Group 2

Fin 211 (5:30-6:30)

BA 211
LIABILITY MANAGEMENT
Zamora, Nhebeth
Liability Management (LM)

Is the process of restructuring outstanding borrowings in order

to improve the composition of the public debt portfolio.

It also involves hedging against changes in interest rates and

controlling the gap between the maturities of assets and
liabilities.
Liability Management (LM)
LM can meet different objectives and encompass a wide
variety of operations. It is implemented in several
government securities markets.
Some LM operations are best undertaken from an early stage
in the life of a market as they can support and accelerate its
development. In particular, this applies to bond buy backs
and bond exchanges.

4
Functions of LM

Initially, LM was used primarily as a risk management tool

It affects the structure of the debt, which determines the risks of the
debt (refinancing, interest rate and currency risks).

Increasingly, LM has also been assigned a few additional

objectives
It can help in achieving some cost savings or in diversifying the investor
base. This applies primarily in mature markets.

5
Functions of LM
Currently, LM operations have five main functions:
to increase liquidity in government securities markets,
to manage risks in the debt portfolio,
to decrease the cost of new funding,
to correct and/ or take advantage of market distortions, and
to stabilize the market during periods of stress.

6
 Deposit Function

Reporter: LIEZEL C. BUCTON

6/20/2017
Ways of Enticing Depositors
1. Interest Rate

2. Money

3. Fees

4. Word of Mouth

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Bank Deposits

-consist of money placed into banking institutions for safekeeping.

-the deposit itself is a liability owed by the bank to the depositor,
and the word refers to this liability rather than to the actual funds that
have been deposited.

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Types of Deposits
1. Current Deposit Account
-also called demand account, is a basic checking account.
Consumers deposit money which they can withdraw as desired on
demand.

2. Savings Account
-an account on which interest is usually paid and from which
withdrawals can be made usually only by presentation of a
passbook or by written authorization on a prescribed form.

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3. Time Deposit Account
-tend to offer a higher rate of return than traditional savings
account but the money must stay in the account for a set period of time.

4. Call Deposit Accounts

-these accounts combine the features of checking and savings
accounts, allowing consumers to easily access their money but also earn
interest on their deposits.

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Significance of Deposits to a Bank
If finance is not provided to any economic sector, it will
suffer and that sector will eventually fail. However, the ability
to provide the relevant financing is dependent on the ability
of the banks to mobilize adequate amount of deposits in the
economy and other foreign sources of funding.

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The Receiving Teller

-is known as the second teller. He deals with the customers of the
bank.
-the department of the receiving teller receives all cash items
delivered over the window by depositors for credit on their accounts,
proves such items, and distributes and charges them to the proper
departments of the banks.

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The Paying Teller
-is ranked as first teller of a bank. This rank is due to the high
responsibilities devolving upon his office.
-his prime duties are to keep the banks cash and pay it out over the
counter, but there are many ancillary duties, such as:
1. Making shipments of currency to the banks correspondents
2. Certifying checks and other items.

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 3. Caring for signature files.
4. Recording and watching stop-payment orders.
5. Settling clearing house balances.
6. Attending to the pay-roll of the bank itself and of other
institutions for which the bank performs this service.

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 The Exchange Function

By: Joy C. Honculada

6/20/2017
 What is an Exchange?

An exchange is a marketplace in which securities, commodities,

derivatives and other financial instruments are traded. The core
function of an exchange is to ensure fair and orderly trading, as
well as efficient dissemination of price information for any
securities trading on that exchange. Exchanges give companies,
governments and other groups a platform to sell securities to
the investing public.

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 Kinds of Exchange

International Exchange

Is a little more complicated, ad occurs when the parties to the

exchange belong to different banks situated in different localities.

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 Domestic Intercommunication

Resembles domestic intercommunication, except that exchange

and collection is effected between parties living in different
countries and depositing at different banks. The items will be
cleared at the international clearing house.

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Simple Exchange

Occurs when the parties involved are depositors of the

same bank in the same locality, or between the main
office and its branches.

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Local Exchange

Takes place when the parties are depositors of two

different banks but in the same locality.

