General Banking Law Annotated
Sec 1. Title. The short title of this Act shall be
"The General Banking Law of 2000.
 Effective June 13, 2000
 Purpose: to fashion a legal framework
so that our banking system can
adequately meet currently emerging
issues associated with deregulation and
increasing financial globalization and
the challenges that lie ahead of us in the
21st century.
 Intention: maintain a strong, safe, and
sound banking system that
effectively perform its five
functions:
o To mobilize savings
o To allocate resources
o To facilitate risk amelioration
o To facilitate exchange of goods
and services between sellers
and buyers
o To monitor corporate
governance of the banking or
financial institutions
Sec 2. Declaration of Policy. The
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.
 State recognizes that a stable and
efficient banking and financial system is
Melicor (D2019)
a cornerstone of the national economy
and its sustained development.
 The aim is to promote and maintain
such a system and make it globally
competitive, dynamic, and responsive
to the demands of the economy.
Vital Role of Banks is described in Simex
International vs. Court of Appeals
Simex International vs. CA
can  the banking system is an indispensable
basic institution in the modern world and
plays a vital role in the economic life of
every civilized nation
 Whether as mere passive entities for the
safekeeping and saving of money or as
active instruments of business and
commerce, banks have become an
ubiquitous presence among the people,
who have come to regard them with
respect and even gratitude, and most of
all confidence.
State  Because it is impressed with public
interest, it is fiduciary in character. This
fiduciary nature requires high standards
of integrity and performance.
 A breach of such fiduciary duty would
make the erring bank liable for moral
damages, even to a corporate client, in
case of the latter’s besmirched
reputation. (note that a financial credit
of a businessman is a prized and
valuable asset).
Simex International vs. CA
 As a business affected with public
interest and because of the nature of its
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General Banking Law Annotated Melicor (D2019)

functions, the bank is under the Samsung Construction vs. Far East Bank
obligation to treat the accounts of its
 The highest degree of care and
depositors with meticulous care, always
diligence is required of banks
having in mind the fiduciary nature of
Heirs of Manlapat vs. CA
the relationship.
 Highest degree of diligence is
BPI vs. IAC
expected, and high standards of
 Bank is not expected to be infallible, but
integrity and performance are required
it must handle the account of
depositors with meticulous care, always
BSP set it straight: highest service standards in
having in mind the fiduciary nature of
dealing with their customers
their relationship.
 Awarded moral but not exemplary
 The bank has a right to demand
damages in the absence of malice and
reimbursement from the erring
bad faith
employee or personnel for what it paid
Prudential Bank vs. CA to depositor or client (as per Art NCC
 Awarded moral as well as exemplary 2181)
even if malice and bad faith on the part
of the bank were not established. Sec 3. Definition and Classification of Banks.

3.1. "Banks" shall refer to entities engaged in

BPI vs. CA the lending of funds obtained in the form of
deposits.
 in dealing with its depositors, a bank
(2a)
should exercise its functions not only
3.2. Banks shall be classified into:
with the diligence of a good father of a
(a) Universal banks;
family, but it should do so with the
(b) Commercial banks;
highest degree of care.
(c) Thrift banks, composed of: (i) Savings and
 Note: understandable why the wording
mortgage banks, (ii) Stock savings and loan
differs to that of Sec 2 of the GBL which
associations, and (iii) Private development
merely requires high standards of
banks, as defined in Republic Act No. 7906
integrity and performance, since the
(hereafter the "Thrift Banks Act");
ruling was prior to the effectivity of the
(d) Rural banks, as defined in Republic Act No.
GBL.
7353 (hereafter the "Rural Banks Act");
Consolidated Bank and Trust Company vs. Court
(e) Cooperative banks, as defined in Republic
of Appeals
Act No. 6938 (hereafter the "Cooperative
 Fiduciary nature of banking requires Code");
banks to assume a degree of diligence (f) Islamic banks as defined in Republic Act No.
higher than that of a good father of a 6848, otherwise known as the "Charter of Al
family.

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General Banking Law Annotated
Amanah Islamic Investment Bank of the
Philippines"; and
(g) Other classifications of banks as
determined by the Monetary Board of the
Bangko Sentral ng Pilipinas.
Sec 3. Definition and Classification of Banks.
3.1. "Banks" shall refer to entities engaged in
the lending of funds obtained in the form of
deposits.
Banks – entities engaged in the lending of
funds obtained in the form of deposits
 This definition described what classical
or core banking is: the taking of
deposits from the public, and the
lending of these funds to the bank’s
own borrowers.
 It highlights the basic banking function
of mobilizing savings (through deposit
taking) and allocating resources
(through lending).
In reality, banks do more than deposit-taking
and lending. The additional activities are set
out Sec 29 and 53.
 All such activities can be conducted by
a UB.
 Both a UB and a KB can have equity
interests in allied enterprises, while a
UB can exercise the powers of an
investment house and be a
stockholder in non-allied enterprises.
 Quasi-banking is also an inherent
power of UB and KB, as under the new
law these banks do not need to be
separately licensed or authorized for
that purpose.
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3.2. Banks shall be classified into:
(a) Universal banks;
(b) Commercial banks;
(c) Thrift banks, composed of: (i) Savings and
mortgage banks, (ii) Stock savings and loan
associations, and (iii) Private development
banks, as defined in Republic Act No. 7906
(hereafter the "Thrift Banks Act");
(d) Rural banks, as defined in Republic Act No.
7353 (hereafter the "Rural Banks Act");
(e) Cooperative banks, as defined in Republic
Act No. 6938 (hereafter the "Cooperative
Code");
(f) Islamic banks as defined in Republic Act No.
6848, otherwise known as the "Charter of Al
Amanah Islamic Investment Bank of the
Philippines"; and
(g) Other classifications of banks as
determined by the Monetary Board of the
Bangko Sentral ng Pilipinas.
History of Universal Banking
 Introduced under BP Blg. 61 antedating
by roughly 19 years the U.S. Gramm-
Leach-Biley Act of 1999, which
dismantled the wall that the Glass
Steagall Act erected between banking
and the securities business in reaction
to the Wall Street Crash.
 Unibanking is based on the German
concept of universality in banking,
which essentially means “what one
bank can do any other bank can do”
o Main objective was the
removal of the legislated
specialization of financial
institutions, which constraint
prevented them from
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General Banking Law Annotated Melicor (D2019)

