GROUP 4 MEMBERS: NAME OF INSTRUCTOR:

Escobillas, Riza Jane F. Zinnia Ibieza

Opialda, Dory T.
Ganea, Charmie T.
Jordan, Lalaine Joy M.

CHAPTER 6 & 7: BANK REPORTS & COMMERCIAL BANK

BANK REPORTS
-Include information on enterprises that are majority-owned or controlled by the bank
so that the public will know the true financial condition of a bank at any given time. These
reports are prepared for manifold purposes. A condensed financial statement of a bank,
together with that of its subsidiaries and affiliates, is usually published quarterly in
newspapers of wide circulation. Likewise, this must also be made available to customers
and stockholders in varied forms. For a more minute scrutiny of the bank's management, a
detailed statement of condition is likewise prepared. Such report will be used to direct the
course of action in order to improve the bank's business and its attendant functions and
services.
WHO NEEDS BANK REPORTS?
-The bank reports serve multiple purposes. These are rendered to meet with the
requirements of the supervisory and regulatory agencies. Bank directors and officers also
need statements as a basis for wise and judicious action. The stockholders who invest
money in the bank for safekeeping are likewise eager to find their bank in shipshape
condition. The lending capacity of banks as well as its loan policies may be reflected in the
statement and, therefore, borrowers will be on the lookout for such reports. Potential
investors seeking outlets for their excess funds may be enticed to augment the bank's
capital if convinced of the financial strength of the bank. Of course, the general public,
too, should be made aware of banking functions through the bank reports. For it could be
a source of potential depositors, borrowers, and stockholders.

Pertinent provisions of Chapter IV of the New General Banking Act are:

