for their sale.
However, as industry developed and grew, producers have been included
among the clients of commercial banks. Today, commercial banks are the biggest lenders in
commercial and industrial loans, They supply loan funds to business firms as well as to
consumers, government agencies, universities, among others. Moreover, commercial banks
possess a unique character among the financial intermediaries. The debts of commercial
banks circulate as money, and they have the power to create and destroy money through their
savings and loan operations
The classification of banks and the recognition of other organized financial institutions
introduced by the financial reforming 1972 are basically the same. The banking sector in the
Philippines is expanding rapidly, hitting double-digit credit growth in four of the five years
from 2013 to 2017. The sector has simultaneously recorded notable improvements across
major stability indicators. The country's banking sector is highly liquid and well provisioned,
and it benefits from robust macroeconomic growth, even as excess liquidity and credit
concentration in certain sectors have become a concern. All signs point to continued
expansion in 2018, with non-performing loans (NPLs)declining in recent times as credit
growth has gained momentum. Furthermore, global rating agencies have projected stable,
sustainable expansion, although, the sector's outsized corporate loan portfolio leaves
commercial banks- particularly creditors of large conglomerate- exposed to concentration
risks. Commercial banks have been classified as (1) ordinary commercial banks and (2)
expanded commercial banks
Commercial banks refers to a financial institution that accepts deposits, offers checking
account services, makes various loans, and offers basic financial products like certificate of
deposits (CDs) and saving accounts to individuals and small businesses.
ORDINARY COMMERCIAL BANKS
Commercial banking is now available not only to existing commercial banks, including
government-owned banks and Philippine branches of foreign banks, but also to other types of
banks henceforth so authorized by the Monetary Board of the Banko Sentral after they have
met the terms and conditions laid down by law and administrative regulations.
PRESENT POWERS OF COMMERCIAL BANKS
Under Batas Pambansa Blg 61 the powers necessary to carry on the business of commercial
banking are the following:
1. Accepting of drafts
2. Issuing letters of credits
3. Discounting and negotiating promissory notes, drafts, bill of exchange and other
evidences of debt
4. Receiving deposits (demand, time and saving) including negotiable order of
withdrawal accounts
5. Buying and selling foreign exchange and gold or silver bullions.
6. Lending money against personal securities and against mortgages on improved real
estate (land and building) and insured improvements thereon
Additional power available to commercial banks include the following:
1. Investing in equity (shares of stock)
2. Purchasing, holding and conveying real estate for its immediate accommodation in
transacting its business or as mortgagee, creditor and buyer under judgement sales
3. Establishing branches
4. Acquiring readily marketable bonds and other debt securities.
5. Receiving in custody funds, documents, valuable objects, and renting safety deposit
boxes for safeguarding such effects.
6. Acting as financial agent in buying and selling, by order of/or for the account of
customers, shares, evidences of debt and all types of securities
7. Making collections and/or payments for the account of others
8. Performing such other services for their customers as these are not incompatible with
banking.
DEPOSIT OPERATION
A commercial bank is authorized to accept or create demand deposits subject to withdrawal
by check. Demand deposits, also known as current accounts or checking accounts, do not
earn interest.
It is also authorized to accept savings deposits which earn interest and are evidenced by a
passbook issued by the bank in the name of the depositor. In making a deposit, the depositor
accomplishes a deposit slip which shall be given to the teller, together with the amount to be
deposited and the passbook. In making a withdrawal, the depositor accomplishes a
withdrawal slip which shall be given to the teller, together with the passbook before th teller
gives him the amount he wants to withdraw. It is also authorized to accept time deposits
which earn interest and are evidenced by a certificate issued by the bank in the name of the
depositor. The minimum period of time deposit is thirty days. When the time deposit reaches
its maturity date, the depositor shall surrender the certificate duly endorsed, and he receives
the amount of the deposit plus accrued interest, if interest has not been paid by the bank in
advance.
A commercial bank may also offer NOW accounts. These are a special type of savings
deposit which can be withdrawn by means of a Negotiable Order of Withdrawal (NOW). This
type of deposit is offered only to natural persons. It may also accept, whether as depository,
trustee, agent or administrator, any fund or money of the government, its branches, agencies,
subdivisions and instrumentalities, including government-owned or controlled corporations.
The reserves that a commercial bank shall maintain against deposit with the Banko Sentral
and prevailing business and economic conditions.
