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July 2018
Prepared by Assoc. Prof. Ria Santos Fajilago
LESSON 1 Overview of Banking

a. Nature of banking business

b. Commercial banks compared with other
banks
c. Basic principles of banking operations

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Learning Outcomes

July 2018
Prepared by Assoc. Prof. Ria Santos Fajilago
a. To understand banks as financial institutions or financial
intermediaries.
b. To understand the nature of banking business.
c. To differentiate commercial banks with all the other
classification of banks.
d. To know the various principles of banking.
e. To appreciate the role of banks in the economy as a
whole.
f. To be up-to-date in the current profile of the Philippine
Banking Industry
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What is a bank?

July 2018
Prepared by Assoc. Prof. Ria Santos Fajilago
A bank is a financial institution that accepts deposits from the
public and creates credit.

Banking can be defined as the business activity of accepting and

safeguarding money owned by other individuals and entities, and
then lending out this money in order to earn a profit.

Bank is an institution which deals in money and credit.

Banking is an activity which involves acceptance of deposits for the

purpose of lending or investing.
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The BSP Monetary Board

July 2018
Prepared by Assoc. Prof. Ria Santos Fajilago
Chairman Nestor A. Espenilla, Jr.

Members Antonio S. Abacan, Jr.

Valentin A. Araneta
Carlos G. Dominguez III

Peter B. Favila

Felipe M. Medalla

Juan De Zuñiga, Jr.

Basic Banking Terminologies 5

Automated Teller Machine is a machine that dispenses cash or performs

July 2018
Prepared by Assoc. Prof. Ria Santos Fajilago
other banking services when an account holder inserts a bank card.

Bank holiday is a business day, during which commercial banks and savings
& loans institutions are closed to the public.

Bank run occurs when a large number of customers of a bank or another

financial institution withdraw their deposits simultaneously due to concerns
about the bank's solvency.

Bankruptcy is a legal term for when a person or business cannot repay their
outstanding debts.

Bounced check is slang for a check that cannot be processed because

the account holder has non-sufficient funds (NSF).
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Custodianship refers to fees and commissions income from the
custodianship services offered by the bank

July 2018
Prepared by Assoc. Prof. Ria Santos Fajilago
Demand Deposits refers to deposits, subject to withdrawal
either by check or through automated tellering machines,
which are otherwise known as current or checking accounts

Interest Rates is the proportion of a loan that is charged as

interest to the borrower, typically expressed as an annual
percentage of the loan outstanding.

NOW Accounts refers to the interest-bearing savings deposit

which are withdrawable by means of NOW
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Postdated check or draft will display a future date on it. A check user
will often write this in to specify that s/he does not want to withdraw

July 2018
Prepared by Assoc. Prof. Ria Santos Fajilago
the amount of the check until the date specified.

Remittance is the funds an expatriate sends to his or her country of

origin via wire, mail, or online transfer.

Savings Deposits refers to interest-bearing deposits which are

withdrawable either upon presentation of a properly accomplished
withdrawal slip together with the corresponding passbook or thru the
automated tellering machines

Time Certificate of Deposits refers to interest-bearing deposits with

specific maturity dates and evidenced by certificates issued by the
bank.
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July 2018
Prepared by Assoc. Prof. Ria Santos Fajilago
How the bank operates?

The main operation of a bank involves financial

intermediation.

Transactions are created between individuals,

business firms, government institutions and foreign
investors- the suppliers and users of funds.
A bank act as a financial intermediary that serves as a 9
middleman for different parties in a financial transaction. It
facilitates the channeling of funds between lenders and

July 2018
Prepared by Assoc. Prof. Ria Santos Fajilago
borrowers indirectly.

Through the process of financial intermediation, certain assets

or liabilities are transformed into different assets or liabilities. As
such, financial intermediaries channel funds from people who
have extra money or surplus savings (savers) to those who do
not have enough money to carry out a desired activity
(borrowers).

That is, savers (lenders) give funds to an intermediary institution

(such as a bank), and that institution gives those funds to
spenders (borrowers).
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July 2018
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July 2018
Prepared by Assoc. Prof. Ria Santos Fajilago
A banker is one who undertakes banking activities,
accepting deposits and lending money for different
purposes.

The essential features of banking activities are as follows:

1. accepting deposits from public;

2. lending or investment of such deposits;
3. incidental to the activities of accepting deposits for
lending or investing,
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banks undertake activities like —

July 2018
Prepared by Assoc. Prof. Ria Santos Fajilago
a. Promoting and mobilizing savings of the public;
b. Providing funds to trade and industry by way of discounting
bills, overdraft, cash credit facility, and transfer of funds from
one place to another;
c. Providing agency services to customers, such as collection
of bills, payment of insurance premium, purchase and sale of
securities, etc., and other general services, such as issue of
travelers’ checks, credit cards, locker facility, etc.;
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Role of banks in the Philippine Financial System as a whole

July 2018
Prepared by Assoc. Prof. Ria Santos Fajilago
Monetary Policies
1. Legal Reserve Requirement
2. Rediscounting
3. Discounting
4. Open Market Operations
5. Selective Credit Control
6. Moral Suasion
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July 2018
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July 2018
Prepared by Assoc. Prof. Ria Santos Fajilago
Commercial Banks Compared with Other Banks

The Bangko Sentral ng Pilipinas is the regulating body of all

banking institutions in the country. The Monetary Board as its
policy making body issues policies and guidelines for the banks
strict implementation.