responding to the totality of (ii) other banking services in

their clientele banking needs. Sec 53
o Secondary objective: increase (iii) purchase hold and convey
the flow of funds, into the real estate as per Sec 51
economy to finance the long- and 52.
term projects of the (iv) Invest in equities of allied
government and the private enterprises
sector.
Thrift Bank (i) Grant loans, whether
Universal banking = expanded commercial secured or unsecured
banking. (ii) Invest in readily
 The General Banking Law governs marketable bonds and
primarily universal and commercial other debt securities
banks. (iii) Issue domestic letters of
 However, the provisions of the GBL are credit
also applicable to thrift banks and rural (iv) Extend credit facilities to
banks, insofar as they are not in these private and government
banks. employees
(v) Extend credit against the
Universal Powers of KB+ powers of an security of jewelry,
Bank investment house and to prescious stones and
invest in non-allied articles of similar nature,
enterprises subject to such rules and
 they may perform the regulatins as the MB may
functions of an prescribe
investment house (vi) Accept savings and time
either directly deposits
(though a separate (vii) Rediscount paper with the
and distinct Land Bank of the
department or unit Philippines, and other
within the bank) or GOCC
indirectly (through a (viii) Accept foreign currency
separate subsidiary deposits
investment house). (ix) Act as as correspondent
 Iit CANNOT perform for other financial
those functions both instiutions
directly and indirectly. (x) Purchase, hold, and
Commercial (i) general powers as a stock convey real estate (as per
Bank corporation Sec 51 and 52)
(xi) Buy and sell FOREX

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General Banking Law Annotated Melicor (D2019)

2. accept savings and

With prior MB approval: time deposits
(a) open current/checking 3. act as correspondent
accounts of other financial
(b) engage in trust, quasi- institutions
banking, and money market 4. rediscount paper with
operations the Land Bank of the
(c) act as collection agent for PH, DBP, or any other
government entities bank
(d) act as depositor of 5. act as collection
national agencies and of agent
municipal, city, or provincial 6. other banking
funds in the MCP where the services (Sec 53)
bank is located 7. buy and sell FOREX
€ issue mortgage and chattel
mortgage certificates, buy If authorized by the MB, a
and sell them for its own rural can provide the
account or for the account of following services:
others, or accept and receive (a) accept current or
them in payment or as checking accounts,
amortization of its loan. provided such rural
(f) invest in the equity of allied bank has net assets
undertakings of at least Php 5M
(g) issue foreign letters of (b) accept NOW
credit (neogitable order of
(h) pay, accept, negotiate withdrawal) accounts
import and export drafts or (c) acts as trustee over
bills of exchange estate or properties
of farmers and
Rural Banks In addition to the powers merchants
provided in other laws (d) act as official as
applicable to it: official depository of
1. extend loans and municipal city or
advances primarily for provincial funds in
the purpose of the MCP where it is
meeting the normal located
credit needs of (e) sell domestic drafts
farmers, fishermen, (f) invest in allied
and farm familities, undertakings
etc.

