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)  

 Head Office only 500 million

 Up to 10 branches1/ 750 million
 11 to 50 branches1/ 1.00 billion
 More than 50 branches1/ 2.00 billion

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can only be withdrawn by means of checks.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.
Page | 2
 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.

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 arequoted 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:

Page | 3
 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).

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.

Page | 4
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.
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

Page | 5
 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.

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.

Page | 6
 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 | 7