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REPUBLIC ACT NO.

8791
GENERAL BANKING LAW

Declaration of Policy and Rationale

The State recognizes the vital role of banks in providing an environment conducive to the
sustained development of the national economy and the fiduciary nature of banking that
requires high standards of integrity and performance. In furtherance thereof, the State shall
promote and maintain a stable and efficient banking and financial system that is globally
competitive, dynamic and responsive to the demands of a developing economy.

Concepts

Banks are entities engaged in the lending of funds obtained in the form of deposits from the
public.

a. It is required that banks are stock corporations and that its funds are obtained from the
public, meaning deposits of twenty (20) or more persons.
b. An investment company which uses its capital to invest in other companies .Such
investment company that is engaged solely in investing, reinvesting or trading in
securities is not engaged in banking. However, an investing company which loans out
the money of its customers, collects the interests, and charges a commission to both
lender and borrower is engaged in banking.
Quasi-banks are entities engaged in the borrowing of funds through the issuance, endorsement
or assignment with recourse or acceptance of deposit substitutes for purposes of relending or
purchasing of receivables and other obligations.
Under Sec. 95 RA 7653, deposit substitutes are alternative forms of obtaining funds from
the public, other than deposits, through the issuance, endorsement, or acceptance of debt
instruments for the borrower’s own account, for the purpose of relending or purchasing of
receivables and other obligations. These instruments may include, but
need not be limited to, bankers acceptances, promissory notes, participations,
certificates of assignment and similar instruments with recourse, and repurchase
agreements.
Trust entities are stock corporations that engage in trust business and act as a trustee or
administer any trust or hold property in trust or on deposit for the use, benefit, or in behalf
of others. Trust entities must be authorized by the Monetary Board to be able to operate.

nature of business of a bank


A bank has a vital role in providing an environment conductive to the sustained national
economy. Banking is fiduciary in nature that requires high standards of integrity and
performance.

Degree of diligence Required of banks

The business of banking is impressed with public interest and great reliance is made on the bank’s
s professional diligence and meticulousness in giving irreproachable service.

For demand deposit,savings deposit and time deposit


High standards of integrity and performance or extraordinary diligence
The degree of diligence required for a bank is high degree of diligence, if not the
utmost diligence or extraordinary diligence.
For other services and contracts
Ordinary diligence or diligence of the good father of a family is required

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Incorporation of banks

A banking or quasi-banking corporation cannot be incorporated without authority from the


BSP. The Articles of Incorporation to be filed with the Securities and Exchange Commission (SEC
for short) should be accompanied by the favorable recommendation or certificate of authority
issued by the monetary board of the BSP, otherwise, it shall not be accepted or approved.
The following must be proven by the bank to convince the MB that it should issue such
certificate
1.all requirements of existing laws and regulations to engage in the business have been
complied with
2.that public interest and economic conditions justify the authorization
3.the amount of capital,financing,organization,direction and administration as well as the
integrity and responsibility of the organizers and administrators reasonably assure the safety of
deposits and the public interest.

Banks must be a stock corporation issuing only par value shares


The funds are obtained from the public which shall mean 20 or more persons and
Minimum capital requirements prescribed by the MB for each category must be satisfied.
Banks shall not purchase or acquire its own share or accept its own shares as security for a loan
except when authorized by the MB and provided that every capital stock acquired shall within 6
months from time of its purchase or acquisition be sold orr disposed of at a public or private sale.

Bank ownership and bank operation rules


A corporation may only own up to 40% of a bank
Exceptions:
1. A universal bank can own up to 100% of a thrift bank
2. A corporation whose shares are listed in the stock exchange can only own up to 60% of
the bank
3. If the corporation has been in existence for 10 years it can own yp to 60% of the bank
4. Under the foreign bank liberalization law or RA 7721 the MB may authorize foreign
banks to operate in the Philippines

Foreign banks
Foreign individuals and non bank corporations may own or control up to 40% of the voting
stock of a domestic bank.
Grandfather Rule the percentage of foreign owned voting stocks in a bank shall be determined
by citizenship of individual stockholders in that bank.
Citizenship of corporation which is a stockholder in a bank shall follow the citizenship of
stockholders of the corporation irrespective of the place of incorporation.

Stockholdings and family or related interest


Stockings of individuals related to each other within 4th civil degree of consanguinity or
affinity,legitimate or common law shall be considered family groups or related interests and
must be fully disclosed in all transactions for such an individual with the bank.
Two or more corporations owned or controlled by the same family group or some group of
persons shall be considered related interests which must be fully disclosed in all transactions
with the bank.