Philippine banking system is composed of universal and

commercial banks, thrift banks, rural and cooperative banks.
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July 2018
Prepared by Assoc. Prof. Ria Santos Fajilago
Universal and commercial banks represent the largest single
group, resource-wise, of financial institutions in the country.

They offer the widest variety of banking services among

financial institutions.

In addition to the function of an ordinary commercial bank,

universal banks are also authorized to engage in underwriting
and other functions of investment houses, and to invest in
equities of non-allied undertakings.
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The thrift banking system is composed of savings and
mortgage banks, private development banks, stock savings

July 2018
Prepared by Assoc. Prof. Ria Santos Fajilago
and loan associations and microfinance thrift banks.

Thrift banks are engaged in accumulating savings of

depositors and investing them.

They also provide short-term working capital and medium-

and long-term financing to businesses engaged in
agriculture, services, industry and housing, and diversified
financial and allied services, and to their chosen markets and
constituencies, especially small- and medium- enterprises
and individuals.
Rural and cooperative banks are the more popular type of banks in 18
the rural communities.

July 2018
Prepared by Assoc. Prof. Ria Santos Fajilago
Their role is to promote and expand the rural economy in an orderly
and effective manner by providing the people in the rural
communities with basic financial services.

Rural and cooperative banks help farmers through the stages of

production, from buying seedlings to marketing of their produce.
Rural banks and cooperative banks are differentiated from each
other by ownership.

While rural banks are privately owned and managed, cooperative

banks are organized/owned by cooperatives or federation of
cooperatives.
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July 2018
Prepared by Assoc. Prof. Ria Santos Fajilago
Banks follow specific principles in its operation. No single
principle is more important than others.

Each facilitates the delivery of its functions and services to

its clients.

Below is a diagram that summarize the principles of

banking.
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July 2018
Principles of Commercial Banking
Principle of safety 21
Banks are to be alert in light of the fact that bank's cash is depositors’
money. Unless the cash loaned out is safe, the banks can't pay depositors
money back.

July 2018
Prepared by Assoc. Prof. Ria Santos Fajilago
Principle of profitability
The main motivation of commercial endeavor is to earn profit.

Principle of liquidity
Deposits are the life blood of the commercial bank. Investors are repayable
on interest or after expiry of a certain period. Everyday investors either store
or withdraw money. To fulfill the demand for cash, all commercial banks
need to keep certain measure of trade in for spendable cash their custody.

Principle of solvency
Commercial bank should be financially sound and maintain the
needed capital to continuing its business.
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Principle of collection of saving
Another vital principle is mobilization of savings. Commercial

July 2018
Prepared by Assoc. Prof. Ria Santos Fajilago
banks should encourage the individuals with surplus funds to
save.

Principle of economy
Commercial banks never strive for any unnecessary costs. They
should continuously attempt to keep up with the economy
and its competitors.

Principle of secrecy
Commercial bank keeps up and keeps the customers’
accounts confidential. None except lawful individual is
permitted to see the records of the customers account.
Principle of providing services 23
Commercial bank believes that client services ought to be
done effectively, efficiently and instantly. Customers should

July 2018
Prepared by Assoc. Prof. Ria Santos Fajilago
have a sense of satisfaction for every service that they provide.

Principle of relation
Commercial banks always try to create & continue an
excellent relationship with their clients and potential customers.

Principle of modernization
It is the time of science and innovation or technology. So, to
adapt with the changing world the commercial bank needs to
embrace cutting edge specialized or updated services like on-
line banking, mobile banking, MasterCard and so on.
Principle of specialization 24
It is a time of specialization. Here commercial banks sections their entire
capacities into different parts & spot their HR as per their proficiency.

July 2018
Prepared by Assoc. Prof. Ria Santos Fajilago
Principle of location
Commercial banks choose a perfect or suitable place where the availability
of customers is large.

Principle of publicity
It is a period of exposure and advertisement. On the off chance that you
might want to gain more money, you need to give more commercial
publicity through different media. All things considered, commercial banks
follows this sort of principle to build their clients and customers.

Principle of loan and investment policy

The sources of funds of commercial banks are through loaning and
contributing money to the suitable projects. So, commercial banks attempt
to gain profit through top ventures.
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Functions of Banks

July 2018
Prepared by Assoc. Prof. Ria Santos Fajilago
Deposit

Loan

Exchange

Collection and Remittance

Trust