Module 2 Banking and Financial Institution

Republic of the Philippines
Laguna State Polytechnic University

Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
LSPU Self-Paced Learning Module (SLM)
Course Banking and Financial Institution

Sem/AY Second Semester/2023-2024
Module No. 2
Lesson Title BANK MANAGEMENT
Week
6-10
Duration
Date March 4 - April 5, 2024
Description This module covers the bank management, bank
of the supervision and examination and bank credit
Lesson instruments.
Learning Outcomes
Intended Students should be able to meet the following intended

Learning learning outcomes:
Outcomes  Understand the purpose of bank supervision and
examination.
Targets/ At the end of the lesson, students should be able to:
Objectives  Understand how to negotiate using credit
instruments.
Province of Laguna
Student Learning Strategies
Online A. Online Discussion via Google Meet

Activities You will be directed to attend in a One Hour
(Synchronous/ class discussion on the nature and types of
Asynchronous) educational technologies. To have access to
the Online Discussion, refer to this link:
https://meet.google.com/ojk-hvpg-nou
The online discussion will happen on March 4 to
April 5, 2024, from 1:00 pm - 2:30 pm.
(For further instructions, refer to your Google
Classroom and see the schedule of activities
for this module)
Province of Laguna
Lesson 3:
BANK MANAGEMENT
Board of directors – composed of a number agreed upon as contained in the by-
laws. It is headed by a chairman whose duty is to preside over the meetings of the
board.
Qualifications:
1. Every Director shall own at least one (1) share of the capital stock of the
corporation.
a. Educational Attainment
b. Adequate competency and understanding of business
c. Age requirement
d. Integrity, probity
e. Assiduousness
2. At least two thirds of the members of the board of directors shall be Filipino
Citizen.
3. The proposed director of a bank shall be subject to qualifications and other
requirements of existing law, rules and regulations of the Bangko Sentral.
Responsibilities:
 Firstly – They are duty bound to adopt measures that shall safeguard the
depositor’s interest.
 Secondly – They must make sure to compensate the stockholders fairly enough
in exchange for the risk they undertake and capital they invest.
 Thirdly – The directors are responsible to the regulatory and supervisory
agencies who keep surveillance over the management of the bank’s affairs to
allow maximum safety to depositors.
Standing Committees:
1. The Executive Committee – deals with administrative matters; often
prepares the groundwork for board meetings.
2. Loans and discount committee – all matters pertaining to loans and
discounts, to lines of credit and other related to the loaning function of the bank.
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3. Investment committee – concern with the banks investment portfolio;
passed judgment on what securities the bank should purchase and in what amounts.
4. Trust committee – fiduciary function of the bank; how funds will be invested;
how much to charge clients, and how to administer trust agreements.
5. Examination committee – improvised methods to conduct such internal
examination.
Liabilities of the Board of Directors – arise in their incompetence and negligence

in the discharged of their duties.
Limitations- Sec.55. Prohibited Transactions

a. Make false entries in the bank reports or participate in fraudulent
transactions.
b. Disclose to any unauthorized person any information relative to the funds
or properties in the custody of the bank.
c. Accept gifts, fees, commission in connection with the approval of a loan.
d. Overvalue security for the purpose of influencing in any way the actions of
the bank.
e. Outscore inherent banking functions.
Bank Officers:
 President – presides board meetings if he is also the chairman. Implements
policies promulgated by the board. He is the court of last resort when the board
is in session.
 Vice-President – acts in behalf of the president if the president is absent.
 Cashier – cash custodian.
 Comptroller – takes care of all accounting and statistical work of the bank.
 Auditor – verifies the accounts resulting from banking transactions.
Bank Operation:
1. Executive Function – a banker must of necessity be faced with the policy-
making, with establishing harmonious relations with customers in order to get
business, with gathering facts and figures about the depositors and debtors, with
recruiting personnel to do the minor operations and with similar duties involving
the caliber of an executive.
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2. Teller Function – he must then act as teller I manifold ways. He accepts deposit,
changes checks for cash, changes big bills with smaller denominations, releases
checks or cash representing loans, receives payment for loans and other teller
functions.
3. Bookkeeping Function – keep faithful record of the events and accounts
passing through his hands. He may also be called upon to summarize and
interpret the facts and figures.
Personal and Educational Qualities of a Banker

