LAWS ON BANKS

INTRODUCTION
1. Concept
Banks – entities engaged in the lending of funds obtained in the form of
deposits

QUASI-BANKS - Entities engaged in the borrowing of funds through the

issuance, endorsement or assignment with recourse or acceptance of
deposit substitutes -( Sec.95, GBL)

Entities authorized to perform universal or commercial banking functions may

also engage inquasi-banking functions.

2. Nature of Business/Degree of Diligence

Impressed with public interest where the trust and confidence of the public in
general is of paramount importance such that:
a) The appropriate standard of diligence must bevery high, if not the
highest, degree of diligence; highest degree of care (PCI Bank vs.CA,
350 SCRA 446, PBCom vs. CA, G.R. No.121413, 29 Jan. 2001)

This applies only to cases where banksare acting in their fiduciary capacity, thatis, as
depository of the deposits of their depositors (Reyes vs. CA, G.R. No.118492, 15 Aug.
2001)

b) Subject to reasonable regulation under thepolice power of the state.

SPECIAL RULES ON STRIKES AND LOCKOUTS:

− Any strike or lockout involving banks, if unsettled after 7calendar days
shall be reported by the BSP to the Sec. of Labor who has 2 options:
a) He may assume jurisdiction over and decidethe dispute; or
b) certify it to the NLRC for compulsory arbitration
− The President may also intervene at any time and assume jurisdiction
over such labor dispute in order to settle or terminate the same.

3. Pertinent provisions on incorporation, change of charter/By-laws

The SEC shall not register the articles of incorporation of any bank or any
amendment thereto unless accompanied by a certificate of authority issued
by the Monetary Board under its seal - (Sec. 14, GBL).

ORGANIZATION OF A BANK OR QUASI-BANK

Requirements:
a) The entity is a stock corporation;
b) Its funds are obtained from the public,i.e. 20 or more persons; and
c) The minimum capital requirements prescribed by the Monetary Board are
satisfied -(Sec. 8, GBL).

A person or entity cannot engage in banking or quasi-banking functions

without a certificate of authority from the BSP - (Sec. 6, GBL).

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4. Classification (universal, commercial, rural, cooperative, foreign)
Universal banks - Primarily governed by the General Banking Law (GBL), can
exercise the powers of an investment house and invest in non-allied enterprises and
have the highest capitalization requirement.

Commercial banks - Ordinary banks governed by the GBL which have a lower
capitalization requirement than universal banks and can neither exercise the powers
of an investment house nor invest in non-allied enterprises.

Thrift banks: These are

a) Savings and mortgage banks;
b) Stock savings and loan associations;
c) Private development banks, which are primarily governed by the Thrift Banks
Act (R.A. 7906).

Rural banks - Mandated to make needed credit available and readily accessible in
the rural a reason reasonable terms and which are primarily governed by the Rural
Banks Act of 1992 (RA7353).

Cooperative banks - Those banks organized whose majority shares are owned and
controlled by cooperatives primarily to provide financial and credit services to
cooperatives. It shall include cooperative rural banks. They are governed primarily
by the Cooperative Code (RA 6938).

Islamic banks - Banks whose business dealings and activities are subject to the basic
principles and rulings of Islamic Shari’a, such as the Al Amanah Islamic Investment
Bank of the Philippines which was created by RA 6848.

Other classification of banks as determined by the Monetary Board of the Bangko

Sentral ng Pilipinas.

DEPOSIT FUNCTION
1. Capacity of depositor (minor, women, would-be corporation)
Minors:
a. At least seven years of age
b. Able to read and write
c. Not disqualified by any incapacity
d. It should only be savings or time deposits

Note: Parents may deposit for their minor children or wards (Sec.1, PD No.734)

If the 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 to the guardian. (Sec.22, Thrift
Banks Act of 1995)

Married Women are allowed to open bank accounts without assistance of

their husbands (RA No. 7192)

Corporations may open bank accounts as follows:

a. Incorporation Stage
b. Post-incorporation Stage

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2. Relationship between the bank and depositor; implications
As debtor-creditor
a) Savings
b) Time
c) Demand

Characteristics:
i) In the nature of irregular deposits ( Serranovs. Central Bank, 96 SCRA 96)
ii) Contract of loan/mutuum with the depositor as creditor
iii) Bank acquires ownership of the thing deposited and the right to use and
dispose
iv) Money deposited is commingled with the other money, constituting a
common fund.
v) Not preferred credits (Central Bank vs.Morfe, 20 SCRA 507).