DIRECTORS AND OFFICERS


COMPOSITION OF BOARD
a) there shall be at least five (5) and a maximum of fifteen (15) members of the board of
directors of a bank two (2) of whom shall be independent directors however in case of merged
or consolidated banks the maximum number of directors is twenty one (21)
b) an “independent director” shall mean a person other than an officer or employee of the
bank its subsidiaries or affiliates or related interests
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c. non – filipino citizens may become members of the board of directors of a bank to the extent
of the foreign participation in the equity if said bank
d. the law provides that no appointive or elective public official, whether full time or part time
shall at the same time serve as officer of any private bank save in case where such service is
incident to financial assistance provided by the government or a government owned or
controlled corporation to the bank or unless otherwise provided under existing laws by way of
exception section 5 of the rural banks act of 1992 provides that nothing in the said act shall be
constructed as prohibiting any appointive or elective official from serving as director officer,
consultant or in any capacity in the bank
Qualifications
The fit and proper rule
This requirement provides that the BSP monetary board shall prescribe, pass upon and review
the qualifications and disqualifications of directors and officers of banks and other financial
institutions. This is to ensure that such individuals shall possess integrity, experience,
education, training, and competence.
Doctrine of apparent authority in banks
Banks will be liable to innocent third persons for acts of a bank agent who is acting within the
general scope of his authority and from acts when the agent is abusing his authority but
made in the course of business. This is because of the fiduciary nature of banks.
Power to suspend or remove bank directors.
After due notice to the bank BOD.MB may disqualify suspend or remove any bank director or
officer who commits or omits an act which render him unfit for the position.
Prohibition on public officials
Except as otherwise provided in the Rural bank act no appointive or elective public official
whether fulltime or part time shall serve as officer of any private bank save in cases where such
service is incident to financial assistance provided by the government or a government owned
or controlled corporation to the bank or unless otherwise provided under existing laws
The Monetary Board limit the grant of compensation to the directors
Only in exceptional cases and when the circumstances warrant such as but not limited to the
following:
1. When bank is under controllership or conservatorship.
2. When a bank is found by the Monetary Board to be conducting business in an unsafe or
unsound manner.
3. When a bank is found by the Monetary Board to be in an unsatisfactory financial condition
(Sec. 18, GBL)
Foreign directors should a bank have
Foreign directors of a bank are allowed to the extent of the foreign participation in the equity of
said bank.
Corporate powers of a bank
A: All powers provided by the corporation code, like issuance of stocks and entering into
merger or consolidation with other corporation or banks.
General powers and functions of a bank
1. Accepting drafts and issuing letters of credit
2. Discounting and negotiating promissory notes, drafts, bills of exchange and other
instruments evidencing debt.
3. Accepting or creating demands deposits, receiving other types of deposits and deposit
substitutes.
4. Buying and selling FOREX and gold or silver bullion.
5. Acquiring marketable bonds and other debt securities.
6. Extending credit.
7. Determination of bonds and other debt securities eligible for investments including
maturities and aggregate amount of such investment, subject to such rules as the Monetary
Board may promulgate.
8. And all other powers as may be necessary to carry on the business of the bank. (Sec. 29, GBL)

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Effect of merger or consolidation of banks to the number of directors allowed
A: The number of directors may be more than 15 but should not exceed 21 (Sec. 17, GBL)

BANK SUPERVISION

Operations and activities of banks shall be subject to supervision of the bangko sentral.
a. issuance of rules of conduct or the establishment of standards of operation for uniform
application to all banking and financial institutions
b. the conduct of examination of the bank and its wholly owned or controlled enterprise
note: the PDIC may also conduct a regular annual examination upon prior approval of the MB
(sec. 8(8) R.A No. 3591 as amended by R.A No. 93021) special examination without prior MB
approval may be made by PDIC if there is an impending bank closure (PDIC reg. No. 2009 -05)
c. overseeing to ascertain that laws and regulations are complied with
d. regulatory investigation which shall not be oftener than once a year from the last date of
examination to determine whether an institution is conducting its business on a safe or sound
basis
e. inquiring into the solvency and liquidity of the institution or
f. enforcing prompt corrective action
Bank operations
Universal or commercial banks may open branches or other offices within or outside the
Philippines only upon prior BSP approval.
A bank authorized to establish branches or other offices shall be responsible for al business
conducted in such branches and offices to the same extent and in the same manner as though
such business had all been conducted in the head office.A bank and its branches and offices
shall be treated as one unit.

A bank may subject to prior approval of the MB use any or all of its branches as outlets for the
presentation and/or sale of the financial products of its allied undertaking or of its investment
house rules.
When a bank maintains branches each branch becomes a separate business entity with
separate books.However when considered with relation to the parent bank they are not
independent. They are merely branches and are subject to the supervision and control of the
parent bank. Ultimately liability for a debt of a branch would rest upon the parent bank.
Strikes and lockouts
Any strike or lockout involving banks if unsettled after 7 calendar days shall be reported by the
BSP to the Dole Secretary who may assume jurisdiction over dispute or decide it or certify the
same to the NLRC for compulsory arbitration.However the President may at anytime intervene
and assume jurisdiction over such labor dispute in order to settle or terminate the same
Liability for torts
As a general rule a banking corporation is liable for the wrongful or tortuios acts and
declarations of its directors or agents within the course and scope of their employment.It may
be liable for the tortuous acts of its officers even as regards that species of torts of which
malice is an essential element.
A bank holding out its officers and agents as worthy of confidence will not be permitted to
profit by frauds those officers or agents were enabled to perpetuate in apparent course of their
employment nor will it be permitted to shrirk its responsibility for such frauds even though
no benefit may accrue to the bank is liable for fraudulent acts or representations of an officer
or agent acting within the scope of his employment or authority.