-A potentially efficient banker must possess a character above suspicion and
integrity of the highest order:
 He should be patient, understanding, cordial and respectful.
 He should be well versed in banking principles and practices.
 He should a good command of the medium of communication.
 He should have a working knowledge of law, economics, accounting,
management, public relations, and business psychology
Qualifications of a director:
A director shall have the following minimum qualifications:
1. He shall be at least twenty-five (25) years of age at the time of his election
or appointment;
2. He shall be at least a college graduate or have at least five (5) years
experience in business;
3. He must have attended a special seminar on corporate governance for
board of directors conducted by the BSP or by seminar providers accredited by the
BSP not later than six (6) months from the date of his election, and
4. He must be fit and proper for the position of a director of the
bank/quasibank/trust entity. In determining whether a person is fit and proper for the
position of a director, the following matters must be considered:
- integrity/probity;
- competence;
- education;
- diligence; and
- experience/training.
Province of Laguna
Qualifications of an officer.
An officer shall have the following minimum qualifications:
1. He shall be at least twenty-one (21) years of age;
2. He shall be at least a college graduate, or have at least five (5) years
experience in banking or trust operations or related activities or in a field related to
his position and responsibilities, or have undergone training in banking or trust
operations acceptable to the appropriate supervising and examining department of
the BSP: Provided, however, That trust officers shall have at least two (2) years of
actual experience or training in trust operations or fund management or other related
fields;
3. He must be fit and proper for the position he is being proposed/appointed
to. In determining whether a person is fit and proper for a particular position, the
following matters must be considered:
- integrity/probity;
- competence;
- education;
- diligence; and
- experience/training.
For commercial banks, the President must, in addition to the above-