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Foreign Exchange

May include several interpretations, it could mean the exchange

of goods and services between international buyers and sellers.
Or it may refer to the means of payment in international
trading.

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 Exchange Rates

are prices and are , therefore, determined by supply of and

demand for foreign exchange. The date o f payment is of utmost
importance in determining these rates. Hence, it becomes
evident that the method of transferring the funds would be a
matter of importance. Payment transmitted by cable rather
than by mail would spell a significant difference in the rate of
exchange.

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 The Collection Process

The collection process involves the clearing of checks or drafts.

May be classified as how the payment will be affected

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 1. Clean Item

When the check, drafts or other items given foe collection is

free of any documents or conditions relating to its final
payment, it is termed as clean collection.

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 2. Documented Items

When the payments of the items for collection is predicated on

certain conditions contained in the contract of credit, such as
the term sight draft with bill of lading (SD/BL) or where the
other documents must be presented before payment is effected,
the process is known as documented collection.

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 3. Demand items

The collection procedure may also be affected by the use of

demand or sight drafts and time drafts, as

These are collection items which are payable on demand upon

presentation. If dishonored, they should be immediately referred
to the issuing party so that the necessary correction on the
instrument may be made to facilitate payment.

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 4. Time items

Are those whose payment is effected after a certain period of

time upon presentation. Such items are presented first for
acceptance and then at maturity for payment.
Usually documented and therefore require the setting up of a
tickler to keep track of the maturities and the instructions for
payment.

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 Communication Breakthroughs

Society for Worldwide Inter-bank Financial Telecommunication

(SWIFT)
Clearing House Inter bank System (CHIPS)
Philippine Clearing House Corporation (PCHC)

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 The Clearing House

Clearing
means it will be ascertained whether or not the checks or
drafts have funds to back them up.

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 Origin of the Modern-Day Clearing House

Advantages of modern-day clearing house:

1. A greater amount of work could be accomplished in less time

2. A lesser number of employees is necessary to accomplish
clearing.
3. Less amount of money, if at all, is needed to effect the
clearing.
4. It is a safer way of settling balances.

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Investment Function

Shahanah M. Abdul
Meaning of investment

The action or process of investing money for profit or material

result.

Investment in keynesian economics refers to investment which

implies the creation of new factory buildings, roads, bridges, and other
forms of productive capital which directly generates new job and increases
production.
At macro level, investment comprises of THREE major factors:
1.Investment decisions made by business firms and organizations.
2.Saving decisions made by the consumers`
3.Decision on supply of investment goods by the producers of
capital goods.

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Types of investment

Induced Investment
Autonomous Investment
INDUCED INVESTMENT
An investment influence by expected profit or rising levels of
income in the economy is termed as induced investment.

The factors that affect profits such as prices, wages, and interest
influence induced investment.

Likewise, it is also affected by demand. At higher levels of income,

consumption expenditure (.i.e. demand) also trends to increase.
INDUCED INVESTMENT
Increased demand raises that expected profitability of the
producers who are consequently induced to make more
investment.

THUS, induced investment is positively related to the levels of

income in an economy. It increases with the rise in income and
falls as income declines.
 Y Induced income

I1

I2

I
X
Y1 Y2 Level of Income

The diagram shows that with the increase in the level of

income from Y1 To Y2, the level of induced income also
increased from I1 to I2.
Autonomous investment
An investment not influenced by expected profitability of level of
income is termed as autonomous investment.

It is an investment expenditure made by the government with a

view of promoting, the level of aggregate demand in the economy.

When the level of aggregate demand falls short of the aggregate

supply, the government tends to push up the level of aggregate
demand through various governmental investment expenditures.
Autonomous investment

Such investment is thus not influenced by profitability and so is

independent of the level of income.
0I is the level of autonomous investment and the horizontal IIa
indicates the 0i level of investment that remained unaffected by the
level of income.
Y Autonomous Investment

I Ia

0 X
Y1 Level of Income Y2
Reporter:
Princess Errol P. Delos Santos

Asset Management
What is Asset Management?