Regulations regarding declaration of dividends


Dividend declaration is prohibited in the following circumstances
a.if it is greater than its accumulated net profits than on hand deducting therefrom its losses
and bad debts
b.if its clearing account with bangko Sentral is overdrawn
c. if it is deficient in the required liquidity floor for government deposits for five or more
consecutive days or
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if it does not comply with the liquidity standards prescribed by the Bangko Sentral for purposes
of determining funds available for dividends declaration or
e.if it has committed a major violation as may be determined by the Bangko Sentral

Regulations regarding ownership of real property


Any bank may acquire real estate as shall be necessary for its own use in the conduct of its
business. However the total investment thereof, including bank equipment shall not exceed
fifty percent of combined capital accounts.
Unless otherwise provided by the monetary board the equity investment of a bank in another
corporation engaged primarily in real estate shall be considered as part of the bank”s total
investment in real estate.
However a bank may acquire hold or convey real property under the following circumstances:
a. Such as shall be mortgaged to it in good faith by way of security for debts
b. such as shall be conveyed to it in satisfaction of debts previously contracted in the course of
its dealings
c. such as it shall purchase at sales under judgments, decrees, mortgages ,or trust deeds held
by it and such as it shall purchase to secure debts due it
Any real property acquired or held under circumstances enumerated above shall be disposed
of by the bank within a period of 5 years or as may be prescribed by the monetary
board.However the bank may after said period continue to hold the property for its own use
subject to the previous limitations

CLASSIFICATION OF BANKS

Universal Banks—banks that have authority to exercise, in addition to the powers and
functions of commercial banks, powers of an investment house and the power to invest in non-
allied enterprises. They have the authority to exercise powers of a commercial bank. It can
also act as an investment house which is a corporation engaged in selling and guaranteeing
securities and shares. It can also engage in non allied undertaking which is an industry
unrelated to banking
Operations of universal banks
It shall have the authority to exercise in addition to powers authorized for commercial bank:
Powers of an investment house
Invest in non allied enterprises as provided in GBL

Prohibition on dividend declaration


No bank or quasi bank shall declare dividends:
Greater than its accumulated net profits then on hand deducting therefrom its losses and bad
debts or
If at the time of declaration
Its clearing account with BSP is overdrawn
It is deficient in required liquidity floor for government deposits for 5 or more consecutive days
It does not comply with BSP prescribed liquidity standards for purposes of determining funds
available for dividend declaration or
It has committed major violation as determined by the BSP
Commercial Banks—banks that are given the power necessary to engage in commercial
banking in addition to general corporate powers. Commercial banking includes the power to
accept drafts, issue letter of credits, discounting and negotiation of negotiable instruments and
evidence of debt, accept and create demand deposits and the like. Commercial banks have
the power to engage in allied undertaking and commercial banking
Operations of Commercial banks
A commercial bank shall have
General powers to corporations
All such powers as may be necessary to carry on the business of commercial banking such as
Accepting drafts
Issuing letters of credit
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Discounting the negotiating notes,drafts or bills
Accepting or creating demand deposits
Receiving other types of deposits and deposit substitutes
Buying and selling foreign exchange and gold or silver bullions

Rural Banks RA 7353 or Rural Bank Act these banks that are created to make needed credit
available and readily accessible in the rural areas for the purpose of promoting comprehensive
and rural development. The purpose of rural banks is “providing adequate credit facilities to
farmers and merchants, or to cooperatives of such farmers and merchants and in general,
the people of the rural communities Rural banks are banks that are created to make needed
credit available and readily accessible in the rural areas for purposes of promoting
comprehensive rural development.
It is a government-sponsored/assisted banks which are privately managed and largely
privately owned that provide credit facilities to farmers and merchants, or to cooperatives of
such farmers or merchants at reasonable terms and in general, to the people of the rural
community.

Rural Bank Act RA 7353


No rural bank can operate without a certificate of authority from the monetary Board.
It must be fully owned and held 100% by Filipino citizens or entities under laws to own and hold
such capital stock
Except
shareholdings of corporations organized primarily to hold equities in rural banks and Filipino
controlled domestic banks
Board of Directors
All members of the BOD shall be Filipino citizens but any appointive or elective public official
may serve as director,officer consultant in any capacity in rural banks
Prohibitions:
No director or officer shall
Borrow an deposit of funds of the bank
Act as guarantor,indorser or surety for loans from such bank except with written approval of
majority of the bank
Loan purposes.Loans granted shall primarily for the purpose of meeting normal credit needs of
Farmers,fishermen or farm families owning or cultivating land dedicated to agricultural
production
Cooperatives and merchants
Small business enterprises not to exceed 15% of bank’s net worth

Thrift Bank RA 7906 or Thrift Bank Act include savings and mortgage banks, private
development banks, and stock savings and loan associations.
Thrift banks shall include savings and mortgage banks, private development banks, and stock
savings and loans associations organized under existing laws, and any banking corporation that
may be organized for the following purposes:
a. Accumulating the savings of depositors and investing them, together with
capital loans secured by bonds, mortgages in real estate and insured improvements
thereon, chattel mortgage, bonds and other forms of security or in loans for personal or
household finance, whether secured or unsecured, or in financing for homebuilding and
home development; in readily marketable and debt securities; in commercial papers and
accounts receivables, drafts, bills of exchange, acceptances or notes arising out of
commercial transactions; and in such other investments and loans which the Monetary
Board may determine as necessary in the furtherance of national economic objectives;
b. Providing short-term working capital, medium- and long-term financing, to businesses
engaged in agriculture, services, industry and housing; and
c. Providing diversified financial and allied services for its chosen market and
constituencies specially for small and medium enterprises and individuals.”