mentioned minimum qualifications, have at least two (2) years experience in banking
and/or finance. For thrift banks and rural banks, any one of the President, Chief
Operating Officer or General Manager must, in addition to the above-mentioned
minimum qualifications, have at least two (2) years experience in banking and/or
finance. The foregoing qualifications for officers shall be in addition to those already
required or prescribed under existing laws.
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Disqualifications of a director
Without prejudice to specific provisions of law prescribing disqualifications for
directors, the following are disqualified from becoming directors:
a. Permanently disqualified
Directors/officers/employees permanently disqualified by the Monetary Board
from holding a director position:
1. Persons who have been convicted by final judgement of the court for
offenses involving dishonesty or breach of trust such as, but not limited to, estafa,
embezzlement, extortion, forgery, malversation, swindling and theft, robbery,
falsification, bribery, violation of B.P. Blg. 22, Violation of Anti-Graft and Corrupt
Practices Act and Prohibited Acts and Transactions Under Section 7 of R. A. No.
6713 (Code of Conduct and Ethical Standards for Public Officials and Employees);
2. Persons who have been convicted by final judgement of a court sentencing
them to serve a maximum term imprisonment of more than six (6) years;
3. Persons who have been convicted by final judgment of the court for
violation of banking laws, rules and regulations;
4. Persons who have been judicially declared insolvent, spendthrift or
incapacitated to contract;
5. Directors, officers or employees of closed banks/quasi-banks/trust entities
who were found to be culpable for such institution’s closure as determined by the
Monetary Board.
b. Temporarily disqualified
Directors/officers/employees disqualified by the Monetary Board from holding
a director position for a specific/indefinite period of time. Included are:
1. Persons who refuse to fully disclose the extent of their business interest or
any material information to the appropriate supervising and examining department
when required pursuant to a provision of law or of a circular, memorandum or rule or
regulation of the BSP. This disqualification shall be in effect as long as the refusal
persists;
2. Directors who have been absent or who have not participated for whatever
reasons in more than fifty percent (50%) of all meetings, both regular and special, of
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the board of directors during their incumbency, or any twelve (12) month period
during said incumbency.
3. Persons who are delinquent in the payment of their obligations as defined
hereunder:
a. Delinquency in the payment of obligations means that an obligation
of a person with a bank/quasi bank/trust entity where he/she is a director or
officer, or at least two obligations with other banks/financial institution, under
different credit lines or loan contracts, are past due pursuant to Secs. X306
and 4308Q of the Manual of Regulations;
b. Obligations shall include all borrowings from a bank/quasi bank
obtained by:
i. A director or officer for his own account or as the
representative or agent of others or where he/she acts as a guarantor,
endorser, or surety for loans from such financial institutions;
ii. The spouse or child under the parental authority of the
director or officer;
iii. Any person whose borrowings or loan proceeds were
credited to the account of, or used for the benefit of a director or
officer;
iv. A partnership of which a director or officer, or his/her
spouse is the managing partner or a general partner owning a
controlling interest in the partnership; and
v. A corporation, association or firm wholly-owned or majority
of the capital of which is owned by any or a group of persons
mentioned in the foregoing Items (i), (ii) and (iv);
This disqualification shall be in effect as long as the delinquency persists.
4. Persons convicted for offenses involving dishonesty, breach of trust or
violation of banking laws but whose conviction has not yet become final and
executory;
5. Directors and officers of closed banks/quasibanks/ trust entities pending
their clearance by the Monetary Board;
6. Directors disqualified for failure to observe/discharge their duties and
responsibilities prescribed under existing regulations. This disqualification applies
until the lapse of the specific period of disqualification or upon approval by the
Monetary Board on recommendation by the appropriate supervising and examining
department of such directors’ election/reelection;
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7. Directors who failed to attend the special seminar for board of directors
required under Item 3 of Sub secs. X141.2/4141Q.2. This disqualification applies until
the director concerned had attended such seminar;
8. Persons dismissed/terminated from employment for cause. This
disqualification shall be in effect until they have cleared themselves of involvement in
the alleged irregularity or upon clearance on their request from the Monetary Board
after showing good and justifiable reasons;
9. Those under preventive suspension; or
10. Persons with derogatory records with the National Bureau of Investigation
(NBI), court, police, Interpol and monetary authority (central bank) of other countries
(for foreign directors and officers) involving violation of any law, rule or regulation of
the Government or any of its instrumentalities adversely affecting the integrity and/or
ability to discharge the duties of a bank/quasi bank/trust entity director/officer. This
disqualification applies until they have cleared themselves of involvement in the
alleged irregularity.
Disqualifications of an Officer
1. The disqualifications for directors mentioned in Sub secs. X143.1 and
4143Q.1 shall likewise apply to officers, except that stated in Items b.2 and b.7.
2. Except as may be authorized by the Monetary Board or the Governor, the
spouse or a relative within the second degree of consanguinity or affinity of any
person holding the position of Chairman, President, Executive Vice President or any
position of equivalent rank, General Manager, Treasurer, Chief Cashier or Chief
Accountant is disqualified from holding or being elected or appointed to any of said
positions in the same bank/quasi-bank; and the spouse or relative within the second
degree of consanguinity or affinity of any person holding the position of Manager,
Cashier, or Accountant of a branch or office of a bank/quasi-bank/trust entity is
disqualified from holding or being appointed to any of said positions in the same
branch or office.
3. In the case of Universal Banks, Commercial Banks, and Thrift Banks, any
appointive or elective official whether full time or part time, except in cases where
such service is incident to financial assistance provided by the government or
government-owned or controlled corporations or in cases allowed under existing law.
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4. In the case of Cooperative Banks, any officer or employee of the
Cooperative Development Authority or any elective public official, except a barangay
official.
5. Except as may otherwise be allowed under C.A. No. 108, otherwise known
as “The Anti-Dummy Law”, as amended, foreigners cannot be officers or employees
of banks.
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Lesson 4:
BANK SUPERVISION AND EXAMINATION
Purpose of Examination and Supervision