As trustee-trustor
a) Trust account

As bailee-bailor
a) Deposit strictly for safekeeping and for specific purposes
− Safety deposit boxes - the relation between a bank renting out safety
deposit boxes and its customer with respect to the contents of the box
is that of a bailor and bailee, the bailment for hire and mutual benefit
has been adopted in this jurisdiction. It cannot be considered as a
contract of lease because the full possessionand control of the safety
deposit box is notgiven to the renters (Sia vs. CA, 222 SCRA 24[1993]).

As agent-principal
a) Deposit of check for collection
b) Deposit for specific purpose
c) Deposit for safekeeping

3. Kinds of deposit (Savings, Time, Demand)

Demand deposits are those liabilities of banks which are denominated in Philippine
currency and are subject to payment in legal tender upon demand by presentation
of checks. In here, no interest is paid by the bank because the depositor can take
out his funds any time. It is called demand deposit because the depositor can
withdraw the money he deposited on the very same day.

Savings Account, which is the most common type of deposit, is usually evidenced by
a passbook. Under the fine print, if you deposit today, you cannot withdraw the
amount until 60 days later. Bank pays an interest rate, but not as high as time
deposits.

Time Deposit is an account with fixed term. The interest rate is stipulated depending
on the number of days. During this period, the money deposited cannot be
withdrawn. It has a higher rate of interest than saving account.

− A bank other than a Universal Bank 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.

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4. Concept of and rules on Joint Account
a. ‘And’ account
− Co-ownership
− The signatures of both co-depositors are required for withdrawals

b. ‘And/or’ account
− Either one of the co-depositors may deposit and withdraw from the
account without the knowledge, consent and signature of the other.
And upon the death of one, the survivor may withdraw the entire
balance on deposit.
− The account may be deemed a survivorship agreement depending on
the intention of the parties; aleatory contract supported by a lawful
consideration which is valid unless when made as a mere cloak to hide
an inofficious donation, to transfer property in fraud of creditors, or to
defeat the legitime of a forced heir (Riveravs. People’s Bank and Trust
Co., 73 Phil.546 [1942]).

5. Anonymous accounts
Anonymous accounts are prohibited - (R.A. No9160 as amended by RA 9194;
BSP Circular No. 251,July 21, 2000)
exception:
Foreign currency deposits may be a “numbered account”. However, the law
requires that the necessary measures are undertaken by the bank to record
and establish the true identity of the depositor.

6. Deceased depositors
− If a bank has knowledge of the death of a person, who maintained a bank
deposit account alone, or jointly with another, it shall not allow any
withdrawal from the said deposit account, unless the Commissioner has
certified that the taxes imposed thereon by this Title have been paid:
Provided, however, That the administrator of the estate or any one (1) of the
heirs of the decedent may, upon authorization by the Commissioner,
withdraw an amount not exceeding Twenty thousand pesos (P20,000)
without the said certification. – (Par 2, Sec 97, National Internal Revenue
Code of 1997)

7. Survivorship Agreements
− Survivorship agreement is a contract that imposes a mere obligation with a
term, the term being death. Such agreements are permitted under Art 2012
of the Civil Code, an aleatory contract. But although the survivorship
agreement is per se not contrary to law, its operation or effect may be
violative of the law. For instance, if it be shown in a given case that such
agreement is a mere cloak to hide an inofficious donation, to transfer property in
fraud of creditors, or to defeat the legitime of a forced heir, it may be assailed and
annulled upon such grounds.
− Joint account may be the subject of a survivorship agreement whereby the co-
depositor 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 -
(Vitug vs. CA, 29 March 1990).

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SECRECY OF BANK DEPOSITS
1. Rationale (RA 1405 - SECRECY OF BANK DEPOSITS LAW)
− To encourage people to deposit in banks
− To discourage private hoarding so that banks may lend such funds and assist
in the economicdevelopment

Coverage:
− All deposits of whatever nature with banks or banking institutions in the
Philippines, including investments in bonds issued by the Government of
the Philippines, its political subdivisions and its instrumentalities

PROHIBITED ACTS
a. Examination and inquiry or looking into all deposits,of whatever nature, with
the banks in thePhilippines including investments in bonds issuedby the
Government.
b. Any disclosure by any official or employee of anybank to any unauthorized
person of any informationconcerning the said deposits.