- one relating to advisory services

- relating to corporate finance.

an advisor or financial services company provides asset management by

coordinating and overseeing a client's financial portfolio -- e.g.,
investments, budgets, accounts, insurance and taxes.
Corporate Finance

- asset management is the process of ensuring that a company's tangible

and intangible assets are maintained, accounted for, and put to their
highest and best use.
HOW IT WORKS?

EXAMPLE:
An asset management company serving as an advisor to a client has one
overriding goal -- to substantially grow its client's portfolio. Asset
managers are often hired by institutional investors like pension funds,
corporations, and financial intermediaries, as well as high net worth
individuals.
 Asset managers conduct:
Research
Interviews
Statistical analyses of companies
Markets
and trends in order to determine what investments to make or avoid on
behalf of their clients.
 Asset managers do not generally need "asset manager" licenses, though
the firms that hire these managers often require registration with one or
more exchanges and/or the National Association of Securities Dealers
(NASD).
 Company's value by managing fixed and intangible assets to be more
reliable, efficient, or cheaper -- including evaluating asset financing
options, asset accounting methods, productions operation
management, and maintenance discipline.
WHY IT MATTERS ?

Although most financial jobs don't carry an official "asset manager" title,
the truth is that nearly everyone in the finance world is an asset manager.

As a result, most financial professionals are judged on their ability to

successfully manage assets -- either directly or indirectly. Proficiency in
asset management makes the difference between a mediocre and a
stellar performance at both the individual and corporate levels.
By: Jenievel G. Nadela
 What is Assests Management?

Systematic and coordinated activities and practices through which an

organization optimally and sustainably manages its assets and asset
systems, their associated performance, risks and expenditures over their
life cycles for the purpose of achieving its organizational strategic plan
 ASSESTS MANANGEMENT-Three Goals

Seek the highest possible return

Reduce risk
Have adequate liquidity
 ASSET MANAGEMENT PROCESSES

Agencies must manage assets through the different stages of an assets life,
from planning to determine the need to own assets, to the time of their
disposal. They should have the following plans and processes in place to
ensure effective asset management.
 PLANNING

Asset Management Plans

Agencies need to develop asset management plans which link physical resources to service delivery
programs and government objectives. These plans should include whole of agency plans (for capital
investment, maintenance, divestment or disposal), risk management and specific asset or facility
plans. Agencies should continually assess service needs and standards and reconcile them with
asset holdings.
Demand management strategies

Agencies should actively develop and pursue demand management strategies based on
direct efforts to influence demand for assets within the community - and even from
within their own agency.
Risk management

Management must consider the agencys exposure to risk throughout the asset
management process. Risk management is a structured way to identify and analyse
potential risk, and devise and implement appropriate responses according to classes of
risks. These responses may include risk prevention, risk transfer, minimising the impact
or acceptance of risk. A combination of these strategies may apply to manage different
individual risks within a particular activity or project.
Life-cycle costing

This serves to ensure that a balance isachieved between asset

performance, which is derived from agreed service standards, and the
total asset costs. Use discounted cash flows to compare alternative
solutions.
Lending Function
Jovert D. Cardente
Objective of Rural Bank Lending:

To promote and expand rural economy in an orderly and effective

manner by providing the people of the rural communities with the
means of facilitating and improving their productive activities.
 Different Types of Credit Accommodation
Rural Bank Lending may be classified into:

1. Ordinary
Short term
maturities not exceeding one year
the law and Rules and Regulations Governing Rural banks can indulge in short term lending without need of
further authority or permission from the Central Bank

Medium and long term

maturities exceeding one year
called by the Rules and Regulations as Term Loans may be made by rural banks only on prior approval of the
Director of the Department of Rural Banks

2. Special
Ordinary Lending Operations

A. Credit Requirement for Short Term (Production) Lending

a. In General
Rural Banks may grant credit provided (1) the purpose of the loan is within those
allowed by the law; (2) the applicant is eligible; and (3) the applicant is worthy of
credit.
 i. Kind of Loans
Agricultural Loans
Commercial Loans
Industrial Loans

Loans may be granted for the purpose of conducting or carrying on, developing, or improving, farm,
commercial or industrial operations, and may also be extended to maintain the efficiency of eligible
borrowers in connection with their health, education, and substance. The purpose must be stated in
the loan application and in the contract of loan.
ii. Borrowers

Eligible borrowers
A. A farmer or cooperative, owning or cultivating as tenant or lessee not more than 50 hectares of
land dedicated to agriculture.
B. A retail or wholesale merchant with capital investment not exceeding P25 000.
C. An operator of a rural industry or enterprise with capital investment not exceeding P25 000.
D. An operator of an essential rural industry or one who produces goods ordinarily purchased by the
low income groups.