Sec. 58. Independent Auditor
-The Monetary Board may require a bank, quasi-bank, or trust entity to engage the
services of an independent auditor to be chosen by the bank, quasi-bank, or trust entity
concerned from a list of certified public accountants acceptable to the Monetary Board.
The term of the engagement shall be as prescribed by the Monetary Board which may
either be on a continuing basis of where the auditor shall act as resident examiner, or on
the basis of special engagements; but in any case, the independent auditor shall be
responsible to the bank's, quasi-banks, o trust entity's board of directors.
Sec. 59 Authority to Regulate Electronic Transactions
-The Bangko Sentral shall have full authority to regulate the use of electronic devices,
such as computers, and processes of recording, storing and transmitting information or
data in connection with the operations of a bank, quasi-bank, or trust entity, including the
delivery of service and products to customers of such entity.
Sec. 60 Financial Statements
-Every bank, quasi-bank, or trust entity shall submit to the appropriate supervising and
examining department of the Bangko Sentral financial statements in such form and
frequency as may be prescribed by the Bangko Sentral, Such statements, which shall be as
of a specific date designated by the Bangko Sentral, shall show the actual financial
condition of the institution submitting the statement, and of its branches, offices,
subsidiaries and affiliates, including the results of its operations, and shall contain such
information as may be required in Bangko Sentral regulations.
Sec. 61 Publication of Financial Statement
-Every bank, quasi-bank, or trust entity shall publish a statement of its financial
condition, including those of its subsidiaries and affiliates, in such terms understandable to
the layman and in such frequency a may be prescribed by the Bangko Sentral, in English
or Filipino, at least once every quarter in a newspaper of general circulation in the city or
province where the principal office, in the case of a domestic institution, or the principal
branch or office in the case of a foreign bank, is located, but if no newspaper is published
in the same province, then in a newspaper published in Metro Manila or in the nearest city
or province.
Sec. 62 Publication of Capital Stock
-A bank, quasi-bank, or trust entity incorporated under the laws of the Philippines shall
not publish the amount of its authorized or subscribed capital stock without indicating at
the same time with equal prominence, the amount of its capital actually paid up. No
branch of any foreign bank doing business in the Philippines shall in any way announce the
amount of the capital and surplus of its head office, or of the bank in its entirety without
indicating at the same time and with equal prominence the amount of the capital, if any,
definitely assigned to such branch. In case no capital has been definitely assigned to such
branch, such fact shall be stated in, and shall form part of the publication.
TYPES OF BANK REPORTS
The bank reports are generally financial in nature and are composed largely of the
statement of condition and the income statement. But where publication of its balance
sheets is a must, a bank is not required to publish its income statement.
Different types of reports:
1. Condensed bank statement
-The accounts in such a statement would appear in condensed or abbreviated
form. This is usually issued for publication or sent to depositors and stockholders as
a means of serving them an opportunity to investigate their particular bank's
financial position. The frequency of publication will be dependent on the
requirement of the supervisory and regulatory agencies. Stockholders are furnished
reports annually, either in writing or orally.
2. Real bank statement
-This statement is usually in more detailed form and is prepared for the
regulatory and supervisory agencies. It is also the basis for the preparation of other
reports. Furthermore, bank management is properly guided and will, therefore, act
accordingly when it knows the details resulting from the bank's operations.
3. Annual Reports
-Some banks also render a "progress report" which contains the resumé of its
yearly operations. This is usually in brochure form. Such report is made available to
the general public as a means of advertising. While there is no uniform or
standardized system of reporting, such reports do contain the "fool points" in the
bank's progress. The addition of a new building, the setting up of branches, and
the like may be stressed in the brochure through "write-ups pictorial reporting. An
income statement, as well as the reconciliation of the bank's capital position may
also be featured.
The Bank Statement
Of major interest among the numerous reports, however, is the bank statement, which
serves to underscore the bank's position at certain periods of time. While there is no hard
and fast rule as to the uniformity and pattern of reporting, nevertheless, most of the bank
statements include the assets and liabilities.
Bank Assets or Resources are:
1. Cash on Hand
-This account represents notes and coins held by the bank to me
depositor's withdrawals and other normal cash needs. Such cash may be in the
bank vaults and/or in the hands of the tellers.
2. Other Cash Resources
-These accounts comprise of
