Santos, Arnold Jansen V. Negotiable Instruments Law II A Atty.

Ylagan

Bangko Sentral ng Pilipinas Circular 681 or The Revised Check Clearing and Settlement Processes

I. Overview Monetary Board Resolution No. 1859 dated December 23, 2009 approved the revised check clearing and settlement processes. Pursuant to this resolution, the Bangko Sentral ng Pilipinas released a Circular No. 681 thus amending the relevant provisions of the Manual of Regulations for Banks (MORB) regarding the process of clearing and settling checks in the Philippines. It became effective on January 1, 2011. Bangko Sentral ng Pilipinas Circular No. 681 or The Revised Check Clearing and Settlement Processes effected significant changes in the way we transact through checks and of course, these changes have its advantages and disadvantages to issuers of checks, to the drawee banks and to the collecting banks. This paper shall discuss the effects of the said BSP circular.

II. The Revised Check Clearing and Settlement Process The following is the process of clearing and settling checks: First, a drawer issues a valid crossed check from a drawee bank to a payee. When the payee deposits the check with a bank, hereinafter to be called collecting bank, the check still has to be cleared for payment before its amount is credited to the account of the payee.

It would be best to first look into the check clearing period. If the collecting bank and the drawee bank are one and the same, the check will be cleared for payment upon presentment provided the drawer it is a good check ie drawer has sufficient funds or drawer has not stopped payment therefor. However if in case it is a issued by a different bank, it shall take three banking days to be cleared save for regional checks which take 5-7 banking days.

At the end of the day, the collecting bank shall consolidate all checks deposited with it. The said bank shall deliver these checks to the Philippine Clearing House Corporation (PCHC). Afterwards, the PCHC shall automatically debit the checks amount to the drawee banks demand deposit account (DDA) with Bangko Sentral ng Pilipinas and consequently credit the same amount to collecting banks own demand deposit account.

PCHC then returns the checks delivered to it to its respective issuer banks within 24 hours from receipt thereof. In our example, PCHC shall deliver the check to drawee bank within 24 hours after receiving the check deposited by the payee.

As Bank D will have to collect from the drawer the amount debited from its demand deposit account, Bank D will have to claim payment for the amount it has advanced the amount debited from its DDA or the amount of the check. If the drawer has sufficient funds, the check issued will then be cleared and automatically be credited to payees account after the lapse of the required period. However, if the drawer has insufficient funds, drawer bank shall return the check to PCHC and the latters system shall automatically revert the transfer of funds from drawee banks DDA to collecting banks DDA.

In the latter scenario or if the check is rejected, drawee bank must return the check to the collecting bank the following day (the day after check was presented for deposit) by 7:30 am. By this time, the check shall be considered already be considered bounced.

As regards to the process of check clearing and settlement between banks themselves, an offsetting system is employed. Each bank has its own

Demand Deposit Account (DDA) and Reserve Deposits with the Bangko Sentral ng Pilipinas.

Checks deposited with the banks are debited and/or credited to their Demand Deposit Accounts as the case if may be. If their clients deposit checks, the amounts of the checks are credited to their DDA. In turn, these amounts are transferred to the account of the payees of the checks. On the other hand, if their clients issue checks, the amounts of these checks are debited from their DDA. In turn, the drawee bank shall reimburse itself of the checks amounts from the checking account of their respective drawers.

In case the amount of withdrawals or drawn checks of a particular bank is greater than its deposits and its demand deposit account does not sufficient balance to cover for this discrepancy, the bank incurs overdrafts and which is to be covered by their Overdraft Credit Line or OCL. The Bangko Sentral ng Pilipinas Circular 681 prohibits these temporary overdrawings against demand deposit account unless these overdrawings are caused by normal bank charges and other fees incidental to handling such accounts. Clearly, overdrawings due to insufficiency of check deposits to the banks respective demand deposit accounts are not among the exceptions to the said prohibiton. In case banks violate this regulation shall be subject to a fine of one-tenth of one percent (1/10 of 1%) per day of

violation which shall be computed on the basis of the amount of overdrawing or fines in amounts as may be determined by the Monetary Board, but not to exceed Php 30,000 a day for each violation.

As a side note, banks are mandated by law to be maintain reserve funds with the Bangko Sentral ng Pilipinas to insure that banks have enough liquidity to continue its everyday business.

III. BSP Circular 681 and its Mandate It is important to note that the Bangko Sentral ng Pilipinas Circular No. 681 did not change the check clearing period. As mentioned earlier, it is still three banking days for checks issued by other banks and 5-7 banking days for regional checks. As regards checks issued and drawn against one and the same bank, it is cleared within the same day. However, checks of drawn against and issued by the same bank are not affected by the revisions provided for by BSP Circular 681.

Basically, the revisions provided by the said Bangko Sentral ng Pilipinas circular merely affects the banks and their check clearing and settlement processes. These changes will be discussed hereinafter.

