
of credit accommodations granted to, and advances made by the bank for the account of the
borrower including interest thereon recorded in the books. Only loans and advances that have been
past due for six (6) months or more and are justified to be uncollectible may be written-off.

The frequency of writing-off loans and advances shall be left to the discretion of the board of
directors of the bank concerned. Charge-off are made against allowance for probable losses
(valuation reserves) or against current operations.


56

The following are the procedural requirements in writing off loans:

(1) Notice/Application for write-off of loans and advances shall be submitted to the appropriate
supervising and examining department within the prescribed period. No loans and advances
shall be written-off without the prior approval of:

a) The Monetary Board ( in case of loans and advances to DOSRI )
b) The head of the appropriate supervising and examining department

(2) Banks shall furnish each person to whom credit is extended, prior to the consummation of the
transaction. Information to be disclosed are: ( in accordance with the Truth in the Lending Act)

1. The cash price or delivered price of the property or service to be acquired
2. The amounts, if any, to be credited as down payment and/or trade-in
3. The difference between amounts set forth in the above items
4. The charges, individually itemized, which are paid or to be paid by such person in
connection with the transaction but which are not incident to the extension of credit
5. The total amount to be financed
6. The finance charges expressed in terms of pesos and centavos
7. The percentage that the finance charge bears to the total amount to be financed
expressed as a single annual rate on the outstanding unpaid balance of the obligation.

































57

EXERCISE 12


TEST I ENUMERATION & IDENTIFICATION:

EXAMPLES OF CUSTOMERS LIABILITY ON DRAFTS UNDER LETTERS OF CREDIT/TRUST
RECEIPTS.
1.
2.
3.
4.
5.
6.
7.
CONDITIONS UNDER WHICH INTEREST ON RESTRUCTURED LOANS MAYBE ACCRUED.
8.
9.
THE MANNER AT WHICH RATE OF INTEREST ON A FLOATING RATE LOAN SHALL BE
STATED UPON AGREEMENT BY PARTIES.
10.
11.
12.
PROCEDURES AT WHICH BANKS ARE ALLOWED TOACCRUE INTEREST EARNED ON
LOANS
13.
14.
15.
16.
17.
18.
DEPOSIT ACCOUNTS OF GOVERNMENT OWNED OR CONTROLLED FINANCIAL
INSTITUTIONS IN THIS BANKS ARE NOT SUBJECT TO THE SINGLE LIABILITY LIMIT.
19.
20.

















58
Chapter 14

Secured Loans

Loans Secured By Real Estate

Loans against real estate security shall not exceed seventy percent (70%) of the
appraised value of the respective real estate security plus seventy percent (70%) of the appraised
value of insured improvements and such loans shall not be made unless title to the real estate is in
the mortgagors name.

Eligible Real Estate collateral on Rural Bank/Cooperative Bank Loans:

a) Security of lands without Torrents Title where the owner of private property can show five (5)
years or more of peaceful, continuous and uninterrupted possession as owner.
b) Portions of friar land estates administered by the Bureau of Lands covered by sales contracts and
the purchasers have paid at least five (5) years installment thereon
c) Portion of estates under the administration of the Department of Agrarian Reform (DAR)
d) Homesteads or free patent lands pending issuance of titles but already approved. Provided that
the loan applied for shall be used for development and other productive economic activities
of same
e) The appraisal and verification of the status of land is in the responsibility of the Rural Bank / Coop
Bank granting said loans.

Insurance on Real Estate Improvements. The required insurance on improvements
used as collateral for loan should be such as shall be sufficient to secure seventy percent (70%) of the
appraised value of such improvements or if inadequately insured, the loan value shall correspond to
the extent of insurance taken on such improvements.

Foreclosure of Mortgages. Foreclosure of mortgages by Thrift Banks varies from the
foreclosure of mortgages by Rural and Coop Banks. Below are its procedures:

1) Foreclosure By Thrift Banks Foreclosure levied upon by a sheriff shall be exempt from the
publication requirements in newspapers now required by law where amount of loan excluding
interests due and unpaid does not exceed P100 thousand or such amount as the Monetary Board
prescribed. Such notices shall be posted in the conspicuous area of the Thrift Banks premises,
municipal building, market, barangay hall where the mortgaged land is situated within a period
of sixty (60) days immediately preceding the public auction of execution of judgment.

2) Foreclosure By Rural / Coop Bank The above provisions holds true to foreclosure by Rural /
Coop Bank. Proof of publication as required herein shall be accomplished by an affidavit of the
sheriff or officer conducting the foreclosure of sale and shall be attached with the records of the
case. In this case, where a homestead or free patent is foreclosed, the homesteader or free
patent holder, as well as his heirs shall have the right to redeem the same within one year from
the date of foreclosure, in case of land not covered by Torrents Title and one year from the date
of the registration of the foreclosure in the case of land covered by a Torrents Title.

Redemption of Foreclosed Real Estate Mortgage. The mortgagor or debtor shall
within one (1) year after the sale of the real estate as a result of the foreclosure sale, may redeem the


59
property, by paying the amount fixed by the court in the order of execution or the amount due
under the mortgage deed, with interest and all the costs and judicial an other expenses incurred by
the bank less income received from the property. However, the purchaser at the auction sale
concerned shall have the right to enter upon and take possession of such property immediately after
the date of the confirmation of the auction sale and administer the same in accordance with the law.

Loans Secured By Chattels. Loans on the security of chattels shall not exceed fifty
percent (50%) of the appraised value of the security, and such loans shall not be made unless title to
the chattels, free from encumbrances, shall be in the mortgagor.

Loans Secured By Personal Properties. Loans may be secured by unencumbered
personal property which may consist of:

a) Bonds and securities issued by the government accepted at face value
b) Stocks and other securities issued by reputable commercial, industrial and other private
companies or entities engaged in non-speculative business up to fifty percent (50%) of
Market Value
c) Expected harvest from a project to be financed or growing crops up to forty percent (40%) of the
calculated Market Value of the crop for which the loan is sought, based on the previous
production records.
d) Quedans or warehouse receipts issued by bonded warehouses covering stock deposited in said
warehouses up to eighty percent (80%) of calculated market value.
e) Any other personal property, up to fifty percent (50%) of the Fair Market Value.

Loans Secured By Certificates of Time Deposit. The original copy of the CTDs subject
to hold-out or assignment shall be surrendered to the lending bank. The depository bank, other than
the lending bank, shall be furnished a copy of the Deed of Assignment or hold-out agreement on the
deposit used as collateral. If the term of the CTDs subject to hold-out or assignment is shorter than
the term of the loan, there shall be an agreement in writing that renewal of the time deposit upon
maturity shall be made at least co-terminus with the term of the loan. There shall be no pre-
termination of the time deposit without the consent of the lending bank and unless an acceptable
substitute collateral for the loan has been made. The lending bank shall keep a complete record of
all pertinent loan documents. The loan documents shall include a waiver on the part of the depositor
which shall be made available for inspection and/or examination by BSP and a waiver of his rights to
the confidentiality of his deposits.

















60
EXERCISE 14

TEST I ENUMERATION

WHAT ARE THE ELIGIBLE REAL ESTATE COLLATERALS ON RURAL BANK/COOP BANK
LOANS?
1.
2.
3.
4.
5.
EXAMPLES OF UNEMCUMBERED PERSONAL PROPERTIES USED AS SECURITY FOR A LOAN.
6.
7.
8.
9.
10.

TEST II IDENTIFICATION.

1. What % of the appraised value is provided for insurance on real
estate improvements?
2. What is the Maximum Amount excluding the principal, of loans
foreclosed by Thrift Banks not requiring publication requirement.
3. What % of the appraised value of the security is provided for on
loans secured by chattels?
4. What % of the appraised value of the security is provided for on
loans secured by Real Estate the title of which must be in the
mortgagors name?
5. The redemption period of foreclosed real estate mortgage.























61
Chapter 15

UNSECURED LOANS


Loans Against Personal Security. The following regulations shall govern credit
accommodations against personal security granted by banks:

A) Proof of Financial Capacity of Borrower-

In addition to the usual personal information sheet about the borrower, banks shall require
that an application for a credit accommodation against personal security be accompanied by 1)
a copy of the latest income tax returns of the borrower and his co-maker duly stamped as
received by the BIR; 2) If the credit accommodation exceeds P500,000, a copy of a borrowers
balance sheet duly certified by a CPA and in case he is engaged in business, also a copy of the
profit and loss statement duly certified by a CPA.

B) Amounts and terms of credit accommodations / Renewals Signatories

Banks shall require that credit accommodations against personal security be made under
the signature of the principal borrower and at least one (1) co-maker, except in the case of a
principal borrower whose responsibility and financial capacity are unquestionable in which
case the signature of the borrower shall suffice.

C) Collateral requirements-

When circumstances so warrant, banks may require applicants for credit accommodations
against personal security to furnish collateral, without subjecting such collateral to the
maximum loan values.

General Guidelines:

Banks must exercise proper caution by ascertaining that borrowers, co-makers, endorsers,
sureties and/or guarantors possess good credit standing and are financially capable of fulfilling their
commitments to the bank. For this purpose, banks shall keep records containing information on the
credit standing and financial capacity of credit applicants.



ASSIGNMENT:

Divide the class into groups and assign each group to a bank that offers unsecured loan
to interview the loans officer on the guidelines in the extension of loan.










62
Chapter 16

RESTRUCTURED LOANS

Banks shall have full discretion in the restructuring of loans in order to provide flexibility in
arranging the repayments of such loans without impairing or endangering the lending banks
financial interest, except in special cases approved by the Monetary Board such as loans funded by
foreign currency obligations. However, the restructuring of loans granted to DOSRI should be upon
terms not less favorable to the bank than those offered to others. While agreements on loan
restructuring should be considered as management tools to maintain or improve the soundness of
the bank' lending operations, these should be drawn mainly to assist borrowers towards the
settlement of their obligations, taking into account their capacity to pay.