GENERAL RULE:
− The deposits covered by law areconsidered as of an absolutely
confidential nature and may not be examined, inquired or looked into by
anyperson, governmental bureau, or office.

2. Exceptions:
FROM R.A. NO.1405
a. written permission of depositor
b. impeachment
c. bribery/dereliction of duty
− The crime of bribery and the overt acts constitutive of plunder are crimes
committed by public officers, and in either case the noble idea that "a public
office is a public trust and any person who enters upon its discharge does so with
the full knowledge that his life, so far as relevant to his duty, is open to public
scrutiny" applies with equal force. Plunder being thus analogous to bribery, the
exception to R.A. 1405 applicable in cases of bribery must also apply to cases of
plunder. (Ejercito vs. Sandiganbayan, 30 November 2006)
d. deposit is the subject matter of litigation

FROM OTHER LAWS

e. anti-graft & corrupt practices – (R.A.No. 3019)
f. net estate determination
− Inquiry by the Commissioner of InternalRevenue into bank deposits of:
a. A decedent to determine his gross estate;
b. A taxpayer who has filed an application for compromise of his tax
liability by reason of financial incapacity to pay his tax liability. Hemust
file a written waiver of his privilege under RA1405 or other general or
special laws (Sec.6[f], NIRC)
g. dormant accounts
− Disclosure to the Treasurer of the Philippines of dormant deposits for at
least 10 years under the Unclaimed Balances Act (Act No. 3936).
h. AMLA (safe harbor provision)
− Inquiry or examination by the Anti-Money Laundering Council(AMLC) of
any particular deposit or investment with any banking institution or non-
bank financial institution
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 upon order of any competent court in cases of violation of the Anti-
Money Laundering Law, when it has been established that there is
probable cause that the deposits or investments are related to an
unlawful activity or a money laundering offense, except that no court
order shall be required in the following unlawful activities:
a) Kidnapping for ransom under Art. 267 RPC;
b) Comprehensive Dangerous Drugs Act of 2002(RA No. 9165);
c) Hijacking and other violations under RA 6235;
d) Destructive arson and murder under RPC.Including those
perpetrated by terrorists against non-combatant persons and
similar targets. (Sec. 11, R.A. No. 9160 as amended by Sec. 8 of RA
9194)

Safe Harbor Provision. - No administrative, criminal or civil proceedings

shall lie against any person for having made a covered transaction
report in the regular performance of his duties and in good faith,
whether or not such reporting results in any criminal prosecution under
the AMLA or any other Philippine law. - Rules And Regulations
Implementing The Anti-Money Laundering Act of 2001(Sec 2.e, Rule 3,
R.A. No. 9160)

i. Human Security Law

− The Court of Appeals, designated as a special court, may issue an order
authorizing law enforcement officers to examine and gather information
on the deposits, placements, trust accounts, assets and records in a bank
or financial institution in connection with anti-terrorism case. - (Rep. Act No.
9372 - often referred to as the “Anti-Terror Law” or “Anti-Terrorism Law“. As will be
seen in the text of the law, however, this is properly known as the “Human Security
Act of 2007)
j. BSP’s periodic or special examination of bank
− BSP’s inquiry into or examination of deposits or investments with any bank,
when the inquiry or examination is made in the course of the BSP’s
periodic or special examination of such bank (Section 11, Anti-Money
Laundering Act of 2001)

3. Rule on foreign currency deposits

FOREIGN CURRENCY DEPOSIT ACT OF THE PHILIPPINES (RA NO. 6426)
− Foreign currency deposits refer to funds in foreign currencies which
are accepted and held by authorized banks in the regular course of
business with the obligation to return an equivalent amount to the
owner thereof, with or without interest.

Absolute Confidentiality of Foreign Currency Deposits

− All foreign currency deposits are absolutely confidential and cannot
be examined, inquired, or looked into by any person, government
official, bureau or office, whether judicial or administrative or
legislative, or any other private or public entity. Foreign currency
deposits are also exempt from attachment, garnishment, or any
other order or process of any court, legislative body, government
agency or any administrative body whatsoever. (Sec. 8, Rep. Act
No. 6426)

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 Instances when Confidentiality of Foreign Currency Deposits is Not Absolute
FROM RA NO. 6426
a) Foreign currency deposits may be examined, inquired or looked into
when there is written permission of the depositor.