(a) Exchanges for the Clearing House,
-This consists of checks deposited at or cashed by the bank preparing the
statement during the course of the day and which are drawn on banks within the
city that are members of the clearing house.
(b) Collections in Transit
-This account consists of "out-of-town" checks or draft drawn on banks
outside the city. The bank receiving them for deposits and or collection usually
credits the account of the depositor or customer pending receipt of the proceeds.
In either case, the entry in the bank's books are on a deferred basis, subject to
final payment or receipt of the proceeds.
(c) other cash items
-This account may include other miscellaneous items such as bond coupons
for which the depositors have been credited pending collection of the coupon.
3. Due from Banks
-This represents deposits carried with other banks. They are usually in the form
of demand deposits. Occasionally, however, the bank depositing them may keep
them in reserve as time deposits in order to earn interest.
4. Balances with Foreign Banks
-This consists of deposits or funds held abroad mainly to fill foreign exchange
needs.
5. Loans and Discounts
-This account is a major item on the bank's asset side. It consists of all
promissory notes and bills of exchange held by the bank evidencing the existence
of a debt or securing a debt.
6. Government Securities
-This is another major item which will serve to buffer any probable loss of the
depositor. It consists of the evidence of indebtedness fully guaranteed by the
Republic of the Philippines in the form of bonds and other instruments of similar
nature.
7. Other Securities
-This will represent the stocks and bonds, or short-term investments not fully
guaranteed by the Philippine government. The securities may belong to private
corporations.
8. Bank Building, Furniture, and Fixture
-This item represents the monetary value of the properties owned by the bank
to carry on its functions.
9. Other Real Estate Owned
-This account arises out of the fact that banks foreclose real estate mortgages
and carry the monetary value of the asset in their books until the real estate is
disposed of. This transaction happens when banks are to accept real estate as
security for loans which turn out to be unpaid.
10. Customers' Liability under Letters of Credit
 -The use of letters of credit in financing foreign and domestic trade has become
quite popular these days. Bank statements carry in their books an account
representing the customers' obligation to reimburse the bank by virtue of the
banks' commitment to substitute its cred for the borrowers by honouring drafts
drawn against it.
11. Customers' Liability Under Acceptances
-This is similar to the customers' liability under letters of credit except that the
bank's obligation in this regard is of greater magnitude.
12. Income accrued but not yet collected
-When a bank grants loans with interest collected at maturity, the bank in effect
has future earnings which as yet have to been collected. The interest runs during
the entire period. In the case of bond interest payments accrue but may not as yet
be collectible.
13. Other Assets
-This item serves to "round-up" any or all other assets not otherwise described in
detail.
Bank Liabilities
Three Main Classifications
A. Liabilities
The bank's liabilities comprise the following:
1. Demand Deposits
-This account represents claims of depositors who withdraw their deposits by
means of checks. The bank must stand ready to pay these deposits at any time
within regular banking hours.
2. Time Deposits
-This represents the claims of depositors who keep their money in the bank for
a specified period of time and for which the bank mu likewise be ready to pay at
maturity. Withdrawals may require written notice if they are made prior to the date
of maturity.
3. Government Deposits
-This represents deposits, either time or demand, which belongs to the
government or its instrumentalities and political subdivisions
4. Cashier's Check Outstanding
-The bank's cashier, in his official capacity as such issues checks to either pay the
bank's obligations, to accommodate customers or to remit funds.
5. Certified Checks Outstanding
-When the depositor requests the bank to certify his check, the bank immediately
sets aside the amount of check by debiting the depositor's account before stamping
certification on the face of the check. It, therefore, makes the instrument more
acceptable. The bank cannot later on refuse payment on the ground of forgery,
insufficiency of funds, or stop-payment order".
6. Due to Banks
-This account represents deposits or balances of other banks with the bank
preparing the statement. Collection items paid for but not yet remitted by the bank
requesting collection may likewise be included in this item.
7. Letters of Credit Outstanding
-This account arises out of the issuance of letters of credit for which the bank
obligates itself to pay or guarantee payment. The bank has a right of recourse
against the customer whose credit it substitutes.
8. Acceptance Outstanding
-This is similar to the account letters of credit outstanding except that it makes the
bank's obligation more real than contingent. The bank will then honor the drafts
 presented to it and will also have the right of recourse against the customer. The