Restructured Loans are loans the principal terms and conditions of which have been
modified in accordance with a restructuring agreement setting forth a new plan of payment or a
schedule of payment on a periodic basis. The modification may include, but is not limited to, change
in maturity, interest rate, collateral or increase in the face amount of the debt resulting from the
capitalization of accrued interest/accumulated charges. Items in litigation and loans subject of
judicially approved compromise, as well as those covered by petitions for suspension or for new
plans of payment approved by the court or the SEC, shall not be classified as restructured loans.

PROCEDURAL REQUIREMENTS

A loan maybe restructured, subject to the approval of the banks board of directors in a
resolution which shall embody the ff:

A. The basis of or justification for the approval;
B. Determination of the borrowers capacity to pay, such as viability of the business
C. The nature and extent of protection of the banks exposure.

The authority to approve the restructuring of loans may be delegated by the banks board of
directors to a committee or officer(s).



ASSIGNMENT

Assign a group to report on banks and their procedure in the structuring of loans.













63


Chapter 17

LOANS AND OTHER CREDIT ACCOMODATIONS TO DIRECTORS, OFFICERS, STOCKHOLDERS AND
THEIR RELATED INTERESTS (DOSRI)

Dealings of a bank with any of its DOSRI should be in the regular course of business and upon
terms not less favorable to the bank than those offered to others.

DEFINITION OF TERMS:

A. Directors shall refer to the bank directors .
B. Officers shall refer to bank officers.
C. Stockholders shall refer to any stockholder of record in the books of the bank,
acting personally, or through an atty-in-fact, executor, as administrator or guardian of
a minor, incompetent and/or deceased stockholder or through a trustee designated
by one (1) or more stockholders pursuant to a voting trust agreement, whose
stockholdings in the lending bank, individually and/or together with his spouse or
relative within the 1
st
degree of consanguinity or affinity or relative by legal adoption.
D. Outstanding deposits shall refer to savings, time and demand deposits which are
not subject to an assignment or hold-out agreement.
E. Book Value of the paid-in capital contribution shall mean the proportional
amount of the banks total capital account as the corresponding paid-in capital
contribution of each director, officer or stockholder concerned bears to the total paid-
in capital of the bank.
F. Total Loan Portfolio shall refer to the sum of all loan accounts outstanding, gross of
valuation reserves, as reflected in the banks consolidated statement of condition,
excluding loans financed by special/specific funds from the government financial
institutions to the extent of the total outstanding loans granted from said
special/specific funds.
G. Unsecured loan, borrowing or credit accommodation- shall refer to any loan,
discount, credit or advance or portion thereof which is not secured
H. Secured loan, borrowing or credit accommodation shall refer to:

a) Any loan, discount, credit or advance or portion thereof, which is secured by real estate
mortgage; chattel mortgage on tangible assets; standby letter of credit issued by foreign
banks excluding Philippine Branches of foreign banks; assignment of, or hold-out on,
deposits or deposit substitutes maintained in the lending bank; cash margin deposit or
assignment or pledge of government securities or readily marketable bonds and other high-
grade debt securities except those issued by the lending entity;
b) Customers liability under import bills outstanding for more than thirty (30) days from date of
original entry;
c) Sales contract receivables arising from sale of real property on credit where title to the
property is retained by the bank; and


64
d) Customers liability-import bills under trust receipts outstanding for not more than thirty (30)
days from the date of booking
Transactions covered. The terms loan, borrow, money borrowed and credit
accommodations as used herein shall refer to transactions which involve the grant, renewal or
extension or increase of any loan, discount, credit or advance in any form whatsoever, and shall
include:

(a) Any advance by means of an incidental or temporary overdraft, cash item, vale,
etc.
(b) Outstanding availments under an established credit line
(c) Drawings against an existing letter of credit
(d) The acquisition of discount, purchase, exchange or Otherwise of any note, draft, bill
of exchange or other evidence of indebtedness upon which a director, officer, or
stockholder maybe liable as a maker, drawer, acceptor, endorser, guarantor or
surety;
(e) Any advance of unearned salary or other unearned compensation for periods in
excess of thirty (30) days.
(f) Loans or other credit accommodations granted by another financial intermediary to
such director, officer or stockholder from funds of the bank invested in the other
institutions trust or other department when there is a clear relationship between the
transactions;
(g) Any advance by means of DAUDs;
(h) The increase of an existing indebtedness, as well as additional availment under a
credit line or additional drawings against a letter of credit;
(i) The sale of assets, such as shares of stocks on credit;
(j) Any other transactions as a result of which a director, officer or stockholder becomes
obligated or may become obligated to the lending bank.

Transactions not covered. The terms loans, borrow, money borrowed or credit
accommodations as used herein shall not refer to the ff:

1.) Advances against accrued compensation, or for the purpose of providing payment of
authorized travel, legitimate expenses or other transactions for the account of the
bank or for utilization of maternity and other leave credits;
2.) The increase in the amount of outstanding credit accommodations as a result of
additional charges or advances made by the bank to protect its interest such as
taxes, insurance;
3.) The discount of bills of exchange drawn in good faith against actually existing values,
and the discount of commercial or business paper actually owned by the person
negotiating the same, including, but not limited to, the acquisition by a domestic
bank of export bills from any of its DOSRI which are drawn in accordance with the
terms and conditions of the covering letters of credit.
4.) Transactions with a foreign bank which has stockholdings in the local bank where the
foreign bank acts as guarantor through the issuance of letters of credit or
assignment of a deposit in a currency eligible as part of the international reserves and
held in a bank in the Philippines to secure credit accommodations granted to another
person or entity.


65
5.) Deposits of bank with another bank, whether domestic or foreign, which has
stockholdings in the depositing bank.

Appilicability to Credit Card Operations. The credit card operations of banks shall not
be subject to these regulations where the credit cardholder is a director, officer or stockholder of the
bank Provided that:

(1) The privilege of becoming a credit cardholder is open to all qualified persons on the
basis of selective criteria which are applied by the bank to all applicants thereof;
(2) The bank director, officer or stockholder concerned reimburses the bank for
advances made on availment on his credit card within a period of thirty (30) day
period mentioned herein, the transaction shall be subject to the applicable
requirements of these regulations.

Direct or Indirect Borrowings. For purposes of these rules on loans and other credit
accommodations to DOSRI, a credit accommodation shall be considered a direct or indirect
borrowing in accordance with the following criteria:

Direct borrowing. If the director, officer or stockholder of the lending bank is a party to any of
the transactions for himself or as the representative or agent of others, or if he acts as a
guarantor, endorser or surety for loans from the bank or if the loan or credit accommodation
to another party is secured by a property interest or right of the director, officer, or
stockholder.
Indirect borrowing. It shall be considered an indirect borrowing if the borrower, guarantor,
endorser or surety is a:

1.) Spouse or relative within the first degree of consanguinity or affinity, or relative by
legal adoption of a director, officer or stockholder of the bank;
2.) Partnership of which a director, officer, or stockholder or his spouse or relative
within the 1
st
degree of consanguinity or affinity, or relative by legal adoption, is a
general partner;
3.) Co-owner with the director, officer, stockholder or his spouse or relative within the 1
st

degree of consanguinity or affinity, or relative by legal adoption, of the property or
interest or right mortgaged, pledged or assigned to secure the loans or credit
accommodations, except when the mortgage, pledge or assignment covers only said
co-owners undivided interest;
4.) Corporation, association, or firm of which a director or officer of the bank, or his
spouse is also a director or officer of such corporation, association or firm, except a)
where the securities of such corporation, associated or firm are listed and traded in
the big board or commercial and industrial board of domestic stock exchanges and
loss than fifty percent (50%) of the voting stock thereof is owned by any one person
or by persons related to each other within the third degree of consanguinity or
affinity; or b) where the director, officer or stockholder of the bank sits as a
representative of the bank in the board of directors of such corporation.
5.) Corporation, association or firm of which any or a group of directors, officers,
stockholders of the lending bank and/or their spouses or relatives within the 1
st

degree of consanguinity or affinity or relative by legal adoption, hold/own more than
twenty percent (20%) of the subscribed capital of such corporation, or of the equity
of such association or firm.


66

Financial Assistance to Banks Officers & Employees

Mechanics of such Financing Plan shall have the following minimum features:

a) Participation shall be limited to full-time and permanent officers and employees of the bank;
b) Financial assistance shall be granted in the form of a loan, advances or credit
accommodation, installment sale, lease with option to purchase or lease-purchase
agreement where the lessee is obligated to purchase the real estate or equipment;
c) The amount and maturity of financial assistance for each purpose, shall be determined by the
bank in consonance with the normal requirements thereof. The maximum amount shall be
stated as percentage or multiple of the total monthly compensation of the officer or
employee and shall be within the paying capacity of the borrowing officer or employee.
(Total monthly compensation shall include the basic salary and all fixed and regular monthly
allowances of the officer or employee. Payments for sickness benefits and other special
emoluments which are not fixed or regular in nature, or the commutation into cash of
unused leave credits shall not be included in the computation of total monthly
compensation)
d) The amortization payment shall include amounts necessary to cover mortgage redemption
insurance and fire insurance premiums, taxes, special assessment and other related fees and
charges;
e) Availment of the financing plan to construct or acquire a residential house and lot shall be
allowed only once during the officers or employees tenure with the bank. Exception is,
when the right over the real estate previously acquired or constructed under the financing
plan is absolutely transferred, or assigned to another officer or employee of the bank or to a
third party; provided, that such party shall have fully reimbursed the bank for the
outstanding availment on the financing plan before the officer/employee is allowed to re-
avail himself of the same financing plan. An officer or employee (or his spouse) who already
owns a residential house and lot shall not be qualified to avail himself of financial assistance
for purposes of acquiring a residential house/lot.
f) Its purpose shall only be for the following:
(a) Acquisition of a residential House & Lot, or the construction, renovation or repair of a
residential house on a lot owned and to be occupied by the officer or employee;
(b) The acquisition of Vehicles, Household Equipment, and Appliances for the personal
use of the officer or employee or his immediate family; ( availment shall be once
every (3) three years, provided that loan or advances have been fully paid )
(c) To meet expenses for the Medical, Maternity, Education, Emergency and other
personal needs of the officer or employee or his immediate family

g) The bank shall adopt measures to protect itself from losses. This shall done, by incorporating
in the plan or contract, provisions requiring co-makers or co-signor, chattel, or real estate
mortgages, fire insurance, mortgage redemption insurance, assignment of money value of
leave credits, pension or retirement benefits, including a provision for the restructuring of
the loan under the banks regular lending operations in case of termination or separation of
the officer or employee for whatever cause.