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General Banking Law Annotated
Cooperative Organized primarily to
Banks provide financial and credit
services to cooperatives.
 Same powers as Rural
Banks
Islamic See page 19-21 of book
Banks (basically services which do
not entail interest)
Monetary Board is authorized to make other
classification of banks, as it may deem proper.
Sec 4. Supervisory Powers. — The operations
and activities of banks shall be subject to
supervision of the Bangko Sentral.
"Supervision" shall include the following:
4.1. The issuance of rules of conduct or the
establishment of standards of operation for
uniform application to all institutions or
functions covered, taking into consideration
the distinctive character of the operations of
institutions and the substantive similarities of
specific functions to which such rules, modes or
standards are to be applied;
4.2. The conduct of examination to determine
compliance with laws and regulations if the
circumstances so warrant as determined by the
Monetary Board;
4.3. Overseeing to ascertain that laws and
regulations are complied with;
4.4. Regular 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: Provided, That the
deficiencies/irregularities found by or
discovered by an audit shall be immediately
addressed;
Melicor (D2019)
4.5. Inquiring into the solvency and liquidity of
the institution (2-D); or
4.6. Enforcing prompt corrective action.
The Bangko Sentral shall also have supervision
over the operations of and exercise regulatory
powers over quasi-banks, trust entities and
other financial institutions which under special
laws are subject to Bangko Sentral supervision.
(2-Ca)
For the purposes of this Act, "quasi-banks" shall
refer to entities engaged in the borrowing of
funds through the issuance, endorsement or
assignment with recourse or acceptance of
deposit substitutes as defined in Section 95 of
Republic Act No. 7653 (hereafter the "New
Central Bank Act") for purposes of relending or
purchasing of receivables and other obligations
 Behind and central to a safe and sound
banking system is an effective banking
supervisor. (role played by the BSP)
 Power was vested solely in the BSP
(Sec 95 of the law removed the
overlapping power of the PDIC to
examine banks to determing safe and
sound practice).
o However, THE PDIC CHARTER
WAS AMENDED GRANTING IT
THE POWER TO EXAMINE
BANKS, with the prior approval
of the monetary board,
provided that no examination
may be conducted by PDIC
within 12 months from the last
examination date.
o They sort out the overlapping
issue through working
guidelines. Latest say that if
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General Banking Law Annotated
the PDIC gives a report to the
MB of unsound practice and
the MB does not act within 45
days, the PDIC can take action
and inform the MB.
Supervision = rule-making power + visitorial
powers.
 The institutions that are supervised by
the Bangko Sentral include not only
banks but also quasi-banks, trust
entities, and other financial institutions.
They may also examine an enterprise
which is wholly or majority-owned by a
bank.
o BSP conducts regular
investigation of their
operations to determine
whether these institutions are
conducting their business in a
safe or sound basis.
o Investigation is conducted not
oftener than once a year, but
the MB, by an affirmative vote
of 5 members, may order a
special examination of a bank.
o If a subsidiary of affiliate is
abroad, MB requires prior to
approval, a certification from
the host country that the BSP
examiner is authorized to
examine.
What is a quasi-bank?
 Quasi-banks are those entities
engaged in obtaining from the “public”
(i.e. 20 or more lenders at any one
time) funds other than deposits
 Deal with deposit substitutes through
the issuance of endorsement, or
Melicor (D2019)
acceptance, with recourse to it, of debt
instruments, for the purpose of (i)
relending, or (ii) purchasing of
receivables and other obligations.
 Banks are also permitted in engage in
such activity.
 Deposit substitutes are essentially
substitutes for savings, current, and
time deposits. For banks the proper
term is “deposit-substitute operation.”
Sec 5. Policy Direction; Ratios, Ceilings and
Limitations. — The Bangko Sentral shall
provide policy direction in the areas of money,
banking and credit. (n)
For this purpose, the Monetary Board may
prescribe ratios, ceilings, limitations, or other
forms of regulation on the different types of
accounts and practices of banks and quasi-
banks which shall, to the extent feasible,
conform to internationally accepted standards,
including those of the Bank for International
Settlements (BIS). The Monetary Board may
exempt particular categories of transactions
from such ratios, ceilings and limitations, but
not limited to exceptional cases or to enable a
bank or quasi-bank under rehabilitation or
during a merger or consolidation to continue
in business with safety to its creditors,
depositors and the general public.
 Reiterates the mandate of the Bangko
Sentral to provide policy directions in
the areas of money, banking, and
credit.
 MB prescribe rations, ceilings,
limitations, and other forms of
regulations one the accounts and
practices of banks and quasi-banks.
The Monetary Board is likewise
7
General Banking Law Annotated
authorized to provide exemptions from
such regulations, and enable a
bank/quasi-bank under rehabilitation
in the process of merger or
consolidation, to continue in business
taking into account the safety of its
creditors, depositors, and the general
public.
Systemic Risk
“the possibility that failure of one bank to
settle net transactions with other bank will
trigger a chain reaction, depriving other
banks of funds leading to a general
shutdown of normal clearing and
settlement activity.” As well as “the
likelihood of sudden, unexpected collapse
of confidence in a significant portion of the
banking or financial system with potentially
large real economic effects.” (PDIC charter
definition)
 Failing or defaulting bank can
demolish the aura of confidence for all
banks and undermine the stability of
the banking system.
 Systemic risk arises in party due to
interbank
 For example, if banks have huge
interbank deposits with a failed bank
they may in turn experience liquidity
problems. The payment system also
links banks to one another
o Under a net settlement system,
it is possible for a bank not be
able to settle its payment
obligations to other banks at
the end of the day, and
thereby make these other
banks in danger of defaulting
on their own payment
Melicor (D2019)
obligations to their respective
counterparties.
o This danger is the driving force
in the shift to real-time gross
settlement, where each
payment obligation is settled
immediately, rather than
aggregated and netted at the
end of day.
 Finally, systemic risk is there on
account of the public perception that
other banks are in the situation as the
failing or failed bank.
Hence, the need to set ceiling on ratios,
etc. As a last resort, the BSP is the “lender
of last resort.”
Sec 6. Authority to Engage in Banking and
Quasi-Banking Functions. — No person or
entity shall engage in banking operations or
quasi-banking functions without authority from
the Bangko Sentral: Provided, however, That an
entity authorized by the Bangko Sentral to
perform universal or commercial banking
functions shall likewise have the authority to
engage in quasi-banking functions.
The determination of whether a person or
entity is performing banking or quasi-banking
functions without Bangko Sentral authority
shall be decided by the Monetary Board. To
resolve such issue, the Monetary Board may,
through the appropriate supervising and
examining department of the Bangko Sentral,
examine, inspect or investigate the books and
records of such person or entity. Upon
issuance of this authority, such person or entity
may commence to engage in banking
operations or quasi-banking functions and shall
continue to do so unless such authority is
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General Banking Law Annotated
sooner surrendered, revoked, suspended or
annulled by the Bangko Sentral in accordance
with this Act or other special laws.
The department head and the examiners of the
appropriate supervising and examining
department are hereby authorized to
administer oaths to any such person,
employee, officer, or director of any such entity
and to compel the presentation or production
of such books, documents, papers or records
that are reasonably necessary to ascertain the
facts relative to the true functions and
operations of such person or entity. Failure or
refusal to comply with the required
presentation or production of such books,
documents, papers or records within a
reasonable time shall subject the persons
responsible therefore to the penal sanctions
provided under the New Central Bank Act.
Persons or entities found to be performing
banking or quasi-banking functions without
authority from the Bangko Sentral shall be
subject to appropriate sanctions under the
New Central Bank Act and other applicable
laws.
 Sec 6 reaffirms the role of the BSP,
through its MB, as the gatekeeper of
the banking system.
 MB determines the entities that may
engage in banking or quasi-banking.
Note than only a stock corporation can
be licensed as a bank or quasi-bank.
o Only UB and KB have inherent
author ity to engage in quasi-
banking activities. Other banks
and financial institutions have
to apply for a quasi-banking
authority from the BSP.
Melicor (D2019)
 BSP may also suspend or revoke a
banking or quasi-banking license. It
also has coercive and penal powers.
 Courts are prohibited from issuing a
restraining order or injunction
prohibiting the BSP from examining
any institution subject to its supervision
or examination, unless there is
convincing proof that the action of the
BSP is plainly arbitrary and in bad faith,
and the petition files a bond in court.
(sec 25).
 Sanctions for unlicensed practice: Sol
Gen can institute a quo warranto
proceedings. BSP can likewise
prosecution for violation of banking
laws.
Sec 7. Examination by the Bangko Sentral. —
The Bangko Sentral shall, when examining a
bank, have the authority to examine an
enterprise which is wholly or majority-owned or
controlled by the bank.
 BSP has supervision over, and may
conduct periodic and special
examination of:
o Banks
o Subsidiaries and affiliates
 “Subsidiary” – a corporation more than
50% of the voting stock of which is
owned by the bank
 “Affiliate” – one in which the
stockholding of the bank is less than
50% or which is related or linked to
such bank or quasi-bank through
common stockholders or such other
factors as may be determined by the
Monetary Board.
o Such other factors:
9
General Banking Law Annotated Melicor (D2019)