BORROWING OPERATIONS
A commercial bank may borrow from the Banko Sentral and other government and private
financial institutions to augment its working capital and loanable funds. Borrowing from the
Banko Sentral may take the from of
1. Rediscounting
2. Direct advance
Rediscounting-A mode of borrowing whereby the bank assigns in favor of the Banko Sentral
the eligible borrowers papers in accordance with established guidelines, terms and conditions.
These papers consist of the original copy of promissory notes, loan application, inspection
report, loan contract (which maybe be for real estate mortgages or chattel mortgage ), title to
property (which may be the original certificate of title or transfer certificate of title), tax
declaration, current tax receipt, co-makers statement, if any, and other documents that support
the loan granted for agricultural, commercial, industrial, real estate, export, import or
consumption purposes.
The following conditions must be met by a commercial bank before it could avail itself of the
credit facilities of the Banko Sentral
1. The ratio of the past due direct and indirect loans to the bank's directors, officers,
stockholders and their related interests to total loans must not exceed 5%
2. The paid-in capital of the bank at the time the application for rediscounting is filed. If the
paid-in capital is less than the stipulated amount the bank must have met its capital build-up
program.
3. The bank has submitted on time all the reports required by the BANKO SENTRAL
4. The bank has complied with the investment-deposit ratio for four consecutive quarters
immediately preceding the date of loan application with the BANKO SENTRAL.
Direct Advance or Loan. As a lender of last resort, the Banko Sentral may grant direct
advances to a commercial bank in times of emergency or when it can no longer be allowed to
rediscount its eligible borrowers' papers. An example of this is when the bank is experiencing
heavy withdrawals to a point that it has become illiquid to pursue its normal operations. The
same conditions prescribed for rediscounting apply to the availment of direct advance. The
rate of interest chargeable on availment of such credit accommodation shall be an amount
equivalent to a rediscount reference rate established by the Banko Sentral from time to time
plus an additional rate.
Any paper, irrespective of maturity, eligible for rediscounting purposes shall also be
acceptable security for direct advance. The loan values of such paper offered as collateral
shall be 80% of the amount still due and outstanding on such paper. The term of the credit
accommodation shall not exceed ninety days. The maximum direct advance or loan which a
commercial bank may avail is equal to 10% of its net worth, net of valuation reserves, as of
the end of the quarter immediately preceding the date of application for such advance or loan.
DEPOSIT SUBSTITUTE OPERATIONS
This is also known as quasi-banking or money market operations. Any deposit substitute
transaction by a bank performing quasi-banking functions, or they can engage in money
market operations - shall be limited to its own promissory notes, repurchase agreements, and
certificates of assignment/or participation with resource
The elements of quasi-banking are the following:
1. Borrowing funds for the borrower's own account.
2. Twenty 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, participations, certificates of
assignment or similar instruments with resource, trust certificates, repurchase agreements,
and such other instruments which the Monetary Board of the Banko Sentral may determine
and allow from time to time.
4. The purpose may be for (a) relending, or (b) purchasing of receivables and other
obligations
Features of Negotiable Promissory Notes
Negotiable promissory notes acquired by a commercial bank in connection with its quasi-
banking functions shall not be negotiated by mere delivery and/or endorsement if they do not
conform with the following provisions:
1. The present value and maturity value and/or the principal amount and interest rate and such
other information as may be necessary must be indicated to enable the parties to determine
the cost of yield of the borrowing or placement.
2. The date of issuance shall be indicated, including the maturity period, or the word "demand
" if it is demand instrument. 3. Securities which are subject of repurchase agreement or a
certificate of assignment/participation with recourse shall be fully described on the face of
said instruments, or on a separate instrument attached and specifically referred to as to the
maker, value, maturity, serial number, and such other particulars as shall clearly identify the
securities.
4. The payee may be identified by his trust account or deposit account number in both
negotiable and non-negotiable instrument.
5. The instrument shall also provide for the payment of liquidated damages, in addition to
stipulated interest, in case of default by the maker or issuer, as well as attorney's fees and
costs of collection in case of suit.
6. A conspicuous notice at the lower portion of the instrument must be shown that the
transaction is not insured by PDIC.