67
Funding By Foreign Banks. In the case of local branches of foreign banks, financial
assistance for their officers and employees may be funded, through any of the following:

1) Through a local affiliate by special arrangement with the Head Office Abroad in the
form of:

(a) Inward remittance from the head office of the affiliate; or
(b) Assignment to the affiliate or equivalent amounts of profits otherwise remittable
abroad under existing regulations; or
(c) Direct loans by the foreign bank to the affiliate; or

(2) Through the Local Branch itself by:

(a) Segregation or transfer of undivided profits normally remitted to the Head office
abroad equivalent to the loans to officer and employees which shall be lodged
under Other Liabilities-Head Office accounts.
(b) Inward remittance; or

(3) Through the Local Branch from Local Sources without Earmarking an Equivalent
amount of undivided profits, Provided that the aggregate ceilings on such loans as
provided under existing regulations shall apply.

The documentation and collection of such loans shall be handled by the branch for the
account of the head office.





ASSIGNMENT

Let the students interview bank employees who have availed to the DOSRi Loans. Let them get the
percentage of availment for each assigned bank.


















68
Chapter 18

MANDATORY CREDIT AND SPECIAL TYPES OF LOANS


Agrarian Reform and Agricultural Credit

Pursuant to P.D. No. 717, the following guidelines shall govern the grant of agrarian reform
credit and agricultural credit by banks, government or private.

Definition of Terms:

Agrarian Reform Credit shall refer to production and other types of loans granted to
beneficiaries of agrarian reform for the following purposes:
1. Acquisition of work animals, farm equipment & machinery, seeds, fertilizer, poultry,
livestock, feeds and other similar items;
2. Acquisition of lands authorized under existing laws;
3. Construction and/or acquisition of facilities for production, processing, storage and
marketing; and
4. Efficient and effective merchandising of agricultural commodities stored and/or
processed by the facilities a fore cited in domestic and foreign commerce.

Agricultural Credit in General shall include all loans and/or advances granted to
borrowers, whether beneficiaries of agrarian reform or not, to finance activities relating to
agriculture, and for processing, marketing, storage, and distribution of products resulting from these
activities.
Agrarian Reform Beneficiaries shall include tillers, tenant-farmers, settlers, agricultural
lessees, amortizing owners, owner-cultivators, farmers cooperatives and compact farms, as
determined by the DAR.

Who may borrow / purposes:

All beneficiaries of agrarian reform credit mentioned under P.D. No. 717 and its implementing
regulations which credit shall be used for agricultural production or for other purposes mentioned
therein shall be qualified borrowers under agrarian reform credit.

Qualified borrowers under agricultural credit in general are:
(1) corporations
(2) entities
(3) private individuals engaged in :

(1) agricultural production (4) storage
(2) processing (5) marketing
(3) exportation of agricultural products (6) importation/manufacture /distribution of
farm machinery & equipment







69

Mandatory Credit to Small Enterprises

Loan Portfolio shall include all loans and advances (net of valuation reserves) in the
Statement of Condition/Balance Sheet excluding the following:

1. Inter-bank Loan Receivables
2. Agrarian Reform/other agricultural credit loans under P.D. No. 717
3. Loans granted under special financing programs
4. Foreign currency denominated loans & advances
5. Loans from multilateral and bilateral sources which are relent by a bank on a wholesale
basis to conduit financial institutions.

Small Enterprises shall refer to any business activity or enterprises engaged in industry,
agribusiness and/or services, whether single proprietorship, cooperative, partnership or corporation:

1. Whose total assets, inclusive of those arising from loans but exclusive of the land on which the
particular business entitys office, plant and equipment are situated, amounts to P15 Million
and below;
2. Duly registered with the appropriate agencies as presently provided by law;
3. One hundred percent (100%) owned and capitalized by Filipino citizens if a single proprietorship
or partnership. If the enterprise is a corporation, at least sixty percent (60%) of its capital
or outstanding stocks must be owned by Filipino citizens;
4. Primarily engaged in manufacturing, processing, and/or production excluding farm level
agricultural/crop production; domestic and export trading including those not guaranteed
by the Small Business Guarantee and Finance Corporation (SBGFC); and
5. Not a branch, subsidiary or division of a large scale enterprise nor its policies determined by a
large scale enterprise or by persons who are not owners or employees of the enterprise.

All lending institutions shall set aside at least five percent (5%) of their total loan portfolio
based on their Consolidated Statement of Condition/Balance Sheet as of the end of the previous
quarter and make it available for small enterprise credit.

Funds set aside in accordance with the above requirements shall be made available to any of
the following:

1. Loans to small enterprises
2. Instruments as may be offered by the SBGFC
3. Purchase of small enterprises promissory notes from lending institutions and/or Non-
Government Organizations (NGO)
4. Equity investments by member banks in and loans by member banks to, the BAP Credit Guaranty
Corporation (BCGC) to the extent of the member banks proportionate share to total
outstanding loans granted by BCGC to small enterprises;
5. Un-availed but committed credit lines. The funds set aside which have not been invested in any
of the above may be held in the form of Cash on Hand and/or Due from BSP.



70
Lending to Medium Enterprises. Lending institutions are encouraged to make available
funds for lending to medium enterprises with total assets, of more than P 15 Million but not more
than P 60.

Special Types of Loans

I nterBank Loans. I nter- bank Loan Transacti ons shal l i ncl ude, among other
thi ngs;

1. Inter-bank call loan (IBCL) transactions.
2. Borrowings evidenced by deposit substitute instruments
3. Purchases of Receivables with recourse

Only IBCL transactions which are evidenced by inter-bank loan advice or repayment transfer
tickets and settled through the banks respective demand deposit account with BSP shall be eligible
to the one percent (1%) reserve. Funds borrowed by banks from trust department of banks or
investment houses shall be excluded from the definition of inter-bank loan transactions.

Systems and Procedures for InterBank Call Loan Transactions. IBCL transactions of
banks shall be governed by the Agreement for an Inter-bank Call Loan Funds Transfer System
executed among the BSP; the Bankers Association of the Philippines and the Philippine Clearing
House Corporation and any subsequent amendments thereto.

Banks shall generate hard copies of the formats of the loan and repayment instruction and
the agreement to be kept as documentary evidence of their matched and processed IBCL
transactions.

Accounting Procedures. Both lending and borrowing banks shall immediately pass the
corresponding entries in their books. Upon receipt of a copy of the transfer instruction ( reported as
matched in the Multi-Transaction Inter-bank Payment System ) (MIPS), the borrowing bank shall
attach the same to the corresponding ticket debiting its Due from BSP account in its books and, in
the case of the lending bank, to the same ticket passed in its books on the day payment is made.

IBCL transactions shall be recorded by the borrowing bank as Bills Payable Inter-bank Call
Loans. Banks shall reconcile their demand deposit account with the BSP against monthly statements
of account to be furnished by the BSP Accounting Department. Two (2) copies of the reconciliation
statement shall be submitted within seven (7) banking days form receipt of the statements of
account from the BSP the original to the BSP Accounting Department and the other copy to the
appropriate supervising department.

Loans to Thrift / Rural / Cooperative Banks. Banks may rediscount papers of Thrift
Banks / Rural Banks / Coop Banks. Banks shall specify the nature of papers acceptable for
rediscounting as well as the rediscount rate.

Issuance of Certification. The Monetary Board shall issue the certification required under
Section 14 of R.A. No. 7353 which shall be final, after the Monetary Board has determined that:

(1) The resources of the Rural Bank are inadequate to meet the legitimate credit needs of
the locality wherein the Rural Bank is established;
(2) There is dearth of private capital in said locality;


71
(3) It is not possible for the stockholders of the Rural Bank to increase the paid-up capital
thereof.

Qualifications for Loan. In order to qualify for the financial assistance under said
provision of law, the Rural Bank shall 1
st
meet the following requirements:

(1) Its capital-to-risk assets ratio during the last six (6) months immediately preceding the
loan application should be at least ten percent (10%);
(2) Its past due loans are not more than twenty-five percent (25%);
(3) It has no deficiency in allowance for probable losses on loans and other risk assets;
(4) It must not have incurred deficiency in its reserves against deposit liabilities for the last
(6) six months preceding the filing of the application;
(5) It must have been operating profitably for the last three (3) days;
(6) Its arrearages with the BSP or other government financial institutions, if any, are being
liquidated through an approved plan of payment, the conditions of which are being
complied with; and
(7) It is operating substantially in accordance with applicable laws and BSP rules and
regulations

Extension of Loan. The LBP, the DBP or any government-owned or controlled bank or
financial institution shall, within sixty (60) days from issuance by the Monetary Board of the
certification, and subject to their loan and investment policies, extend to an Rural Bank a loan or
loans from time to time, repayable in ten (10) years, with concessional rates of interest, against
security/ies which the stockholder (s) of the Rural bank may offer.






ASSIGNMENT

1. Divide the class into groups. Each group will interview a lending institutions and a client
Medium and Small Enterprise.


2. Assign a group to report on LBP as well as DBP on their loan and investment policy of loan
extension to Rural Bank.
















72

Chapter 19
STAND-BY LETTERS OF CREDIT

A Letter of Credit is a document issued by a bank authorizing the bearer to receive money
from one of its foreign branches or from another bank abroad. The order is non-negotiable, and it
specifies a maximum sum of money not to be exceeded. Widely used by importers and exporters,
the letter of credit is also made available to tourists by their home banks so that they may draw
foreign currency while traveling abroad. When the instrument is directed to more than one agent, it
is called a circular letter of credit.