1. Ownership, control, or Under this provisions, BSP can only examine a

power to vote, of 10% subsidiary when examining a bank.
or more of the OCS.
2. Interlocking directors Sec 8. Organization. — The Monetary Board
or officership may authorize the organization of a bank or
3. Common stockholders quasi-bank subject to the following conditions:
owning 10% or more 8.1. That the entity is a stock corporation;
of the outstanding 8.2. That its funds are obtained from the
voting stock of each public, which shall mean twenty (20) or more
financial intermediary persons (2-Da); and
4. Management contract 8.3. That the minimum capital requirements
or any arrangement prescribed by the Monetary Board for each
granting power to the category of banks are satisfied. (n)
bank to direct or
cause direction of No new commercial bank shall be established
management policies within three (3) years from the effectivity of this
of the entity, or vice Act. In the exercise of the authority granted
versa herein, the Monetary Board shall take into
5. Permanent proxy or consideration their capability in terms of their
voting trusts in favor financial resources and technical expertise and
of the bank integrity. The bank licensing process shall
constituting 10% or incorporate an assessment of the bank's
more of the ownership structure, directors and senior
outstanding voting management, its operating plan and internal
stock of the entity, or controls as well as its projected financial
vice versa. condition and capital base.

However, for purposes of determining whether Conditions:

a direct ownership by a bank affiliate of a
certain investee company is to be considered
as an indirect ownership by the bank of such
company, the bank must directly own at least
20% (not 10%) of the voting stock of such
affiliate.
 The 20% threshold applies in
determining whether an entity is an
affiliate of a bank issuing long-term
negotiable certificates of time deposit.
(1) stock corporation
(2) funds are obtained from the public (20
or more more)
(3) minimum capital requirements are
satisfied
This does not mean that for organizational
purposes, a bank must have at least 20
incorporators, for indeed the number of
incorporators cannot exceed 15.
 BSP recommends that those in excess
of 15 be listed as original subscribers.