Ineligible borrowers
A. The officers, directors and employees of the bank
B. The officers and employees of the Central Bank
C. The officers and employees of any government which performs examination or supervision
functions or gives technical aid to the rural bank.
 iii. Amount of Loans

The amount lent out to the borrower is determined according to the needs of the applicant, but limited by
the amount applied for by him and his capacity to pay. In those instances where security is demanded by
him, he can borrow within the allowable loan value of the collateral. No borrower singly may borrow more
than 10% of the unimpaired capital and surplus of the bank, except when expressly authorized by the
Central Bank in which case the limit may be increased to 15%.

iv. Periods of Loans

The loan periods are adapted to the kind of loan applied for. Short term agricultural loans are granted for
period not exceeding one year, commercial loans, for periods not exceeding 180 days, and industrial loans,
for periods not exceeding 270 days. They may be renewed under certain conditions.
 v. The ff. may be offered as collateral:

1) Unencumbered Real Property which may be:

a) Torrens titled private lands;
b) Untitled private lands where the owner can show 5 years or more of peaceful and continuous possession in
concept of owner;
c) Homestead and free patent lands with approved applications but pending issuance of patents and/or titles;
d) Portions of friar land estates, or other lands administered by the Bureau of Lands, covered by sales contracts,
wherein the purchasers have paid at least 5 years installments;
e) Portions of estates administered by the Land Authority, covered by sales contracts wherein the purchasers have
paid at least 5 years installments;
f) Buildings constructed over any of these lands together with the lands, provided the building is insured for its loan
value where the loan amount is more than P1000.
2) Unencumbered Personal Property which may be consist of:
a)Bonds issued by the government or by its agencies fully guaranteed by the government;
b)Stocks and other securities issued by private commercial or industrial companies if prior
approval of the Central Bank is taken;
c)Shares in the harvest of tenant-borrowers to lands cultivated by them;
d)Sugar quedans in the name of the loan applicant issued by reputable sugar centrals;
e)Any other personal property.
 vi. Interest rates

The maximum rate of interest which a bank may charge it borrowers is 12% per
annum, collectible in advance, computed on a daily basis.

vii. Loan Release

The release of loan in a lump sum should be avoided whenever possible. If needed to
purchase materials, payment should be made by the bank direst to the supplier.
 B. Agricultural Loans

i. Purposes
1. Farm expenses like labor for planting and harvesting;
2. Purchases for seeds, fertilizers, work-animals and equipment and implements, or for the hiring of said animals or implements;
3. Purchase of animals, poultry or fish for breeding;
4. Minor repairs of the farm or fishpond;
5. Payment of taxes, and irrigation fees;
6. Expenses for food, clothing, elementary or vocational education and shelter of the farm family

ii. Amount of loans

7. If needed for corn or palay production 50% of the established production in previous years; or 40%, if said data is not available;
8. If needed for coconut, sugar, coffee, cacao, ramie or abaca production 40% of the calculated marketable value;
9. If needed for production of perishable products like fruits and vegetables 30% of the previous years production;
10. If needed for livestock, poultry and fish production 40% of the appraised value of the stock;
11. If needed for storage, transportation and marketing farm products amount thus needed.
 C. Commercial Loans

The loan may be granted for the purpose of purchasing commodities for resale
which are considered as necessities or semi-necessities by consumers or end-users,
and are of general acceptability and have a quick turn-over.

The loan amount cannot exceed 50% of the commodities to be purchased for
resale, and may be secured by a chattel mortgage of the machineries purchased.