Domestic standby letters of credit may be issued or used in transactions other than those
involving movement of goods under the following guidelines:

1.) The banks obligation to pay shall be either unconditional ( as against presentation of a clean
draft) or conditional only upon the representation of documents and not upon actual
existence or non-existence of facts, i.e., the bank must not be called upon to determine
disputed questions of facts or law;
2.) The banks obligation shall have an expressed expiration date;
3.) The banks obligation shall be limited to a fixed maximum amount;
4.) The standby letters of credit accommodation shall not violate any law or existing BSP
directives, rules and regulations, such as the SBL and DOSRI ceilings;
5.) The party who opened the standby letter of credit or the ultimate borrower shall not have
any past due obligation with the issuing bank for the ninety (90) day period preceding the
date of issuance of the letter of credit
6.) Drawings shall be honored only upon failure of the party who opened the letter of credit
(borrower or principal obligor) to pay the amortization(s) due and upon presentation of a
written certificate to this effect;
7.) The party who opened the letter of credit (borrower or principal obligor) must have an
unqualified obligation to reimburse the bank on the same condition as the bank has paid; and
8.) Banks shall not issue standby letters of credit in favor of another bank to secure the
obligation of the latters client or for the faithful performance by the client of his obligation
to said bank.

The total standby letters of credit, foreign and domestic, including guarantees, the nature of
which requires the guarantor to assume the liabilities/obligations of third parties in case of their
inability to pay, that may be issued by a bank and outstanding at any given time, shall not exceed
fifty (50%) percent of the banks unimpaired capital and surplus, except those fully secured by cash,
hold-out on deposits/deposit substitutes or government securities.

Banks shall submit a monthly report of domestic standby letter of credit opened and
outstanding in the prescribed form within fifteen (15) banking days after end of reference month to
the appropriate supervising and examining department containing the following:
1) Date the letter of credit was opened
2) Amount, purpose and the name of accountee;
3) Beneficiary


73
4) Security and value of security
5) Expiry date of letter of credit
6) Certification as to the correctness of the report by an authorized officer or the bank.


EXERCISE

1) How do Letters of Credit work in an export-import transaction?
2) Why do importers open letter of credit? What are the advantages of opening Letter of Credit
in the payment of the transaction?
3) Who are the parties involved in this type of transaction?
4) What is the reason why banks need to submit a monthly report of domestic standby
letter of credit opened and outstanding in the prescribed form within fifteen (15)
banking days after end of reference month to the appropriate supervising and
examining department?
5) What is the difference between the domestic standby letter of credit and an
international letter of credit used by importers/exporters?























74


Chapter 20
EQUITY INVESTMENTS

The following rules shall govern the investment of banks in the equities of allied
undertakings, whether financial or non-financial, and non-allied undertakings, as well as the
establishment/acquisition of subsidiaries and affiliates abroad.

Conditions for Investment in Equities. A bank shall not invest in the equity of any
enterprise, if the investing bank is in any of the following situations:

1.) Its capital is impaired, whether by actual losses or unbooked valuation reserves required by
the BSP;
2.) Its lending operations had been suspended on account of reserve or capital deficiency, until
such suspension shall have been lifted for at least one (1) year and sufficient reserves or
capital adjustments required by the BSP;
3.) It incurred losses from its operations during the preceding year;
4.) It has not fully booked the valuation reserves and other capital adjustments required by the
BSP;
5.) It has exceeded the individual and aggregate ceilings as well as the ceiling on unsecured
credit accommodations to DOSRI; and
6.) Its ratio of past due loans to total loan portfolio exceeds twenty percent (20%).


Financial Allied Undertakings. With prior BSP approval, banks may invest in equities of
the following financial allied undertakings:

1.) Leasing companies
2.) Banks
3.) Investment Houses
4.) Financing companies
5.) Credit card companies
6.) Financial institutions catering to small and medium scale industries including venture
capital corporations;
7.) Companies engaged in stock brokerage/securities dealership; and
8.) Companies engaged in foreign exchange dealership/brokerage.

In addition, Expanded Commercial Banks may invest in the following as financial allied
undertakings:

1.) Insurance companies: PROVIDED that the equity investment in an insurance
company of an investment bank, any of its subsidiaries, its directors, officers and stockholders
owning two (2%) percent or more of the bank' subscribed capital stock, shall not exceed fifty-one


75
percent (51%) of the total subscribed capital stock and the total voting of such insurance company;
and
2.) Holding company : PROVIDED, that the investments of such holding company
are confined to the equities of allied undertakings and/or non-allied undertakings of expanded
commercial banks allowed under BSP regulations.

The Monetary Board may declare such other activities as financial allied undertakings of
banks. The determination of whether the corporation is engaged in a financial allied undertaking
shall be based on its articles of incorporation and the volume of its principal business.

Investments in Venture Capital. The following rules and regulations shall implement
Presidential Decree No. 1688 entitled Authorizing Banks to Invest in the Equity of Venture Capital
Corporations to Assist Small and Medium-Scale Enterprises.

A venture capital corporation (VCC) shall refer to an entity organized jointly by private
banks,( the National Development Corporation and the Technology Livelihood and Resource Center
and/or such other government agency as may be authorized by the appropriate authority), the
primary purpose of which is to develop, promote and assist, through debt or equity financing or any
other means, any small and medium-scale enterprise in the country.

Requirements for Investors. Banks may invest in a VCC organized to assist small and
medium-scale enterprises, subject to the following conditions:

1. The bank shall have a minimum capital of P 100 Million;
2. Two or more banks may own up to sixty percent (60%) of the total voting equity and
of the total equity of a VCC. A bank shall not be allowed to invest in the equity of
more than one VCC;
3. The initial paid-in capital of VCC shall not exceed P 5 Million. Any subsequent increase
in paid-in capital of the VCC in which a bank owns equity shall be subject to prior
approval of the Monetary Board;
4. Loans, which the investor-bank, may grant to a VCC shall be limited to such amounts
as would enable the VCC to promote equity financing to viable small and medium
scale enterprise. Unless, otherwise authorized by the Monetary Board, the
aggregate outstanding loans of such bank to a VCC shall not exceed twice the
amount of its equity investment in the VCC.
5. The combined equity investments in, and loans of, the bank to its VCC shall not
exceed fifteen percent (15%) of the banks net worth; and
6. The aggregate investments in equities by a bank, including equity investments in a
VCC, shall not exceed the prescribed ceiling of twenty-five (25%) of the banks net
worth.

Equity Investments of Venture Capital Corporations. Equity investment of a VCC in
small and medium-scale enterprises shall be subject to the following conditions:
1.) Equity financing by a VCC may be extended to a small and medium-scale enterprise
engaged in a industry certified as desirable by the Department of Trade and Industry; and
2.) The total assets of the enterprises shall not exceed P 4 Million, including the VCCs equity
investment. Should the total assets of the small and medium-scale enterprise
subsequently exceed the prescribed P 4 Million maximum, the VCC equity investment


76
therein made before the total assets of the enterprise exceeded P 4 Million, may be
maintained but not be increased.

Business Name of Venture Capital Corporations. A VCC shall be known by any name
not otherwise appropriated with the words venture capital corporation made a part thereof.


EXERCISE

1) What type of banks can invest in the equity of Allied Undertakings?
2) What is a Venture Capital Corporation?
3) Give examples of a Venture Capital Corporation?
4) What are the requirements for investors to invest in Venture Capital Corporation?








































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PART FOUR
TRUST, OTHER FIDUCIARY BUSINESS & INVESTMENT MANAGEMENT ACTIVITIES

Chapter 21

TRUST AND OTHER FIDUCIARY BUSINESS

Statement of Principles

The cardinal principle common to all trust and other fiduciary relationships is Fidelity. Policies
predicated upon this principle are directed towards confidentiality, scrupulous care, safety & prudent
management of property including reasonable probability of income with proper accounting and
appropriate reporting thereon. Practices are designed to promote efficiency in administration and
operation; to adhere and conform to the terms of the instrument or contract; and to maintain
absolute separation of property free from any intrusion of conflict of interest.

A bank authorized to engage in trust and fiduciary business is under no obligation, either
legal or moral, to accept any such business being offered or has it the right to accept if the same is
contrary to law, rules, regulations, public order and public policy. It shall advertise its services in a
dignified manner and enter such business only when demand for such service is evident, when
specially equipped to render such service and upon full appreciation of the responsibilities involved.
It shall be ready and willing to give full disclosure of the services being offered and shall conduct its
dealing with transparency. Harmonious relationship shall likewise be pursued with other professions
to achieve the common goal of mutual service to the public and protection of its interest.

Definitions of Terms:

1.) Trust and other Fiduciary Business shall apply to banks authorized to engaged
in trust and other fiduciary business including investment management activities;
2.) Investment Management Activities shall apply to banks without trust authority
but with authority to engage in investment management activities. It shall refer to
any activity resulting from a contract or agreement primarily for financial return
whereby the bank (the investment manager) binds itself to handle or manage
investible funds or nay investment portfolio in a representative capacity as financial
or managing agent, adviser, consultant or administrator of financial or investment
management advisory, consultancy or any similar arrangement which does not
create or result in a trusteeship.
3.) Trust is a relationship or an arrangement whereby a person called a trustee is
appointed
4.) Trust Business shall refer to any activity resulting from a trustor-trustee
relationship, (trusteeship) involving the appointment of a trustee, by a trustor for the
administration, holding, management of funds and/or properties of the
trustor by the trustee for the use, benefit or advantage of the trustor or of others
called beneficiaries.




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5.) Other Fiduciary Business shall refer to any activity of a trust-licensed bank
resulting from a contract or agreement whereby the bank binds itself to render
services or to act in a representative capacity such as in an agency, guardianship,
administratorship or wills, properties & estates, executorship, receivership
and other similar services which do not create or result in a trusteeship. It shall
exclude collecting or paying agency arrangements and similar fiduciary services
which are inherent in the use of the facilities of their operating departments of said
bank. Investment management activities, which are considered as among other
fiduciary business, shall be separately defined in the succeeding item to highlight its
being a major source of fiduciary business.
6.) Trust Agreement is an instrument in writing covering the terms and conditions of
the trust.
7.) Trustee is any person who holds legal title to the funds and/or property of a trust.
8.) Trustor is any person who creates a trust.
9.) Beneficiary is any person for whose benefit a trust is created.
10.) Fiduciary shall refer to any person or entity engaged in any of the other fiduciary
business as herein defined where no trustor-trustee relation exists.
11.) Agency shall refer to a contract whereby a person binds himself to render some
service or to do something in representation or on behalf of another, with the
consent or authority of the latter.
12.) Principal shall refer to the person who grants authority to another person called an
agent, under a contract to enter into transactions in his behalf.
13.) Agent shall refer to a person who acts in representation or on behalf of another with
the latters authority.
14.) Trust Department shall refer to the department, office, group, division which carries
out the trust and other fiduciary business of a bank.
15.) Trust Officer shall refer to the designated head or officer-in-charge of the trust
department.
16.) Trust Account shall refer to an account where transactions arising from a
trusteeship are kept and recorded.
17.) Common Trust Fund (CTF) shall refer to a funds maintained by a bank authorized
to perform trust functions under a written and formally established plan, exclusively
for the collective investment and reinvestment of certain money representing
participation in the plan received by it in its capacity as the trustee.
18.) Fiduciary Account shall refer to an account where transactions arising from any of
the other fiduciary business are kept and recorded.
19.) Investment Manager shall refer to any person or entity engaged in investment
management activities.
20.) Investment Management Account shall refer to an account where transactions
arising from investment management activities are kept and recorded.