FROM OTHER LAWS

b) Directors, officers, stockholders and related interests who contract a
loan or any form of financial accommodation with their bank or
related bank are required to execute a written waiver of secrecy of
deposits pursuant to The New Central Bank Act. (Sec. 26, Rep. Act No.
7653)
c) The Commissioner of Internal Revenue is authorized to inquire into bank
deposit accounts in relation to:
i) an application for compromise of tax liability or a
determination of a decedent’s gross estate under The
National Internal Revenue Code (Rep. Act No. 8424, as
amended by Rep. Act No. 10021); and
ii) a request for tax information of specific18 taxpayers made by
a foreign tax authority pursuant to a tax treaty under The
Exchange of Information on Tax Matters Act of 2009 (Rep. Act
No. 8424, as amended by Rep. Act No.10021).
d) AMLA
Money Laundering – a crime whereby the proceeds of an unlawful
activity is transacted thereby making them appear to have originated
from legitimate sources
• AMLC can inquire into deposits upon court order when there is a
probable cause that the deposits are related to any unlawful
activity.

• No court order is required if examination is in connection with:

(a) Kidnapping for ransom;
(b) Violation of Comprehensive Dangerous Drugs Act of 2002;
(c) Violations of RA 6235;
(d) Destructive arson; and
(e) Murder, including those perpetrated by terrorists.

Preventive measures:
(1) Covered Transaction Report
− Transaction in cash or other monetary instrument in
excess of P500, 000 within one banking day.
− Covered institution shall report to the AMLC all covered
and suspicious transactions within 5 working days from
the occurrence thereof, unless the Supervising Authority
prescribes a longer period not exceeding10 working
days
(2) Suspicious Transaction Report
− Suspicious transaction' are transactions with covered
institutions, regardless of the amounts involved, where
any of the following circumstances exist:
a) There is no underlying legal or trade obligation,
purpose or economic justification;
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 b) The client is not properly identified;
c) The amount involved is not commensurate with the
business or financial capacity of the client;
d) Taking into account all known circumstances, it
may be perceived that the client's transaction is
structured in order to avoid being the subject of
reporting requirements under the Act;
e) Any circumstances relating to the transaction
which is observed to deviate from the profile of the
client and/or the client's past transactions with the
covered institution;
f) The transactions is in a way related to an unlawful
activity or offense under this Act that is about to be,
is being or has been committed; or
g) Any transactions that is similar or analogous to any
of the foregoing.
(3) Customer Identification
− Covered institutions shall establish and record the true
identity of its clients based on official documents. They
shall maintain a system of verifying their clients and
incase of corporate client, require a system of verifying
their legal existence and organizational structure, as
well as the authority and identification of all person
purporting to act on their behalf
(4) 5-year period to store record
− All records of all transaction of covered institution shall
be maintained and safely stored for 5 years from the
dates of transaction. With respect to closed accounts,
the records on customer identification, account files
and business correspondence, shall be preserved and
safely stored for at least 5 years from the dates when
they were closed.

e) The Bangko Sentral is authorized to –

i) Inquire into or examine bank deposits and investments in the
course of a periodic or special examination to ensure
compliance with The Anti Money Laundering Act, in
accordance with the rules of examination of the Bangko Sentral
(Sec. 11, Rep. Act No. 9160, as amended); and
ii) Conduct annual testing which is limited to the determination of
the existence and true identity of the owners of numbered
accounts (Sec. 9, Rep. Act No 9160, as amended21).
f) The Philippine Deposit Insurance Commission and the Bangko Sentral may
inquire into bank deposits when there is a finding of unsafe or unsound
banking practices. (Sec. 8, Rep. Act No. 3591, as amended)
g) The Commission on Audit is authorized to examine and audit government
deposits pertaining to the revenue and receipts of, and expenditures or
uses of funds and properties, owned or held in trust by, or pertaining to,
the Government or any of its subdivisions, agencies or instrumentalities,
including government-owned and controlled corporations with original
charters. (See Art. IX-D, 1987 Constitution and Pres. Dec. No.1445)
h) The Presidential Commission on Good Government, in the conduct of its