acceptance makes the instrument easily negotiable and more acceptable for
discounting.
9. Bills Payable
-This represents the claims of creditors of the bank for funds borrowed by it.
10. Rediscounted Notes
-This account arises out of the use of endorsed commercial papers for the
purpose of procuring funds. The commercial papers serve as the security and the
bank's endorsement thereon establishes its obligation in case the primary debtors
fail to pay. Commercial banks discount their notes with Bangko Sentral when they
run out of loanable funds or for some other need.
11. Discounts Collected but not yet Earned
-When the bank gives out a loan and collects interest in advance, the amount
deducted is not as yet really earned in full.
12. Other liabilities
-This account serves as the counterpart of the "other assets" and includes all
other liabilities not otherwise designated in detail. Officers' unpaid checks may be
one of such accounts.
B. Reserves
The accounting reserves in a bank statement are:
1. Reserve for accrued taxes
-A bank, as in the case of any corporation, is levied numerous taxes. While such
are paid at different tax periods, the total and exact amounts cannot be known
ahead of time. It may set aside the amounts monthly.
2. Reserve for accrued interest
-This represents the interest accruals on time deposits as well as interest
payments on money borrowed by the bank. Interest on deposits is usually
computed on the daily balances of depositor's accounts, or in some other stipulated
manner.
3. Reserve for accrued expenses
-This constitutes the salaries, supplies, and other expenses estimated on the
bank's budget for the year. The bank builds up this reserve by distributing the total
amount on a monthly or a weekly basis.
4. Reserve for depreciation on bank properties
-This item represents the wear and tear on the bank's building, furniture, and
fixtures.
5. Reserve for depreciation on securities
-A portion of the bank's assets are composed of securities. This account will
represent the cushion for the fall in the value of the securities held by the bank.
6. Reserve for contingencies. This will represent losses incurred by the bank either
through bad loans or investments. It may also cover the estimated payment of
pending lawsuits.
C. Stockholders' Equity
The accounts representing the stockholders' equity are sometimes termed as the
bank's capital accounts. This group of accounts becomes doubly significant for the fact
that it is usually a "thin equity" compared to the deposit liabilities. It has already been
stated that a bank "trades on the equity." Therefore, the bank's net worth represents how
much the depositors could possibly recover in case of loss, not to mention the claim of
stockholders themselves. It is perhaps for this reason that the state sets the capital-to-
deposit ratio and tabs strict surveillance on the impairment of a bank's capital position.
The items comprising the stockholders' equity are the following:
1. Capital Stock
 -This account is carried as per the par or face value of the total
number of stocks appearing in the bank's charter.
2. Surplus
-This account may consist of earnings derived from the sale of stock above par
or earnings retained by the management from operations. A part of the surplus
may be derived from the sale of obsolete assets. Impairment of the surplus
account may not be a cause for reorganization, unlike that of capital stock.
3. Undivided profits
-This account is gaining more adherents in bank financial management for the
reason that it is of transitory nature. This represents earnings from current operations not
yet paid out as dividends. The account may be allocated for different purposes-part of it
may be earmarked for payment t of dividends, or it may be placed in one of the reserve
accounts to offset losses or to cover ascertained expenses, or it may be added to the
surplus account.
When earnings are transferred to surplus, it serves as a notice to stockholders
and the general public that such transfer becomes permanent addition to the capital
position. If such earnings are retained in the undivided profits accounts, then the
management has more freedom to allocate the funds for any of the purposes mentioned
previously.
Minimum Capital Requirement
In reading the statement of condition, a significant ratio must at all times be met with
the banks. For it is so provided by law in accordance to Section 34 of the New General
Banking Act:
The Monetary Board shall prescribe the minimum ratio which the net worth of a bank
must bear to its total risk assets which include contingent accounts. For purposes of this
section, the Monetary Board may require that such ratio be determined on the basis of the
net worth and risk assets of a bank and its subsidiaries, financial or otherwise, as well as
prescribe the composition and the manner of determining the net worth and total risk
assets of banks and their subsidiaries. Provided, that in the exercise of this authority, the
Monetary Board shall, to the extent feasible, conform to internationally accepted
standards, including those of the Bank for International Settlements (BIS), relating
to risk-based capital requirements. Provided, further, that it may alter or suspend
compliance with such ratio whenever necessary for a maximum period of one (1) year.
Provided, finally, that such ratio shall be applied uniformly to banks of the same category.
