The Bank’s Functional

Departments
Midterm
The Bank’s Functional Departments
• Receiving Operations
• Paying Operations
• Collection Operations
• Bank Accounting Operations
• Bank Audit Operations
• Lending Operations
• Foreign Operations
• Trust Operations
• Other Financial Operations
 Deposit Function of Banks
• Demand Deposits
– All those liabilities of the Bangko Sentral and of
other banks which are denominated in Philippine
currency and are subject to payment in legal
tender upon demand by the presentation of
(depositor’s) checks.
– Banks may accept or create demand deposits
subject to withdrawal by check.
• Demand Deposits
– A Universal Bank and Commercial Bank may
accept or create demand deposits to withdrawal
by check without prior authority from the BSP.
– A Thrift Bank/Rural Bank/Cooperative Bank may
accept or create demand deposits upon prior
authority of the BSP.
 In the ordinary and usual course of banking
operations, current account deposits are accepted by the
bank on the basis of deposit slips prepared and signed by
the depositor, or the latter’s agent or representative, who
indicates therein the current account number to which the
deposit is to be credited, the name of the depositor or
current account holder, the date of the deposit, and the
amount of the deposit either in cash or checks. The
deposit slip has an upper portion or stub, which is
detached and given to the depositor or his agent; the
lower portion is retained by the bank. In some instances,
however, the deposit slips are prepared in duplicate by
the depositor. The original of the deposit slip is retained
by the bank, while the duplicate copy is returned or given
to the depositor.
1. Temporary Overdrawings; Drawings Against
Uncollected Deposits
– Temporary overdrawings against current account
shall not be allowed, unless caused by normal
bank charges and other fees incidental to handling
such accounts.
– Technical overdrawings 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
“Other Assets” in the Statement of Condition.
1. Temporary Overdrawings; Drawings Against
Uncollected Deposits
– Drawings against uncollected deposits shall be
prohibited except when the drawings are made
against uncollected deposits representing
manager’s/cashier’s/ treasurer’s checks, treasury
warrants, postal money orders and duly funded
“on us” checks which may be permitted at the
discretion of each bank.
2. Current Accounts of Bank Officers and
Employees
 Prohibited from maintaining demand deposits or
current accounts with the banking office in which
they are assigned:
a. All officers
b. Employees of the bank’s cash department/cash units
c. Other employees who have direct and immediate
responsibility in the handling of transactions and/or
records per training to demand deposits or current
accounts.
3. Checks
 A check is a bill of exchange drawn on a bank
payable on demand.
 A check is a written order addressed to a bank or
persons carrying on the business of banking, by a
party having money in their hands, requesting
them to pay on presentment, to a person named
therein or to bearer or order, a named sum of
money.
4. Duty of Banks to Honor Checks
i. Where the bank possesses funds of a depositor, it is
bound to honor his checks to the extent of the
amount of his deposits. The failure of a bank to pay
the check of a merchant or a trader, when the
deposit is insufficient, entitles the drawer to
substantial damages without any proof of actual
damages.
ii. A bank performs its full duty where, upon the
receipt of a check drawn against an account in
which there are insufficient funds to pay it in full, it
endeavors to induce the drawer to make good his
account so that the check can be paid, and failing in
this, it protests the check on the following morning
and notifies its correspondent bank by the
telegraph of the protest.
4. Duty of Banks to Honor Checks
iii. Banks must ensure that the amount of the
checks should be paid only to its designated
payee.
5. Responsibilities of Drawer
 a drawer must remember his responsibilities every
time issues a check.
 A check, is supposed to be drawn against previous
deposit of funds for it is ordinarily intended for
immediate payment.
6. Duty of Banks to Know Signatures
 a bank is bound to know the signatures of its
customers; and if it pays a forged check, it must be
considered as making the payment out of its own
funds, and cannot ordinarily charge the amount so
paid to the account of the depositor whose name was
forged.