No bank shall advertise or represent itself as being engaged in trust and other fiduciary
business or in investment management activities or represent itself as trustee or investment
manager or use words of similar import; and/or use in connection with its business title the words


79
trust, trust corporation, trust plan, trust company, or words of similar import, without having
obtained the required authority to do so.

Prerequisites for Engaging in Trust and Other Fiduciary Business

A bank, before it may engage in trust and other fiduciary business, shall comply
with the following requirements:

(1) Where the applicant is a domestic bank, its combined capital account shall be according to
the prescribed capital requirements for domestic bank or shall not be less than P 250
Million. Where the applicant is a branch of a foreign bank, it must comply with the
prescribed capital requirements for foreign banks.
(2) The applicant has been duly licensed or incorporated as a bank or created as such by special
law or charter;
(3) The articles of incorporation or governing charter of the bank shall include among its powers
or purposes, acting as trustee or administering any trust or holding property in trust
or on deposit for the use, or in behalf of others;
(4) The by-laws of the bank shall include, among other things:

A. The organization plan or structure of the department, office, or unit of the bank
which shall conduct the trust and other fiduciary business;
B. The creation of a trust committee, the appointment of a trust officer and subordinate
officers of the trust department; and
C. A clear definition of the duties and responsibilities as well as the line and staff
functional relationships of the various units, officers and staff within the
organization.

The applicant bank shall also meet the following additional requirements:

1.) It has continuously complied with its net worth to risk assets ration, liquidity floor and ceiling
on DOSRI loans for the last sixty days immediately preceding the date of application;
2.) It has not incurred net weekly reserve deficiency against deposit liabilities and deposit
substitutes during the last 8 weeks immediately preceding the date of application; and
3.) It has shown substantial compliance with other pertinent laws, rules and regulations, policies
and instructions of the BSP.

Pre-Operating Requirements. The following are the pre-operating requirements:

a) Government securities acceptable to the BSP amounting to P500,000 as minimum basic
security deposit for the faithful performance of trust and other fiduciary duties.
b) Organization Chart of the trust department which shall carry out the trust and other fiduciary
business of the bank;
c) Names and positions of individuals designated as chairman and members of the trust-
committee, trust officer and other subordinate officers of the trust department with their
respective bio-data and statement of duties and responsibilities.



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Security for the Faithful Performance of Trust and Other Fiduciary Business

(1) Basic security deposits equivalent to at least one percent (1%) of the book value of the total
volume of trust, other fiduciary and investment management assets;

(2) Eligible Securities such as government securities consisting of evidences of indebtedness of
the republic of the Philippines and of the BSP and other evidences of indebtedness or
obligations the servicing and repayment of which are fully guaranteed by the Republic of
the Philippines and other kinds of securities declared eligible by the Monetary Board.
Provided, It shall be free, unencumbered and not utilized for any other purpose and that
such securities shall have remaining maturity of not more than three (3) years from the
date of deposit with the BSP.

Reserves against Peso-denominated Common Trust fund(CTF) and Trust and other
Fiduciary Accounts.

Reserves against peso-denominated CTFs. In addition to the basic security deposit, a
bank authorized to engage in trust and other fiduciary business shall maintain reserves on
1) Peso-denominated CTF; and
2) Other managed peso funds which partake the nature of collective investment
of a peso-denominated CTF as may be indicated by the presence of the
following:
a) The funds are composed of contributions from two (2) or more investors;
b) The funds are managed/administered as a vehicle for collective investment and
reinvestment;
c) The trustee/administrator/agent has the exclusive management and control over the
funds and the sole right at any time to sell, convert, invest, exchange, transfer or
otherwise change or dispose of the assets comprising the funds; and
d) Investments/contributions to, or withdrawals from, the funds are being allowed at
anytime or as of a fixed date in the future, and/or the income, net of all expenses
incurred in the management of the fund plus the fee of the
trustee/administrator/agent, are being distributed among the participants of the
funds, without the need to liquidate all assets of the funds.

Reserve against Trust and Other Fiduciary Accounts (TOFA) Others. In addition
to the basic security deposit, banks shall maintain reserves on TOFA-Others, except accounts held
under:

A. Administratorship
B. Bond Issues/Other Obligations Under Deed of Trust or Mortgage
C. Custodianship and Safekeeping
D. Depository & Reorganization
E. Employee Benefit Plans Under Trust;
F. Escrow;


81
G. Personal Trust (testamentary or living trust);
H. Executorship;
I. Guardianship;
J. Life Insurance Trust
K. Pre-Need Plans (institutional/individual)

Organization and Management of Trust

Organization. A bank authorized to engage in trust and other fiduciary business
shall include in its by-laws, provisions on the organization plan or structure of the department, office
or unit which shall conduct such business. The by-laws, shall also include provisions on the creation
of a trust committee, the appointment of a trust officer and other subordinate officers. A clear
definition of their duties and responsibilities as well as their line and staff functional relationships
within the organization shall be in accordance with the following guidelines.

Trust and other fiduciary business of a bank shall be carried out through a trust department
which shall be organizationally, operationally, administratively and functionally separate and distinct
from the other departments and/or businesses of the institution.

A bank which is also engaged in investment management activities, shall conduct the same
only through its trust department and the responsibilities of the board of directors, trust committee
and trust officer shall be construed to include the proper administration and management of
investment management activities. The bank proper and the trust department may share the
following activities:

Electronic Data Processing
Credit Investigation
Collateral Appraisal
Messengerial, janitorial and security services

The trust department, trust officer and other subordinate officers of the trust department
shall only be directly responsible to the banks trust committee which shall, in turn, be only directly
responsible to the banks board of directors.

No director, officer or employee taking part in the management of trust and other fiduciary
accounts shall perform duties in other department or the audit committee of the bank & vice versa.
However, branch managers duly authorized by the board of directors may, for or on behalf of the
trust officer, sign pre-draw trust instruments such as CTFs.

The organization structure and definition of duties and responsibilities of the trust
committee, officers and employees of the trust department shall reflect adherence to the minimum
internal control standards prescribed by the BSP;

Provisions shall be made by the bank to have legal assistance readily available in the review
of proposed and/or existing trust and fiduciary agreements and documents and in the handling of
legal and tax matters related thereto.



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Composition of Trust Committee. The trust committee shall be composed of at least five
(5) members including the President, the Trust Officer and the directors who are appointed by the
board of directors on a regular rotation basis and who are not officers of the bank proper. No
member of the audit committee, shall be concurrently designated as a member of the trust
committee. That in the case of a trust committee composed of more than five (5) members, the
appointment of an operating officer may be allowed only if the required balance in the membership
of at least three (3) members of the board for every operating officer shall be maintained. That the
Philippine branch of a foreign bank may appoint its resident manager or chief executive officer in lieu
of the president while the positions allotted for members of the board may be filled up by the area
manager and/or officers/representatives from the Head Office who are not involved in audit-related
activities.

Qualifications of Committee Members, Officers and Staff. The banks trust
department shall be staffed by persons of Competence, integrity and honesty. Directors,
committee members and officers charged with the administration of trust and other fiduciary
activities shall, in addition to meeting the qualification standards prescribed for directors and officers
of banks, possess the necessary technical expertise in such business. The trust officers who shall be
appointed shall have at least two (2) years of actual experience or training in trust operations.

Responsibilities of Administration

The Board of Directors is responsible for the proper administration and management of
trust and other fiduciary business. It shall be administered with the skill, care, prudence, and
diligence necessary under the circumstances then prevailing that a prudent man, acting in like
capacity and familiar with such matters, would exercise in the conduct of an enterprise of like
character and with similar aims.

It shall determine and formulate general policies and guidelines on the 1) Acceptance,
termination, or closure of trust & other fiduciary accounts 2) Proper administration and
management of each trust & other fiduciary accounts 3) investment, reinvestment and disposition
of funds or property held in its capacity as trustee or fiduciary. It shall direct and review the actions
of the trust committee and all officers and employees designated to manage the trust and other
fiduciary accounts, especially accounts without specific agreements on investments or discretionary
accounts. It shall approve or confirm the acceptance, termination or closure of all trust and other
fiduciary accounts and shall record such in its minutes. It shall immediately review all non-cash assets
received for management, upon acceptance of an account and shall make a review once every year
to determine the advisability of retaining or disposing of such assets. It shall be responsible for
taking appropriate action on the examination reports of supervisory agencies, internal and/or
external auditors on the banks trust and other fiduciary business and recording of such actions. It
shall designate the members of the trust committee, the trust officer and subordinate officers of the
trust department and shall be responsible for requiring reports from said committee. It shall
establish an appropriate staffing pattern and adopt operating budgets that shall enable the trust
department to effectively carry out its functions. It shall provide officers & staff with appropriate
training programs in the administration and operation of all phases of the business.

Trust Committee. Duly authorized by the board, it shall act within the sphere of authority
which may be provided in the by-laws and/or as may be delegated by the board such as: 1)
Acceptance and closing of trust and other fiduciary accounts. 2) Initial review of assets placed under


83
its custody. 3) Investment, re-investment and disposition of funds. 4) The review and approval of
transactions between trust and/or fiduciary accounts.