In case a bank does not comply with the prescribed minimum ratio, the Monetary Board
may limit or prohibit the distribution of net profits by such bank and may require that part
or all of the net profits be used to increase the capital accounts of the bank until the
minimum requirement has been met. The Monetary Board may, furthermore, restrict or
prohibit the acquisition of major assets and the making of new investments by the bank,
with the exception of purchases of readily marketable evidences of indebtedness of the
Republic of the Philippines and of the Bangko Sentral and any other evidences of
indebtedness or obligations the servicing and repayment of which are fully guaranteed by
the Republic of the Philippines, until the minimum required capital ratio has been restored.
In case of a bank merger or consolidation, or when a bank is under a rehabilitation
program approved by the Bangko Sentral, the Monetary Board may temporarily relieve the
surviving bank, consolidated bank, or constituent bank or corporations under such
conditions as it may prescribe.
Before the effectivity of the rules which the Monetary Board is authorized to prescribe
under this provision, Section 22 of the General Banking Act, as amended, Section 9
of the Thrift Banks Act, and all pertinent rules issued pursuant thereto, shall continue to
be in force.
Bank Earnings and Expenses
Of great importance to a bank, and for that matter to all other businesses, is the profit
and loss statement. Although this is seldom published, it is nevertheless important in the
appraisal of a bank's financial condition. A bank must earn enough to meet its expenses, to
cover losses, as well as to provide a return on the stockholders' investments. A bank's
profit and loss statement (or income statement) is singular in the sense that it deals
mainly on financial transactions and the accounts are confined to the sources of income
and the disposition of the same. The most significant sources of the commercial bank's
income are in the form of interest on loans and investments in government and other
securities. Other minor, but equally significant, sources are the service and other fees
charged by banks for services rendered such as service fees on loan processing, service
fees on deposit accounts, collection fees, earnings from the trust department, and the like.
Income may likewise come from unexpected sources such as recoveries from loans
previously "written off" or charged as losses, or profits from the sales of securities above
par.
The current operating expenses of a bank are practically the same as that of other
businesses except for the interest paid on time deposits. The banks also use stationery and
supplies, furniture and fixtures which depreciate; pay salaries of employees; use telephone
service; and such other expenses common to other businesses.
If the income statement shows a profit, it is indicative of efficient bank management
and will further enhance the bank's position in the community. On the other hand, a loss
may mean curtailment of some of its operations and loss of prestige in the community. It
is perhaps for this reason that banks desist from publishing much too often their statement
of earnings and expenses, although they use the same to a large extent for internal
management purposes and to meet the requirement of the supervisory and regulatory age
ncies.
Criticism on Published Statements
While some reports do stir a "hornet's nest," sometimes they are so commonplace
nowadays as to arouse the interest of the ordinary laymen because of a number of
reasons:
1. Published statements are too abbreviated as to give any significant detail in
banking operations. For example, the surplus account may be large, but efficient
management can only be gauged by a detailed analysis on the sources of surplus.
2. The ordinary layman is not conversant with banking functions, or perhaps even
with the banks, so he cannot understand the significance of the accounts appearing
in the statement.
3. The assets and liabilities are so combined as to make it impossible to "look
through" or discover the real picture of the bank unless one is an expert in financial
statement analysis.
4. The real picture of the bank's financial position as reflected in the financial reports
will depend largely on how the accountant estimates the valuation of assets and
how completely he enumerates the liabilities. Some accountants, for instance,
resort to secret reserves.
Nevertheless, it is of common assent that such statements and/or reports would serve to
reinforce the existing trust and confidence of the public in banks and the banking system.
Analysis of Transactions
As a palliative to the criticisms leveled on bank statements, a few transactions which
give rise to the contents of the bank statement and changes therein are cited. Offhand, it
must be admitted that such presentations would not make the student all-knowing
regarding banking functions and transactions. This may, therefore, only serve as eye-
openers and it is up to the reader to seek "wider horizons" to broaden his knowledge of
banking theory and practice.
 Assuming that the bank's charter represents the issue of 50,000 shares at a par value
of P100.00 each and that the stockholders have fully paid their shares, the resulting figure
will be:
Assets Liabilities

