CLASSIFICATION OF DEPOSIT

• Deposits which enter into the funds of the bank may be

classified into two general ways, namely: according to the
source of deposit, and according to terms of withdrawal.

1
ACCORDING TO SOURCE OF DEPOSIT
• The deposits which banking institutions receive come
generally from two main sources: (a) from the private sector,
and (b) from the government.

2
• Individuals, partnerships, and corporations generally deposit
their idle funds with the banks either for safekeeping or for
the purpose of making it acquire interest or both.

3
• On the other hand, some public funds are deposited by government
agencies or institutions in banks for the same purpose as individuals,
partnerships and corporations deposit their funds. However, in this
case of government agencies or institutions, they generally require
the banks to pledge acceptable securities for the direct protection of
their funds. Thus, it may be observed in the case of the Philippine
National Railways, the Social security System, the Government Service
Insurance System and others, their funds entrusted to different
banking institutions are secured with the corresponding pledges or
securities.

4
• In this connection, the basic difference between these two main
sources of funds may be pointed out. All banking institutions, with
good reason, look forward to the expectation that private
depositors, whether or not– individuals, partnerships or
corporations – will always strive to maintain fairly steady balances in
their accounts with their banks since their deposits, by the large,
arise out of business transactions.

5
• In contrast, however, the balances of
public depositors, as has been observed
on many occasions, are subject to
fluctuations in view of the fact that
public funds generally consist of receipt
from taxes and their use is largely
provided for “in advance by salaries,
interest and principal payments on
books, and other general expenses of the
government body.” 6
ACCORDING TO TIME OF WITHDRAWAL
• Classified on the basis of time of withdrawal, deposits may
either be demand or time.

7
• A demand deposit is one in which the customer has the right
to withdrawal at any time, that is, upon demand. Such
withdrawal is made through the use of checks. This type of
deposit comprises the largest group of deposit in commercial
banks.

8
• Demand deposit is popularly known under the term checking
account for the reason that withdrawal is upon demand
through the use of checks as aforesaid. It is also known under
the term current account in view of the fact that this type of
account permits simultaneous deposit and withdrawal.

9
• On the other hand, time deposit as the term would indicate is
one wherein the customer could withdraw his funds subject to
a certain specified date. Time deposit are of three general
classes they are: saving deposit, time certificates of deposits
and time deposits—open account.

10
PROHIBITION
• The following officers and employees of commercial banks are
prohibited from maintaining demand deposits or current
accounts with the banking office, such as the head office or
branch, in which they are assigned:

11
a) Officers and employees of the cash department;
b) Officers of banking offices other than head offices such as
branches, extension offices and money shops;
c) Other offices and employees who have direct and immediate
responsibility in the handling of transactions and/or records
pertaining to demand deposits or current accounts.

12
• The above mention prohibition shall include the
spouses and minor children under the parental
authority of the officers and employees covered by
the prohibition, and the business interests of such
officers and employees, their spouses and minor
children under their parental authority, in single
proprietorships, or partnerships or corporations in
which such officers and employees individually or as
a group, own or control at least a majority of the
capital of the partnership or the outstanding
subscribed capital stock (voting and non-voting) of
the corporation.
13
STATEMENT OF ACCOUNT
• Holders of checking account are furnished by commercial bank
a statement of account each month. This is known as the bank
statement. Sometimes, it is also called as statement of
account for obvious reasons.

14
 Briefly described, a bank statement is a detailed record of the
depositor’s transactions with the bank during the month. It gives
the following information:
a) A statement of the balance at the beginning of the month;
b) Entries showing each deposit and withdrawal made during the
month;
c) Service charge made by the banks if any for the previous service.
d) The balance on hand at the end of the month.

15
• With this statement, the bank likewise enclose the depositor’s
cancelled checks. The depositor, upon receipt of such bank
statement for his information must try to reconcile it with his
checks stubs.

16
SAVING DEPOSIT
• Generally speaking, savings bank and savings
departments of commercial banks accept deposits from
people of average means. These deposits are accepted
by the banks on the basis of time. Interest for their use
is paid by the bank to the depositor. Such interest rates
are regulated by the Monetary Board in order to
eliminate the possibility of cut-throat competition
among banks and, at the same time, enable them to
make profits for their owners. Saving deposit is
evidenced by a passbook. 17
 • Deposits as well as withdrawals shall be accompanied by the
presentation of the passbook.

TIME CERTIFICATE OF DEPOSIT

Time deposit represents funds left with a bank
by a customer not on call but for stated periods
of time. Funds thus deposited, earn a higher rate
of interest than that of saving deposits since it is
possible for the funds to be placed in longer
term investments.
18
• Where such time deposits are accordingly accompanied by the
issuance of certificates by the bank which receive such funds,
it is termed as time certificates of deposit.