7. The corporate name of the issuer shall be prominently indicated on the instrument, and
below shall be a designation of the instrument, such as " Promissory Note" or "Repurchase
Agreement"
8. Each instrument shall be serially pre-numbered.
9. The copy of the instrument delivered to the payee shall bear the word "original", and the
copies retained by the issuer shall be identified as "duplicate", or file copy, as the case maybe
10. Only security paper with adequate safeguards against alteration or falsification shall be
used.
Other Borrowings
Except as may be authorized by existing laws, no private bank, whether or not performing
quasi- banking functions, shall borrow any fund or money from the government or any of its
entities, through the issuance or sale of its acceptances, notes or other evidences of debt. A
commercial bank may issue short and long-term commercial papers, including bonds, in
accordance with law, rules, and regulations being enforced by the Banko Sentral and
Securities and Exchange Commission.
LENDING OPERATIONS
Loans granted by a commercial bank may be classified as follows:
1. As to collateral
a. Secured loans - These loans are secured by real estate mortgage. Loans against real estate
security shall not exceed 70% of the appraised value of the real estate, plus 70% of the
appraised value of the improvements on said real estate. Loans for house building and
subdivision development for low- and middle income families against real estate security
may be granted up to 80% of the appraised value of the real estate security. Loans for the
acquisition of any instrument, machinery and other equipment for the use of the borrower in
the production, processing, transformation, handling or transportation of agricultural and
industrial products may be granted up to 60% of the appraised value of the assets so acquired
with the proceeds of the loan. However, such loans shall not be granted unless title to said
equipment is in the name of the borrower. If such loan is further secured by real estate, the
loan may amount to 80% of the appraised value of the real estate.
b. Unsecured loans - These loans are granted against personal security. Before this type of
loan is granted, the bank must exercise proper caution by ascertaining that the borrowers, co-
makers. Endorsers, securities and/or guarantors possess good standing and are financially
capable of fulfilling their commitments to the bank. For this purpose, the bank shall keep
records containing information on the credit standing and financial capacity of credit standing
and financial capacity of credit applicants. The bank shall require that the application for a
credit accommodation against personal security be accompanied by (1) a certified true copy
of the latest income tax return of the borrower, stamped " received" by the BIR and (2) a
certified true copy of the annual financial statements duly certified by an independent public
account, if the borrower is engaged in business and the credit accommodation applied for.
This type of loan shall be granted only in amounts and for the periods of time essential for the
completion of the projects or operations to be financed. The bank shall also require that the
loan against personal security be made under the signature of the principal borrower and at
least a co-maker, except in the case of a principal borrower whose responsibility and financial
capacity are unquestionable. In which case the signature of the principal borrower is
sufficient.
2. As to purpose
a. Agricultural - THESE LOANS ARE GRANTED TO FINACE AGRICULTURAL
PRODUCTION and related activities, purchase of farm machinery, equipmentt., and
implements and work animals
b. Commercial - These loans are granted to finance the purchase of goods, commodities, or
merchandise for resale.
c. Industrial - These loans are granted to finance the purchase and processing of raw materials
and manufacture of goods, including the marketing of such goods.
d. Real estate - These loans are granted to finance and/or refinance the construction,
acquisition, expansion and/or improvements of urban and rural properties
e. Others - These loans are granted for purposes other than agricultural, commercial,
industrial, and real estate.
3. As to
a. accounting treatment Demand loans - These loans are granted without fixed maturity dates
but which become due and payable upon call or demand at the option of the lending bank.
These also include loans whose maturity dates are approximated because they cannot be
definitely ascertained.
b. Bills discounted - These loans are those in the interest of which is collected in advance or
discounted from the face of the covering promissory note. These loans usually mature within
one year.
C.Time loans - These loans are payable on a fixed date or within a specified period of time,
usually more than one year. TRUST OPERATION
A commercial bank may engage in trust operation or trust business which refers to the
administration, holding, and management by a trustee of funds and/or property for the use,
benefit or advantage of the trustor or the beneficiaries.
OTHER PERATIONS
1. A commercial bank can finance export and import requirements through letters of credits
and other instruments generally used in international transactions and foreign exchange
dealings.
2. It may engage in the sale of government securities, such as bonds, treasury bills, and other
debt instruments which the government may issue from time to time.
3. Upon prior authority, it may also collect taxes, customs duties, and other government levis
as a form of assistance to the BIR and Bureau of Customs.
4. It is authorized to participate in clearing operations which have been transferred from the
BS to the Philippine Clearing House
Corporation, where the clearing of checks and settlement of interbank balances pass through.