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Thrift banks must be organized as a stock corporation where at least 40% of its voting stock
shall be owned by Filipinos citizens

Cooperative Banks According to RA 6893 or Cooperative Code these banks primarily provide
financial, banking and credit services to cooperative organizations and their members. This
bank is owned and controlled by cooperatives so as to give financial and credit services to
cooperatives
Islamic Banks According to RA 6848 these are banks that are subject to the basic principles and
rulings of Islamic Shari'a. Example: Al Amana Islamic Investment Bank of the Philippines.It is bank
created to promote and accelerate the socio-economic development of the Autonomous Region
of Muslim Mindanao by performing baking,financing and investing operations and to establish
and participate in agricultural,commercial and industrial ventures based on Islamic concepts
concept of banking.
Foreign bank it is a bank or banking corporation formed, organized and existing under any
foreign law.
Foreign Banks Republic Act 10641
Authorized foreign banks to
Acquire,purchase or own up to 100% of the voting stock of an existing bank
Invest up to 100% of the voting stock of a new domestic banking subsidiary
Establishing branches with full full banking authority
However the law mandates the MB to ensure that control of at least 60% of the resources or
assets of the entire banking system is held by domestic banks that are majority owned by
Filipinos
Only foreign banks widely owned and publicly listed in their country of origin may be allowed to
enter the Philippines unless such foreign bank is owned and controlled by the government of its
country of origin

Offshore Banking System

Offshore banking refers to the conduct of banking transactions in forign currencies involving
the receipt of funds from external sources and utilization of such fuds in transactions with non
residents or other offshore banking units
Only banks which are organized under any law other than those of the Philippines,their
branches, subsidiaries aor affiliates shall be qualified to operate offshore banking units
However local branches of foreign banks already authorized to accept foreign currency deposits
under FCDU may opt to apply for authority to operate an offshore banking unit.

Kinds Universal Bank Commercial Bank Thrift Bank


Law GBA GBA Thirft Bank
Powers 1.has authority to 1.to engage in allied Exercised all the
exercise the powers undertaking and in powers of a commercial
of a commercial bank addition to the bank except
2.to act as an general powers a.to issue imported
investment house incident to a letters of credit
which is a corporation corporation may b.to accept or open
that sells and exercise all such checking account
guarantees sale of powers as may be unless it has prior
securities and shares necessary to carry on approval by the MB.
of stock the business of The MB requires at
3.to engage in a non commercial banking. least a net asset worth
allied undertaking Allied undertakings P28M
which is not related at are those activities or 3.to engage in a non
all to banking entities which allied undertaking
4.can be a enhance or which is not related at
stockholder in allied complement all to banking
and non allied banking.It can be a 4.can be a stockholder
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undertaking stockholder in allied in allied and non allied
undertaking only undertaking

Universal banks and commercial banks (as well as other banks depending on the type of bank
and/or the corresponding authority given by the Monetary Board) may also exercise the
following functions:
1.Receive in custody funds, documents and valuable objects; Funds, securities and other effects
which it receives shall be kept separate from
the bank’s own assets and liabilities.
2.Act as financial agent and buy and sell, by order of and for the account of their customers,
shares, evidences of indebtedness and all types of securities;
3.Make collections and payments for the account of others and perform such other services for
their customers as are not incompatible with banking business;
4.Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or
administrator of investment management/advisory/consultancy accounts; 5.Rent out safety
deposit boxes.

A bank other than a universal or commercial bank cannot accept or create demand deposits
except upon prior approval of and subject to such conditions and rules as may be prescribed
by the monetary board

Minimum capitalization of banks

Universal bank Head office & 10 branches P6.00 billion


Commercial banks Head office & 10 branches P2 B
Thrift banks Head office in ncr & 10 P500M
branches
Head office outside of ncr P200M
&10 branches
Rural and cooperative banks Head office &10 branches P50M
Head office outside of NCR P20M
(cities to 3rd class
municipalities
Head office outside NCR 94th P10 M
class municiapalities to 6th
class municipalities

FUNCTION OF BANKS
Deposit function
Loan function
Trust function

Deposit Function
This function refers to the receiving of money from depositors, safely keeping it and returning
the same Fixed, savings and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning simple loan. Under the rule, the bank is the debtor while
the depositor is the creditor.

Consequences:
The bank can make use money deposited as its own. Said amount is not being held in trust for
the depositor nor is it being kept for safe-keeping.

Third persons who may have a right to the money deposited cannot hold the bank responsible
unless there is a court order or garnishment. The duty of the bank is to its creditor-depositor

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and not to third persons. If a third person has a valid right over the money deposited, he must
prove the same before a court of competent jurisdiction.
The officers of the bank cannot be held liable for estafa if they authorized the use of the money
deposited by the depositor. There would be no liability for estafa under Article 315(1)(b) of the
Revised Penal Code even if the bank failed to return the amount deposited.
The bank has the right to compensation. It can set off the deposits with the indebtedness of the
depositor that are due and demandable.