NATURE OF BANK DEPOSITS

19
• Bank deposits, which represent the funds entrusted to the bank by
its customers for safekeeping and which earn interests in the case
of saving deposits (time deposits), are not assets to the bank. On
the contrary, they represent liabilities of the bank since the bank is
merely the custodian of funds entrusted to it, and therefore are
obligated to return such funds to its customers (depositors) when
the need for them arises. Under such a situation the bank assumes
the position of a debtor to the extent of the funds entrusted to it
while the creditors are the bank depositors.

20
• Briefly stated, a bank deposit is a claim against
a bank, that is, the right to demand money
from the bank either immediately as in the
case of a checking account) or after a notice of
specified number of days (as in the case of
savings account). Current practice does not
require the depositor of savings deposit to
give advance notice of his desire to withdraw.
Such requirement is practically a dead one.

21
• However, the bank is one institution
engaged in business which prides itself of
having so much liabilities. As a matter of
fact, when the bank encourages its
customers to leave their idle funds with
the bank, it in effect, merely tries to
increase its liabilities. This seem quite
strange if not paradoxical

22
• However, this may be understood when one
takes into account the fact that one way by
which one bank can make money, that is,
profits for its stockholders, is by lending its
available funds. In this connection, one
should likewise not lose sight of the fact
that the funds the bank lends are not its
own. They actually represent the numerous
deposits of its customers.
23
• If the bank is to be able to pay the interests due on the deposits of
its customers, evidently, it must make use of such funds. Thus, it
would follow that the greater the deposits (and therefore, the
greater the liabilities of the bank), the greater amount of funds are
placed at the disposal of the bank which it can use for lending
purposes. Consequently, it will also enable the bank to make
greater profits.

24
A BANK’S RESPONSIBILITY TO
DEPOSITORS
• That a bank is responsible to its depositors and stockholders is
quite obvious. Such responsibility consists primarily of paying
the depositors demands on time and assuring the
stockholders profits in the form of dividends. The bank can
discharge successfully such responsibility under the following
conditions:

25
• But then the question that continues to arise is: how are deposits
protected and ready repayment assured?
• The answer is: First, through the requirement of reserves by the
Central Bank. Second, through the establishment of the Philippine
Deposit Insurance Corporation as provided for under Republic Act
No. 3591, as amended.

26
• The Philippine Deposit Insurance Corporation.
• Apart from insuring bank deposits the coverage of which was
increased from 15000 to 40000 under P.D. No. 1897 issued January
1984, the Philippine Deposit Insurance Corporation now makes
available emergency financial assistance to member banks.

27
• Under the guidelines approved by its board of directors, the
corporations may grant emergency financial assistance to member
banks suffering from temporary liquidity in the form of regular
interest-bearing time deposit placement with maturities of not
more than one year.
• The amount of emergency financial assistance that may be
extended to member banks shall not exceed 10 percent of the
applicant’s and total deposit.

28
• The Philippine Deposit Insurance Corporation can refuse emergency
financial assistance to banks which have been delinquent in their
assessment fees on insurance premiums.
• It is also not allowed to extend emergency financial assistance if
the deterioration in the financial condition of the applicant bank
arose from fraud committed by its principal stockholders, officers
and directors.

29
• Moreover, the Philippine Deposit Insurance Corporation may not
grant such assistance if the applicant bank has uncorrected material
violations since the last examinations by the Central Bank.
• Prior to this, the operations of the Philippine Deposit Insurance
Corporation, known as the PDIC for short, were confined to
ensuring bank deposits. With the increase in deposit insurance
fund, the PDIC is now in a position to extend emergency financial
assistance to avert closure of member banks.

30
• PDIC pays the 40000 insurance coverage per deposit only after a bank is
closed by the monetary board. However, actual disbursements take time
because of the audit required to ascertain the record deposit. PDIC has
20 million in permanent insurance fund, 427.74 million in reserves for
insurance losses and 4.47 million in retained earnings.
• The corporation’s main source of funds is still the assessment levied on
insured banks. The present assessment rate is 1/15 of one percent
annually of total deposit liabilities. Assessment are paid to the
corporation by banks semi-annually.

31
• Aside from assessments, PDIC also derives its income from its
investments in government securities. PDIC is also now allowed to
borrow from the Central Bank “any amount for insurance purposes.”
Previously, such borrowing from the Central Bank by PDIC was limited
to a ceiling of 100 million on the aggregate at any one time. This
limitation had been removed.
• Moreover, PDIC is empowered to issue bonds, debentures and other
obligations whenever its capital funds are not sufficient to meet its
obligations to depositors whose deposits are insured.