Cash P5,000,000.00
Stockholders’ Equity P5,000,000.00
Total Assets P5,000,000.00
Total Liabilities and
Stockholders’ Equity P5,000,000.00
Then out of the cash received, the management buys a building worth P1,000,000.00 and
furniture and equipment worth P500,000.00. The balance sheet will now be:
Assets Liabilities

Cash P3,500,000.00
Banking Building 1,000,000.00
Furniture & Fixture 500,000.00 Stockholders’ Equity P5,000,000.00

Total Liabilities and

Total Assets P5,000,000.00 Stockholders’ Equity P5,000,000.00
The above transaction has led to a decrease in cash (a current asset) but transferred to a
fixed asset (bank building, furniture and fixture). Capital remains the same but now
reflects current and fixed capital.
The bank receives demand deposits to the tune of P1,000,000.00 in cash. The position I
now shift a little and will appear as follows:
Assets Liabilities

Cash P4,500,000.00 Demand Deposits P1,000,000.00

Banking Building 1,000,000.00
Furniture & Fixture 500,000.00 Stockholders’ Equity P5,000,000.00

Total Liabilities and

Total Assets P6,000,000.00 Stockholders’ Equity P6,000,000.00
There is an apparent increase in cash, but the bank now has a liability commensurate to
the increase in cash. However, because of the imposition of the legal reserve requirement,
the statement will be adjusted as follows (assuming that the legal requirement is 10%):
Assets Liabilities

Cash P4,400,000.00 Demand Deposits P1,000,000.00

Due from Bank 100,000.00
Banking Building 1,000,000.00
Furniture & Fixture 500,000.00 Stockholders’ Equity P5,000,000.00

Total Liabilities and

Total Assets P6,000,000.00 Stockholders’ Equity P6,000,000.00
In the preceding balance sheet, there is a slight change to reflect the 10% legal reserve
requirement. The cash is decreased by P100,000.00

The bank receives loan applications and after due processing approves the loans for
P200,000.00 in cash. The statement will then be:
Assets Liabilities
 Cash P4,200,000.00 Demand Deposits P1,000,000.00
Due from Bank 100,000.00
Loans & Discounts 200,000.00
Banking Building 1,000,000.00 Stockholders’ Equity P5,000,000.00
Furniture & Fixture 500,000.00