Nature of bank deposit


As a general rule bank deposits are of the nature of loan. The bank can make use of its own the
money deposited. Said amount is not being held as trust for the depositor not is it kept for
safekeeping.
Safety Deposit Box
It is a special kind of deposit. The renting out of the safety deposit box is covered by the
contract of lease

Kinds of Deposits

a.Demand Deposits Demand deposits are money deposited into a bank account from
which you can withdraw 'on demand' - at any time without any advance notice to the bank.
No interest is paid on this type of deposit because the depositor can withdraw the money at
any time.
They are subject to payment in legal tender upon demand by presentation of checks subject to
the following rules:
1. Only a universal bank or commercial bank can accept or create demand deposits.
2. A bank, other than a universal bank or commercial bank cannot accept demand
deposits except on prior approval of the Monetary Board.
3. Temporary overdrawing against current accounts shall not be allowed unless
caused by normal bank charges and other fees incidental to handling such
accounts.
4. Drawings against uncollected deposits (i.e., uncleared checks) are generally
prohibited.

b.Savings Account—this is the most common type of deposit and is usually evidenced by a
passbook.
1. Banks are prohibited from issuing/accepting withdrawal slips or any other similar
instruments designed to effect withdrawals of savings deposits without requiring
the depositors concerned to present their passbooks and accomplishing the
necessary withdrawal slips, except for bank authorized by the BSP to adopt the
no passbook withdrawal system.
2. The requirement of presentation of passbooks is usually included in the terms
and conditions printed in the passbooks. A bank is negligent if it allows the
withdrawal without requiring the presentation of a passbook.
3. Savings deposit is the most common type of deposit and is
usually evidenced by a passbook. The bank pays interest on this
type of deposit because banks stipulate a specific number of days
before the depositor can withdraw the money.

c.Negotiable Order of Withdrawal Accounts (NOWA)—interest-bearing deposit accounts that


combine the payable on demand feature of checks and investment feature of savings accounts.
Negotiable order of withdrawal deposits earn interest and combines the payable on
demand feature of checks and the investment feature of savings accounts.
d.Time Deposit—an account with fixed term.
Time deposit is an account with a fixed term. The interest rate depends on the number of days
of the time deposit. During this period, the deposited money cannot be withdrawn. The
interest rate for a time deposit is higher than that of a savings deposit.
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Demand, savings, NOW accounts, time deposits and deposit substitutes shall not be subject to
interest ceilings.

Current deposits are deposits to a bank account or financial institution without a specified
maturity date. This type of deposit is generally made available to the customer for withdrawal at
any time and without an early withdrawal penalty. Funds are typically made immediately
available to the customer for withdrawal by writing a check. Such Current Deposit accounts
are generally used for businesses that have a need for issuing checks to pay employee salaries
and bonuses, as well as to provide cash for inventories and other such business expenses.
Checking deposits are available money allocated to one's checking account, in a bank or financial
institution, allowing the account owner to write a check or draft against that available
amount in the account.
Anonymous Accounts are prohibited.
Exception: Foreign currency deposits which may be a “numbered account.” However, the law
requires the necessary measures are undertaken by the bank to record and establish the true
identity of the depositor (Foreign Currency Deposits Act).
Joint Accounts may be the subject of a survivorship agreement whereby the co-depositors
agree to permit either of them to withdraw the whole deposit during their lifetime and
transferring the balance to the survivor upon the death of one of them.

Freezing of accounts
A bank does not have a unilateral right to freeze the account of a depositor based on its mere
suspicion that the funds therein were the proceeds of some shady transactions.

Right of banks of off-set


A bank is under no duty or obligation to make an application or set-off against the deposit
accounts of a borrower. To apply the deposit to the payment of a loan is a privilege a right of
set-off which the bank has the option to exercise but not the obligation.

Rules on depositors

a. Minors—they can open bank accounts in their own right provided that:
1. They are at least seven years of age,
2. They are able to read and write and have sufficient discretion,
3. They are not otherwise disqualified by any other incapacity,
4. It should only be savings or time deposits.

With respect to Thrift Banks, the law states that if any guardian shall give notice in writing to
any thrift bank not to make payments of deposits, dividends, or interest to the minor of whom
he is the guardian, then such payment shall be made only to the guardian.
Married Women—they are allowed to open bank accounts without the assistance of
their husbands.
Bank account may be opened by one individual or by two or more persons. Whenever two (2)
or more persons open an account, the same may be an “and/or account” or an “and” account.

DOSRI accounts
DOSRI accounts are accounts held by Directors, Officers, Stockholders of a bank and
their related interests
Nature of bank deposit
All bank deposits are loans
The bank can use the money deposited as its own provided said amount is not held in trust or
for safekeeping
Contract between bank and depositors is not a trust agreement. The fiduciary natureof the
bank depositor relationship does not convert the contract to a trust agreement.
Nature of safety deposit box
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The contract for the use of safety deposit box is governed by the law on lease

Loan function of banks


Basic rules/ restrictions
a. a bank shall grant loans and other credit accommodations only in amounts and for the
periods of time essentials for the effective completion of the operations to be financed
b. such grant of loans and other credit accommodation shall be consistent with safe and sound
banking practices
c. before granting a loan or other credit accommodation, a bank must ascertain that the debtor
is capable of fulfilling his commitments to the bank
d. PAYMENTS
1) Amortization schedule of bank loans and other credit accommodations shall be adapted to
the nature of the operations to be financed (sec. 44, GBL)
2) Loans and other credit accommodations with maturities of more than five years provisions
must be made for periodic amortization payments but such payments must be made at least
annually
3) a borrower may at any time prior to the agreed maturity date prepay in whole or in part, the
unpaid balance of any bank loan and other credit accommodation subject to such reasonable
terms and conditions as may be agreed upon between the bank and its borrower (sec. 45, GBL)

SINGLE BORROWERS LIMIT

Single Borrower’s Limit


Except as MB may prescribe for reason of national interest the total amount of loans credit
accommodations and guarantees that may be extended by a bank to any person, partnership,
association, corporation or other entity shall at no time exceed (25%) of the net worth of such
bank (as increased by BSP circular 425)

The basis for determining compliance with the SBL is the total credit commitment of the bank
to the borrower.