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 investigations to recover ill-gotten wealth accumulated by former
President Ferdinand E. Marcos, his immediate family, relatives,
subordinates and close associates, may issue subpoenas requiring the
attendance and testimony of witnesses and/or the production of books,
papers, contracts, records, statement of accounts and other documents.
(Sec. 3 [e], Exec. Order No. 1[1986])

REQUISITES OF IN CAMERA INSPECTION:

i) There must be a pending case before a court of competent
jurisdiction.
ii) The account must be clearly identified, the inspection limited to
the subject matter of the pending case before the court of
competent jurisdiction.
iii) The bank personnel and the account holder must be notified to
be present during the inspection, and
iv) Such inspection may cover only the account identified in the
pending case. (Marquez vs Desierto, G.R. No. 135882, June 27,
2001)

FROM JURISPRUDENCE ON GROUNDS OF EQUITY

i) Account of a Non-resident Alien
− The garnishment of a foreign currency deposit account of a non-
resident alien found guilty of raping a minor was allowed on the basis
of equity. (Salvacion v. Central Bank of the Philippines, 278 SCRA 27,
Aug 21, 1997)
j) Account of a Co-payee of a Check
− A co-payee of a check who filed a suit for recovery of sum of money
was considered, in a pro hac vice ruling by the Supreme Court, as a
depositor in view of the distinctive circumstances of the case. (China
Banking Corporation v. Court of Appeals, 511 S.C.R.A. 110 [2006])

PDIC - Philippine Deposit Insurance Corporation

FUNCTIONS OF PDIC:
a) Deposit Insurer
b) Co-regulator of Banks
c) Receiver and Liquidator of Closed Banks

1. Mandatory Insurance Coverage (RA 9576)

2. Risk insured against - bank closure
3. Amount insured – amount deposited net of any obligation of the depositor to
the bank as of closure
4. Maximum coverage - P500,000 per bank regardless of the number of the
accounts held
5. Joint accounts separately covered
Excluded:
a) deposit in foreign branches;
b) investment products;
c) unfounded, fictitious or fraudulent;
d) deposits emanating from unsafe and unsound banking practices;
e) AMLA;
f) splitting of deposits
6. Filing of claim – 2 years from actual take over
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7. Remedy for amounts in excess of P500,000
− In case the depositor’s account is more than the insurance
coverage, the balance may still be recovered from the PDIC after
the final liquidation of the remaining assets of the closed bank
8. Period for PDIC to pay the claim
− The claim for insured deposit should be settled within six (6) months
from the date of filing provided all requirements are met but the
claim must be filed within twenty-four (24) months after bank
takeover. The six-month period shall not apply if the documents of
the claimant are incomplete or if the validity of the claim requires
the resolution of issues of facts and law by another office, body or
agency, independently or in coordination with PDIC.

LOAN FUNCTION

1. Basic rules on bank loans (Sec. 39, 40 & 55.2, GBL)

Section 39. Grant and Purpose of Loans and Other Credit Accommodations. - A bank
shall grant loans and other credit accommodations only in amounts and for the periods
of time essential for the effective completion of the operations to be financed. Such
grant of loans and other credit accommodations shall be consistent with safe and
sound banking practices. The purpose of all loans and other credit accommodations
shall be stated in the application and in the contract between the bank and the
borrower. If the bank finds that the proceeds of the loan or other credit accommodation
have been employed, without its approval, for purposes other than those agreed upon
with the bank, it shall have the right to terminate the loan or other credit
accommodation and demand immediate repayment of the obligation.

Section 40. Requirement for Grant Of Loans or 0ther Credit Accommodations. - Before
granting a loan or other credit accommodation, a bank must ascertain that the debtor
is capable of fulfilling his commitments to the bank. Toward this end, a bank may
demand from its credit applicants a statement of their assets and liabilities and of their
income and expenditures and such information as may be prescribed by law or by rules
and regulations of the Monetary Board to enable the bank to properly evaluate the
credit application which includes the corresponding financial statements submitted for
taxation purposes to the Bureau of Internal Revenue. Should such statements prove to
be false or incorrect in any material detail, the bank may terminate any loan or other
credit accommodation granted on the basis of said statements and shall have the right
to demand immediate repayment or liquidation of the obligation. In formulating rules
and regulations under this Section, the Monetary Board shall recognize the peculiar
characteristics of micro financing, such as cash flow-based lending to the basic sectors
that are not covered by traditional collateral.