7. No obligation to Make Partial Payment
 a bank is under no obligation to make part payment
on a check, up to only the amount of the drawer’s
funds, where the check is drawn for an amount larger
than what the drawer has on deposit.
8. No duty to Make Up the Deficiency form
Other Accounts
 Where a depositor has two accounts with a bank, an open
account and a savings account, and draws a check upon
the open account for more money than the account
contains, the bank may rightfully refuse to pay the check,
and is under no duty to make up the deficiency from the
savings account.
9. Legal Character of Checks Representing
Demand Deposits
 Checks representing demand deposits do not have
legal tender power and their acceptance in the
payment of debts, both public and private, is at
the option of the creditor.
10. Cross-Check
a. The check may not be encashed but only
deposited in the bank
b. The check may be negotiated only once – to one
who has an account with a bank
c. That the act of crossing the check serves as a
warning to the holder that the check has been
issued for a definite purpose so that such holder
must inquire if the check has been received
pursuant to that purpose.
11. Cashier’s Check
 A cashier’s check is really the bank’s own check and may
be treated as a promissory note with the bank as the
maker. The check becomes the primary obligation of the
bank which issues it and constitutes a written promise to
pay upon demand.
12. Set-Off
 a bank may debit the personal account of a
deposit for an amount erroneously credited to the
depositor’s sole proprietorship account because
the latter being a sole proprietorship has no
separate and distinct personality from the
depositor.
12. Set-Off
 Crossing of the check with the phrase “Payee’s Account
Only,” is a warning that the check should be deposited
only in the account of the payee.
13. Relationship of Payee or Holder and the
Bank
 it is a well- settled rule that the relationship
between the payee or holder of commercial paper
and the bank to which it is sent for collection is, in
the absence of an agreement to the contrary, that
principal and agent. A bank which receives such
paper for collection is the agent of the payee or
holder.
14. Encashment of Checks
 Banking business requires that the one who first
cashes and negotiates the check must take some
precautions to learn whether or not it is genuine.
 A bank which cashes a check drawn upon another
bank, without requiring proof as to the identify of
persons presenting it, or making inquiries with
regard to them, cannot hold the proceeds against
the drawee when the proceeds of the checks were
afterwards diverted to the hands of a third party.
 Check Image Clearing System (CICS)
• The PCHC adoption of check truncation is called the Check
Image Clearing System or CICS. CICS does not include the
original paper check from the collection or return process.
With no end in sight for the use of the paper check as a
payment instrument, banking institutions that are
constantly seeking better, speedier, and more cost-effective
processes for the delivery of their services to their
customers cannot disregard the benefits that check
truncation provides.
• In lieu of the actual paper checks, their digital images are
transmitted electronically to either the drawee bank for
collection of its amount or to the depository/presenting
bank in case of dishonor of the check. This will eliminate
the need to physically transport paper checks, making
processing of check payments faster and more efficient.
They will be using CICS in view of the following
reasons:
– Paper check processing and clearing costs are
increasing, while electronic and image processing
costs are decreasing;
– The benefits of a reduction in float (items that are in
processing) are optimized by an image exchange;
– Today’s check transportation alternatives carry
increasing cost and risk;
– Value drivers in financial institutions are focusing not
only on new product opportunities, but also on
process improvements and enhanced customer
satisfaction.
http://www.securitybank.com/blog/bsp-check-
image-clearing-system-2017/
• Checks with old design (i.e. without waiver
statement) will be accepted for clearing until
June 30, 2017 only.
• Make sure the check you issue is sufficiently
funded.
• Use pens with dark-colored ink (blue or black)
to write
 Savings Deposit
1. Servicing deposits outside bank premises
2. Individual and Joint Accounts
• A joint account may be an “and” account or an
“and/or” account.
• In an “and” account, the signature of both co-
depositors are required for withdrawals.
• In case of an “and/or” either one of the co-
depositors may be deposit and withdraw from
the account without the knowledge, consent and
signature of the other.