The loan granted for an original period of 180 days may be renewed for another
period of 90 days, subject to certain conditions.
 D. Industrial Loans

May be granted for (1) expenses for labor in the manufacture of the goods; (2)
purchase of raw materials; and (3) marketing of the manufactured goods.The loan grant
cannot exceed 50% of the market value of the products purchased, may be secured by a
chattel mortgage in favor of the rural bank, and may have a maturity period not exceeding
270 days renewable for another 135 days subject to certain condition.

E. Loans to Cooperatives

Loans may be granted to cooperatives of small farmers, cooperatives for the purchase of
commodities for resale to their members, and cooperatives for small artisans, provided that
these cooperatives are duly registered, are actually operating and satisfy the requirements
for the rural bank borrowers.
B. Credit Requirements for Term Loans
a. Classes of Term Loans

Medium Term Loan maturity of more than one year but not exceeding five years
Long Term Loan maturity of more than 5 years

b. Purposes of Term Loans

a) Purchase of farm land to be devoted to agriculture;

b) Land improvement for the borrowers own use;
c) Acquisition of agricultural or industrial machinery;
d) Purchase of equipment and materials for livestock, poultry raising, fish culture and coastal fishing;
e) Production and harvesting needs of agricultural crops with production cycles exceeding one year.

c. Maturity Periods of Term Loans

The maturity periods for the classes of loans, granted as medium or long term loans are as follows:

a) Purchase of farm lands 20 years

b) Improvement of agricultural, industrial, commercial or residential lands 10 years
c) Purchase of agricultural or industrial machinery equipment 5 years
d) Purchase of work animals 3 years
e) Production and harvesting needs of agricultural crops with production cycles of more than one year 18
months
Letters of Credit
Parties to a Letter of Credit
The Accredited Buyer.
The applicant for a letter of credit to whose credit standing the bank adds its
own is known as the accredited buyer.
The Beneficiary
The person to whom the proceed of the letter of credits shall be paid is called
the beneficiary.
The Opening Bank
The bank which substitute its credit for that of the accredited buyer is known
as opening bank.
 The Notifying Bank
Since the dealer in foreign trade belong to different countries there
is a need for another bank to relay the message indicating the opening of
the letter of credit and its term and conditions.
 The Confirming Bank
The bank which holds itself responsible to the beneficiary for the
payment of the drafts drawn under the terms of the letter of credit is
referred to as the confirming bank
The Negotiating Bank
Any other bank situated in the domicile of the seller, honors the
drafts drawn under the letter of credit it is referred to as negotiating
bank
Purposes of the Letter of Credit
To the Beneficiary
To the Manufacturer
To the Buyer
To the Bank
Letter of Credit
Financing
Purposes of the Letter of Credit
To the Beneficiary
To the Manufacturer
To the Buyer
To the Banks
Mechanics of Letter of Credit
Financing
The buyer and seller agree upon the terms of sale.
The buyer completes an application for a letter of credit and
forwards it to a bank that will issue the letter of credit.
The bank investigates the credit standing of the buyer and
examines details of sale.
The issuing bank then forwards the L/C to a correspondent bank in
the sellers country
 The advising bank relays the approval of the L/C to the seller.
If the seller is not the manufacturer, the L/C is assigned to the
manufacturer.
Having received the assurance of payment, the seller prepares the
documents required under the L/C and delivers them to the
advising bank.
The seller also makes arrangements to ship the goods, including its
insurance coverage.
 The goods, w/c had been prepared earlier, are then delivered for
shipment/air freight and the bill of lading is released by the
shipper/ carrier.
If the L/C specifies that drawings can be made upon presentation
of the bill of lading, the seller may draw a draft against the
confirming bank.
 The advising bank examines the documents at hand.
Acceptance may be negotiated in the bill or money market.
While the goods are in transit, notification and documents
evidencing the shipment are sent to the issuing bank and the
buyer.
The issuing bank, having received the documents, examines these.
The issuing bank then reimburses the advising bank.
Foreign banks that pay drafts to the issuing bank are reimbursed
thru bookkeeping entries, if they are correspondents banks.
 Upon arrival of the goods, these are brought to the Customs Office
for assessment and payment of duties.
The buyer arranges for the release of goods
When the goods are paid and released, the bank cancels the L/C
In case of trust receipt financing, cancellation occurs after the
buyer fully settles his account w/ the issuing bank
Letter of Credit Classified
According to the methods of transmission, we have the circular and
the specially advised.

