Branch Banking. Unit vs. Branch Banking. Most countries have only a few large banks, each banks with many branches located throughout the nation. Other countries, however, have distinct and separate banks throughout the country.
Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.
Unit vs. Branch Banking • Most countries have only a few large banks, each banks with many branches located throughout the nation. Other countries, however, have distinct and separate banks throughout the country. • This is because some countries only allow unit banking – which is a system that permits each bank to have only a single geographic location; a prohibition against branch banking. • Branch Banking – as its name suggests, is one of two or more banking offices owned and operated by a single banking corporation.
What is a Deposit? • Deposit – is money placed in a bank for safekeeping or to earn interest and to be used according to banking practice. Deposits are the lifeblood of a bank. A deposit is a contract between savers (creditors) and the bank (debtor), thus giving rise to a debtor-creditor relationship. Note: Bank deposits constitute one of the most influential factors in the whole financial system. They are not only the largest element of money stock, but at the same time form an important source of investment funds.
Why Banks Accept Deposits? • Banks are businesses – they must be operated like any other businesses (strive to make their business profitable). • A major portion of the bank’s income comes from lending, and to be able to do so, they must accept deposits. • Since profits is a pre-requisite to survival, banks must engage in the generation of income. Note: Deposits constitute the bulk of the liabilities of a bank.
Types of Deposit • As to Source a. Private Deposits – made by private individuals and businesses. b. Public deposits – made by the government (local or national). 2.As to the Way They are Created a. Direct or Primary Deposits – come from: (1) Households (2) Businesses, and (3) Local/national gov’t Note: Direct deposits are deposited over-the-counter by depositors. They are called primary because they arise at the discretion of customers and the bank must place a cash reserves behind these deposits. Direct deposits do not increase money in circulation
Types of Deposit Cont’d. (Types of Deposit) 3. Method of withdrawal a. Checkable Deposits – customers are allowed to write checks or other orders to pay on demand for purchases of goods/services; also called demand deposits (withdrawable on demand) or current accounts (simultaneous deposit/ withdrawals). b. Nontransaction Deposits – can not be withdrawn by demand or checks but may be withdrawn over-the-counter, ex. Savings or Time Deposit Accounts.
Forms of Deposits Cash (or cash items) Checks issued by the bank Checks issued by other banks (a.k.a “Clearing Items”). Note: If a check cannot be credit right away to a depositor’s account, this is referred to as “Items for Collection from Banks and Other Financial Institutions”. Proceeds of loans and discounts Traveler’s checks Drafts Promissory Notes Money orders
Cash Items • Cash (or Cash Items) – are currencies and coins kept by banks. Currency can either be referred to a particular currency, ex. peso, coins and banknotes. Cash items are for immediate credit to the account of the depositor (unlike checks which are subject for clearing) and withdrawable anytime.
Checks • A Check – is a written order of a depositor to a bank to pay a specified amount, from a demand account, either to himself or to a third person. Checks may be drawn “on us” or drawn on other banks (known as Clearing Items). Checks are valid for 6 months only. • Manager’s Check (or Cashier’s Check) – are checks drawn by the bank against itself; guarantees payment to the receiver of the check
Checks Parts of a Check: 1. Place of issue 2. Check number 3. Date of issue 4. Payee 5. Amount 6. Signature of the drawer/maker 7. MICR – routing, account number
Checks Parties to a Check: 1. Drawee Bank – the primary party; the bank to whom the check was drawn. 2. Drawer – the secondary party; the maker of the check against funds on deposit in the bank. The maker writes the various details including the amount, date, and a payee, and signs it, ordering his bank to pay a person or company the amount of money stated. 3. Payee – the third party, the person or entity who endorses the check. Note: Both maker and payee must be natural persons or legal entities.
Checks Types of Checks: 1. Order Check – the most common; payable only to the named payee or his endorsee; usually contains “Pay to the order of (name)” 2. Bearer Check – payable to anyone who is in possession of the document; usually containing no payee or payable to either “Bearer” or “Cash”. 3. Counter Check – bank check given to customers who have run out of checks or whose checks are not yet available; used for purposes of withdrawal.
Items for Collection Kinds of Items for Collection 1. According to Destination a. City Collections – payable locally b. Country Collections – payable out-of-town c. Foreign Collections, Imports – payable outside the country d. Foreign Collections, Exports – originating outside of the country 2. As to Type of Item a. Drafts b. Notes or acceptances c. Real estate contracts or mortgages d. Bonds and coupons e. Stock certificates
Traveler's Checks • Traveler’s Checks – are issued by banks in booklet form and usable only if countersigned by the traveler. Conversely, TCs are checks not drawn on a particular bank, but are payable anywhere throughout the world. They are used extensively in foreign travels not only because of the convenience they afford to their holders but also because of their safety.