The bank examination and supervision is done internally and externally. This
is undertaken to insure the safe and efficient operations of any bank. The external
supervision comes from agencies of the government and is not in any way connected
with banks management. This is done to ensure that they conduct their business
properly and lawfully.
Purposes:
a. To find out whether banks are doing their business in conformity with the
banking laws and that of the rules and regulation of the central bank and other
government agencies.
b. Determine how soundly the bank I financially. The examiners should
establish the fact that the bank owns the assets, that the titles to property are good,
that the assets are properly valuated in the books, and that they are of acceptable
quality.
c. Examination is more for discovering the unsound and unsafe practice and
to offer remedies or solutions for such practice. Some of such practices are granting
of big loans to a single interest, receiving collaterals of inferior quality, laxity in
collection of loans, payment of excessive salaries of dividends, keeping incomplete
or inaccurate records and payment of unreasonably high rate of interests on time
deposits. These practices serve to jeopardize not only the stockholders but also the
depositor’s interest.
External Supervision
In the Philippines, the Supervision and Examination Sector of the Bangko
Sentral is charged with responsibility of conducting spot and regular checks on all
banking institutions. It is therefore, a vital arm of the Bangko Sentral. It is headed by
a Deputy Governor and staffed by examiners and other administrative personnel.
The Major functions of this sector are the chartering of banks, supervisions ad
examinations of banking and other non-bank financial institutions.
Province of Laguna
Provisions of the New Central Bank Act:

Sec.25 Supervision and Examination – The Bangko Sentral shall
supervision over, and conduct periodic or special examination of banking institutions
and quasi-banks, including their subsidiaries and affiliates engaged in allied activities.
For purposes of this section, a subsidiary means a corporation more than fifty
percent (50%) of the voting stock of which is owned by a quasi-bank and an affiliate
means a corporation the voting stock of which, to the extent of fifty percent (50%) of
less, is owned by a bank or quasi-bank or which is related or linked to such institution
or intermediary through common stockholders or such other factors as may be
determined by the Monetary Board.
Sec.26 Bank Deposits and Investments - Any director, officer or

stockholder who, together with his related interest, contracts a loan or any form of
financial accommodation from : (1) his bank; or (2) from a bank (a) which is a
subsidiary of a bank holding company of which both his bank and the lending bank
are subsidiaries or (b) in which is controlling proportion of shares is owned by the
same interest that owns a controlling proportion of shares of his bank, in excess of
five percent (5%) of the capital and surplus of the bank, or in the maximum amount
permitted by law.
Sec.27 Prohibition
(a) An officer, director lawyer, or agent or stockholder subject to supervision
by the Bangko Sentral, except non-stock saving loans associations and provident
funds organized exclusively for employees of the BSP.
(b) Directly or indirectly requiring or receiving any gift, present or pecuniary or
material benefit for himself or another, from any institution subject to supervision or
examination by the BSP.
(c) Revealing in any manner, except under the court, the Congress or any
government office or agency authorized by law, or under such conditions as may be
prescribed by the Monetary Board, information relating to the condition or business of
any institution.
(d) Borrowing from any institution subject to supervision or examination of the
BSP shall be prohibited unless said borrowings are adequately secured, fully
disclosed to the Monetary Board may prescribe.
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Sec.28 Examination and Fees. The supervising and examining department

head, personally or by deputy, shall examine the book and every banking institution
once in every twelve (12) months, and such other times as the Monetary Board by an
affirmative vote of five (5) members: may deem expedient and to make a report to
the Monetary Board.
Banking and quasi-banking institutions which are subject to examination by
the BSP shall pay to the BSP, within the first thirty (30) days of each year, an annual
fee in an amount equal to a percentage prescribed by the Monetary Board.
Sec.29 Appointment of Conservator. Whenever on the basis of the report

submitted by the appropriate supervising or examining department, the Monetary
Board finds that a bank or a quasi-bank is in a state of continuing inability or
unwillingness to maintain a condition of liquidity deemed adequate to protect the
interest of depositors and creditors.
The Monetary Board may appoint a conservator with such powers as the
Monetary Board shall deem necessary to take charge of the assets, liabilities, and
the management, collect all monies and debts due said institutions, and exercise all
powers necessary to restore its viability. The conservator shall report and be
responsible to the Monetary Board and shall have the power to overrule or revoke
the actions of the previous management and board of directors of the bank or quasi-
bank.
The conservator shall be competent and knowledgeable in bank operations
and management. The conservatorship shall not exceed one (1) year. The
Conservator shall receive remuneration to be fixed by the Monetary Board in an
amount not to exceed two-thirds (2/3) of the salary of the president of the institution
on one(1) year, payable in twelve (12) equal monthly payments.
The Monetary Board shall terminate the conservatorship when it is satisfied
that the institution can operate on its own and the conservatorship is no longer
necessary. The conservatorship is likewise terminated, should the Monetary Board,
on basis of the report of the conservator or of its findings, determine that the
continuance in business of the institution would involve probable loss to its depositors
or creditors or creditors, in which case the provision of Sec.30 shall apply.
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Sec.30 Proceedings in Receivership and Liquidation. Monetary Board