3. Withdrawals
 Banks are prohibited from issuing/ accepting
withdrawal slips or any other similar instruments
designed to effect withdrawals of saving deposits
without requiring the depositors concerned to
present their passbooks and accomplishing the
necessary withdrawal slips, except for banks
authorized by the BSP to adopt the no passbook
withdrawal system.
 There is no law mandating banks to call up their
clients whenever their representatives withdraw
significant amounts from their accounts.
 Negotiable Order of Withdrawal
(NOW Accounts)
1. Authority to accept NOW accounts
 NOW accounts are interest-bearing deposit
accounts that combine the payable on demand
feature of checks and investment feature of
savings account.
 A Universal Bank/Commercial Bank may offer
NOW accounts without prior authority of the
Monetary Board.
2. Rules on Servicing NOW Accounts
a. The bank should inform the depositor of its terms and
conditions
b. The bank shall be responsible for the proper
identification of its depositors; it shall require 2 specimen
signatures and such other pertinent information.
c. Deposits shall be covered by deposit slips in duplicate
duly validated and initiated by the teller receiving the
deposit.
d. NOW accounts shall be kept and maintained separately
from the regular savings deposits.
e. Blank NOW forms shall be prenumbered and shall be
controlled as in the case of unissued blank checks.
f. A bank statement shall be sent to each depositor at the
end of each month for confirmation of balances
g. Banks must use the form prescribed by present rules for
NOW Accounts
 Time Deposits
• One of the payment of which cannot legally be
required within such a specified number of days.
1. Term of Time Deposits
 Issued for a specific period of term.
2. Special Time Deposits
 Authority shall be automatically granted to any accredited
banking institution which may participate in the
supervised credit program to accept special time deposits
from the Agrarian Reform Fund Commission with interest
lower than the rate allowed on time deposits accepted
from the general public.
3. Certificates of Time Deposits (CTD)
a. Negotiable Certificates of Time Deposit
i. Universal banks/commercial banks may issue NCTDs
without approval of the BSP.
ii. Thrift Banks/Rural Banks/ Cooperative Banks may
issue NCTDs upon the prior approval of the BSP
b. Non-Negotiable Certificates of Time Deposit
 Banks may issue long-term non-negotiable tax-exempt
certificates of time deposit without approval of the BSP.
 http://www.bsp.gov.ph/regulations/regulations.asp?ty
pe=1&id=1081
• LTNCDs vs. Time Deposits
– LTNCDs are similar to time deposit accounts in the
sense that they have both known maturities and fixed
interest rates. As opposed to a regular time deposit,
however, an LTNCD has a longer maturity. While usual
time deposits mature in 3, 6, or 12 months, the usual
maturity date for an LTNCD is a little more than five
(5) years. As such, it is exempted from paying the 20%
withholding tax charged on savings or time deposit
accounts.
– Unlike time deposits, LTNCDs cannot be
preterminated. Investors need to wait until the
maturity date before they can get their principal back.
Alternatively, they can sell their LTNCDs to other
willing buyers since LTNCDs are negotiable.
 Deposit Substitute Operations
(Quasi-Banking Functions)
Essential Elements of quasi-banking are:
a. Borrowing funds for the borrower’s own
account;
b. Twenty (20) or more lenders at any one time;
c. Methods of borrowing are issuance,
endorsement, or acceptance of debt
instruments of any kind, other than deposits
d. The purpose of which is (1) relending, or (2)
purchasing receivables or other obligations
 Foreign Currency Deposits
1. Authority to Deposit Foreign Currencies
– Any person, natural or juridical, may deposit with
such Philippine banks in good standing, as may,
upon application, be designated by the Central
Bank for the purpose, foreign currencies which
are acceptable as part of the international
reserve.
2. Authority of Banks to accept Foreign
Currency Deposits
3. Foreign Currency Cover Requirements
 Administration of Deposits
• Specimen Signatures, 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 bank.