Trust Officer. He/she shall act and represent the bank in all trust and other fiduciary
matters within the sphere of his authority as may be provided in the by-laws or as may be delegated
by the board such as: 1) administration of the account. 2) The implementation of policies and
instructions of the board of directors and the trust committee. 3) The submission of reports on
matters requiring attention of the trust committee and the board. 4) Maintenance of adequate
books, records and files for each account. 5) Maintenance of necessary controls and measures to
protect assets under his custody.

Non-Trust, Non-Fiduciary and/or Non-investment Management Activities.

The basic characteristic of Trust, other fiduciary and investment management activities is the
absolute non-existence of a debtor-creditor relationship, thus, there is no obligation on the part of its
manager to guarantee returns on the funds or properties regardless of the results of the investment.
Its Manager is entitled to fees or commissions which shall be stipulated and fixed in the contract or
indenture and the trustor or principal is entitled to all the funds or properties and earnings less fees,
commissions, losses and other charges. Any agreement or arrangement that does not conform to
these shall not be considered as trust, other fiduciary and/or investment management relationship.

The following does not constitute a trust, other fiduciary and/or investment management
relationship:

(1) When there is a preponderance of purpose or of intent that the arrangement creates a
relationship other than a trust, other fiduciary and/or investment management;
(2) When the agreement or contract is itself used as a certificate of indebtedness in exchange for
money placement from clients and/or as the medium for confirming placements and
investment thereof;
(3) When the agreement or contract of an account is accepted under the signature(s) of those
other than the trust officer or subordinate officer of the trust department or those
authorized by the board of directors to represent the trust officer;
(4) Where the risk or responsibility is exclusively with its manager in case of loss, when such is not
due to its failure to exercise the skill, care, prudence and diligence required by law.
(5) Where there is a fixed rate or guaranty of interest, income or return in favor of its client or
beneficiary. Where funds are placed in fixed income-generating investments, a
quotation of income expectation or like terms, shall neither be considered as
arrangement with a fixed rate nor a guaranty of interest, income or return when the
agreement or indenture categorically states in bold letters that the quoted income
expectation is neither assured nor guaranteed and it does not, therefore, entitle the
client to a fixed interest or return of his investment.

The following practices or practices similar thereto shall be construed as fixing or
guaranteeing the rate of interest, income or return:

(1) Issuance of certificates, side agreements, letters of undertaking, or other similar documents
providing for fixed rates or guaranteeing interest, income or return;
(2) Paying trust earnings based on indicated or expected yield regardless of the actual investment
results;
(3) Increasing or reducing fees in order to meet a quoted or expected yield;


84
(4) Entering into any arrangement, scheme or practices which would result in the payment of fixed
rates or yield regardless of the actual investment results.

UNSOUND PRACTICES. The following are unsound practices that should be desisted by a
manager:

1.) Entering in an arrangement whereby the client is at the same time the borrower of
his own fund placement, or whereby the trustor or principal is a borrower of other trust
funds belonging to the same family or business group of such trustor or principal.
2.) Granting loans or accommodations to any trust committee member, officer and
employee of the trust department except where such loans are obtained by said persons
as members of an employee benefit fund of the trustees own institution;
3.) Borrowing from, or selling trust, other fiduciary and/or investment management
assets to, the bank proper to cover portfolio losses and/or to guarantee the return of
principal or income;
4.) Granting new loans to any borrower who has a past due and/or classified loan
account with the bank proper or the trust department; and
5.) Requiring the clients to sign documents in blank.

Minimum Documentary Requirements

Each trust or fiduciary account shall be covered by a written document establishing such
account, as follows: 1) In the case of accounts created by an order of the court or other competent
authority, the written order of said court or authority. 2) In the case of accounts created by
corporations, business firms, organizations or institutions, the voluntary written agreement or
indenture entered into by the parties, accompanied by a copy of the board resolution or other
evidence authorizing the establishment of, and designating the signatories to, the trust or other
fiduciary account. 3) In the case of account created by individuals, the voluntary written agreement
or indenture entered into by the parties.

The voluntary written agreement or indenture shall include the following minimum
provisions:

1.) Title or nature of contractual agreement in noticeable print;
2.) Legal capacities, in noticeable print, of parties sought to be covered;
3.) Purposes and objectives;
4.) Funds and/or properties subject of the arrangement
5.) Distribution of funds and/or properties;
6.) Duties and powers of trustee or fiduciary;
7.) Liabilities of the trustee or fiduciary;
8.) Reports to the client
9.) Termination of contractual arrangement and, in appropriate cases, provision for successor-
trustee or fiduciary
10.) The amount or rate of the compensation of trustee or fiduciary
11.) A statement in noticeable print to the effect that these are not covered by the PDIC and that
losses, if any, shall be for the account of the client


85
12.) Disclosure requirements for transactions requiring prior authority and/or specific written
investment directive from the client, court of competent jurisdiction or other competent
authority.

lending and investment disposition. Assets received in trust or in other fiduciary
capacity shall be administered in accordance with the terms of the instrument creating the trust or
other fiduciary relationship.

When a trustee or fiduciary is granted discretionary powers in the investment disposition of
trust or other fiduciary funds and unless otherwise specifically enumerated in the agreement or
indenture and directed in writing by the client, court of competent jurisdiction or other competent
authority, loans and investments of the fund shall be limited to:

1.) Evidences of indebtedness of the Republic of the Philippines and of the BSP, and any other
evidences of indebtedness or obligations the servicing and repayment of which are fully
guaranteed by the Republic of the Philippines or loans against such government
securities;
2.) Loans fully guaranteed by the Republic of the Philippines as to the payment of principal and
interest;
3.) Loans fully secured by a hold-out on, assignment or pledge of deposits maintained either with
the bank proper or other banks, or of deposit substitutes of the bank, or of mortgage
and chattel mortgage bonds issued by the trustee or fiduciary;
4.) Loans fully secured by real estate or chattels.

Transactions Requiring Prior Authority. A trustee or fiduciary shall not undertake any of
the following transactions for the account of the client, unless prior to its execution, such
transaction has been fully disclosed and specifically authorized in writing by the client, beneficiary,
other party-in-interest, court of competent jurisdiction or other competent authority:

1. Lend, sell, transfer or assign money or property to any of the departments, directors, officers,
stockholders or employees of the trustee or relatives within the 1
st
degree of consanguinity or
affinity; or to any corporation where the trustee owns at least fifty percent (50%) of the
subscribed capital or voting stock in its own right and not as trustee nor in a representative
capacity;
2. Purchase or acquire property or debt instruments from any of the departments, directors,
officers, stockholders or employees of the trustee or relatives within the 1
st
degree of
consanguinity or affinity; or to any corporation where the trustee owns at least fifty percent
(50%) of the subscribed capital or voting stock in its own right and not as trustee nor in a
representative capacity;
3. Invest in equities of, or in securities underwritten by, the trustee or fiduciary or a corporation in
which the trustee or fiduciary owns at least (50%) fifty percent of the subscribed capital or voting
stock in its own right and not as trustee nor in a representative capacity; and
4. Sell, transfer, assign, or lend money or property from one trust or fiduciary account to another
trust or fiduciary account except where the investment is in any of those enumerated above.






86

Common Trust Funds ( CTFs)

A bank authorized to engage in trust business may establish, administer and maintain one (1)
or more CTFs. In addition to the trust agreement or indenture required, each CTF shall be
established, administered and maintained in accordance with a written declaration of trust referred
to as the plan, which shall be approved by the board of directors of the trustee and a copy submitted
to the appropriate supervising and examining department of the BSP within thirty (30) banking days
prior to its implementation. The plan shall make provisions on the following matters:

1.) Title of the plan
2.) Manner in which the plan is to be operated
3.) Investment powers of the trustee with respect to the plan, including the character and kind of
investments which may be purchased;
4.) Allocation, apportionment, distribution dates of income, profit and losses;
5.) Terms and conditions governing the admission or withdrawal as well as expansion or
contraction of participation in the plan including the minimum initial placement and
account balance to be maintained by the trustor;
6.) Auditing and settlement of accounts of the trustee with respect to the plan;
7.) Detailed information on the basis, frequency, and method of valuing and accounting of CTF
assets and each participation in the fund;
8.) Basis upon which the plan may be terminated;
9.) Liability clause of the trustee;
10.) Schedule of fees and commissions which shall be uniformly applied to all participants in a fund
and which shall not be changed between valuation dates; and
11.) Such other matters as may be necessary or proper to define clearly the rights of participants
under the plan.
12.) The legal capacity of the bank administering a CTF shall be indicated in the plan and other
related agreements or contracts as trustee of the fund and not in any other capacity
such as fund manager, financial manager, or like terms. The provisions of the plan shall
control all participation in the fund and the rights and benefits of all parties in interest.

The plan may be amended by a resolution of the board of directors of the trustee, provided
that participants are immediately notified & shall be allowed to withdraw their participation if they
are not in conformity with amendments made and that it shall be submitted to the BSP within ten
(10) banking days from approval of the amendments by the board of directors.

Management of CTF. The trustee shall have the exclusive management and control
of each CTF administered by it, and the sole right at any time to sell, convert, reinvest, exchange,
transfer or otherwise change or dispose of the assets comprising the fund.

The trustee shall designate clearly in its records the trust accounts owning participation in
the CTF and the extent of the interests of such account. The trustee shall not negotiate nor assign
the trustors beneficial interest in the CTF without prior written consent of the trustor or beneficiary.
No trust account holding a participation in a CTF shall have or be deemed to have any ownership or
interest in any particular asset or investment in the CTF but shall have only its proportionate
beneficial interest in the fund as a whole.


87

Operating and Accounting Methodology. By its inherent nature, a CTF shall be operated
and accounted for in accordance with the following:

1. The trustee shall have exclusive management and control of each CTF administered by it and the
sole right at any time to sell, convert, reinvest, exchange, transfer or otherwise change or
dispose of the assets comprising the fund;
2. The total assets and accountabilities of each fund shall be accounted for as a single account
referred to as pooled-fund accounting;
3. Contributions to each fund by clients shall always be through participation in the fund;
4. All such participation shall be pooled and invested as one account (referred to as collective
investments );
5. The interest of each participant shall be determined by a formal method of participation
valuation established in the written plan of the CTF, and no participation shall be admitted to, or
withdrawn from, the fund except on the basis of such valuation.