Bank Drafts • A Bank Draft – is a type of check drawn by one bank upon another bank. A type of “Order to Pay” instrument endorsed in the same way as checks and deposited the same way. Drafts drawn by a depositor or by another person are handled as a collection item and as such are not credited until paid.
Negotiable Instrument, PN and B/E, Distinguished • A Negotiable Instrument – is a specialized type of contract for the payment of money that is unconditional and capable of transfer by negotiation . 2 Classes: 1. Promissory Note - written promise by the maker to pay money to the payee. 2. Bill of Exchange – is a "draft" or a written order by the drawer to the drawee to pay money to the payee.
What is a “Holder in Due Course”? • It is often convenient to use cash as payment in certain transactions (e.g., those involving large sums of money), but ordinary promises to pay are unsuitable as a substitute for cash because contract defenses may apply. A Holder in Due Course (HDC) – is a person who takes a negotiable instrument, such as a PN, for value without knowledge of any apparent defect in the instrument nor any notice of dishonor. Status as a "holder in due course" is an affirmative defense against all legal claims the debtor may have against the original creditor.
What is a “Holder in Due Course”? Example: A consumer purchases a car on an installment plan from a car dealer. The credit transaction would be secured by a PN, a chattel mortgage, deed of trust, or other contract (i.e., retaining "title" by retailer and permitting it to repossess the car if the consumer does not make payment according to the installment sales terms). The retailer may then sell the note and related documents to a bank or other finance company. The retailer would assert that it is an HDC and therefore, not responsible for any defects in the car or for any misrepresentations about it that the retailer made to the consumer.
Money Order • A Money Order – is a document purchased by a party who desires to transmit money. Postal Money Order - is a check sold by a post office which “orders” the payment of money by its branch or affiliate at the location to which it is to be sent by the “payor”. This is a more trusted method of payment than a personal check. Merchants welcome the extra security of a pre-paid money order instead of a personal check, which can bounce.
The Checking Account • A Checking Account – is a service provided by banks which allows individuals and businesses to deposit money and withdraw funds from their accounts. Since deposits are withdrawable upon demand through the use of checks, they are invariably termed as checking accounts. The terms of a checking account may vary from bank to bank, but in general a checking account holder can use personal checks in place of cash to pay debts. Virtually every bank offers some form of checking account services. Some require a minimal initial deposit, along with proof of identification and address. Account holders have a supply of official checks of the bank.
The Checkbook • A Checkbook – consists of pre-printed bank checks, a registry for recording payments and deposits, and a protective sleeve with a pocket for receipts. • A checkbook is given after payment of a nominal amount (intended to cover the cost of printing and documentary stamps). • PD No. 783 – commercial banks now use MICR-encoded checks.
Checks Over Cash • Checks can be written for convenient amounts, adapts itself to the needs of the moment. • It is more portable than currency. • Economizes the use of money. • More secure (in case of loss, the owner may “stop payment” of the check). • It serves as a voucher record. • The returned cancelled checks serves as receipt evidencing payment. • Traceable (i.e., only rightful owners can cash it).
How Banks Handle Checking Account? A typical checking account is handled through posting of deposits and withdrawals. When a check is filled out correctly, the recipient treats it the same as cash. The recipient after receiving a check either encash it over the counter or deposit it to his own bank account. The recipient’s bank then send the check for clearing. Through a clearing house, the bank of the check owner receives the check and debits the check owner’s account. If the account has insufficient funds, the check is then sent back to the clearing house (which in turn will sent it to the recipient’s bank). This process continues for every check written against an individual checking account.
Clearing of Checks The PCHC In the country, checks are being cleared by the Philippine Clearing House Corporation (est. July 1977, RA No. 3591). The Clearing Rule Every clearing member needs to maintain an account with PCHC. It’s the clearing member’s function to make sure that the funds are available in his account with PCHC on the day of pay-in to meet the obligations. In case of a pay-out, clearing member receives the amount on pay-out day.
Opening of Checking Account • Who Can Open a Checking Account? – Anyone of majority age, irrespective of sex and regardless of nationality can apply. – Some requirements include identity of the applicant, references, type of business, if any, etc. • How Much is the Initial Deposit? – Banks impose a minimum initial deposit and a maintaining balance (or sometimes, average balance) every month, or they will impose service charges for non-compliance.