• Minors and Corporations as Depositors
a. Minors
– minors are vested with special capacity and power, in
their own right and in their own names, to make
savings or time deposits with and withdraw the same
as well as receive interests thereon from banking
institutions, without the assistance of their partners
or guardians, provided the following requisites are
met:
1. at least seven years of age
2. Able to read and write
3. Have sufficient discretion
4. Not otherwise disqualified by any other incapacity
b. Corporations
– Corporations may open bank accounts as follows:
i. Incorporation stage – in case the payment of
subscription is in cash, the SEC requires a Bank
Certificate of deposit of paid-up capital notarized
in place where signed.
ii. Post Incorporation – in opening a bank account,
the Board of Directors issues a resolution
authorizing the signatories and specifying the
depositary bank.
• Time of Payment of Interest on Time
Deposits/Deposit Substitutes
– Interest or yield on time deposit / deposit
substitute may be paid at maturity or upon
withdrawal or in advance: Provided, however, That
interest or yield paid in advance shall not exceed
the interest for one (1) year.
Interest rates – the cost of borrowing money or the
amount paid for lending money expressed as a
percentage of the principal
Interest rate differential – the difference or margin
between interest rates such as the difference
between domestic and foreign interest rates.
• Treatment of Matured Time Deposits/ Deposit
Substitutes
– A time deposit not withdrawn or renewed 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.
• Clearing Cut-off Time
– As a general rule, all deposits and withdrawals during
regular banking hours shall be credited or debited to
deposit liability account on the date of receipt or
payment thereof: Provided, however, That 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 (3-1/2)
hours before the start of clearing for all its branches,
agencies and extension offices doing business in the
Philippines, after which time, deposits received shall be
booked as hereinafter provided: Provided, further, That
banks which are located in areas where there are no
BSP regional/clearing arrangements may set a clearing
cut-off time not earlier than two (2) hours before the
start of their local clearing after which time, deposits
received shall be booked likewise as hereinafter
provided.
• Average Daily Balance
– Banks may impose and collect service charges and/or
maintenance fees on savings and demand deposit
accounts, whether active or dormant, that fall below
the required minimum monthly average daily balance
(ADB) subject to the ff. conditions:
a. The imposition of such charges or fees is clearly
stated among the terms and conditions of the
deposit;
b. The rate or amount of such charges or fees is
properly disclosed among the terms and conditions
of the deposit;
c. The deposit account balances have fallen below the
required minimum monthly ADB for dormant
accounts and for at least two (2) consecutive
months for active accounts.
d. The required minimum monthly ADB of
deposits are properly disclosed among the
terms and conditions of the deposit; and
e. In the case of charges and fees for dormant
accounts or dormancy fee, the period of
dormancy shall be properly disclosed among
the terms and conditions of the deposit, and
that the depositors shall be informed by
registered mail with return card on his last
known address at least sixty (60) days prior
to the imposition of dormancy fee.
Survivorship Agreement
• There is survivorship agreement when joint (and
several) owners of a deposit agree that either of the
could withdraw any part or the whole of said account
during the lifetime of both, and the balance, if any,
upon the death of either, belonged to the survivor.
• It is an aleatory contract supported by a lawful
consideration
– The mutual agreement of the joint depositors permitting
either of them to withdraw the whole deposit during their
lifetime, and transferring the balance to the survivor upon
the death of tone of them.
Duties of Banks
A. Meticulous Care
B. Payment to Proper Party
C. In Case of Death of Depositor
– If a bank has knowledge of the death of a person,
who maintained a bank deposit account alone, or
jointly with another, it shall not allow any
withdrawal from the said deposit account, unless
the Commissioner has certified that the taxes
imposed thereon by this Title have been paid.