Unless the MB prescribes otherwise SBL may be increased by an additional 10% of net worth
provided additional amount is supported adequately by trust receipts,shipping
documents,warehouse receipts or other similar documents transferring or securing title
covering readily marketable non perishable goods which must be covered by insurance

Other limitations imposed upon banks with respect to its loan function
The total amount of loans, credits accommodations and guarantees prescribe in (a) may be
increased by an additional 10% of the net worth of such bank provided that the additional
liabilities are adequately secured by trust receipt, shipping documents, warehouse receipts,
and other similar documents which must be fully covered by an assurance. (Sec. 35.2, GBL)
3. Loans and other credit accommodation secured by REM shall not exceed 75% of the
appraised value of the real estate security plus 60% of the appraised value of the insured
improvements (Sec. 37, GBL).
4. Loans being contractual, the period of payments may be subject to stipulation by the parties.
In loan the case of amortization, the amortization scheduled has no fixed period
as it depends on the project to be financed such as that if it was capable of raising revenues, it
should be at least once a year with grace period of 3 years if the project to be financed is not
that profitable which could be deferred up to 5 years if the project was not capable of raising
revenues (Sec. 44, GBL)

a bank shall grant loans and other credit accomodations only in amounts and for the periods of
time essential for the effective completion of the operations to be financed

before granting a loan or other credit accommodation a bank must ascertain that the debtor is
capable of fulfilling his commitments to the bank
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a bank may demand from its credit applicants a statement of their assets and liabilities and
their income and expenditure

the purpose of all loans and other credit accomodations shall be stated in the application and in
the contract between the bank and the borrower. if the bank finds that the borrower has hot
used the funds borrowed for the purpose agreed upon the bank may terminate the loan and
demand immediate payment

Loans and other credit accommodations excluded in the computation of SBL


1.loans and other credit accommodations secured by obligations of the BSP or the government
2.loans and other credit accommodations fully guaranteed by the government as to the
payment of principal and interest
3.laons and other credit accommodations covered by assignment of deposits maintained in lthe
lending bank and held in the Philippines
4.laons credit accommodations and acceptances under letters of credit to the extent covered
by margin deposits
5.other loans or credit accommodations which the monetary board from time to time specify as
non risk loans

The limit on loans,credit accommodations and guarantees prescribed herein shall not apply to
loans,credit accommodations and guarantees extended by a cooperative bank to its
cooperative shareholders.

Restrictions on bank exposure to directors,officers,stockholders and related interests (DOSRI)


Loans granted to DOSRI
a. Director
b. Officer
c. Stockholder, having at least 1% ownership over the bank.
d. Related interest, such as DOS’s spouses their relatives within the first degree whether
by consanguinity of affinity, partnership whereby DOS is a partner or a corporation where
DOS owns at least 20%

No director or officer or any bank shall directly for himself or as the representative or against or
agent of others borrow from such bank nor shall he become a guarantor indorser or surety for
loans from such banks to others no in matter be an obligor or incur any contractual liability to the
bank
Except with written approval of majority of all directors of the bank excluding director concerned

Principles
Dealings of the bank shall be upon terms no less favorable to the bank than those offered to
others
Dosri accounts shall be limited to an amount equivalent to their respective unencumbered
deposits provided loans, credit accommodations secured by assets considered as non risk by
the monetary board shall be excluded from such limit
Loans, credit accommodations and advances to officers in form of fringe benefits granted shall
not apply to loans credit accommodations and guarantees extended by a cooperative bank to
its stockholders.
Banks are not created for the benefit of their directors and officers who cannot therefore
use the assets of the bank for their own benefit except as may be permitted by law.
The MB may regulate the amount of loans, credit accommodations and guarantees that may
regulate the amount equivalent to their respective unencumbered deposits and book value of
their paid in capital contribution in the bank provided that the loans, accommodations and
secured by assets considered as non risk by the MB shall bbr excluded from such limit. Provided
further that loans credit accommodations and advances to officers in the form of fringe
benefits granted in accordance with rules as may be prescribed by the MB shall not be subject
to individual limit.
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What are the restrictions of DOSRI accounts

The general banking law imposes restrictions (not total prohibition) on borrowings and
security arrangement by directors, officers, and stockholders of the bank. These restrictions
apply when the loan or financial accommodation of DOSRI is in excess of 5% of the capital and
surplus of the lending bank or in the maximum amount permitted by law, whichever is lower.

Requisites for applicability of restrictions


1. The borrower is a director, officer or any stockholders of the bank (and related interests)
2. He contacts a loan or any form of financial accommodations
3. the loan or financial accommodation’s is from (1) his bank or (2) a bank that is a subsidiary of
a bank and lending bank are subsidiaries (3) a bank in which a controlling proportion of the
share is owned by the same interests that owns a controlling proportion of the shares of his
bank and
4. the loan or financial accommodation of the director, officer or stockholder, singly or with
that of his related interest is in excess of 5% of the capital and surplus of the lending bank or in
the maximum amount permitted by law whichever is lower

Transactions covered by the DOSRI regulation

The transaction covered is loan and credit accommodation. Not being a loan, the ceiling will
not apply to lease and sale, however, it should still comply with the procedural requirement.