finds that a bank or quasi-bank:
a. Is unable to pay its liabilities as they become due in the ordinary course of
business.
b. Have insufficient realizable assets, as determined by the BSP to meets its
liabilities.
c. Cannot continue in business without involving probable losses to its
depositors or creditors.
d. Involving acts or transactions which amount to fraud or a dissipation of the
asset of the institution.
The receiver shall immediately take charge of all the assets and liabilities of
the institution. He shall determine as soon as possible, but not later than ninety (90)
days from takeover, whether the institution may be rehabilitated or placed in such
condition so that it may be permitted to resume business.
If the receiver determines that the institution cannot be rehabilitated or
permitted to resume business in accordance with the next preceding paragraph. The
receiver shall:
a. File ex parte with the proper regional trial court, and without requirement of
prior notice or any other action, a petition for assistance in the liquidation of the
institution pursuant to a liquidation plan adopted by the PDIC.
b. Convert the asset of the institution into money, dispose of the same to
creditors and other parties, for the purpose of paying debts of such institution in
accordance with the rules on concurrence and preference of credit under the Civil
Code of the Philippines. The asset of an institution under the receivership or
liquidation shall be deemed in custodialegisin the hands of receiver and shall, from
the moment the institution was placed under such receivership or liquidation, be
exempted from any order of garnishment, levy, attachment, or execution.
Sec.31 Distribution of Assets. In case of liquidation of a bank or quasi-bank,

after payment of the cost of proceedings, including reasonable expenses and fees of
the receiver to be allowed by the court, the receiver shall pay the debts of such
institution, under order of the court.
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Sec.32 Disposition of Revenues and Earnings – All revenues and earnings

realized by the receiver in winding up shall be used to pay the costs, fees, and
expenses mentioned in preceding section, salaries of such personnel whose
employment is rendered necessary in the discharged of liquidation together with
other additional expenses caused thereby.
Sec.33 Disposition of Banking Franchise-The BSP may, if public interest

so requires, award to an institution, upon such terms as the Monetary Board may
approve. Provided, that whatever proceeds may be realized from such award shall
be subject to the appropriate exclusive disposition of the Monetary Board.
Sec.34 Refusal to Make Reports on Permit Examination- Any officer,

agent, manager etc… subject to supervision or examination by the BSP within
purview of this Act, who willfully refuses to file the required report or permit any lawful
examination into the affairs of such institution shall be punished by a fine not less
than 50,000 or not more than 100,000 or by imprisonment of not less than (1) year or
not more than (5) years or both, in discretion of the court.
Sec.35 False Statement- the willfully making of a false or misleading

statement on a material fact to the Monetary Board or to the examiners of the BSP
shall be punished by a fine of not less than one (100,000) or not more than (200,000),
or by imprisonment of not more than (5) years.
Sec. 36 Proceedings Upon Violation of this Act and Other Banking Laws,
Rules, Regulations, Orders or Instructions.
- Whenever a bank or quasi-bank or any person or entity, willfully violates this
act or other pertinent laws enforced by BSP or any rule issued by the Monetary
Board, this act be punished by a fine of not less than (50,000) or not more than
(200,000) or by imprisonment of not less than (2) years or not more than (10) years,
or both.
Sec.37. Administrative Sanctions on Banks and Quasi-banks - Without