5. As part of its authority to engage in foreign exchange transactions, a commercial bank can
also act as dealer or foreign currencies which form part of our international reserves.
Expanded commercial banks
These are commonly known as universal banks which emerged with the introduction of
financial reforms in 1980. Expanded commercial banking can be briefly defined as the
combination of commercial banking with the powers of an investment house. The investment
house operations may be discharged by an expanded commercial bank either (a) in house,
that is, by establishing a separate department therefore in the bank; or (b) through the
establishment of a separate subsidiary.
Scope of Authority
The authority of an expanded commercial bank shall include, in addition to the commercial
banking powers earlier mentioned in this chapter, the authority to exercise the powers of an
investment house as provided in the pertinent laws, 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 or a bank authorized to provide commercial banking services,
in accordance with applicable laws and regulations.
Equity Investments
An expanded commercial bank may invest in the equity of other financial institutions under
the following regulations:
1. It can own up to 100% of the voting stock of a financial institution performing quasi-
banking functions (money market operation)
2. It can invest in the following non-financial allied undertakings:
a. warehousing companies
b. storage companies
C. safe deposit box companies
d. companies engaged in the management of mutual funds themselves
e. management corporations engaged in activities similar to the management of mutual funds
f. companies engaged in the provision of computer services
g. insurance agencies
h. companies engaged in home building and/or home development
i. companies providing drying and/or milling facilities for agricultural crops, such as rice and
corn
3. the banks investment, or of its wholly or majority owned subsidiary, in any single - non-
allied undertaking shall not exceed 35% of the total subscribed capital stock nor shall it
exceed 35% of the voting stock of that enterprise.
4. The banks total equity investment in, and outstanding loans to, any single enterprise
whether allied or non- allied, shall not, at any time, exceed 15% of the net worth of the
investing bank. The total amount of investments in equities made by said bank in all
enterprises, shall not exceed 50% of its net worth.
UNDERWRITING AND DEALERSHIP IN SECURITIES
Underwriting is the act or process guaranteeing the distribution and sale of securities of any
kind issued by another corporation. Securities are written evidences of ownership, interest, or
participation, in an enterprise, of indebtedness of a person or enterprise. It includes, but is not
limited to, the instruments enumerated in the Securities Act.
The types of underwriting arrangement are:
1. The guaranteed basis where the underwriting bank guarantees the disposition of the
securities it has received from the issuing corporation. Any inventory of securities not sold is
for the account of the bank, that is, it pays for all unsold securities.
2. Best-efforts basis where the underwriting bank simply tries its best to dispose of the
securities without any guarantee. The unsold securities are returned to the issuing corporation
and not paid for by the underwriting bank.
In dealership, however, the bank buys and sells for its own account; that is, the bank is a
buying customer of the issuing corporation, which in turn becomes a selling institution from
the moment it starts selling the securities it has bought. In dealership, the bank may realize
income or may suffer losses, as the case may be.
Dealership is distinguished from brokerage in that the latter refers to the act performed by a
person or institution whereby it arranges the meeting of a seller and a buyer of securities.
After the seller and the buyer have agreed on the terms and conditions of the buy-and- sell
transactions, the broker receives hi commission for the effort which made possible the fruit
full meeting of the seller and the buyer.
OBJECTIVES OF FINANCIAL INTERMEDIATION
The financial reforms of 1980 which culminated in the birth of expanded commercial banks
have sought the attainment of two objectives in financial intermediation:
1. The attainment of greater efficiency thru increased competition and scale economies, by
the way of eliminating enforced specialization of certain banks, and the offering of a broader
range of financial services by said banks.

2. There is now greater availability and use of longer term funds to hasten the development
process in terms of meeting debt and equity requirements.

With the revision of the banking structure and certain administrative regulations, the financial
system in our country hopes to reap the benefits of progress and development as expanded
commercial banks continue to serve the credit needs of urban and countryside economic
activities, side by side with the other types of banking institutions.

Since we are a developing country, we need huge development funds for our various
programs and projects. It is noted that ordinary commercial banks provide short-term loans.
Such lending program is not responsive to the financial requirements of our developing
country. The latter needs long-term loans to be able to finance development programs and
projects which usually require longer periods for their completion. With the introduction of
universal banking which supplies long-term funds, it is hoped that our development processes
will be faster - unless destructive conditions like devaluation, inflation, and fiscal and
monetary mismanagement take place.