Section 55.2. 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.

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2. Specific rules on:
amortization (Sec. 44, GBL);
− The amortization schedule of bank loans and other credit accommodations
shall be adapted to the nature of the operations to be financed. In case of
loans and other credit accommodations with maturities of more than 5 years,
provisions must be made for periodic amortization payments, but such
payments must be made at least annually: Provided, however, That when the
borrowed funds are to be used for purposes which do not initially produce
revenues adequate for regular amortization payments therefrom, the bank
may permit the initial amortization payment to be deferred until such time as
said revenues are sufficient for such purpose, but in no case shall the initial
amortization date be later than 5 years from the date on which the loan or
other credit accommodation is granted. In case of loans and other credit
accommodations to micro finance sectors, the schedule of loan amortization
shall take into consideration the projected cash flow of the borrower and
adopt this into the terms and conditions formulated by banks.
prepayment (Sec. 45, GBL);
− 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.
renewal (Sec. 48, GBL);
− The Monetary Board may, by regulation, prescribe the conditions and
limitations under which a bank may grant extensions or renewals of its
loans and other credit accommodations.
losses/write-offs (Sec. 49, GBL);
− All debts due to any bank on which interest is past due and unpaid for
such period as may be determined by the Monetary Board, unless the
same are welt-secured and in the process of collection shall be
considered bad debts within the meaning of this Section. The Monetary
Board may fix, by regulation or by order in a specific case, the amount of
reserves for bad debts or doubtful accounts or other contingencies.
Writing off of loans, other credit accommodations, advances and other
assets shall be subject to regulations issued by the Monetary Board.
escalation clause
− raising of interest.
− allowed ONLY when the monetary board has increased the rate of
interest provided that there is also a stipulation that interest will be lowered
if MB has lowered the rate of interest
− Both instances should be present before escalation clause is allowed
− Exception: if the creditor unilaterally decreased the interest even if it was
not stipulated, esacalation will be allowed.

3. DOSRI Restrictions
Rationale
− The general policy behind the DOSRI limit is to level the lending field
between insiders (namely, directors, officers, stockholders, and their
related interests) and the outsiders.
− The rules require that loans and other credit accommodations to DOSRI
are to be in the regular course of business and upon terms not less
favorable to the bank than those offered to those outside the DOSRI
circle.
− The aim is to prevent the bank from becoming a captive source of
finance of the DOSRI.
− The evil sought to be avoided is the abuse of confidence.
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Requisites:
a) borrower – director, officer, stockholder of the bank (1%) or their related
interests
b) loan
c) from his bank or bank subsidiary (or affiliate) or bank controlling interest
of which is the same as his bank
d) Amount of loan in excess of 5% of capital surplus of the lending bank

Related Interests
a) Relatives (spouse and 1st degree relatives)
b) Partnership (of which the DOS is a general partner)
c) Co-owner of the collateral
d) certain corporations, association or firm where:
i) DOS or relative is also a director or officer
ii) any or group of DOS or relative holds at least 20% of the
capital stock
iii) wholly/majority owned by any related entity or group of
related entities
iv) owns at least 20% of the capital stock of a substantial
stockholder of the lending bank or which controls majority
interest of the bank
v) lending bank owns 20% of the corporation or has
management contract with the lending bank (CB Circular
423, 2004)

DOSRI Requirements:
a) written approval of all the directors of the lending bank
b) report to BSP
c) arms length
Arms Length Rule - Dealings of a bank with any of its DOSRI shall be
upon terms not less favorable to the bank than those offered to others.
d) aggregate ceiling of DOSRI loans
– 15% of the bank’s loan portfolio or 100% of combined capital
accounts whichever is lower
e) individual ceiling
– encumbered deposit and book value of paid up shares
– an amount equivalent to his or her unencumbered deposits in
the lending bank plus the book value of paid-capital
contribution therein.

