Investment, Loans, and

other Banking Functions

Operation of Universal banks
Powers of Universal bank
1.Commercial bank
2.Investment house
3.Invest in non-allied enterprises
Equity Investments of Universal bank
Allied enterprises are those which enhance or complement banking. If it is
a financial allied enterprise, then it involves money matters.

Otherwise it shall be non-allied enterprise. Moreover, the total investments

in equities of allied and non-allied enterprises shall not exceed 50% of
the net worth of the bank.

Equity investment in any one enterprise, whether allied or non, shall not
exceed 25%.

Net worth- the total of the unimpaired paid in capital including paid-in
surplus, retained earnings and undivided profit
Equity investments of Universal bank in
Financial Allied enterprise
Universal bank can own 100% of the equity in a thrift, rural bank or
financial allied enterprise. Publicly-listed universal or commercial bank
may own 100% of voting stock of another universal or commercial
bank. If not publicly-list then they can only own 49%.
Equity investments of Universal bank in
Financial Allied enterprise
The following are financial allied enterprises:
1. Leasing companies
2. Banks
3. Investment houses
4. Financing companies
5. Credit card companies
6. Financial institutions
7. Companies in stock brokerage and foreign exchange dealership
8. Insurance companies
9. Holding company provided that the equities of the entity is confined under
universal bank BSP regulation
On the other hand, universal bank may own up to 100% of equity in non-financial
allied enterprises.

Examples are:
1.Warehousing companies
2. Storage
3. Safe deposit box
4. Companies engaged in management of mutual funds and not funds itself
5. Computer services
6. Home building and development
7.Service bureaus
Rural and cooperative banks can invest in non-financial allied
enterprises such as:
1. Warehousing
2. Fertilize and agricultural chemical
3. Farm equipment
4. Trucking and transportation
5. Marketing agricultural products
6. Leasing
Equity Investment of Universal Bank in
Non-allied enterprise
Equity investment in a single non-allied enterprise shall not exceed 35% in total
equity or voting stock.

Universal bank may invest in equity of enterprise in the following areas:

1. Enterprises engaged in agriculture, mining, quarrying, manufacturing,
public utilities
2. Industrial parks
3. Commercial project with government privatization program

Equity investment in Quasi-banks – universal bank can only invest up to 40% in

equity of quasi-banks.
Operations of Commercial Banks
Powers of Commercial banks
1. General powers incident to corporations
2. All power necessary to carry business of commercial
banking such as:
a. Accepting draft and issuing letters of credit
b. Discounting
c. Creating demand deposits
d. Buy and selling Forex
Issuance of Letters of Credit
Letter of credit – financial device developed by merchants as convenient mode of
dealing with sales of goods.

Process:
The buyer will apply for a letter of credit in the issuing bank. The seller will then
send the goods to the carrier and he will make a draft, called bill of exchange. The
seller will present the draft and the necessary documents, such as the bill to issuing
bank to receive the payment.

While the goods are in transit, it shall be owned by issuing bank. When the goods
arrived at the port of the buyer, the buyer will pay the corresponding payment and
also gain the documents. Since the buyer gain the documents, he can now acquire
the delivered goods
Issuance of Letters of Credit
Independence principle – bank determines compliance with letter of credit only by
examining shipping documents presented and need not examine the goods.

There are three contracts:

1.buyer-seller
2.buyer-bank
3.seller-bank

There can be other parties such as notifying bank (inform seller), confirming bank
(lend credence to letter of credit), paying bank and negotiating bank (discounter).
Limit on loans, credit accommodation and
guarantees
Single Borrowers Limit
Total amount of loans, credits accommodation and guarantees extended to
any person, partnership or corporation shall not exceed 20% of net worth of
bank.
In Circular 425 of 2004 of BSP, the SBL was increased to 25%.
Exceptions to SBL:
1. Monetary Board may otherwise prescribe for reasons of national interest
2. Deposit of rural banks with GOC financial institutions such as LB, DBP
and PNB.
Limit on loans, credit accommodation and
guarantees
The basis for determining Single Borrower’s Limit (SBL) is the total credit commitment
of bank to borrower:

For loans – the consideration must be based on all accounts under the loan portfolio

Credit accommodations - credit and market risk exposure of banks arising from
accommodation other than the loan.

Total credit commitment - include loans, credit accommodation, deferred letters of

credit less margin deposits and guarantees. The total credit commitment can be
increased by 10% provided additional liabilities are secured by trust receipts, shipping
documents or readily marketable goods.
Limit on loans, credit accommodation and
guarantees
Readily marketable goods – articles of commerce, agriculture or industry as
constant dealings in ready market and price is easily ascertainable and disposable.

Parent corporation’s total credit commitment shall also include its subsidiaries’ if it
guarantees, accommodate or subsidiary is merely a department of it.

Wholesale lending of government banks shall not exceed 35% of net worth to
participating financial institutions.
Limit on loans, credit accommodation and
guarantees
PFI – institutions for relending to end-user borrowers. The end-user borrower shall
be subject to the 25% SBL.

In municipalities where there are no government banks, deposits of rural and coop
banks in private banks shall not be subject to SBL. Deposit in private depository
bank used by thrift, rural and coop banks, with authority to accept demand deposits,
after being cleared, shall be exempted from SBL.
Limit on loans, credit accommodation and
guarantees
Bank guarantee – irrevocable commitment of a bank binding to pay a sum of
money in event of non-performance of third party

Credit Risk Transfer – arrangement that allows the bank to transfer the credit risk
associated with its loan or other credit accommodation to a third party

Control of majority interest or controlling interest – parent owns, directly or

indirectly through its subsidiaries, more than half of voting power of the enterprise.
Limit on loans, credit accommodation and
guarantees
Even if less than half of said voting power, it shall still have controlling interest if:
1. Agreement with investors
2. Govern financial and operations
3. Can appoint majority of directors
4. Cast majority vote on meetings
Subsidiary – corporation where more than 50% of the voting stock is owned by a
parent corporation

Bill of exchange drawn in good faith against actually existing values – drawn by a
seller on the purchase for the price of commodity sold
Limit on loans, credit accommodation and
guarantees
Commercial paper owned by person negotiating the same – paper arising from
business transaction.

Exclusion from SBL:

1. Discount bills of exchange and discount commercial paper
2. Credit accommodation to finance importation of rice or corn up to 100%
net worth of bank
Must be approved by NEDA
3. Loans and credit accommodation guaranteed by Industrial Guarantee and
Loan Fund
Limit on loans, credit accommodation and
guarantees
Exclusion from SBL:
4. Liabilities of commercial paper issued for commercial paper held by UB
as firm underwriter. Only 180 days and not exceed 5% from normal SBL.
5. Loans and credit accommodations covered by international or regional
institutions where Philippines is shareholder such as ADB.
6. Loans and credit accommodations with valuation reserves provided that
bank has no unbooked valuation reserves.
7. Loans and credit accommodations as a result of underwriting agreement
of debt securities not exceeding 30 days.