Prohibited to Maintain Checking Accounts • BSP Circular No. 549 (December, 1976) – prohibits the following bank officers and employees KBs from maintaining checking accounts with the banking offices in which they are assigned: • Officers and employees of the cash department. • Officers of banking offices other than the main office (e.g., branches, extension offices, money shops, etc.) • Officers/employees who have direct/immediate responsibility in the handling of transactions and records pertaining to demand deposits. Note: Included are spouses/children, business interests, of the officers/ employees covered by the prohibition.
Bank Statement • A Bank Statement – is a detailed record of the depositor’s checking account transactions with the bank during the month. • It gives the following information: • A statement of the balance at the beginning of the month. • Entries showing each deposit and withdrawal made during the month. • Service charges made by the bank • The balance on hand at the end of the month. Note: With the statement, the bank likewise sends the depositor his cancelled checks. The depositor must reconcile it with his check stubs for his interest and advantage.
Check Endorsements A Check Endorsement – refers to how the back of a check is written (or endorsed) upon by the person that receives the check. When receiving a check, there are many ways that it can be endorsed. • Blank Endorsement: When the recipient of the check signs their name on the back of the check. Once the check is signed, it becomes like cash and can be negotiated similarly. • Restrictive Endorsement: Specifies the way in which a check can be negotiated. The most common form of restrictive endorsement is "For Deposit Only," which makes a check unable to be cashed.
Check Frauds • Check Washing – altering the face of the check. Ex. An account holder writes out a check in the amount of, say P1,000. The recipient of the check uses techniques to alter the check so that the payable amount becomes P100,000. • Check Fraud Through Mail Theft – thieves intercept checks issued by a company to a vendor. The face value of the check is left intact but the recipient information is altered to allow the thief to deposit the check into account set up for the purpose of receiving the money. A variation of this is to steal checks to produce counterfeit checks that can be made out for any amount. (Note: Forged checks accounts for a huge amount of check fraud today.)
The Savings Account • A Savings Account – is a thrift account bearing fixed interest rate (lowest, but customers can withdraw at will) but no specific maturity. Savings banks and savings department of commercial banks accept deposits from people of average means. Interest rates are regulated by a CB in order to eliminate the possibility of cut-throat competition among banks (at the same time enable them to make profits). Savings account is evidenced by a passbook or ATM card.
Checking Account vs. Savings Account Checking Account • Spendable money (by writing checks chargeable against the checking account). • Usually do not earn interest. Savings Account • Money can only be spent by withdrawing funds from the bank in the form of cash (or MCs) or by transferring funds to checking accounts. • Earn interest.
Withdrawals • Withdrawals – refers to taking the money out from an account. Withdrawal Rules: • As much as possible, withdrawals should be made by the depositor in person by filling out a withdrawal slip (with the passbook). Nonetheless, banks usually permit a person authorized by the depositor to make withdrawals on the depositor’s behalf. • There is no limit that a depositor can withdraw provided the amount does not exceed the balance outstanding to his credit (shown in the passbook). • The bank may require a pre-notice if withdrawals would be significant (amounts bigger than that kept in the bank).
Automatic Withdrawals • Automatic Withdrawals – are automatic transference of money from one account to another; i.e. from one's checking account to a company in payment of a bill (Automatic Bills Payments), or from one's checking account into one's savings (Automatic Transfer Arrangements). Note: Automatic withdrawals (from checking to savings account) can be useful for savings, retirement, and investment purposes.
Passbooks • Passbooks – are simple paperbooks that include pages that are intended for use with simple accounting notations regarding a bank account. Functions of Passbooks: It as an evidence of a contract between the depositor and the bank. Serves as a miniature ledger of all the deposits and withdrawals made.
Loss of a Passbook • If the passbook is lost, the bank should be immediately notified (for the mutual protection of the bank and depositor). • The bank may request an affidavit of lost passbook from the depositor, after which the bank shall issue a duplicate passbook. • In some instances, banks require depositors to file an indemnity bond (to protect the bank from loss).
Time Deposits • A “Certificate of Time Deposit” accompany time deposits (as proof of deposit/ownership). This entails payment by the holder of a documentary stamp tax (DST). • Computing for the documentary stamp taxes in a CTD. Ex. If the regulation is P0.30 (DST) for every P200, how much is the docs. stamp tax of a P5,350 time deposit? Answer: P5,400 ÷ 200 x 0.30 = P8.10 Rounded-off to the nearest 200.
Other Types of Accounts • Deposit Substitute – (in addition to the earlier definition) shall mean an alternative form of obtaining funds from the “public”, other than deposits. Done through the issuance, endorsement, or acceptance of debt instruments for the borrower's (i.e., the bank’s) own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agents or dealers. Note: The term “public” – means borrowing from 20 or more individual or corporate lenders at any one time.