4. Single Borrower Limit – 25% of the net worth of the bank

− The single borrower’s limit (‘SBL’) serves to allocate bank resources to
different sectors of the economy. It prevents the bank from making
excessive loans and other credit accommodations to a single borrower or
corporate group. Thus, the bank is prohibited from placing all of its eggs in
the basket of a single client, thereby safeguarding the bank from too
large a risk exposure to a single client. Currently, the SBL is 25 per cent of
the net worth of the bank. There could be an incremental SBL of 10 per
cent of the net worth of the bank, provided that the additional liabilities of
the borrower are adequately secured by documents of title to goods that
are readily marketable, non-perishable, and fully insured.
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 Included in the SBL:
− direct and indirect liability
− liabilities of corporations, etc. in which the borrower is a major stockholder
− liabilities of subsidiaries, if the borrower is a corporation
− liabilities of members, if borrower is a partnership or association

Excluded from the SBL:

− loans secured by: the BSP, government US Treasury, other central banks of
foreign countries with high credit quality, hold out on/security on deposit,
− others – MB

5. Collaterals – 75% of the appraised value of the real property plus 60% of the
value of the improvement or 75% of the appraised value of the chattel (Sec 37 &
38, GBL)
Note: 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.

6. Redemption – Real Estate

− if natural person - one (1) year after the sale
− if juridical person – until but not after registration of certificate of
foreclosure sale, in no case more than 3 months after foreclosure which
ever is earlier

Effect of Restraining Order

− Any petition in court to enjoin or restrain the conduct of foreclosure
proceedings instituted pursuant to this provision shall be given due course
only upon the filing by the petitioner of a bond in an amount fixed by the
court conditioned that he will pay all the damages which the bank may
suffer by the enjoining or the restraint of the foreclusure proceedings.

TRUTH IN LENDING ACT or TILA (RA 3765- Disclosure of Finance Charges)

Policy - protect the citizens from a lack of awareness of the true cost of credit by
assuring a full disclosure of such cost.

Disclosure shall include:

a) The cash price of the property or service to be acquired
b) Amounts for downpayment
c) Charges which are paid in connection with the transaction
d) Amount to be financed
e) Finance charge - interest and fees incident to the extension of credit

− Truth in Lending Act may also be violated if the agreement provides for an
escalation clause on interest which is dependent solely on the will of the bank.
(UCPB vs Sps Beluso, G.R. No. 159912, August 17, 2007)
− Subsequent compliance with the disclosure requirement cannot be deemed in
substantial compliance with the Truth in Lending Act. (UCPB vs Sps Beluso, G.R. No.
159912, August 17, 2007)

Penalty- either civil or criminal (1k-5k fine or imprisonment for 6-12 months, or both)
- Government is exempted from the punishment or penalty

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BANK OWNERSHIP

RULES UNDER THE MANUAL OF REGULATIONS FOR BANKS

1. Foreign Individuals and non-bank corps – 40% of the voting stock (Aggregate
ceiling – 40%)
2. Filipino individual and domestic non-bank – each up to 40%
No aggregate ceiling
3. Citizenship of the corporation which is a stockholder of a bank – citizenship of
the controlling (more than 50%) stockholders
4. Commercial banks – 60% (Filipino)
Rural banks – 100% (Filipino)
Thrift bank - 40% (Filipino)

DIRECTORS & OFFICERS

1. Board Composition - 5 to 15 members (2 should be independent)

An “independent director” shall mean a person other than an officer or
employee of the bank, its subsidiaries or affiliates or related interests.
Public officials (appointive or elective, whether full-time or part-time) not
qualified -except for rural banks – (Section 19, GBL)

2. Meetings – can be done electronically

3. Fit and Proper Rule - Section 16, GBL

“Fit and Proper Rule” states that “to maintain the quality of bank management
and afford better protection to depositors and the public in general, the
Monetary Board shall prescribe, pass upon and review the qualifications and
disqualifications of individuals elected or appointed bank directors or officers
and disqualify those found unfit.”
“After due notice to the board of directors of the bank, the Monetary Board
may disqualify, suspend or remove any bank director or officer who commits or
omits an act which render him unfit for the position.”
“In determining whether an individual is fit and proper to hold the position of a
director or officer of a bank, regard shall be given to his integrity, experience,
education, training, and competence.”

4. Disqualifications
a) Conviction of offenses involving dishonesty or breach of trust;
b) Sentenced – more than 6 years;
c) Violation of banking laws;
d) Responsible D&O of closed banks;
e) D&O found administratively liable for violation of banking laws where removal
from office is imposed;
f) Those found unfit for the position of D&O

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OWNERSHIP OF REAL PROPERTY
A bank can acquire real estate necessary for the conduct of its Business. BUT,
total investment in real property shall not exceed 50% of the combined capital
accounts.