prejudice to the criminal sanctions against the culpable persons provided in section
34, 35 and 36, the Monetary Board may, at its discretion, impose upon any bank or
quasi-bank their directors or officers, for any willful violation o its charter by laws,
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willful delay in the submission of reports or publications thereof as required by law,
rules and regulations.
Mechanics of Examination
Bank examiners examine bank’s books at any time during banking hours.
Examiner takes possession of the banks books and documents which are owned by
the bank or pledged by debtors as collaterals. Analysis involves the classification of
assets as to quality, valuation, and assurance that everything is in order. This would
lead to the conclusion on how efficient the management is and on how effective the
policies are. If there are any violations, immediate steps are suggested and are taken
up to correct the banks position.
Programming of Controls
a. Embezzlement – the taking of funds that belongs to depositors and
customers.
b. Defalcation – the misappropriation of funds which belongs to stockholders
such as income, fees, and commissions or through fictitious notes or fraudulent
expense vouchers.
c. Peculation- would mean all kinds of embezzlement, defalcation, or
misappropriation of funds.
d. Examination- the review and analysis of the assets and liabilities of a bank
to determine their existence, values and true ownership, and to ascertain that
everything in regard to said assets and liabilities is in order.
Causes of Peculation
1. Gambling- simply a recreation then it becomes a habit and finally a status
symbol that must be maintained.
2. Pride and Envy – A man working in a bank consumed by pride and envy
will do most everything to get even.
3. Living beyond ones income– keeping up with rich neighbors and thus
spending well beyond one’s income could also lead to embezzlement.
4. Unsound salary policies- the rising prices without commensurate salary
adjustments may invite one to commit peculation.
5. Poor employee relations- officers may look down on their subordinates and
even go to the extent of emphasizing this cleavage between them in public places.
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6. Immorality- bank officers and employees are not free from temptation to
commit crimes against morality.
Preventive Measures - the most effective prevention against peculation is the

establishment of sound and adequate internal controls. To be effective, it should
compose of two parts:
a. First part is setting up procedures where the work of one person shod
checked and proven by another. Adopting a system where an entire department or
section should not be under the complete control of one person but rather that
another person should exercise the right to approve; and to prevent anyone person
to have custody and control over any of the major subsidiary accounts.
b. Second part constitute of procedures and routines to determine that the
work performed balances and that everything is in order in relation to the general
ledger accounts. The use of daily proof sheets, periodical statement reconciliation of
accounts, reports, and similar activities are the objects of this phase of internal
control.
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Lesson 5:
BANK CREDIT INSTRUMENTS
Negotiability of Credit Instruments

 Credit takes place when there is the creditor’s belief or faith in the borrower’s
willingness and ability to pay. Hence the borrower can command in exchange for
a written or oral promise to pay either money or goods.
 The banks use negotiable documents in plying their trade and the most common
of these are the bills of exchange, the promissory note, and the check. However,
not all instruments used by the banks are unlimited acceptance.
 To be fully negotiable, an instrument’s must contain essentials of negotiability. It
must be in writing and signed by the drawer or maker; it must be made payable
to order or to bearer; it must be payable on demand or at a future determinable
time; and there must an unconditional order or promise to pay.
General Divisions of Credit Instruments

In order to distinguish one instrument from another, the following is a short
description of each. A general division between the credit instruments is that of
promise to pay and orders to pay:
Promise to Pay
 Promissory Note - is an unconditional promise for the maker to pay a sum
certain in money to order or to bearer on demand or at a future determinable
time. When the note is secured, it is called a collateral promissory note.
 Bank note - is an unconditional promise of a bank to pay a sum certain in money
on demand. Such note is used as a substitute for money. Essential Features of a
note:
a. It is a Direct Obligation of the issuing bank.
b. It is negotiated by simple delivery by reason of the fact that it is a bearer
instrument.
c. The transferee acquires a clean title to it and becomes the creditor and the
note can be circulated for longer periods of time before it is finally redeemed.
d. The notes are also in handy sizes and convenient denominations.
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 Banker’s Acceptance - a bankers acceptance contains the banks promise to
pay a draft that is presented to it for acceptance. To constitute the bank’s
intention of honoring the instruments, the word “ACCEPTED” is stamped on the
face of the draft and it is duly signed by the bank’s representative.
 Letter of Credit – a letter of credit is also a promise of a bank to honor drafts
drawn against it or for its account. A bank substitutes its credit for that of the
accredited buyer and promises to pay the beneficiary or his representative upon
presentation of a draft, subject to the condition in the letter of credit.
Bank Notes Distinguished from Standard Money