Other Types of Accounts • Money Market Account– is an interest-earning savings account with limited transaction privileges; usually limited to six (6) transfers or withdrawals per month, with no more than three (3) transactions as checks written against the account. The interest rate paid on a money market account is usually higher than that of a regular passbook savings rate. Money market accounts also have a minimum balance requirement.
Other Types of Deposits • Dollar or Foreign Currency Deposits (CBP Circular No. 304 dtd. July 21, 1970) – was issued so banks could accept dollar deposits. Note: Dollar/foreign currency deposits may be withdrawn anytime provided no liens are attached to such deposits. R.A. 6426 – Foreign Currency Deposit Act of the Phils. (April 1972) – not only for banks to deposit dollars but also other currencies; guarantees secrecy of deposits in foreign currencies and confiscation.
Dormant or Inactive Account • Dormant or Inactive Account – is when a savings or checking account showed no activity (other than posting interest) for some specific period. In the country, a savings account shall be classified as dormant if it has no activity for 2 years, while checking account for 1 year. Note: Dormant accounts after 10 years shall be escheated to the local government (such as the Bureau of Treasury).
How Banks Handle Dormant/Inactive Accounts? • Banks shall review all deposit ledgers and segregate accounts that fall under dormant accounts. • When an account becomes dormant, a short letter should be sent to the depositor encouraging him to use the account. • At the end of every quarter, all dormant accounts are segregated and placed under joint custody of two responsible officers/employees. • Entries to dormant accounts should be verified and approved by a designated officer. His initials should be placed next to the entry of the ledger sheet.
Service Charges on Dormant/Inactive Accounts • Banks may impose service/maintenance fees on dormant/inactive accounts subject to the following conditions: The charge is imposed pursuant to an appropriate provision in the contract between the bank and the depositor. There is a limit to the charge, say P200/month. The period of inactivity before imposition of a charge shall be at least 2 years (for SA account) and 1 year (for CA account). A notice shall be sent to the depositor at his last known address approximately 30 days in advance before any charge is levied.
Deposit Insurance • Deposit insurance – is an insurance coverage to protect/cover depositors’ deposits to banks. Depositors, if they heard of the slightest hint of trouble, “ran” to the bank to withdraw all of their money. Rumors make people uneasy about the security of their money in the bank. “Bank runs” have often than not, lead to failures of many banks and huge losses of savings for many people. Other banking insurance – were especially designed to cover deposits in cases of burglaries, robberies, vandalism, etc.
The PDIC • For the protection of depositors in the country, the Phil. Deposit Insurance Corp. (RA No. 3591) was established to insure deposit liabilities of banks. Originally set at P10 thousand, now it is P250 thousand. Note: While insurance protects bank deposits, legal reserves are considered as a safety fund in meeting the normal demands of the depositors and tool of monetary policy to regulate money supply.
How Depositors Claim from PDIC? For Depositors of Insolvent or Closed Banks – • PDIC shall pay by (1) cash, or (2) a transfer bank deposits (in another insured bank). • PDIC may require proof of claims or, if needed, a final examination of a court of competent jurisdiction before paying such claims.
Deposit Reserves • Primary Reserve – first line of defense for withdrawals. Primary reserves are as follows: Vault cash Deposits with other banks Cash and other cash items outstanding for payment Deposits with CB Note: These accounts will not generate much income for which reason they are kept to the minimum enough to meet operational needs.
Deposit Reserves • Secondary Reserve – assets which can be converted into cash; supplements the primary reserve consisting of time loans, mortgages, and bonds (all of which should mature at a relatively short periods of time). Secondary reserves are as follows: Self-liquidating, short-term working capital loans. Bankers’ Acceptances Commercial papers Government securities Note: These accounts should mature at a relatively short period of time and paid at maturity. Loans should not be extended. Securities’ marketability/market value must be strong
The Required Reserve Ratio • TheRequired Reserve Ratio – is the percentage of total reserves that the CB requires banks to hold in the form of vault cash, deposits with CB, and invested in GS. • The required reserve ration is broken down to statutory and liquidity reserve. Explanation. A 22% reserve requirement may be composed of 12% statutory (or regular) reserve and 10% liquidity reserve. – Statutory Reserve – are kept in bank vaults and deposits with other Banks/CB. – Liquidity Reserve – are invested in GS
Computing the Reserve Requirements Example: • BSP imposed a 22% reserve requirement (to all banks) which is composed of the following: • Statutory reserve: 12% • Liquidity reserve: 10% • The legal reserve (i.e., the amount that should be deposited with BSP) is 25% of the reserve requirement. Note: The compliance to this requirement is done on a per week basis using banks’ weekly ADB as basis.