 Credit
• Any loan, mortgage, deed of trust, advance, or discount
• Any conditional sales contract;
• Any contract to sell, or sale or contract of sale of property or
services, either for present or future delivery, under which
part or all of the price is payable subsequent to the making of
such sale or contract;
• Any rental-purchase contract;
• Any contract or arrangement for the hire, bailment, or leasing
of property;
• Any option, demand, lien, pledge, or other claim against, or
for the delivery of, property or money
• Any purchase, or other acquisition of, or any credit upon the
security of, any obligation of claim arising out of any of the
foregoing; and
• Any transaction or series of transactions having a similar
purpose or effect
• Finance Charge
– Interest, fees, service charges, discounts, and such
other charges incident to the extension of credit
as the Board may by regulation prescribe.
• Creditor
– Any person engaged in the business of extending
credit (including any person who as a regular
business practice make loans or sells or rents
property or service on a time, credit, or
installment basis, either as principal or as agent)
who requires as an incident to the extension of
credit, the payment of a finance charge.
 Lending Operations
• Amount and Purpose of Loans
– A bank shall grant loans and other credit accommodations
only in amounts and for the periods of time essential for
the effective completion of the operations to be financed.
– The purpose of all loans and other credit accommodations
shall be stated in the application and in the contract
between and the borrower.
– If the bank finds that the proceeds of the loan or other
credit accommodations have been employed, without its
approval, for the purposes other than those agreed upon
with the bank, it shall have the right to terminate the loan
or other credit accommodation and demand immediate
repayment of the obligation.
• Requirements for Grant of Loans or Other
Credit Accommodations
a. A statement of their assets and liabilities
b. A statement of their income and expenditures
c. Such information as may be prescribed by law or
by rules and regulations of Monetary Board to
enable the bank to properly evaluate the credit
application.
• The debtor shall lose every right to make use of the
period:
1. When after the obligation has been contracted, he
becomes insolvent, unless he gives a guaranty or security
for the debts;
2. When he does not furnish to the creditor the guaranties
or securities which he has promised
3. When by his own acts he has impaired said guaranties or
securities after their establishment, and when through a
fortuitous event disappear, unless he immediately gives
new ones equally satisfactory;
4. When the debtor violates any undertaking, in
consideration of which the creditor agreed to the period.
5. When the debtor attempts to abscond.
• Reasons for Stringent Rules in Granting Loans
– The bank invests the money that it holds in trust
of its depositors.
– In approving the loan of an applicant, the bank
concerns itself with proper information regarding
its debtors.
– Under GBL of 2000, banks shall grant loans and
other credit accommodations only in amounts and
for periods of time essential to the effective
completion of operations to be financed,
“consistent with safe and sound banking
practices.”
• Amortization on Loans and Other Credit Accommodations
i. The amortization schedule of bank loans and other credit
accommodations shall be adapted to the nature of the
operations to be financed.
ii. In case loans and other credit accommodations with
maturities of more than five years, provisions must be made
for periodic amortization payments, but such payments must
be made at least annually.
iii. When the borrowed funds are to be used for purposes which
do not initially produce revenues adequate for regular
amortizations payments therefrom, the bank may permit the
initial amortization payment to be deferred until such time as
said revenues are sufficient for such purpose, but not later
than 5 years.
iv. In case of loans and other credit accommodations to
microfinance sectors, the schedule of loan amortization shall
take into consideration the projected cash flow of the
borrower and adopt this into the terms and conditions
formulated by banks.
 Microfinancing Loans
• Small loans granted to the basic sectors, as
defined in the Social Reform Poverty Alleviation
Act of 1997 (RA 8425), and other loans granted to
the poor and low-income households for their
microenterprises and small businesses so as to
enable them to raise their income levels and
improve their living standards.
• Granted on the basis’ of the borrower’s cash flow
and are typically unsecured.
• The Usury Law provides:
“Sec. 7-a. 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 law or by
the Monetary Board: Provided, that 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 by law or by the Monetary Board:
Provided further, that 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.
• Banks Cannot Extend Peso Loans to Non-
Residents
– To curb undue speculation in the foreign exchange
market and to further reinforce the memorandum
that peso deposits should be funded from inward
foreign exchange remittance, the Monetary Board
decided to prohibit banks from extending peso
loans to non-residents.