To put things in perspective, it is best to look into what the Bangko Sentral ng Pilipinas Circular No. 681 specifically mandates as to the check clearing and settlement processes. The said circular mandates all banks to return to the Philippine Clearing House Corporation (PCHC) by 7:30 am the next day after its presentation for clearing the following checks: 1. Checks drawn against uncollected deposits Uncollected deposits are those funds that come from other checks which are yet to be cleared by the bank from which the checks are drawn. Put simply, these are checks which though already deposited to drawers account, have not yet been paid for by the drawee bank pending its clearing. 2. Checks with insufficient funds These are checks drawn against an account without enough balance to cover the amount of the same. For this reason, the drawee bank could not pay for the said check as there is not enough funds to credit from the drawers account. 3. Checks with stop payment orders These are checks which the drawer has revoked or cancelled earlier than or on the date that the check was presented by the payee.

Ultimately, the funds as payment for these checks could not disbursed by the drawee bank without its fault.

IV. Objective of BSP Circular 681 Bangko Sentral ng Pilipinas Circular 681, through the amendments and revisions it has effected, forces drawers of checks to make sure that they have sufficient funds in their respective checking accounts to cover the amount of the checks they draw. Otherwise, drawers of checks shall be charged corresponding fines for bounced or returned checks.

In addition, the said circular aims to complement the provisions of Batas Pambansa Bilang 22 (An Act Penalizing the Making or Drawing and Issuance of a Check Without Sufficient Funds or Credit). With the following amendments and revisions in the check clearing and settlement process, violations of the said special law is sought to be curbed and diminished. Being a special law, a violation of BP 22 is a malum prohibitum offense. Thus, intent does not matter in convicting the offender so that a mere infraction would be sufficient to warrant a conviction of BP 22. This will be true even if the drawer was in good faith as when he just honestly forgot about the check he drew. This could easily be unfair to drawers of insufficient funds in good faith. On the other hand, BSP Circular 681, with its more stringent penalty fees, insures or at least forces drawers of checks with

insufficient balances to fund their checking accounts immediately. In effect, it would now be less likely for a drawer in good faith to be convicted of violating BP 22 as if he is really in good faith, then the drawer would have already made good the check he drew within 5 days.

Also, by requiring drawee banks to affix to the bounced or returned check a Return Stamp indicating therein the date when the check is returned and the reason for the refusal to pay the same to the holder thereof, the bounced or returned check itself shall constitute a very strong evidence for conviction of Batas Pambansa Bilang 22.

V. Effects of BSP Circular 681 i. There is no more opportunity for late funding With this revision on the check clearing and settlement processes, the checking account depositors today will no longer have the chance to fund checks with insufficient balance the following day after its presentation. With the effectivity of the BSP Circular 681, there is no more opportunity for late funding.

So that prior to the effectivity of the said circular, a checking account depositor, in case he forgets to fund a check he has drawn, the depositor

could still deposit the necessary amount to cover the amount of the check. By doing so, the check will still be honored on the same day.

However, with the effectivity of this circular, a check drawn against uncollected funds, or a check with insufficient funds is as good as a bounced or returned check. In effect then, these aforementioned checks will be charged a penalty of PHP 2,000 plus an additional PHP 200 for every PHP 40,000 fraction of the check amount per day.

As for checks subject to Stop Payment Order (SPO), they can be honored as long as the check has not been deposited for clearing by the payee yet. Otherwise, they will be considered unfunded already and will be charged the corresponding fees.

ii. Drawings against uncollected deposits prohibited Drawings against uncollected deposits (DAUDs) as mentioned earlier, checks which though already deposited to drawers account, have not yet been paid for by the drawee bank pending its clearing. Prior to the amount being credited to drawers account, the amounts of these checks are considered uncollected. Under BSP Circular 681, the general rule is that these amounts cannot be drawn in order to cover the checks drawn by the said drawer.

However as exception to the general rule, drawings made against uncollected deposits representing managers or cashiers or treasurers checks, treasury warrants, postal money orders and duly funded on us checks which may be permitted at the discretion of each bank may be accounted for in covering the amount of the checks drawn by the drawer.

VI. Advantages and Disadvantages to Parties i. As to drawers of checks As mentioned earlier, it is the objective of the Bangko Sentral ng Pilipinas Circular 681 to ensure that checks drawn are sufficiently funded. The amendments of the said circular is advantageous to drawers of checks as it should encourage them to be diligent enough to make sure that they have sufficient funds before they even issue a check. In effect, people doing business through checks will have more trust in check drawers. Through the use of checks, business transactions are facilitated with more ease. And with the trust of the general public in check drawers and subsequent indorsers as well, businesses will thrive and the countrys economy will develop.

Note that before, there is still time for checking account depositors to fund their checks upon notice by the drawee bank of the lack of funds therein. However with the revised procedure of clearing and settling checks, 10

drawers would now have to be conscious of the checks they issue under pain of more stringent penalty fees. Today, upon presentment of the check, and if in case the drawer does not have sufficient funds to cover for it, the check shall be considered bounced or returned immediately. And fees will have to be paid for by the drawer.