32
FUNCTIONS OF RESERVES
• Originally, the purpose of bank reserves was thought to be assure
noteholders and depositors of the ability of the bank to redeem its
demand obligations in cash. It gradually became apparent, however,
that legal maximum requirements had to remain in the vaults or on
deposit with the Central Bank. They could not be used, and they
give little assurance to depositors that obligations payable on
demand would be honored by the bank.

33
• These legal reserves seemed to be a form of frozen “liquid” assets. To be
able to pay cash to depositors, the bank must maintain some liquid
reserve and a secondary reserve that may be converted quickly into
cash. The primary function of legal reserve requirements today is to
provide a restraining influence upon the freedom of banks to expand
credit by leading and creating checkbook money.

• Customarily, the assets of a bank may be divided into a number of

categories.

PRIMARY AND SECONDARY RESERVES

34
• One main purpose is for the ascertainment of what proportion of the
assets of the bank might be readily utilized to meet sudden liabilities of
the bank. Those assets which can be readily converted into cash to meet
the demand liabilities have been termed as primary reserves. Thus, they
are the bank’s first line of defense when depositors withdraw their
funds.
• Primary reserves consist of the following: (a) cash on hand; (b) deposits
held in other banking institutions, callable on demand; and (c) legal
reserves held with the Central Bank.

35
• On the other hand, those assets which can be converted into cash
at all times without appreciable loss, are called secondary reserves.
They are used to supplement primary reserves as a means of
meeting the withdrawal demands of depositors. Hence, the
adjectival word “secondary.” Thus, secondary reserves consist of
loans payable within short periods of time; mortgages which are
about to mature; and bonds and other securities currently listed on
the exchange market.

36
Reserve Requirements
• In order to control the volume of money created by credit
operations of the banking system, banks operating in the
Philippines shall be required to maintain reserves against their
deposit liabilities. The required reserves of each bank shall be
proportional to the volume of its deposit liabilities and shall
ordinarily take the form of a deposit in the Central Bank of the
Philippines.

37
• Nevertheless , the Monetary board may , whenever circumstances
warrant , permit the maintenance of part of the required reserves
in the form of assets other than peso deposits with the Central
Bank . Reserve requirements shall be applied to all banks uniformly
and without discrimination.

38
• Only securities which are Central Bank-
supported and expressedly authorized by
the Monetary Board shall be allowed as
reserves against deposit liabilities of all
banks. Regular Central Bank Certificates
of Indebtedness (CBCIs) may also be used
, provided , however , (10%) of the
maximum reserves allowed to be held in
the form of cash in vault and government
securities. 39
• Not with standing the provisions of the preceding paragraph , the
Monetary Board may , in periods of inflation prescribe higher
reserve , but not exceeding 100% for any future increase in the
deposits of each bank above the amounts outstanding on the date
on which the bank is notified of the requirement.

40
• Whenever the reserve requirements
established by the Monetary Board
place any bank under obligation to
maintain minimum reserves in excess
25% of its total time or savings deposits ,
or in excess of 50% of its total demand
deposits , the Central Bank may pay
higher interest on said excess at a rate
which shall not be higher that the bank’s
lowest rediscount rate.
41
• It should be observed in this connection that the reserve
requirements which banks must maintain aside from the statutory
limits of their increase or decrease are the result of monetary policy
as influenced by prevailing economic conditions. Member banks are
affected by changes in reserve requirements since they are required
by law to keep a percentage of their deposits with the Central Bank
of the Philippines.

42
• Needless to state, a bank shall not permit
its reserves to fall below given
requirements without unduly suffering
from the consequences of its non-
compliance. On the other hand, a bank
as may logical to expect will not wish to
keep its reserve account over and above
its requirements owing to the fact that it
will not receive any income from such
excess reserves. 43
• When banks acquire access reserve, as
when the requirement is reduced by the
Central Bank, they tend to lend such
excess as well as invest them more
readily thereby contributing for easier
credit situation. Conversely, as reserve
requirements are increased, the banks
cannot lend and invest as fast and as
much as they want to. Thus, credit
becomes tight. 44
• In the case of increase in reserve
requirements, whenever it becomes
necessary, the increase against existing
liabilities shall be made in a gradual manner
and shall not exceed four percentage points
in any thirty-day period. Furthermore, the
banks shall be notified in advance of the date
In which such increase is to become
effective.

45
• Included among deposits (demand, savings and time) subject to
reserve requirements are (a) proceeds from sales of DBP Progress
Bonds; (b) collection of premium contributions from the Social
Security System; and (c) tax and loan accounts established in
designated commercial banks in connection with he issuance and
sale of Treasury Bills (Tax Anticipation Series) which shall be treated
as demand deposits.

46