According to the duration of the substitution of credit, it may either

be a revocable or irrevocable letter of credit.
 According to obligations assumed by the bank, a bank either
confirms the credit or does not do so.

According to the method of reimbursement, there is what is known

as the simple and the reimbursement.

According to the method of payment; a letter of credit may either

be termed as negotiation, straight, sight, acceptance, local currency or
foreign currency, indicating how payment is going to be effected.
Other Classifications:
a. Assignable
b. Back-to-back
c. Red-clause
d. Revolving
Essential Features of the Letter of
Credit
1. Advice Number
2. Issuing Bank
3. Amount
4. Name of Importer
5. Tenor of the Letter of Credit
6. Type of the Letter of Credit
Documents Required with Letters
of Credit
1. Commercial Invoice
2. Insurance Certificate
3. Consular Invoice
4. Forwarding Receipts
5. Export License
6. Import License
7. Exchange License
Documents Required with Letter of Credit
 Commercial Invoice describes the merchandise, identifying
marks for shipment, the unit price the total amount, and such
other details.
Insurance Certificate insurance company to the effect that
the goods are insured in accordance with the terms of sale.
Consular Invoice commerical invoice except that it is issued
by consular estabalishments.
Forwarding Receipts indicate the position of the good for
shipment.
 Export License a license is isssued when the export are
restricted or by qoutas.
Import License this is similar to the export license, except that
is would indicate import control perhaps through a system of
priorities.
Exchange License when there are restrictions in the
movement of foreign exchange, such license would be
necessary to accompany the letter of credit.
Acceptance Credit
Bankers acceptance are also popular, if not more desirable
sometimes, than letter of credit.
Banks Position Before and After Acceptance
In assuming the obligation to honor the drafts at maturity, the
banks add so that acceptability of the draft or bill of exchange.
Creation of Acceptance Credit
Importation and Exportation of goods
Domestic Shipment of goods
Drafts secured by documents conveying or securing titles to
readily marketable staples
Draft drawn by foreign banks or bankers for the purpose of
furnishing dollars exchange.
Trust Receipt
One of the most important documents use in connection with
letter of credit financing is the trust receiopt.
OTHER SERVICES
Commercial Banks
Is a financial institution that provides various financial services, such
as accepting deposits and issuing loans.
Commercial banks services:
Tellers perform the mechanical job of placing the correct amount of currency in
different denominations as requested by the firm together with the accompanying
check for such purpose.

Financial counselors: Depositors of the bank can avail of its services

with respect to advice of financial and business activities,
investments and others, most frequently, kinds of investments or the
marketability or liquidity of a certain bond or stocks.
Commercial bank sells:
Bank draft a bank draft is a payment on behalf of a payer that is guaranteed by
the issuing bank. A draft ensures the payee a secure form of payment.

Money order a money order is a certificate, usually issued by

governments and banking institutions, that allows the stated payee
to receive cash on-demand. A money order functions much like a
check, in that the person who purchase the money order may stop
payment.
 Safe Deposit Box
A secure way to store valuables and other personal possessions such as the deed
to a house, certificate or Torren Title, an automobile bill of sale, an insurance
policy, birth and marriage certificate, etc.

Safe deposit boxes provide peace of mind because access to the

safe deposit box is available only to properly authorized or identical
parties.

These safe deposit boxes feature a dual key lock control which
means that two keys are required to unlock the box. One key is in
the possession of the renter and the other one is kept in the box.
Other Services (Continuation)

-John Rey D. Abelita

Payroll Services
This service facilitates payment of the correct amount for salaries
and wages.
Big business firm hire the payroll service of their respective banks
to prepare the pay envelops for their employees.
Payroll Services
There are other services which a bank also give its customers for a
nominal fee or sometimes without any charges at all.
Banks give invaluable financial advice on their customers.
Bank also give investment counsel as part of their trust functions.
Automated Teller Machines (ATM)
As the array of prospective clients widened, conventional and
ordinary banking transaction have to be supplemented with new
approaches to ensure client satisfaction.
This is why banks are including "convenience banking" as one of
their main thrusts.