 Bank notes are practically like money the only divergence of the note from the
real money is the fact that the notes represent private bank credit rather than the
state’s credit.
 The note is declared as legal tender either fully or on a limited scale.
 Like money, bank notes are fiduciary in nature and their circulation is dependent
upon the credit of the issuing bank.
 Bank notes however, necessitate final redemption into standard money.
 Therefore, they merely represent the government’s notes.
Bank Notes Distinguished from Deposits

 The circulation of bank notes and deposits necessitates legal reserves. However,
where deposits are concerned,
Bank’s keep larger reserves because bank notes circulate longer while
checks drawn against deposits could immediately be presented for payment when
endorsed.
 Deposits necessitate the use of the checks to circulate them; bank notes in
themselves constitute the means of payment.
 In the case of deposits as well as in issuing notes, the bank becomes a debtor to
the depositor or the note holder.
Orders to Pay
 Bills of Exchange - is an order of one person/bank (drawer) to another
person/bank (drawee) to pay a third person (payee) a sum certain in money or
demand or at some specified future time. A bill of exchange is also in the form of
a check or a draft.
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 Check - is the order of a depositor to his bank to pay a third person or himself a
sum certain in money on demand. Such is commonly known as a personal check.
When the bank’s cashier is the drawer of the check, it is known as cashier’s
check. When the manager of a business concern is the drawer, it is termed a
manager’s check.
NOW Account
NOW stands for “Negotiable Order of Withdrawal”. It earns interest and
account holders can write as many NOW checks as they want on the account. It has
a feature of a savings deposit as it earns interest. It is also like a current/checking
account as it offers depositors the convenience of issuing checks for payments.
Types of checks other than negotiable instruments:

1. Rubber or Bouncing check – is one which is returned for insufficiency of funds.
2. Crossed check- one which is intended only for deposit.
3. Certified check- is one which is confirmed to have existing funds.
4. Draft- is also an order to pay and is a bill of exchange. Drafts are classified as
sight or demand, time, commercial or bank drafts.
5. Demand drafts–are instruments which are paid at sight upon presentation.
6. Time draft– those payable at a future determinable time.
7. Time sight draft- is payable also after a determinable time but the counting of its
maturity starts from the date of acceptance.
8. Time date drafts- maturity is counted from the date appearing on its face, or the
date the draft is made.
9. Commercial/trade draft- when the draft is drawn by a merchant against another.
10. Bank draft - if drawn by a bank against another bank.
Money Market Instruments

1. Treasury bill- are short-term securities issued by the country’s treasury. The bill
consists of an obligation to pay the bearer the face value of the bill upon a given date.
2. Banker’s Acceptance/ Letter of Credit- it I s a time draft and accepted bank. Before
acceptance, the draft is merely an order by the drawer to the bank to pay a specified
sum of money on a specified date to a named person or to the bearer of the draft; it
is not an obligation to the bank.
Province of Laguna
3. Negotiable Certificates of Deposit (NCD) – are liked fixed deposits except they are
bearer documents. They offer related rate of interest and are completely liquid
because they can be negotiated during the term of the deposit. Most NCD’s have a
term of less than a year. They usually offer rate of return higher than banker’s
acceptances.
4. Commercial paper – short-term commercial paper is a debt instrument commonly
issued by corporations to fund a temporary capital requirement. This form of
corporate borrowing usually matures within one year. Commercial paper is
guaranteed by the company that incurs obligation.
5. Bank Guarantees- a guarantee by Bank (banker’s guarantee) is a written
undertaking wherein the ban agrees to make stipulated payments on your behalf
should you fail to fulfill or carry out specified terms of a contract.
Negotiation - means the transfer of the instrument from one person to another
either by endorsement and delivery, by mere delivery or by assignment. Such
transfer will depend on the tenor of the instrument, particularly to whom it is made
payable, or to what extent is the interest of the transferee.
- When the instrument is payable to order which means that there is a
specified name appearing the payee, the instrument is negotiated by endorsement
and delivery. When, however, the instrument is made payable to bearer, which,
means that there is no specified name as payee or when payable to cash, then the
negotiation is completed by mere delivery.
Negotiation has certain conditions:

