Bukidnon State University

City of Malaybalay
College of Business
FM103 (Banking and Financial Institutions)

CHAPTER 7
COMMERCIAL BANKS

Commercial bank - deals in multifarious functions and services. Bangko Sentral requires
P2,400.00 (in million pesos) as the minimum level of capitalization.

Amended Minimum Capital Requirements for Banks

Existing Minimum Revised Minimum

Bank Category/Network Size
Capitalization Capitalization
Universal Banks P 4.95 billion2/

 Head Office only P 3.00 billion

 Up to 10 branches 1/ 6.00 billion
 11 to 100 branches1/ 15.00 billion
 More than 100 branches1/ 20.00 billion

Commercial Banks 2.40 billion2/

 Head Office only 2.00 billion

 Up to 10 branches1/ 4.00 billion
 11 to 100 branches1/ 10.00 billion
 More than 100 branches1/ 15.00 billion

Thrift Banks
Head Office in:

 Metro Manila 1.00 billion2/

 Cebu and Davao cities 500 million2/
 Other Areas 250 million2/

Head Office in the National Capital Region

(NCR)
500 million
 Head Office only 750 million
 Up to 10 branches1/ 1.00 billion
 11 to 50 branches1/ 2.00 billion
 More than 50 branches1/

Head Office in All Other Areas Outside NCR

 Head Office only 200 million

 Up to 10 branches1/ 300 million
 11 to 50 branches1/ 400 million
 More than 50 branches1/ 800 million

Rural and Cooperative Banks

Page | 1
Head Office in:

 Metro Manila 100 million2/

 Cebu and Davao cities 50 million2/
 Other cities 25 million2/
 1st to 4th class municipalities 10 million2/
 5th to 6th class municipalities 5 million2/

Head Office in NCR

 Head Office only 50 million

 Up to 10 branches1/ 75 million
 11 to 50 branches1/ 100 million
 More than 50 branches1/ 200 million

Head Office in All Other Areas Outside NCR

(All Cities up to 3rd Class Municipalities)

 Head Office only

 Up to 10 branches1/ 20 million
 11 to 50 branches1/ 30 million
 More than 50 branches1/ 40 million
80 million
Head Office in All Other Areas Outside NCR
(4th to 6th Class Municipalities)

 Head Office only

 Up to 10 branches1/ 10 million
 11 to 50 branches1/ 15 million
 More than 50 branches1/ 20 million
40 million

Note: 1/ Inclusive of Head Office

2/ With no distinction for network size

Functions of Commercial Bank

1. Deposit Function – a commercial bank primarily receives demand deposits which can
only be withdrawn by means of checks. It may also receive time deposits.
2. Loan Function – It advances sums of money for relatively short period 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 transfer or swapping of credit.
4. Trust function – engage in fiduciary activities such as administrators 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, given expert
advice to clients on their business dealings.
Banks Services

1. Rental of safe deposit boxes – valuables are kept in specially constructed vaults to allow
maximum safety from fire, burglary and other risks.

Page | 2
 2. Sale of drafts and cashier’s checks – commercial banks also undertake the sale of drafts
and the cashier’s checks. The bank charges a small fee for this service.
3. Sale of traveler’s checks – a traveler is provided a safe medium of exchange through this
service of commercial banks. The traveler 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 be drafts, checks, bond coupons, promissory
notes and others.
5. Credit Information – commercial banks used credit information not only within their
own offices but also disseminate such information to others who need the same.
6. Payrolls – bank employees are also assigned to prepare payroll payment by inserting the
correct amounts in envelopes to cover salaries of employees of business concerns.

General Banking Law of 2000 (R.A 8791) under Chapter IV, Articles II and Articles III,
Section 53 are quoted hereunder:

Sec.29 Powers of a Commercial Bank – Commercial bank shall have, in addition to the general
powers incident to corporations, al 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 deposits substitute; 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.

Sec.30 Equity Investments of a Commercial bank – commercial bank may, subject to the
conditions stated in the succeeding paragraphs, invest only in the equities of allied enterprise as
may be determined by the Monetary Board. Allied enterprises may either be financial no n-
financial.

Except as the Monetary Board may otherwise prescribe:

30.1 The investment in equities of allied enterprises shall not exceed 35% of the net
worth of the bank.
30.2 The equity investment in any one enterprise shall not exceed 25% of the net worth
of the bank.

Sec.31 Equity Investments of a Commercial bank in Financial Allied Enterprises – A commercial

bank may own up to one hundred (100%) of the equity of thrift bank or 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 Investment of a Commercial Bank in Non-Financial Allied Enterprise – A commercial

bank may own up to one hundred percent (100%) of the equity in non-financial allied
enterprises.