Requirements which must be complied with in case of DOSRI accounts


Procedural requirement
loan must be approved by the majority of all the directors excluding the director concerned. CB
approval is not necessary; however, there is a need to inform prior to the transaction. Loan
must be entered in the books of the corporation. (Sec. 36)
Substantive requirement
Loan must not exceed the paid in contribution and unencumbered deposits. (Not to exceed
15% of the portfolio or 100% of the net worth, whichever is lower.) (Sec. 36[4])
arm’s length rule.
The account should be upon terms not less favorable to the bank than those offered to others
reportorial requirement
The resolution approving the loan shall be entered in the records of the bank and a copy of the
entry shall be transmitted forthwith to the supervising and examination sector of the BSP

Aggregate ceilings
The monetary board may regulate the amount of loans, credit accommodation’s and
guarantees that may be extended, directly or indirectly by a bank to its director, officers
stockholders and their related interests as well as investment of such bank in enterprise owned
or controlled by said directors, officers stockholders and their related interest the manual of
regulation for banks provide that the aggregate is fifteen percent (15%) of the total loan
portfolio of the bank or one hundred percent (100 %) of the combined capital accounts
whichever is lower
Loans excluded from loans limitation
A: Non – risk loans, such as:
1. Loans secured by obligations of the Bangko Sentral ng Pilipinas or the Philippine
Government.
2. Loans fully guarantee by the government.
3. Loans covered by assignment of deposit maintained in the lending bank and held in the
Philippines.
4. Loans, credit accommodations and acceptance under letters of credit to the extent covered
by margin deposit.
5. Other loans or credit accommodations which the MB may be specify as non – risk items.
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restrictions under sec. 26 ncba

1. The borrower shall be required by the lending bank to waive the secrecy of his deposits of
whatever nature in all banks in the Philippines. The directors, officers or stockholders are
required to make such waiver if they themselves are the borrowers
2. The accounts are subject to examination but any information obtained from an examination
of his deposits shall be held strictly confidential and may be used by examiners only in
connection with the supervisory and examination responsibility or by the bangko sentral in an
appropriate legal action it has initiated involving the deposit account
COLLATERALS
a. value of collaterals
The loan shall not exceed 75% of the appraised value of the real property plus 60% of the
appraised value of the improvement or 75% of the appraised value pf the chattel (SEC’S. 37
and 38, GBL)

B. foreclosure of mortgage (sec. 47, GBL)

a) redemption period

1. Redemption period for natural persons


The mortgagor or debtor who is a natural person whose real property has been sold for the full
or partial payment of his obligation shall have the right within one year after the sale of the real
estate to redeem the property. The one year redemption period should be counted from the
date of the registration of the certificate of sale with the register of deeds (see section 1(3) of
Supreme Court circular A.M no 99-10-05 as further amended on Aug. 7 2001)

2. Redemption period for juridical persons


A juridical person whose property has been sold pursuant to an extrajudicial foreclosure shall
have the right to redeem the property but not after the registration of the certificate of
foreclosure sale with the proper register of deeds which in no case shall be more than (3)
months after foreclosure whichever is earlier
In case of foreclosure whether judicialy or extrajudicially of any mortgage on real mortgage
which is security for any loan shall have the right within one year after sale of real estate to
redeem it by paying amount due under the mortgage deed with interest at specified rate and
all costs and expenses incurred by bank from the sale and custody of said property less the
income derived therefrom.
However the purchaser shall have the right to enter upon and take possession of such property
immediately after date of confirmation of auction sale.

b) Right of redemption and Redemption price


BSP Circular 337 shall have right to redeem with one year after sale by paying amount due as
well as all costs incurred by bank and custody of said property less income derived therefrom.
In case of a juridical mortgagor whose property is being sold under extrajudicial foreclosure and
shall have the right to redeem the property in accordance with the rules but not after the
registration of the certificate of foreclosure sale with the Register of Deeds which in no case
shall be more than 3 months adter foreclosure whichever is earlier.
Redemption may be exercised by paying the amount due under the mortgage deed, with
interest thereon at the rate specified in the mortgage and all the costs and

Possession

The purchaser at the auction sale concerned whether in a judicial or extrajudicial foreclosure
shall have the right to enter upon and take possession of such property immediately after the
date of confirmation of the auction sale and administer the same in accordance with the law.

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Restrictions on borrowers of banks

1.Fraudulently overvalue property offered as security for a loan or other credit


accommodation from the bank;
2.Provide false or make misrepresentation or suppression of material facts for the purpose of
obtaining, renewing, or increasing a loan or other credit accommodation or extending the
period thereof;
3.Attempt to defraud the bank in the event of a court action to recover a loan or other credit
accommodation;
4.Offer any bank director, officer, employee, or agent of a bank any gift, fee, commission, or
any other form of compensation in order to influence such persons into approving a loan or
other credit accommodation application.
5.An examiner, officer or employee of the Bangko Sentral or of any department, bureau, office,
branch or agency of the Government assigned to supervise, examine, assist or render technical
assistance to any bank shall not commit any of the acts enumerated in this Section or aid in the
prohibited acts.
Trust operations of banks

A bank may be authorized by the monetary board to engage in trust business and act as a
trustee or administer any trust or hold property in trust or on deposit for the use, benefit or
behalf of others (sec. 79, GBL) the securities and exchange commission shall not register the
articles of incorporation and by-laws or any amendment thereto of any trust entity, unless
accompanied by a certificate of authority issued by the bangko sentral (sec. 80, GBL)