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General Banking Law Annotated
The Monetary Board changes the
minimum level of capitalization from time
to time.
 The minimum capital requirement is
intended to limit moral hazard in
banking, by putting the money of bank
owners or stockholders at risk.
 It is a paradox that when a person is
insured against risk, considerations of
morality or ethics which would
otherwise restrain him from increasing
risk, are eroded by the very assurance
against risk provided by his insurer.
o This is why the PDIC does not
fully insure bank deposits, so
as not to encourage risky
banking activities.
o Exposing the capital of bank
owners or stockholders to risk
of loss in case of
mismanagement also has the
same effect.
Sec 9. Issuance of Stocks. — The Monetary
Board may prescribe rules and regulations on
the types of stock a bank may issue, including
the terms thereof and rights appurtenant
thereto to determine compliance with laws and
regulations governing capital and equity
structure of banks: Provided, That banks shall
issue par value stocks only.
Banks may issue par value stocks only.
Sec 10. Treasury Stocks. — No bank shall
purchase or acquire shares of its own capital
stock or accept its own shares as a security for
a loan, except when authorized by the
Monetary Board: Provided, That in every case
Melicor (D2019)
the stock so purchased or acquired shall, within
six (6) months from the time of its purchase or
acquisition, be sold or disposed of at a public
or private sale.
“If banking corporations were given a lien on
their own stock for the indebtedness of the
stockholders, the prohibition against grating
loans or discounts upon the security of the
stock would become largely ineffective.”
Sec 11. Foreign Stockholdings. — Foreign
individuals and non-bank corporations may
own or control up to forty percent (40%) of the
voting stock of a domestic bank. This rule shall
apply to Filipinos and domestic non-bank
corporations. (12a; 12-Aa)
The percentage of foreign-owned voting stocks
in a bank shall be determined by the
citizenship of the individual stockholders in that
bank. The citizenship of the corporation which
is a stockholder in a bank shall follow the
citizenship of the controlling stockholders of
the corporation, irrespective of the place of
incorporation.
Foreign/Non-bank stockholdings in a domestic
bank – only up to 40% of voting stock.
RA 10641 currently allows the full entry of
qualified foreign banks into the Philippine
system.
At present, a qualified foreign bank (either
widely owned or publicly listed, if not owned or
controlled by the government in its country of
origin) can:
(i) acquire up to 100% of the voting stock
stock of an existing domestic bank
(ii) establish a 100% owned subsidiary
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General Banking Law Annotated
(iii) form a Philippine branch with full
banking authority.
Sec 12. Stockholdings of Family Groups or
Related Interests. — Stockholdings of
individuals related to each other within the
fourth 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 by such an
individual with the bank.
 No limit of family groups or related
interests. It is simply required that
there be a full disclosure of the
relationship of an individual to such
family group, every time such an
individual transacts with the bank.
 Individuals related to each other within
the fourth degree of consanguinity or
affinity, whether legitimate or common
law, are deemed a family group or
related interests.
Sec 13. Corporate Stockholdings. — Two or
more corporations owned or controlled by the
same family group or same group of persons
shall be considered related interests and must
be fully disclosed in all transactions by such
corporations or related groups of persons with
the bank.
 There is “control” if “the parent owns
directly or indirectly through
subsidiaries more than ½ of the voting
power of an enterprise unless, in
exceptional circumstances, it can be
clearly demonstrated that such
ownership does not constitute control.
Melicor (D2019)
 There is “control” even if ½ or less of
the voting power of an enterprise
when there is:
o Power over more than ½ of
the voting rights by virtue of
an agreement with other
stockholders
o Power to govern the financial
and operating policies of the
enterprise under a statute or
an agreement
o Power to appoint or remove
the majority of the members
of the board of directors or
equivalent body
o Power to cast the majority
votes at meetings of the board
of directors or equivalent
governing body
o Any other arrangement similar
to any of the above
Sec 14. Certificate of Authority to Register. —
The Securities and Exchange Commission 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.
Such certificate shall not be issued unless the
Monetary Board is satisfied from the evidence
submitted to it:
14.1 That all requirements of existing laws and
regulations to engage in the business for which
the applicant is proposed to be incorporated
have been complied with;
14.2. That the public interest and economic
conditions, both general and local, justify the
authorization; and
14.3. That the amount of capital, the financing,
organization, direction and administration, as
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General Banking Law Annotated
well as the integrity and responsibility of the
organizers and administrators reasonably
assure the safety of deposits and the public
interest. (9)
The Securities and Exchange Commission shall
not register the by-laws of any bank, or any
amendment thereto, unless accompanied by a
certificate of authority from the Bangko Sentral.
Sec 15. Board of Directors. — The provisions of
the Corporation Code to the contrary
notwithstanding, there shall be at least five (5),
and a maximum of fifteen (15) members of the
board of directors of bank, two (2) of whom
shall be independent directors. An
"independent director" shall mean a person
other than an officer or employee of the bank,
its subsidiaries or affiliates or related interests.
(n)
Non-Filipino citizens may become members of
the board of directors of a bank to the extent
of the foreign participation in the equity of said
bank. (Sec. 7, RA 7721)
The meetings of the board of directors may be
conducted through modern technologies such
as, but not limited to, teleconferencing and
video-conferencing
.
Board of Directors:
(i) 5-15
(ii) 2 independent directors
(iii) foreign directors only to the extent of
foreign ownership
An independent director is a person:
1. Is not or has not been a member of
the executive committee of the board
of directors, an officer or employee of
the bank, its subsidiaries or affiliates or
Melicor (D2019)
related interests during the past 3
years counted from the date of his
election
2. Not a director or officer of the related
companies of the institutions’ majority
stockholder
3. Is not a stockholder with shares of
stock sufficient to elect one (1) seat in
the board of directors of the
institution, or in any of its related
companies or its majorty corporate
shareholders
4. Is not a relative within the 4th degree of
consanguinity, legitimate or common-
law of any director, officer, or a
shareholder holding shares of stock
sufficient to elect 1 seat in the BOD of
the bank or any its related companies.
5. Is not acting as a nominee or
representative of any director or
substantial shareholder of the bank, or
any of its related companies or any of
its substantial shareholders
6. Is not retained as progessional adviser,
consultatnt, agent or counsel of the
institution, any of its related companies
or any of its substnatital shareholders,
either in his personal capacity or
through.. (see page 59)
Sec 16. Fit and Proper Rule. — 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,
13
General Banking Law Annotated
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.
 The Monetary Board, however may do
so after due notice to the board of
directors.
 BSP Manual, a bank director must have
the following minimum qualifications
prescribed by the Monetary Board:
o He must be at least 25 years
old at the time of his election
o He must be at least a college
graduate and at least 5 years
experience in business
o He must have attended special
seminar on corporate
governance
o Fit and proper for the position
An officer:
o 21 years at least
o College degree; 5 years of
working expericne in a related
field
o Undergone satisfactory
training.
Sec 17. Directors of Merged or Consolidated
Banks. — In the case of a bank merger or
consolidation, the number of directors shall not
exceed twenty-one (21).
Melicor (D2019)
Sec 18. Compensation and Other Benefits of
Directors and Officers. — To protect the funds
of depositors and creditors, the Monetary
Board may regulate the payment by the bank
to its directors and officers of compensation,
allowance, fees, bonuses, stock options, profit
sharing and fringe benefits only in exceptional
cases and when the circumstances warrant,
such as but not limited to the following:
1. When a bank is under comptrollership
or conservatorship; or
2. When a bank is found by the Monetary
Board to be conducting business in an
unsafe or unsound manner; or
3. When a bank is found by the Monetary
Board to be in an unsatisfactory
financial condition.
Sec 19. Prohibition on Public Officials. — Except
as otherwise provided in the Rural Banks Act,
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 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.
General Rule: Appointive/Elective official
cannot serve as officer of private bank
Exception: incidental to financial assistance by
government or GOCC to the bank.
Sec 20. Bank Branches. — Universal or
commercial banks may open branches or other
14
General Banking Law Annotated Melicor (D2019)