ASSIGNMENT:
1. List down banks that have Trust Department.

































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Chapter 22
INVESTMENT MANAGEMENT

Investment Management Activities. An investment management account shall be covered
by a written document establishing such account, as follows:

1. In the case of accounts created by corporation, business firms, organizations or institutions, the
voluntary written agreement or indenture entered into by the parties, accompanied by a copy of
the board resolution or other evidence authorizing the establishment of and designating the
signatories to, the investment management account.
2. In case of accounts created by individuals, the voluntary written agreement or indenture entered
into by the parties, which shall include:
A. Pre-numbered contractual agreement form
B. Title or nature of contractual agreement in noticeable print
C. Legal capacities of parties sought to be covered ( in noticeable print)
D. Purposed and objectives
E. Initial amount of funds and/or value of securities subject of the arrangement delivered to the
investment manager;
F. Duties and powers of the investment managers;
G. Liabilities of the Investment Manager
H. Report to the clients
I. The amount or rate of the compensation of the investment manager
J. Terms and conditions governing withdrawals from the account
K. Termination of contractual agreement
L. Disclosure requirements for transactions requiring prior authority and/or specific written
investment directives from the client
M. Statement in underlined noticeable print that:
1. The agreement is an agency and not a trust agreement. As such, the client shall at all
times retain legal title to the funds and properties subject of the arrangement;
2. The arrangement does not guarantee a yield, return or income by the investment
manager. As such, past performance of the account is not a guaranty of future
performance and the income of investments can fall as well as rise depending on
prevailing market conditions; and
3. The investment management agreement is not covered by PDIC and that losses, if
any shall be for the account of the client;

No investment management account shall be accepted or maintained for an amount less
than P 1 Million. An investment management account reduced to less than P1 Million due to
investment losses shall be exempt from this requirement.

Two (2) or more individual investment management accounts shall not be commingled
except for the purpose of investing in government securities or in duly registered commercial


89
papers; Provided, that the participation of each of the aforementioned accounts in the commingled
account shall not be less than P 1 Million; and that such commingling has been duly disclosed and
specifically agreed in writing by the clients.

Authority Resulting from Merger or Consolidation. In merger of financial institutions,
the authority to engage in trust and other fiduciary business and in investment management
activities shall continue to be in effect if the surviving institution has such authority and the same
has not been withdrawn by the BSP. It shall secured the prior approval of the Monetary Board if the
surviving has no previous authority but desires to engaged in such activities.

Receivership. Whenever a receiver is appointed by the Monetary Board for a bank which is
authorized to engage in trust and other fiduciary business or in investment management activities,
the receiver shall, pursuant with the instructions of the Monetary Board, proceed to close the
accounts promptly and/or transfer all other accounts to substitute trustees, fiduciaries or investment
managers acceptable to the trustors, beneficiaries, principals or other parties in interest; provided it
is acting under appointment by a court, the receiver shall proceed pursuant to the instructions of
said court.





ASSIGNMENT:

FOR STUDENTS:

1. Choose a commercial bank that has an investment management function.
2. Interview one of its employees in the investment banking on the departmental goals and
objectives.
























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Chapter 23
FOREIGN CURRENCY DEPOSIT SYSTEM AND OTHER OPERATIONS IN FOREIGN
CURRENCY

FCDU/EFCDU Trust Account.

Only a bank with authority to operate a foreign currency deposit unit (FCDU) or an expanded
Foreign Currency Deposit unit (EFCDU) may accept foreign currency-denominated trust accounts.

Banks with trust authority is also authorized to operate an FCDU or EFCDU under R.A. No.
6426, as amended and shall deposit with the BSP additional eligible government securities as faithful
performance of trust duties equivalent to at least (1%) one percent of the value of the FCDU/EFCDU
trust assets based on the average of the month-end balances of such assets during the immediately
preceding quarter as converted in the local currency at the prevailing foreign exchange rate. Such
security shall be deposited within thirty (30) banking days after the end of every calendar quarter. Is
shall also be required to set up at least (10%) ten percent of the book value of the fund for liquidity
purposes, provided that it shall be in any or a combination of the following:

A. Readily marketable foreign currency security with maturity of not more than (3) three years.
B. Foreign currency deposits with foreign banks, provided that liquidity requirements of
EFCDUs may, in addition to the foregoing, also be in the form of foreign currency deposits
with other EFCDU or resident offshore banking units. The base amount of the liquidity
requirement shall be the average of the month-end balances of the CTFs within a given
quarter.

A bank authorized to engage in trust and other fiduciary business, shall before the
declaration of dividends, carry to surplus at least ten percent (10%) of its net profits realized out of its
trust, investment management and other fiduciary business since the last preceding dividend
declaration until the surplus shall amount to twenty percent (20%) of its authorized capital stock and
no part of such surplus shall at any time be paid out in dividends but looses accruing in the course of
its business may be charged against surplus.

Audits. There are two types of audit in the bank.

1) Internal Audit. The banks internal audit shall include among his functions, the conduct of
periodic audits of the trust department or investment management at lest once every (12) months.
The board of directors may also require the internal auditor to adopt a suitable continuous audit
system to supplement and/or to replace the periodic audit. In any case, the audit shall ascertain
whether the institutions trust and other fiduciary business and investment management activities
have been administered in accordance with laws, BSP rules and regulations, and sound trust or
fiduciary principles.

2) External Audit. The audit of the assets and accountabilities of the trust department/investment
management department of a bank authorized to engage in trust activities, shall cover the minimum
review of the trust operations, practices and policies. These include audit and internal control
system, which shall be subject to auditing standards to the extent necessary to express an opinion
on the financial statements.



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The audit shall be covered by a separate supplemental audit report to be submitted to the
banks board of directors and to the BSP within the prescribed period containing, the statements of
conditions of trust funds and managed funds and the related statements of earnings of both funds
presented separately.

Definition of Terms

FOREIGN CURRENCY DEPOSIT UNIT (FCDU) & EXPANDED FOREIGN CURRENCY
DEPOSIT UNIT (FCDU) shall refer to a unit of a local bank or of a local branch of a foreign
bank authorized by the BSP to engage in foreign currency-denominated transactions
pursuant to provisions of R.A. 6426, as amended.
LOCAL BANK shall refer to a Commercial Bank, Expanded Commercial Bank, or Thrift
Banks organized under the laws of the Republic of the Philippines.
LOCAL BRANCH OF A FOREIGN BANK shall refer to a branch of a foreign bank shall
refer to a branch of a foreign bank doing business in the Philippines.
SHORT-TERM LOANS & SECURITIES shall refer to those with maturity of more than
one (1) year but not more than five (5) years.
MEDIUM TERM LOANS & SECURITIES shall refer to those with maturity of more than
one (1) year but not more than five (5) years.
LONG-TERM LOANS AND SECURITIES shall refer to those with maturity of more than
five (5) years.

Qualification Requirements. Commercial banks/expanded commercial banks may be
authorized to operate an FCDU or EFCDU : Provided, that they meet the minimum capital
requirements as prescribed and discussed in the 1st part of these text.

Thrift Banks may also be authorized to operate an FCDU provided that they have a net worth
or combined capital accounts of at least P 50 Million.

Authorized Transactions. Banks with certificate of authority to operate an FCDU are
authorized to engage in the following transactions:

1. Accept deposits and trust accounts from residents and non-residents
2. Deposit, on short-term maturity, with foreign banks abroad, offshore banking units
(OBUs) and other FCDUs/EFCDUs.
3. Invest in foreign currency-denominated debt instruments, which are of short-term
maturity and are readily marketable.
4. Grant short-term foreign currency loans as may be allowed by BSP regulations
5. Borrow, from other FCDUs/EFCDUs and from non-residents and OBUs, subject to
existing rules on foreign borrowings.
6. Engage in foreign exchange-foreign currency swap;
7. Engage in direct purchase of export bills of resident exporters, subject to the following
conditions: (1) Export transactions covered by usance or sight letters of credit shall be
allowed to be purchased by EFCDU and (2) Export bills negotiated/purchased by the


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banks Regular Unit and outstanding in its books shall not be allowed to be purchased
by its EFCDus.
8. Engage in foreign exchange trading and, with prior BSP approval, engage in financial
futures and options trading; and
9. On request/instructions of its foreign correspondent bank:
10. Issue letter of credit for a non-resident importer in favor of a non-resident exporter,
11. Pay, accept or negotiate drafts/bills of exchange drawn under the letter of credit; and
12. Make payment to the order of the non-resident exporter: provided that the foreign
correspondent bank shall deposit sufficient foreign exchange with the EFCDU issuing
the letter of credit to cover all drawings;

Foreign Currency Cover Requirements

Depository banks under the foreign currency deposit and expanded foreign currency deposit
systems shall maintain at all times a 100% cover for their foreign currency liabilities. For purposes of
complying with this requirement, the principal offices in the Philippines of the authorized banks and
all its branches located therein shall be considered as a single unit.

The foreign currency cover shall consist of:

A) For Banks authorized to operate an FCDU:

1. Foreign currency deposits with the BSP
2. Foreign currency deposits of short term maturity with foreign banks abroad,
OBUs and other FCDUs/EFCDUs
3. Short term foreign currency loans authorized by the BSP, except those classified
by the BSP as bad or uncollectible debts
4. Investments in foreign currency-denominated debt instruments, which are of
short term maturities and are readily marketable
5. Foreign currency notes and coins on hand
6. Foreign currency foreign currency swaps
7. Foreign currency interests receivables and
8. Such other assets as may be determined by the Monetary Board as eligible cover.

B) For Banks authorized to operate an EFCDU (Expanded Foreign Currency
Deposit Unit):

In addition to the above, the following shall also be considered as eligible asset cover:

1. BSP authorized foreign currency loans maturing beyond one (1) year, except those
classified by the BSP as bad or uncollectible debts. BSP-authorized foreign currency
loans shall include those with specific approval by the BSP, as well as loans of the private
sector from FCDUs/offshore sources, irrespective of maturity, to be serviced using
foreign exchange purchased from outside of the banking system.