Universal Bank
Universal Bank – is also a commercial bank. A UB exercises the power and services authorized
for a KB. Required minimum capital is P 4,950.0 (in million pesos). Also called an expanded
commercial bank (EKB).
Page | 3
Sec.23 Powers of a Universal Bank – shall have the authority to exercise the power authorized
for a commercial bank in section 29 the powers of investments house as provided in existing
laws and the power to 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 enterprise as
may be determined by the Monetary Board. Allied enterprise may either be financial or non-
financial. Except as the Monetary Board may otherwise be prescribe:
24.1 The total investment in equities of allied non-allied enterprise 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.

Sec.25 Equity Investment of a Universal Bank in Financial Allied Enterprise – A universal bank can
own up to one hundred percent (100%) of the equity in a thrift bank, rural bank, or a financial
allied enterprise. A publicly listed universal or commercial bank may own up to one hundred
percent (100%) of the voting stock of only one other universal or commercial bank.

Sec.26. Equity Investment of a Universal bank in Non-Financial Allied Enterprise - a universal bank
may own up to one hundred (100%) of the equity in a non-financial allied enterprise.

Sec.27. Equity Investment of a Universal Bank in Non-Allied Enterprises – the equity investment of
a universal bank, or of its wholly or majority-owned subsidiaries, in a single non-allied
enterprise shall not exceed thirty five percent (35%) of the total equity in that enterprise nor
shall it exceed thirty five percent (35%) of the voting stock in that enterprise.

Sec.28 Equity Investment in Quasi-bank – to promote competitive condition in financial markets,

the Monetary Board may further limit to forty percent (40%) equity investment of universal
banks in quasi banks.

Take Note! :
A universal bank may perform the functions of an investment house either directly or indirectly
through a subsidiary investment house. The underwriting of equity securities and securities
dealing shall be subject to pertinent laws and regulation of the Securities and Exchange
Commission (SEC).

Non-Financial Allied Undertakings:

1. Warehousing companies
2. Storage companies
3. Safe deposit box companies
4. Companies primarily engaged in the management of mutual funds but not in mutual
funds themselves.
5. Management corporations engaged or to be engaged in an activity similar to the
management of mutual funds.
6. Companies engaged in providing computer services
7. Insurance agencies/Brokerages.
8. Companies engaged in home building and home development.
9. Companies providing drying and/or milling facilities for agricultural crops.
Page | 4
 10. Service Bureaus organized to perform for and in behalf of banks and non-bank financial
institutions as the services allowed to be outsourced under Circulation No. 268.
Provided, that data processing companies may be allowed to invest up to 40% in the
equity service bureaus.
11. Philippine Clearing House Corporation (PCHC) and the Philippine Deposit Insurance
Corporation (PDIC)
12. Such other similar activities as the Monetary Board may declare as non-financial allied
undertakings of banks.

Financial Allied Undertakings

1. Leasing companies including leasing of stalls and spaces in a commercial
establishments; provided that bank investment in/acquisition of shares of such leasing
company shall be limited/applicable only in cases of conversion of outstanding loan
obligation into equity;
2. Investment houses
3. Banks
4. Financing companies
5. Credit card companies
6. Financial institution catering to small and medium scale industries including venture
capital corporations (VCC)
7. Companies engaged in stock brokerage/securities dealership
8. Companies engaged in foreign exchange dealership/brokerage.
In addition the UB’s may invest in the following as financial allied undertakings:
a. Insurance Companies
b. Holding companies, provided that the investment of such holding company are confined
to the equities of allied undertakings and /or non-allied undertakings of the UB’s
allowed under the BSP regulations.

Departmentalization
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 Controls, Safe Deposit Boxes, and Armored Car Services.

2. Loan and Discount Department – headed by a loan officer. 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 – headed by a trust officer who is well-versed in trust functions. It

deals more on legal officer’s work and a lawyer would be ideal for this job. The divisions
will be line with the fiduciary activities.

4. Foreign Department – deals in exchange 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.

Page | 5
 5. Accounting Department – takes care of all the transactions of the bank. It puts in order
all the books, proof sheet, financial statements, and other accounting procedures used in
the bank.

6. Auditing Department – takes care of seeing to it that disbursement 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.
Forms of Bank Credit

Bank credit – represents the bank’s trust and the confidence in the borrowers willingness and
ability to pay a loan when due. It could also mean the depositors trust in the bank which makes
him put his money for safekeeping. It may be in the form of bank notes, deposits, letters of
credit, lines of credit, acceptances, and notes payable.

Sources of Bank Funds

The major or primary source of bank funds is the contribution of stockholders and
sizable deposits. The banks will try their best to outdo one another to attract depositor. 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, monetize,
depreciation, and others.

“If any of you lacks wisdom, he should ask God, who gives generously to all without
finding fault, and it will be given to him. But when he asks, he must believe and not
doubt, because he who doubts is like a wave of the sea, blown and tossed by the wind.”
– JAMES 1:5-6 -

Page | 6