offices within or outside the Philippines upon Secretary of Labor who may assume
prior approval of the Bangko Sentral. jurisdiction over the dispute or decide it or
Branching by all other banks shall be governed certify the same to the National Labor Relations
by pertinent laws. Commission for compulsory arbitration.
A bank may, subject to prior approval of the However, the President of the Philippines may
Monetary Board, use any or all of its branches at any time intervene and assume jurisdiction
as outlets for the presentation and/or sale of over such labor dispute in order to settle or
the financial products of its allied undertaking terminate the same
or of its investment house units.
A bank authorized to establish branches or Sec 23. Powers of a Universal Bank. — A
other offices shall be responsible for all universal bank shall have the authority to
business conducted in such branches and exercise, in addition to the powers authorized
offices to the same extent and in the same for a commercial bank in Section 29, the
manner as though such business had all been powers of an investment house as provided in
conducted in the head office. A bank and its existing laws and the power to invest in non-
branches and offices shall be treated as one allied enterprises as provided in this Act.
unit. (6-B; 27)
SECTION 21. Banking Days and Hours. —
A universal bank is a commercial bank with the
Unless otherwise authorized by the Bangko
authority to exercise the powers of an
Sentral in the interest of the banking public, all
investment house and invest in non-allied
banks including their branches and offices shall
enterprises.
transact business on all working days for at
 This includes a foreign bank’s
least six (6) hours a day. In addition, banks or
Philippine branch that has a universal
any of their branches or offices may open for
banking license.
business on Saturdays, Sundays or holidays for
 The function of an investment house
at least three (3) hours a day: Provided, That
may be performed by a universal bank
banks which opt to open on days other than
either directly through a separate
working days shall report to the Bangko Sentral
department or unit within the bank, or
the additional days during which they or their
indirectly through a subsidiary
branches or offices shall transact business.
investment house.
For purposes of this Section, working days shall
o The underwriting of securities
mean Mondays to Fridays, except if such days
and securities dealings will be
are holidays. (6-Ca)
subject to pertinent laws and
SECTION 22. Strikes and Lockouts. — The
the applicable rules of the SEC.
banking industry is hereby declared as
(have to register with SEC)
indispensable to the national interest and, not
withstanding the provisions of any law to the
Sec 24. Equity Investments of a Universal Bank.
contrary, any strike or lockout involving banks,
— A universal bank may, subject to the
if unsettled after seven (7) calendar days shall
conditions stated in the succeeding paragraph,
be reported by the Bangko Sentral to the

15
General Banking Law Annotated
invest in the equities of allied and non-allied
enterprises as may be determined by the
Monetary Board. Allied enterprises may either
be financial or non-financial.
Except as the Monetary Board may otherwise
prescribe:
24.1. The total investment in equities of allied
and non-allied enterprises shall not exceed fifty
percent (50%) of the net worth of the bank;
and
24.2. The equity investment in any one
enterprise, whether allied or non-allied, shall
not exceed twenty-five percent (25%) of the
net worth of the bank.
As used in this Act, "net worth" shall mean the
total of the unimpaired paid-in capital
including paid-in surplus, retained earnings
and undivided profit, net of valuation reserves
and other adjustments as may be required by
the Bangko Sentral.
The acquisition of such equity or equities is
subject to the prior approval of the Monetary
Board which shall promulgate appropriate
guidelines to govern such investments.
Total investment in allied or non-allied: not
more than 50% of net worth
Total investment in one enterprise of net worth
does not exceed 25% of net worth.
Total investment in non-allied enterprise: not
more than 35% of equity of enterprise.
Sec 25. Equity Investments of a Universal Bank
in Financial Allied Enterprises. — A universal
bank can own up to one hundred percent
Melicor (D2019)
(100%) of the equity in a thrift bank, a rural
bank or a financial allied enterprise.
A publicly-listed universal or commercial bank
may own up to one hundred percent (100%) of
the voting stock of only one other universal or
commercial bank
Only publicly-listed universal bank can own up
to 100% of the voting stock of only one other
universal bank or commercial bank. (if not
publicly listed can only acquire up to 49% of
the voting stock.)
*same rule for UB acquiring KB, KB acquiring a
KB.
Sec 26. Equity Investments of a Universal Bank
in Non-Financial Allied Enterprises.
A universal bank may own up to one hundred
percent (100%) of the equity in a non-financial
allied enterprise.
The equity in a non-financial allied enterprise
may also be owned up to 100% by a universal
bank. Subject to the prior approval of the
monetary board.
Sec 27. Equity Investments of a Universal Bank
in Non-Allied Enterprises. — The equity
investment of a universal bank, or of its wholly
or majority-owned subsidiaries, in a single non-
allied enterprise shall not exceed thirty-five
percent (35%) of the total equity in that
enterprise nor shall it exceed thirty-five percent
(35%) of the voting stock in that enterprise.
A UB cannot own more than 35% of voting
stock in a non-allied enterprise. Moreover, a
16
General Banking Law Annotated Melicor (D2019)