Total Liabilities and

Total Assets P6,000,000.00 Stockholders’ Equity P6,000,000.00
The transactions show a change in cash which is made up by the creation of the asset
loans and discounts. The total on the asset side does not change. The liabilities and net
worth also remain the same.
Another transaction which might be of interest is the granting of loans which will turn
into deposits. For example, a borrower requests for an overdraft line of P40.000.00. It
would mean that the borrower will retain the money in a current account which he may
utilize later. The balance sheet will appear as follows:
Assets Liabilities

Cash P4,196,000.00 Demand Deposits P1,040,000.00

Due from Bank 104,000.00
Loans & Discounts 200,000.00
Banking Building 1,000,000.00 Stockholders’ Equity P5,000,000.00
Furniture & Fixture 500,000.00

Total Liabilities and

Total Assets P6,040,000.00 Stockholders’ Equity P6,040,000.00
It will be noted that overdraft is also an asset because it represents a loan on the part of
the person requesting the same. At the same time, however, the bank stands as debtor
because the proceeds were turned into a deposit. (The interest on the overdraft and the
loans and discounts has not been considered for purposes of simplifying the presentation.)
The multifarious functions of a commercial bank will further resort to a pyramiding of
transactions. However, these few transactions above may serve our purpose in trying to
understand and "see through" banking operations in detail and banking business as a
whole.
Classification of Bank Accounts
It must have been noted in the shift on the balance sheet affected by the transactions
that there is also a change in the bank accounts. Assets are generally of a current or fixed
nature. However, some are more liquid than others and, therefore, in analyzing bank
statements, it might be noticed that their sequence reflects the classification. The same is
true with the liabilities. Generally, the liabilities represent claims of stockholders,
depositors. outside creditors (which may be other banks or the general public).
Furthermore, the banks have the contingent accounts which are kept separate as
reflected in balance sheets. The letters of credit or dealings in foreign exchange may
comprise these contingent accounts.
Chapter 7
The Commercial Bank
The commercial banks now do not only deal in their original functions which
characterized them, but rather embrace multifarious functions that have been attributed to
other types of banks. A bank of almost any type (provided it operates within lawful
boundaries) relegates the commercial bank's functions to a department within the omnibus
organization. A savings department, a trust department, and other such departments may
be housed in a commercial bank. Similarly, a trust company may also departmentalize its
functions to include a "commercial banking department." The process of
departmentalization is the "rule of the day," or what is actually being resorted to in the
banking circles today. Nonetheless, it must be borne in mind that whether the setup is
dedicated purely to commercial banking functions or relegated to a "commercial banking
department" in a bigger institution, such major functions are distinctly classified as
"dealings in credit." The connotation becomes evident that a commercial bank is a credit
institution.
Functions of a Commercial Bank
A commercial bank (KB) deals in multifarious functions and services. With these powers
and scope of authority that a commercial bank performs, the Bangko Sentral requires
P2,400.0 (in million pesos) as the minimum level of capitalization.
The most common functions of KBs are the following:
1. Deposit function
-A commercial bank primarily receives demand deposits which can only be
withdrawn by means of checks. It may, however, also receive other types of
deposits.
2. Loan function
-It advances sums of money for relatively short periods of time to persons
engaged in commerce and trade. It charges interest on such loans at legal rates.
3. Exchange function
-This refers to the transfer of funds without the physical transfer of cash.
Commercial banks deal in offsetting of book entries either domestically or
internationally, Credit instruments are used in effecting transfers or swapping of
credit.
4. Trust function
-Commercial banks also engage in fiduciary activities such a administrator of
estates, guardians of minor's interest; registrars and transfer agents of stocks and
bonds; executors of last wills and testaments, and other similar functions.
5. Advisory function
-Commercial banks, through their experienced officers, give expert advice to
clients on their business dealings.
Bank Services
Beside the above-mentioned functions, the commercial banks also deal in varied
services, namely:
1. Rental of safe deposit boxes
-Some people have valuables such as jewellery and/or important documents
which they want to keep safe. The commercial bank provides this service through
the renting out of safe deposit boxes. Such valuables are kept in specially
constructed vaults to allow maximum safety from fire, burglary, and other risks.
2. Sale of drafts and cashier's checks
-Commercial banks also undertake the sale of drafts and cashier's checks. In a
previous chapter, these types of credit instruments were already mentioned. The
bank charges a small fee for this service.
 3. Sale of traveller’s checks
-A traveller is provided a safe medium of exchange through this service of
commercial banks. Such checks are contained in a wallet and are in convenient
denominations in dollars. The traveller is made to sign twice, once when buying
the checks (when he signs all of them) and again when he uses the check for
payment (when he signs each one as it is used).
4. Collection agent
-To facilitate transactions between foreign creditors and debtors or even in
domestic trade, the commercial bank acts as collection agent for a nominal fee.
Instruments for collection are represented by drafts, checks, bond coupons,
promissory notes, and others.
5. Credit information
-Commercial banks use credit information not only within their own offices but
also disseminate such information to others who need the same. This may be done
directly or indirectly. Such information is kept in the strictest confidence.
6. Payrolls
-Bank employees are also assigned to prepare payroll payments by inserting the
correct amounts in envelopes to cover salaries of employees of business concerns,
All the business establishment has to do is to issue a check against its deposits in
the bank for the total amount.
For a clear overview of the operations of commercial banks in the Philippines, the
provisions of the General Banking Law of 2000 (R.A. 8791) under Chapter IV,
Articles II and Article III, Section 53 are quoted hereunder:
Sec. 29. Powers of a Commercial Bank
-A commercial bank shall have, in addition to the general powers incident to
corporations, all such powers as may be necessary to carry on the business of commercial
banking, such as accepting drafts and issuing letters of credit; discounting and negotiating
promissory notes, drafts, bills of exchange, and other evidences of debt; accepting or
creating demand deposits; receiving other types of deposits and deposit substitutes;
buying and selling foreign exchange and gold or silver bullion; acquiring marketable bonds
and other debt securities; and extending credit, subject to such rules as the Monetary
Board may promulgate. These rules may include the determination of bonds and other
debt securities eligible for investment, the maturities and aggregate amount of such