1. The credit instrument is complete and regular on face value.
2. The holder obtains possession of the instrument before it has become past due
and even without notice that it was previously dishonored.
3. The holder took the instrument in good faith and for value.
4. At the time it was negotiated to the holder, no defects in instruments or title were
detected.
Presentment - means the exhibiting of the instrument at the bank either for payment
or for acceptance. The check should be presented for payment within a reasonable
period of time after its issue according to the Negotiable Instruments Law.
Province of Laguna
Dishonor - means that the check is refused payment or a time draft is refused
acceptance. The refusal therefore may be termed dishonor by non-payment or
nonacceptance. If this happens, the holders of the instrument may file a protest in
writing or orally. The law prescribes the way a protest is to be made.
Endorsement - forms part of a negotiation of an instrument. It is simply indicated by

the signature of the endorser at the back of the instrument or on some paper
attached thereto. If such case, this is termed special endorsement.
- When a specified person is named as the transferee, followed by the
signature endorser, this is termed special endorsement.
- An endorsement which restricts the further negotiation of the instrument is
deemed as a restricted endorsement.
- An endorsement is qualified when the words “without recourse” appears as
part of the endorsement.
- It transfers the title and warrant the genuineness of the instrument, but does
not guarantee the payment of the endorser in case the bills have defects.
- The liability of the endorser on the note or bill will then be determined
according to the type of endorsement made by him.
Significance of Bank Credit Instruments

- Besides facilitating to a great extent dealings in credit, such bills of
exchange and promissory notes might also bring about losses on the part of the bank.
The bank is also responsible to honor checks for payment, or bills or exchange in
general, it should see to it that its normal cash needs would always be enough to
answer the demands of depositors and customers.
Province of Laguna
Learning Resource
 Almina-Mutya, Ruby (2007). Introduction to Philippine Money, Credit, and
Banking. 2 nd National Bookstore, Mandaluyong City
 Cloudhey, Moorad (2011). An Introduction to Banking: Liquidity Risk and Asset-
Liability Management, John Wiley and Sons. LTD, West Sussex United Kingdom
 Croushore, Dean (2012). Money and Banking. Cengage Learning Asia Phil. Ltd.

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Module 2 Banking and Financial Institution

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Republic of the Philippines

Laguna State Polytechnic University

LSPU Self-Paced Learning Module (SLM)

Course Banking and Financial Institution

Intended Students should be able to meet the following intended

Student Learning Strategies

Online A. Online Discussion via Google Meet

Liabilities of the Board of Directors – arise in their incompetence and negligence

Limitations- Sec.55. Prohibited Transactions

Personal and Educational Qualities of a Banker

For commercial banks, the President must, in addition to the above-

Purpose of Examination and Supervision

Provisions of the New Central Bank Act:

Sec.26 Bank Deposits and Investments - Any director, officer or

Sec.28 Examination and Fees. The supervising and examining department

Sec.29 Appointment of Conservator. Whenever on the basis of the report

Sec.30 Proceedings in Receivership and Liquidation. Monetary Board

Sec.31 Distribution of Assets. In case of liquidation of a bank or quasi-bank,

Sec.32 Disposition of Revenues and Earnings – All revenues and earnings

Sec.33 Disposition of Banking Franchise-The BSP may, if public interest

Sec.34 Refusal to Make Reports on Permit Examination- Any officer,

Sec.35 False Statement- the willfully making of a false or misleading

Sec.37. Administrative Sanctions on Banks and Quasi-banks - Without

Preventive Measures - the most effective prevention against peculation is the

Negotiability of Credit Instruments

General Divisions of Credit Instruments

Bank Notes Distinguished from Standard Money

Bank Notes Distinguished from Deposits

Types of checks other than negotiable instruments:

Money Market Instruments

Negotiation has certain conditions:

Endorsement - forms part of a negotiation of an instrument. It is simply indicated by

Significance of Bank Credit Instruments

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