UB’s total equity (voting and non-voting) in accrued during the period when the bank is
such non-allied enterprise cannot exceed 35%. actually closed and non-operational.
 However, the BSP can still collect
Sec 28. Equity Investments in Quasi-Banks. — interest and other appropriate charges
To promote competitive conditions in financial on all such bank’s closure, receivership,
markets, the Monetary Board may further limit or liquidation.
to forty percent (40%) equity investments of
universal banks in quasi-banks. This rule shall Banker’s Acceptance
also apply in the case of commercial banks.  By accepting a draft, a bank creates a
“banker’s acceptance.”
 A banker’s acceptance is a negotiable
Sec 29. Powers of a Commercial Bank. — A
time draft or bill of exchange drawn on
commercial bank shall have, in addition to the
and accepted by a commercial bank.
general powers incident to corporations, all
The accepting bank is unconditionally
such powers as may be necessary to carry on
and irrevocably liable to pay the holder
the business of commercial banking, such as
at maturity.
accepting drafts and issuing letters of credit;
o The bank’s acceptance
discounting and negotiating promissory notes,
transforms the draft into a
drafts, bills of exchange, and other evidences
more creditworthy instrument,
of debt; accepting or creating demand
thereby facilitating trade.
deposits; receiving other types of deposits and
(since bank is primarily liable
deposit substitutes; buying and selling foreign
to pay it
exchange and gold or silver bullion; acquiring
marketable bonds and other debt securities;
Letter’s of Credit
and extending credit, subject to such rules as
 it is a financial device developed by
the Monetary Board may promulgate. These
merchants as a convenient and
rules may include the determination of bonds
relatively safe mode of dealing with
and other debt securities eligible for
sales of goods to satisfy the seemingly
investment, the maturities and aggregate
irreconcilable interests of a seller who
amount of such investment.
refuses to part with his goods before
he is paid and a buyer who wants to
The Supreme Court has taken judicial notice of
have control of the goods before
the fact that what enables a bank to pay
paying.
interest on money deposited with it is precisely
 Without a trust receipt, a letter pf
its own income-generating activities. According
credit transaction is a composite of at
to the SC, a banking institution which has been
least 3 distinct but intertwined
declared insolvent and subsequently ordered
relationship, each relationship being
closed by the Central Bank cannot be held
concretized in a contract.”
liable to pay interest on back deposits which
 Letters of credit are governed primarily
by their own provisions, by laws