investment.
Sec. 30. Equity Investments of a Commercial Bank
A commercial bank may, subject to the conditions stated in the succeeding
paragraphs, invest only in the equities of allied enterprises as may be determined by the
Monetary Board. Allied enterprises may either be financial or non-financial.
Except as the Monetary Board may otherwise prescribe:
30.1. The total investment in equities of allied enterprises shall not exceed thirty-five
percent (35%) of the net worth of the bank; and
30.2. The equity investment in any one enterprise shall not exceed twenty-five
percent (25%) of the net worth of the bank.
The acquisition of such equity or equities is subject to the prior approval of the Monetary
Board which shall promulgate appropriate guidelines to govern such investments.
Sec. 31. Equity Investments of a Commercial Bank in Financial Allied
Enterprises
-A commercial bank may own up to one hundred percent (100%) of the equity of a
thrift bank or a rural bank.
 Where the equity investment of a commercial bank is in other financial allied enterprises,
including another commercial bank, such investment shall remain a minority holding in
that enterprise.
Sec. 32. Equity Investments of a Commercial Bank in Non-Financial Allied
Enterpriser
-A commercial bank may own up to one hundred percent (100%) of the equity in non-
financial allied enterprise.
Universal Bank
-A universal bank (UB) is also a commercial bank. Meaning, a UB exercises the powers
and services authorized for a KB. Aside from the powers and services of a KB, a UB
additional functions. As such, UB's required minimum capital is P4,950.0 (in million peso).
A Universal Bank (UB) is also called an expanded commercial bank (EKB).
The powers of a UB is clearly stipulated in the New Banking Law of 2000, otherwise
known as R.A. 8791, under Chapter IV, Article I:
Sec. 23. Powers of a Universal Bank
A universal bank shall have the authority exercise, in addition to the powers
authorized for a commercial bank in Section 25 the powers of an investment house as
provided in existing laws and the power invest in non-allied enterprises as provided in this
Act.
Sec. 24. Equity Investments of a Universal Bank
-A universal bank may, subject to the conditions stated in the succeeding paragraph,
invest in the equities of allied and non-allied enterprises as may be determined by the
Monetary Board. Allied enterprise may either be financial or non-financial.
Except as the Monetary Board may otherwise prescribe:
24.1. The total investment in equities of allied and non-allied enterprises shall not
exceed fifty percent (50%) of the net worth of the bank; and
24.2. The equity investment in any one enterprise, whether allied or non-allied, shall
not exceed twenty-five percent (25%) of the net worth of the bank.
As used in this Act, "net worth" shall mean the total of the unimpaired paid-in capital
including paid-in surplus, retained earnings and undivided profit, net of valuation reserves
and other adjustments as may be required by the Bangko Sentral The acquisition of such
equity or equities is subject to the prior approval of the Monetary Board which shall
promulgate appropriate guidelines to govern such investments.
Sec. 25. Equity Investments of a Universal Bank in Financial Allied
Enterprises
-A universal bank can own up to one hundred percent (100%) of the equity in a thrift
bank, a rural bank, or a financial allied enterprise.
Departmentalization
In order for the banking functions to be affected with the maximum efficiency and,
therefore, improve the serviceability of banks, the commercial bank has different
departments which specialize in their numerous functions and services. For its internal
operations, a bank generally deals in three diverse activities which tend to complement
one another. Such are the executive, the teller, and the bookkeeping activities.
Except in smaller banking units like rural banks, most banks in the Philippines may well
be considered as big businesses. They will have departments of common usage amongst
them, although not uniformly:
1. Cash Department
-The cashier heads this department, which will take care of the deposit function
of the bank and allied activities. It may be sub-divided into New Accounts, Signature
Control, Safe Deposit Boxes, and Armored Car Services.
2. Loan and Discount Department
 -This department is headed by a loan officer. This is sometimes called the credit
department. It takes care of everything connected with loans. It is also conveniently
divided into sections which may include that of Small Loans, Bank Credit Investigation.
Rediscounting, Statistics, Loan Releases, Renewals, Collections, and others.
3. Trust Department
-This is usually headed by a trust officer who is well-versed in trust functions. It
deals more on a legal officer's work and a lawyer would be ideal for this job. The divisions
will be in line with the fiduciary activities.
4. Foreign Department
-This department deals in exchanges on the international level, although it also
attends to some domestic exchanges. It is devoted to the processing of applications for
letters of credit, the buying and selling of foreign exchange, and similar transactions. It
also keeps an eye on the movement of the prices of investment securities.
5. Accounting Department
-This department takes care of all the transactions of the bank. It puts in order
all the books, proof sheets, financial statements, and other accounting procedures used in
the bank.
6. Auditing Department
-This department takes care of seeing to it that disbursements are in order by
conducting pre-audits, spot checks on the transactions and physical assets, and institutes
general control on the activities of the bank.
7. Legal Department
-It is the duty of this department to see to it that the bank is amply protected
legally for any action that it takes. All matters of legal importance are referred to it.
8. Administrative Department
-The general administration of the bank falls under this department. Personnel
recruiting, hiring, training, and the like may be undertaken by it. Likewise, are the
administrative matters which are more of routine rather than execution of policy or
decision-making.
Forms of Bank Credit
-Bank credit represents the bank's trust and confidence in the borrower's willingness
and ability to pay a loan when due. On the other hand, it could also mean the depositor's
trust in the bank which makes him put his money for safekeeping. Bank credit partakes in
different forms. It may be in the form of bank notes, deposits, letters of credit, lines of
credit, acceptances, and notes payable. Today, the most popular are the deposits and
letter of credit. However, acceptances are also attached to letters of credit, while loaning
activities would emphasize the use of lines of credit, particularly the overdraft line.
Sources of Bank Funds
-The major or primary sources of bank funds are the contribution of stockholders and
sizable deposits. The banks will try their best to outdo one another to attract depositors.
For while the stockholders are required to put in a minimum amount of capital as initial
outlay before starting their business, the degree of success of a bank with more deposits
would be very much better, indeed. Furthermore, earning money on borrowed funds is the
very nature of banking business.
To augment its capital and deposits, the bank also has other sources such as interest
from loans and investments, collection and service fees, earnings on trust, monetized
depreciation, and others.