Chapter 4 Investments, Loans and Other Functions of Banks I. Operations of Universal Banks A. Powers of Universal Banks 1.

Powers authorized for a commercial bank 2. powers of an investment house 3. power to invest in non-allied enterprises B. Equity Investments of a Universal Bank - universal banks may invest as may be determined by the Monetary Board *Allied Enterprises a. Financial b. Non-financial *General Rules: a. Total investment in equities of allied and non-allied enterprises shall not exceed 50% of the net worth of the bank b. Equity investment in any one enterprise, whether allied or non-allied, shall not exceed 25% of the net worth of the bank >>EXCEPTION: Prescribed by the Monetary Board *Net Worth - the total 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 Section 24, GBL - acquisition of equity or equities is subject to the prior approval of the Monetary Board which shall promulgate appropriate guidelines to govern such investments C. Equity Investments of a Universal Bank in Financial Allied Enterprises 1. Universal bank can own up to 100% of the equity in a thrift bank, rural bank or financial allied enterprise 2. Publicly-listed universal or commercial bank may own up to 100% of the voting stock of only one other universal or commercial bank (SEC. 25, GBL) *Financial Allied Undertakings:

a) Leasing companies - leasing of stalls and spaces in a commercial establishment > bank investment in/acquisition of shares of such leasing company shall be limited/applicable onl in cases of conversion of outstanding loan obligations into equity b) Banks c) Investment Houses d) Financing Companies e) Credit Card Companies f) Financial Institutions catering to small and medium scale industries oncluding venture capital corporation g) Companies engaged in stock brokerage/securities dealership h) Companies engaged in foreign exchange dealership/brokerage *Universal Banks may invest in the following financial undertakings: a) Insurance Companies b) Holding Company > investments of such are confined to the equities of allied undertakings and/or non-allied undertakings of Universal Banks allowed under BSP regulations *Monetary Board may declare such other activities as financial allied undertakings of banks *Determination of whether the corporation is engaged in a financial allied undertaking - primary purpose as stated in int articles of incorporation and the volume of its principal business D. Equity of a Universal Bank in Non-Financial Allied Enterprises -up to 100% *Non-Financial Allied Undertakings a) Warehousing Companies b) Storage Companies c) Safe deposit box companies d) Companies primarily engaged in the management of mutual funds but not in the mutual funds themselves e) Management corporations engaged or to be engaged in an activity similar to the management of mutual funds f) Companies engaged in providing computer services g) Insurance agencies/brokerages h) Companies engaged in home building and home development

i) Companies providing drying and/or milling facilities for agricultural crops such as rice and corn j) Services bureaus, organized to perform for and in behalf of banks and non-bank financial institutions the services allowed to be outsourced > data processing companies may be allowed to invest up to 40% in the equity of service bureaus k) Philippine Clearing House Corporation, Philippine Central Depository, Inc and Fixed Income Exchange l) Other Similar activities as the Monetary Board may declare as non-financial allied undertakings of banks. > Health Maintenance Organizations (HMOs) *Rural Banks/Cooperative Banks - invest as a non-financial allied undertaking, in the equities of companies engaged in the ff.: a) Warehousing and other post-harvest facilities b) Fertilizer and agricultural chemical and pesticides distribution c) Farm equipment distribution d) Trucking and transportation of agricultural products e) Marketing of agricultural products f) Leasing g) Other undertakings as may be determined by the Monetary Board E. Equity Investments of a Universal Bank in Non-Allied Enterprises - not exceed 35% of the total equity in that enterprise nor shall it exceed 35% of the voting stock in that enterprise (SEC. 27, GBL) F. Investments in Non-allied or Non-Related Undertakings - universal banks may engage with *Non-Allied Undertakings Eligible for Investment by Universal Banks: a) Enterprises engaged in physically productive activities in agriculture, mining and quarrying, manufacturing, public utilities, construction, wholesale trade and community and social services following the industrial groupings in the Philippine Standard Industrial Classification b) Industrial park projects and/or industrial estate developments c) Financial and commercial complex projects arising from or in connection with the Governments privatization program - land development and buildings constructed thereon

d) Other broad categories as the Monetary Board may declare as appropriate G. Equity Investments in Quasi-Banks - Monetary Board may limit to 40% > apply to commercial banks > Purpose: promote competitive conditions in financial markets (SEC. 28, GBL) II. Operations of Commercial Banks A. Powers of a Commercial Bank 1. General Powers incident to corporations 2. All such powers as may be necessary to carry on the business of commercial banking: i. accepting drafts and issuing letters of credit ii. discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt iii. accepting or creating demand deposits iv. Receiving other types of deposits and deposit substitutes v. Buying and selling forex and gold or silver bullion; acquiring marketable bonds and other debt securities vi. Extending credit, subject to such rules as the Monetary Board may promulgate >> include determination of bonds and other debt securities eligible for investment, the maturities and aggregate amount of such investment (SEC. 29, GBL) B. Issuance of Letters of Credit Letter of Credit financial devise developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer who wants to have control of the goods before paying - an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit - bank merely substitutes its own promise to pay for one of its customers who in return

promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon - Purpose : to insure to a seller payment of a definite amount upon presentation of documents - A banker advances money to an intending importer and thereby lends the aid of capital, of credit, or of business facilities and agencies abroad, to the enterprise of foreign commerce - Not an ordinary pledge by the importer to the banker, for the importer has never owned the goods, and moreover he is not able to deliver the possession; but the security is the complete title vested originally in the bankers, and this characteristic of the transaction has again and again been recognized and protected by the courts Characteristics of letters of credit Engagement of the issuing bank to pay the seller once the draft and the required shipping documents are presented to it Independence principle bank determines compliance with the letter of credit only by examining the shipping documents presented precluded from determining whether the main contract is actually accomplished or not Letter of credit Transaction - 3 distinct but intertwined concretized in a contract: relationships

draft and proper documents of titles and to surrender the documents to the buyer upon reimbursement c) Seller in compliance with the contract of sale, ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment C. Equity Investments of a Commercial Bank - equities of allied enterprises as may be determined by the Monetary Board > Financial > Non-financial General Rules: 1. Total investment in equities of allied enterprises shall not exceed 35% of the net worth of the bank 2. Equity investment in any one enterprise shall not exceed 25 % of the net woth of the bank subject to prior approval of Monetary Board = promulgate appropriate guidelines to govern such investments (SEC. 30, GBL) EXCEPTION: Prescription made by Monetary Board D. Equity Investments of a Commercial Bank in Financial Allied Enterprises - up to 100% of the equity of a thrift bank or rural bank ONLY - 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. 31, GBL) E. Equity of a Commercial Bank in nonFinancial Allied enterprises - up to 100% (see Table in page 130 of book) III. Risk-Based Capital A. Minimum Ratio - Monetary Board

International Settlements relating to risk-based capital requirements - May alter or suspend compliance with such ratio whenever necessary for a maximum period of 1 year - Shall be applied uniformly tp banks of the same category B. Effect of Non-Compliance - Monetary Board: 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 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 RP and of the BSP and any other evidences of indebtedness or obligations the servicing and repayment of which are fully guaranteed by the RP, until the minimum required capitol ratio has been restored *SEC. 34, GBL bank merger or consolidation or under rehabilitation under a program approved by BSP > MB may temporarily relieve the surviving bank, consolidated bank, or constituent bank or corporations under rehabilitation for full compliance with the required capital ratio under such conditions as it may prescribe IV. Limit on Loans, Credit Accommodations and Guarantees A. Single Borrowers Limit 1. As defined by MB mat be extended by a bank to any person, partnership, association, corporation or other entity shall at no time exceed 20% of the net worth of such bank EXCEPTIONS: a) Prescription by the Monetary Board b) Deposits of the rural banks with GOCCs

> LBP, DBP, Pnb = exempted from single borrowers limit imposed by the General Banking Act c) total amount of loans, credit accommodations and guarantees prescribed in the preceding paragraph may be increased by an additional 10% of the net worth of such bank > additional liabilities of any borrower are adequately secured by trust receipts, shipping documents, warehouse receipts or other similar documents transferring or securing title covering readily marketable, non-perishable goods which must be fully covered by insurance EXCEPTION TO (a): Readily Marketable Goods - articles of commerce, agriculture or industry of such uses as to make them the subject of constant dealings in ready markets with such frequent quotations as to make their prices easily and definitely ascertainable, or which lend themselves easily to disposal by sale at any time to pay the obligations secured by the said goods Basis for determining compliance with simgleborrowers limit - total credit commitment of the bank to the borrower Loans all the accounts under the loan portfolio of a bank as enumerated in the manual of accounts for banks Other Credit Accommodations credit and specific market risk exposures of banks arising from accommodations other than loans such as receivables (sales contract receivables, accounts receivables and other receivables) and debt securities booked as investments Total credit commitment outstanding loans and other credit accommodations, deferred letters of credit less margin deposits and guarantees - reckoned on credit riskweighted basis consistent with existing regulations Circular No. 425 s. 2004 - amendments to Section x303, subsections x303.1 to x303.5 and subsection x347.2 of the Manual of Regulations for Banks to implement Section 35 of GBL (see pp. 133-140 of book)

a) links the party applying for L/C (account party or buyer or importer) and the party for whose benefit the L/C is issued (beneficiary/seller/exporter) b) account party and issuing bank - application and agreement - reimbursement agreement - account part applies to the issuing bank for a specified L/C and agrees to reimburse the bank for amounts paid by that bank pursuant to L/C c) issuing bank and beneficiary, in order to support the contract, under (a), of the account party and the beneficiary to, inter alia, pay certain monies to the latter Parties a) Buyer procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents of title

b)

Bank Issuing the letter of credit undertakes to pay the seller upon receipt of the

net worth of a bank must bear to its total risk assets which may include contingent accounts - may require that it 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 - MB shall conform to internationally accepted standards, including those of the Bank for