However, the high penalty fee might be a double-edged sword for check drawers. On one end, it does not take into account the good faith of the check drawers even if there is yet to prejudiced the payee. Again as previously mentioned, upon presentment of a check with insufficient balance, it is considered bounced or returned at once. As a malum prohibitum offense, intent does not matter in convicting the offender so that a mere infraction would be sufficient to warrant a conviction of BP 22. This could easily be unfair to drawers of insufficient funds in good faith.

On the other end, the revisions provided by the Bangko Sentral ng Pilipinas Circular 681 at the same time helps check drawers avoid Batas Pambasa 22 charges. Violations of the Batas Pambasa 22 is sought to be curbed and diminished by the provisions of the said circular. The high penalty fees might actually help the drawers of check to be conscious of their drawings. And in case a check they have issued have insufficient funds, then they are in a way forced to immediately cover the amount thereof in

11

order to avoid further penalties. In effect, it would now be less likely for a drawer in good faith to be convicted of violating BP 22 as if he is really in good faith, then the drawer would have already made good the check he drew within 5 days.

Also, the prohibition on drawing against uncollected deposits can be disadvantageous to drawers of checks. It has been established that the Bangko Sentral ng Pilipinas Circular No. 681 is directed to ensure that checks drawn are duly funded. This being the case, it would just be right for the drawer to assume that the checks he has deposited in his own account awaiting clearance will actually be cleared as it is sufficiently funded as well. With this in mind, drawings against uncollected deposits, for as long as they are collected prior to the clearing of checks drawn (in whole or in part) against it, should be allowed. In this way, drawers can avoid penalty for having insufficient funds as uncollected deposits yet to be cleared can be used in accounting for the checks issued by the said drawers.

ii. As to payees The amendments and revisions brought about by the Bangko Sentral ng Pilipinas Circular No. 681 is ultimately aimed to ensure that checks drawn or subsequently indorsed to them are sufficiently funded. It can be said that this particular circular is directed to address the qualms of the payees of not

12

being able to encash the checks drawn to them. The said circular tries to achieve this objective by forcing drawers of checks to make sure that they have sufficient funds in their respective checking accounts to cover the amount of the checks they draw. Otherwise, drawers of checks shall be charged corresponding fines for bounced or returned checks.

However, the prohibition of drawing against uncollected deposits could be disadvantageous not only to drawers as discussed above but also to payees. If it has been held that the Bangko Sentral ng Pilipinas Circular No. 681 is directed to make sure that all checks are backed with sufficient balances, then a drawer has the right to assume that the checks he has deposited in his own account awaiting clearance will actually be cleared as it is sufficiently funded as well. In this way, checks can already be cleared notwithstanding insufficiency of funds provided that the amount of uncollected deposits will be enough to cover the deficiency. This will enable to the payee to encash his check at the soonest possible time. Having this in mind, drawings against uncollected deposits, for as long as they are collected prior to the clearing of checks drawn (in whole or in part) against it, should be allowed.

iii. As to banks By the provisions of the Bangko Sentral ng Pilipinas Circular No. 681,

13

drawers are specifically prohibited to draw against uncollected deposits. From the discussions earlier, it is clear that this prohibition is for the benefit and advantage of the banks. This is so because the banks are in no way bound to advance payments for their checking account depositors who draw against their uncollected deposits. This secures reserve funds of the banks and allows them to invest their free funds in profitable ventures rather than use their money to advance for payments for drawings against uncollected deposits. However, the Bangko Sentral ng Pilipinas Circular 681 also imposes certain responsibilities on banks. For one, banks are mandated by the said BSP circular to return unfunded checks not later that 730 am of the day after the said is deposited. Also, banks are required to affix to a bounced or returned check a Return Stamp indicating the date when the check is returned and the reason for the refusal to pay the same to the holder thereof .

As previously discussed, the Bangko Sentral ng Pilipinas Circular 681 prohibits these temporary overdrawings against demand deposit account unless these overdrawings are caused by normal bank charges and other fees incidental to handling such accounts. In case banks violate this regulation shall be subject to a fine of one-tenth of one percent (1/10 of 1%) per day of violation which shall be computed on the basis of the amount 14

of overdrawing or fines in amounts as may be determined by the Monetary Board, but not to exceed Php 30,000 a day for each violation. This particular prohibition is consistent with the mandate for the banks to maintain reserve funds with the Bangko Sentral ng Pilipinas.

VII. Conclusion With the foregoing, the Bangko Sentral ng Pilipinas Circular No. 681 is directed in order to ensure that checks drawn are really funded. The main benefit that the general public can derive from this particular BSP circular is the facility for business transactions that it provides. A general trust in drawers and subsequent indorsers of checks will help spur economic progress not only for the benefit of the banking institutions and their clients but also for the good of every Filipino.

15