Limitation does not apply to real properties:

a) Mortgaged to it;
b) Conveyed to it in satisfaction of debts;
c) Purchased at sales under judgments, etc.

BANKS IN DISTRESS

A. UNSECURED LOANS – to provide liquidity (not more than 7 days)

Sec 83, NCBA. Loans for Liquidity Purposes. - The Bangko Sentral may extend
loans and advances to banking institutions for a period of not more than
seven (7) days without any collateral for the purpose of providing liquidity to
the banking system in times of need.

B. EMERGENCY LOANS – not more than 50% of total deposits

Sec 84, NCBA. Emergency Loans and Advances. - The BSP, upon the
approval of at least 5 members of the MB, may also grant emergency loans
or advances in the amount not exceeding 50% of its total deposits and
deposit substitutes.

C. CONSERVATORSHIP (Sec 29, NCBA)

Condition: continuing inability or unwillingness to maintain liquidity
Period: 1 year
Powers:
1) Take charge of/manage the assets & liabilities
2) Reorganize management
3) Collect receivables
4) Necessary powers

D. RECEIVERSHIP (Sec 30, NCBA)

Condition:
1) Unable to pay liabilities
2) Insufficient assets
3) More losses if business will continue
4) Willful violation of CDO

Close Now Hear Later Scheme

− No prior hearing needed, but subject to subsequent judicial review
(certiorari by holders of majority of the capital stock within 10 days
from receipt of order)
− The law does not contemplate prior notice and hearing before the
bank may be directed to stop operations and placed under
receivership. The purpose is to prevent unwarranted dissipation of
the bank’s assets and as a valid exercise of police power to protect
the depositors, creditors, stockholders and the general public.
(Central Bank of the Philippines v. CA, G.R. No. 76118 Mar. 30, 1993)
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 EFFECTS OF RECEIVERSHIP:
1) Exemption from garnishment, levy, attachment & execution
2) Stoppage of business
3) Suspension of bank’s authority over its properties (Assets are deemed
under custodia legis)
4) Exemption from payment of interests on deposits
5) Retention of juridical personality
6) Exclusive jurisdiction of liquidation court

E. LIQUIDATION
- Cannot proceed simultaneously with rehabilitation
- Receiver to file ex parte petition with the proper RTC for assistance in the
liquidation of the bank
- All claims (including disputed claims) subject to the liquidation court’s
jurisdiction

Distinguished from liquidation under the Corporation Code (In Re: Petition for
Assistance in the Liquidation of Rural Bank of Bokod, 18 December 2006)
- Prior notice and hearing not required (summary)
- Bank has no option to undertake its own liquidation
- Can be dissolved even without prior BIR clearance

SUBSTANTIAL DIFFERENCES IN THE PROCEDURE FOR INVOLUNTARY DISSOLUTION AND

LIQUIDATION - In Re: Petition for Assistance in the Liquidation of Rural Bank of Bokod, 18 Dec. 2006
UNDER THE CORPORATION CODE
The SEC may dissolve a corporation, upon
the filing of a verified complaint and after
proper notice and hearing, on grounds
provided by existing laws, rules, and
regulations.
The SEC shall issue the final order of
dissolution only after the corporation has
submitted its tax clearance; or in case of
involuntary dissolution, the SEC may
proceed with the dissolution after 30 days
from receipt by the BIR of the documentary
requirements without a tax clearance
having been issued
The corporation may undertake its own
liquidation, or at any time during the said
three years, it may convey all of its property
to trustees for the benefit of its stockholders,
members, creditors, and other persons in
interest.
NEW CENTRAL BANK ACT
The Monetary Board may summarily and
without need for prior hearing, forbid the
banking corporation from doing business in
the Philippines, for causes enumerated in
Section 30 of the New Central Bank Act;
and appoint the PDIC as receiver of the
bank.
The actions of the Monetary Board shall be
final and executory, and may not be
restrained or set aside by the court except
on a Petition for Certiorari filed by the
stockholders of record of the bank
representing a majority of the capital stock.
PDIC, as the appointed receiver, shall file ex
parte with the proper RTC, and without
requirement of prior notice or any other
action, a petition for assistance in the
liquidation of the bank.
The bank is not given the option to
undertake its own liquidation.

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