Trust business is any activity resulting from a trustor-trustee relationship (trusteeship) involving
the appointment of a trustee by a trustor for the administration, holding, management of funds
and or properties of the trustors by the trustee for the use benefit or advantage of the trustor
or of others called beneficiaries (sec.X403(a), manual)

A trust licensed bank may also be involved in other fiduciary business which refer to any activity
resulting from a contract or agreement whereby a bank binds itself to render services or to act
in a representative capacity such as in an agency, guardianship, administratorship or wills,
properties or estates, executorship which does not create or result in trusteeship (ILBID, par. )

Powers or trust entity

A trust entity, in addition to the general powers incident to corporations shall have the power
to
a. act as trustee on any mortgage or bond issued by any municipality, corporation or anybody
politics and to accept and execute any trust consistent with law
b. act under the order or appointment of any court as guardian, receiver, trustee, or depositary
of the estate of any minor or other incompetent person, and as receiver and depository of any
moneys paid into court by parties to any legal proceedings and of property of any kind which
may be brought under the jurisdiction of the court
c. act as administrator of the estate of any deceased person with the will when it is named the
executor thereof
d. act as administrator of the estate of any deceased person with the will annexed or as
administrator of the estate of any deceased person when there is no will
e. accept and execute any trust for the holding management and administration of any estate
real or personal and the rents, issues and profits thereof and
f. establish and manage common trust funds, subject to such rules and regulations as may be
prescribed by the monetary board
Separation of trust business of banks

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The law prohibits the integration of the properties and funds of all the other business of the
bank with those of the trust business. The trust business and all funds, properties or securities
received by any trust entity as executor, administrator, guardian, trustee, receiver or
depositorty shall be kept separate and distinct from the general business including all other
funds, properties and assets of such trust entity. The accounts of all such funds, properties and
assets of such trust entity the accounts of all such funds, properties or securities shall likewise
be kept separate and distinct fro, the accounts of the general business of the trust entity (sec.
87, GBL)

Diligence required in the conduct of trust business

A trust entity shall administer the funds or property under its custody with the diligence that a
prudent man would exercise in the conduct of an enterprise.

Other Banking Services

1. Acceptance of deposits
2. Granting credits
3. Financial leasing
4. Provide credit services
5. Opening and management of accounts
6. Providing market securities
7. Lending deposit boxes
8. Acceptance of payment for beneficiaries
9. Currency exchange

The Monetary Board has the authority to regulate these services to ensure that the interests of
the depositors and other creditors of the bank are not endangered.
Under Republic Act no. 8791, directors, officers, employees, or agents of any bank are not
allowed to:
Falsify entries in any bank report or statement or participate in any fraudulent
transaction, thereby affecting the financial interest of, or causing damage to, the bank or any
person;
Without order of a court of competent jurisdiction, disclose to any unauthorized person any
information relative to the funds or properties in the custody of the bank belonging to
private individuals, corporations, or any other entity: Provided, That with respect to bank
deposits, the provisions of existing laws shall prevail;
Accept gifts, fees or commissions or any other form of remuneration in connection with
the approval of a loan or other credit accommodation from said bank; Overvalue or aid in
overvaluing any security for the purpose of influencing in
any way the actions of the bank or any bank; or Outsource inherent banking functions.

A bank or quasi-bank that publicly announces or notifies the Bangko Sentral of a


bank holiday or suspends the payments of its deposit liabilities continuously for
more than thirty (30) days, the Monetary board can close such banking
institution and place it under receivership of the Philippine Deposit Insurance
Corporation (PDIC) without need for prior hearing

Prohibited Acts
a. Banks are prohibited from engaging in insurance business.
b. Outsourcing of functions are generally prohibited.
c. Engage in prohibited banking transactions

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Prohibited Banking Transactions

1. A bank shall not directly engage in insurance business as the insurer.


2. No director, officer, employee, or agent of any bank shall —
a. Make false entries in any bank report or statement or participate in any fraudulent
transaction, thereby affecting the financial interest of, or causing damage to, the
bank or any person;
b. Without order of a court of competent jurisdiction, disclose to any unauthorized
person any information relative to the funds or properties in the custody of the bank
belonging to private individuals, corporations, or any other entity: Provided, That
with respect to bank deposits, the provisions of existing laws shall prevail;
c. Accept gifts, fees or commissions or any other form of remuneration in connection
with the approval of a loan or other credit accommodation from said bank;
d. Overvalue or aid in overvaluing any security for the purpose of influencing in any
way the actions of the bank or any bank; or
e. Outsource inherent banking functions.
3. No borrower of a bank shall —
a. Fraudulently overvalue property offered as security for a loan or other credit
accommodation from the bank;
b. Furnish false or make misrepresentation or suppression of material facts for the
purpose of obtaining, renewing, or increasing a loan or other credit accommodation
or extending the period thereof;
c. Attempt to defraud the said bank in the event of a court action to recover a loan or
other credit accommodation; or
d. Offer any director, officer, employee or agent of a bank any gift, fee, commission, or
any other form of compensation in order to influence such persons into approving a
loan or other credit accommodation application.
4. No examiner, officer or employee of the Bangko Sentral or of any department, bureau,
office, branch or agency of the Government that is assigned to supervise, examine,
assist or render technical assistance to any bank shall commit any of the acts
enumerated in this Section or aid in the commission of the same.
5. No bank shall employ casual or non-regular personnel or too lengthy probationary
personnel in the conduct of its business involving bank deposits.

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