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2. Investments in foreign currency denominated debt instruments, irrespective of
maturity.
3. All outstanding Export Bills Purchased in the EFCDU books, except those classified as bad
or uncollectible accounts.

Foreign currency deposit with the BSP equivalent to at least fifteen percent (15%) as a form of
foreign currency cover shall be optional on FCDUs of Commercial Banks/Expanded Commercial
Banks/Thrift Banks. The BSP may pay interest on the foreign currency deposit and if requested, shall
exchange the foreign currency instruments drawn on its depository banks.

FCDU of Thrift Banks shall maintain the foreign currency cover in the same currency as that
of the corresponding foreign currency deposit liability.

FCDus/ EFCDU of Commercial and Expanded Commercial Banks shall maintain not less than
seventy percent (70%) of the foreign currency cover in the same currency as that of the liability and
thirty percent (30%) or less, at the option of the FCDU/EFCDU, may be dominated in other acceptable
foreign currencies.

Secrecy of Deposits. All foreign currency deposits are absolutely confidential.
Except upon the written permission of the depositor, in no instance shall such foreign currency
deposits be examined, inquired or looked into by any person, government official, bureau or office,
whether judicial, administrative or legislative, or any other entity, whether public or private.

Withdraw ability and Transferability of Deposits. There shall be no restrictions on the
withdrawal by the depositor of his deposit or on the transfer of the same abroad, except those
arising from the contract between the depositor and the bank.

Insurance Coverage. Foreign currency deposits shall be insured under the
provisions of R.A. No. 3591, as amended. Depositors are entitled to receive payment in the same
currency in which the insured deposits are denominated.

Rate of Interest / Eligibility as Collateral / Taxes. FCDU are not subject to interest
ceilings. They are eligible as collateral for peso loans or for foreign currency loans to both domestic
juridical entities and/or resident individuals.

All foreign currency deposits, including interest and all other income or earnings of such
deposits, are exempt from any and all taxes whatsoever, irrespective of whether or not these
deposits are made by residents or non-residents, so long as the deposits are eligible or allowed under
these rules.

Exemption from Court Order or Process. Foreign currency deposits shall be exempt
from attachment, garnishment or any other order or process of any court, legislative body,
government agency or any administrative body whatsoever.

The Usury Law shall not apply to banks in respect to their foreign currency transactions.


Accounting and Supervision. FCDU deposits and cover shall be considered as funds
separate and distinct from the regular assets and liabilities of the authorized banks. It shall maintain


94
a separate accounting for transactions covered that will enable preparation of the Balance Sheet &
Profit and Loss Statement covering said funds.

The Governor, and the head of the appropriate department of the BSP, personally or by
deputies, is authorized to verify the books of account and transactions of each authorized bank, to
verify the eligible cover, as well as review all other requirements.

Other Transactions in Foreign Currency. The operation of mobile foreign currency (FX)
booths and off-site automatic multi-currency money changers (OAMMC) shall be governed by the
BSP.

Without prior authority from the BSP, banks may operate mobile FX booths subject to the
following conditions:

a) The bank shall advise the BSP of the number of booths in operation, date of start of
operation, areas of operation and the branch where the foreign exchange acquisition will be
turned over and booked
b) Its service shall solely for the changing foreign exchange currency into peso notes and coins
and not pesos to other foreign currency
c) It shall not accept deposit or perform other banking functions other than purchase of foreign
currency
d) Its internal control system shall be submitted to the appropriate supervising & examining
department of the BSP, as well as other security measures adopted therein
e) It shall be covered by insurance to protect adequately the bank against losses of whatever
nature arising from its operations.

Without prior authority from the BSP, banks which may have shown general compliance with
banking laws, rules and regulations, may install an OAMMC, subject to the following condition:

a) It shall be installed only in centers of activities like shopping centers, supermarket, hotels and
airports Provided that the site is within the area where the applicant bank has a regular
branch to service the money changers
b) It shall maintain adequate internal control and security measures, which shall include
immediate rejection and detection of fake currencies by the machines.
c) Its transactions shall be booked in specific branches with must be identified at the time of
application for the putting up of an OAMMC
d) Its services shall be solely for changing foreign exchange currency into peso notes and coins
and not pesos to other foreign currencies.









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EXERCISE

Arrange the following banks and arrange it according to whether it has an EFCDU and FCDU
Authority:
1) Banco Filipino 6) Philippine National Bank
2) Bank of Commerce 7) Bank of the Philippine Islands
3) ASPAC Bank 8) Union Bank of the Philippines
4) Security Bank 9) Metro Banking Corporation
5) RCBC 10) China Banking Corporation



EFCDU and FCDU Authority Without EFCDU and FCDU Authority






























96
Chapter 24
Bank Supervision

Effective bank supervision increases public confidence in banks. It thereby reduces the
incentives of depositors to withdraw funds and minimizes the likelihood of bank failures. The
liberalization of financial markets and the advancements in technology have changed banking
services and practices, thus lead to increased risk of failure. Liberalization has reduced the many
barriers to competition in the banking industry thus drive banks to continually develop products and
services that respond to the clients needs and wants and to enhance the best practices of industry
leaders. Nevertheless, the same financial market forces has lead to undesirable results as
competition drives banks into innovating and developing new products with unclear attendant risks,
as observed by Villareal Jr. (2004). A growing concern in conglomerates is that of ownership
structure of financial institutions becoming more inter-related. Financial institutions of these type
offer hybrid products and services that used to be associated with a particular type of financial
institution like mortgages for banking, annuities for insurance and mutual funds for securities. The
risks are compounded by technological advancements that transmit effects of greater risks. These
risks require close supervision to safeguard against institutional failures arising from risks taken by
bank officers and owners. These market failures caused many large financial institutions to fail either
because of mismanagement, fraud, poor business judgment or severe economic stress. Thus
regulation is necessary for the banking industry specifically because of the fiduciary nature of the
business. Depositors entrusted their funds to banks. They do not have the capacity to monitor
banks to ensure safety of their funds. Thus the role of the Bangko Sentral Ng Pilipinas is very crucial
in ensuring performance of banking function.

Framework of Bank Supervision. The BSP supervises Philippine banks with the aim of
promoting and maintaining a stable and efficient banking and financial system that is globally
competitive, dynamic and responsive to the demands of the economy. The BSP is authorized to
supervise and exercise regulatory powers over the operations not only of banks, but also of finance
companies and non-bank financial institutions performing quasi-banking functions. This authority is
extended to subsidiaries and affiliates of banks and quasi-banks, including non-allied enterprises
controlled by banks.

Cognizant of the emergence of products and services of banks that are integrated with that
offered by securities and insurance firms, BSP has been working closely with the Securities and
Exchange Commission and with the Insurance Commission.


The Role of Philippine Deposit Insurance Corporation. As a financial safety net player,
it is the interest of the PDIC to protect depositors from the consequences associated with bank
failures and to sustain public confidence in the banking system by providing a formal mechanism to
resolve bank failures. PDIC monitors the condition of its member banks to be able to assess and
manage the risks posed to the Deposit Insurance Fund (DIF). It relies on the BSPs effectiveness as
supervisor of banks and uses the reports received by the BSP in their monitoring functions. PDIC
uses all these available information on individual bank condition from the BSP and other available
sources to assess the risk posed to the DIF.








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EXERCISE

1.) How much is the PDIC Insurance per accountholder?


2.) What is the role of PDIC in the economy and in the socio-economic development of the
country?


DEBATE:
Resolve whether the role of PDIC have helped in the socio-economic development of the
Philippines.











































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BIBLIOGRAPHY



Circulars to Banks. BANGKO SENTRAL NG PILIPINAS

Manual of Regulations for Banks, BANGKO SENTRAL NG PILIPINAS

Miranda, Gregorio S, 2002. COMMERCIAL BANKING Revised Edition.

PDIC Forum Vol.2 No. 1 June 2004

Encarta Reference Library 2002









































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ABOUT THE AUTHOR

A graduate of DOCTOR OF PHILOSOPHY IN PUBLIC
ADMINISTRATION ( May 2013) from the University of Bohol;
University of San Carlos and University of Cebu Instructor of
Management and Finance ; and Keynote Speaker, facilitator
and trainor of Customer Service Training Program- SERVICE
PLUS of DDI, Ma. Fe Planco-Imbong was born on July 19,
1957 in Cebu City.




She was raised by her parents, Arcadio Cabardo Planco and Epifania Monte De Ramos
Logrono, in the City of Lapu-Lapu, where she is now residing with her husband Franco B. Imbong and
their children. She finished her high school studies from St. Alphonsus Catholic School, Lapu-Lapu
City with academic honors. She studied at the Cebu State College ( now Cebu Normal University ) for
one year taking up Bachelor of Science in Nursing and finished her Bachelor of Science in Commerce
Major in Accounting from St. Theresas College, Cebu City on May, 1978 while enjoying a scholarship
grant from Aboitiz and Company. From 1978 to 1980, she worked at Aboitiz Shipping Corporations
Corporate Planning Department as Senior Budget Analyst. She also worked at Fairchild Philippines in
MEPZ, as Senior Data Process Clerk for a year. From 1981 to 1996, she worked at Citibank N. A.
Makati and Cebu Branch as Money Transfer Clerk, Teller, Cables Clerk, Card Products Authorizer and
Citicare-Authorizer. After her retirement from Citibank, N. A. Cebu, she joined Plantation Bay for a
short stint as General Cashier and trainor for Customer Service. From 1996 to 1998, she worked at
Universal Telecommunication Services Inc ( Mobilcom) as Customer Support Head for the Visayas
and Mindanao. For two years, she managed her own businesses. She also worked at Pilipinas Makro
Incorporated for Makro Store 6-Cebu as Audit and Logistics Manager.
She is currently a graduate school professor of the University of the Visayas, Cebu City
teaching Public Administration. Among her teaching experience were in the University of Cebu and
University of San Carlos, Cebu City. A Customer Service Facilitator and Trainor, she facilitated
customer service trainings for ASPAC Bank, Tambuli Resorts Group of Companies, and Cebu
Chamber of Commerce Inc.

Ma Fe Planco-Imbong