17
General Banking Law Annotated
specifically applicable to them, and by
usage and custom.
o Observance of the UCP in this
jurisdiction is justified by
Article 2 of the Code of
Commerce. (which states that
in the absence of any
particular provision in the
Code of Commerce,
commercial transaction shall
be governed by the usages
and customs generally
observed.)
Independence Principle -- obligation under
the letter of credit is independent of the related
and originating contract. The letter of credit is
separate and distinct from the underlying
transaction.
Strict Compliance Rule – documents tendered
must strictly conform to the the letter of credit.
Fraud Exception:
(a) there is clear proof of fraud
(b) the fraud constitutes fraudulent abuse of
the independent purpose of the letter of credit
and not only fraud under the main agreement
(c) irreparable injury might follow injunction is
not granted or the recovery of damages would
be seriously damaged.
Role of Correspondent Bank
 Notifying bank – the correspondent
bank assumed no liability except to
notify and/or transmit to the
beneficiary the existence of the letter
of credit
 Negotiating bank – correspondent
bank which buys or discounts a draft
Melicor (D2019)
under the letter of credit. Its liability is
dependent upon the stage of the
negotiation. If before negotiation, it
has no liability with respect to the seller
but after negotiation, a contractual
relationship will then prevail between
the negotiating bank and the seller
 Confirming Bank – assumes a direct
obligation to the seller and its liability
is a primary one as if the
correspondent bank itself had issued
the letter of credit.
L/C and T/R.
 Bank effectively extends a loan under
the letter of credit, with the trust
receipt standing as the security for
such loan.
 The transaction involves a loan feature
represented by the letter of credit, and
a security feature which is in the
covering trust receipt.
Trust Receipt
 In a trust receipt transaction, the goods
are released by the bank (as the
entruster) to the importer or purchaser
of the goods (as the entrustee), so the
entrustee can sell the goods and, from
the proceeds of the sale, reimburse the
entruster for the latter’s exposure
under the letter of credit.
 A violation of the law is punished as
malum prohibitum, mere failure to
deliver the proceeds constitutes estafa.
See cases under this topic.
Discounting Evidence of Debt/Acquiring Debt
Securities
18
General Banking Law Annotated
 A commercial bank can acquire
marketable bonds and other debt
securities.
 It can discount PNs, drafts, bills of
exchange and other evidences of debt.
 However, when it comes to selling the
receivables of a bank, the Manual
prohibits a bank from selling its
receivables (other than government
securities) on a without-recourse basis,
unless those receivables are registered
first with the SEC, except if the buyer is
authorized to perform quasi-banking
functions or is a qualified buyer. (See
page 103 for full provision).
Qualified Buyer
(Natural Person)
1. Must have:
a. an annual gross income of at
least P10,000,000 for at least
two years prior to registration,
or
b. a total portfolio investment in
SEC-registered securities of at
least Php 10M, or
c. a personal net worth of not
less than 30M and
2. Must have been engaged in securities
personally or through a fund manager
for a minimum period of one year or
must have held a position of
responsibility in any professional
business entity that requires
knowledge or expertise in securities
trading.
(Juridical Person)
1. Must have at time of registration:
Melicor (D2019)
a. Gross assets of at least 100M
or
b. A total portfolio investment in
SEC-registered securities or
financial instruments issued by
the PH government of at least
P60,000,000.
All other exempt securities under Sec 9 of the
SRC are not covered by the prohibition
(regardless of who might be the buyer)
considering that all exempt securities are not
required to be registered with the SEC prior to
sale to the public.
 Thus commercial papers are exempt
per se, as well as evidence of
indebtedness arising from bona fide
sale of goods or property would also
be excluded from the prohibitory
thrust.
 The prohibition would also not apply
to securities sold in “exempt
transactions” under Sec 10 of the SRC.
Deposit and Deposit-Substitute Taking
 Sec 29 restates a core banking function
when it provides that commercial
banking includes “accepting or
creating demand deposits” and
“receiving other types of deposits and
deposit substitutes”
Deposit
 The term deposits refers to savings,
demand, or time or fixed deposits
which are characterized as loans to the
bank.
 Bank is subject to a standard of
integrity and performance higher than
that required of non-bank debtors.
19
General Banking Law Annotated
(Fiduciary nature does not convert
deposit liability into a trust). – Failure
to pay is a breach of loan transaction,
not a breach of trust.
 Although the Usury Law has been
legally non-existent (since the Central
Bank removed the ceiling on interest
for secured and unsecured loans
regardless of maturity), the highest
possible interest rate is not without
limit.
o Interest rate may be equitable
reduced should the same be
found to be iniquitous,
unconscionable, and
exorbitant.
 Peso deposits are accepted by the RBU
(or the bank proper); on the other
hand, Foreign Currency Deposit Unit is
authorized to accept deposits in
foreign currency acceptance as part of
the international reserves of the
country.
o Any person,
natural/juridical/resident or
otherwise, can open an FCDU
account as well as a peso
account.
o However, a non-resident
cannot open a peso account
unless it is funded among
others, a remittance of
convertible foreign exchange.
o FCDU deposits are exempt
from attachment, garnishment,
or any other order or process
of any court, legislative body,
or other government agency.
1. Note Salvacnion vs.
CA exception
Melicor (D2019)
 “As a general rule, the bank has a right
to set off of the deposits in its hands
for the payment of any indebtedness
to it on the part of the depositor.
Conversely, the depositor has every
right to apply his deposit in a bank
against his loan from such bank.”
 If bank has knowledge of death of
depositor it cannot authorize
withdrawal unless the CIR has certified
that estate tax has been paid.
Withdrawal up to P20,000 is allowed
o Sec 97 will not apply if there is
a survivorship agreement
between the joint depositors.
Deposit Substitutes
 Funds obtained by a bank from the
public (i.e. 20 or more lenders at any
one time) other than in the form of
savings, demand, and time/fixed
deposits.
 Deposits are usually evidenced by
passbooks and certificates of deposit,
and may be used for lending and other
purposes:
o Deposit substitutes are (i)
evidenced by debt instruments
(including but not limited to
banker’s acceptances,
promissory notes,
participations, certificates of
assignment, and similar
instruments with resource and
repurchase agreemnts) and
o To be used for the purpose for
relending or purchasing of
receivables and other
obligations.
 Reserves are required to be
maintained against deposit and
20
General Banking Law Annotated
deposit-substitute liabilities. The
reserve requirements are not static, as
they may be varied by the MB.
o Required reserves are kept in
the form of deposits placed in
the bank’s demand deposit
account with the BSP.
o These deposits are not paid
interest.
o These reserves serve as a
ready source of funds that will
respond to unusually large
number of withdrawals or
pretermination of deposits or
deposit substitutes.
o The reserves are also invested
by the BSP in debt securities
issued by the BSP, hence the
finance the deficit in the
country’s budget.
 As an added prudential measure,
banks are required to insure their
deposit liabilities (but not their
deposit-substitute liabilities) with the
PDIC.
o Each are insured for a
maximum amount of P500,000
or its foreign currency
equivalent (in case of FCDU
deposit).
Buying and Selling Foreign Exchange and Gold
or Silver Bullion
 The buying and selling of foreign and
bullion (whether gold or silver) is
subject to Bangko Sentral Rules.
 The MB may require banks to sell to
the BSP all or part of their surplus
holdings of foreign exchange reserves
sufficient to enable it to maintain the
Melicor (D2019)
international stability and convertibility
of the peso or to promote the
domestic investment of bank
resources.
 In times of exchange crisis or national
emergency (or imminence thereof), the
MB with the approval of the President
of the PH may subject all the
transactions in gold and foreign
exchange to licensing by the BSP.
Extending Credit
 Deploying deposits and deposit
substitutes as loans to bank customers
or clients.
 For this type of lending, banks are not
limited to accepting traditional security
devices, such as real estate or chattel
mortgages, but may be able to accept
non-traditional security arrangements
on a case by case basis.
 A commercial bank cannot lend pesos
to a nonresident, unless explicitly
allowed by the BSP.
Guarantee
 Guarantees are now included in the
SBL.
 In the present law, banks are now
allowed to issue guarantees in any
form and not limited to the exceptional
cases.
Letter of Credit
 Standby letters of credit are primary
obligations and not accessory
contracts and are separate and
independent agreements
 THEY ARE NOT CONTRACTS OF
GUARANTY
21
General Banking Law Annotated
o It is an absolute undertaking
(praimry obligation)
o Independence principle –
independent of and not
accessory to or affected by,
the obligations of the parties
to the underlying transaction
o Bank is not entitled to any
“benefit of excussion.” This
benefit requires the
guarantees party to exhaust all
the property of the debtor and
resort to all remedies against
the debtor, before making a
claim or drawing on the
guarantee
Avail
 An aval guarantees the payment of
drafts already accepted by the drawee.
 It comes from the old French word
“foot or bottom” and its terms are
usually written down by the avalista on
the draft itself (on the foot of the draft)
(see page 123)
Sec 30. Equity Investments of a Commercial
Bank. — A commercial bank may, subject to
the conditions stated in the succeeding
paragraphs, invest only in the equities of allied
enterprises as may be determined by the
Monetary Board. Allied enterprises may either
be financial or non-financial.
Except as the Monetary Board may otherwise
prescribe:
30.1. The total investment in equities of allied
enterprises shall not exceed thirty-five percent
(35%) of the net worth of the bank; and
Melicor (D2019)
30.2. The equity investment in any one
enterprise shall not exceed twenty-five percent
(25%) of the net worth of the bank.
The acquisition of such equity or equities is
subject to the prior approval of the Monetary
Board which shall promulgate appropriate
guidelines to govern such investments.
Equity investment of a commercial bank in any
allied enterprise must not exceed 25% of the
NW of the bank.
 Aggregate investment in equities of
allied enterprises is not to exceed 35%
of the NW.
 Prior approval of MB is needed.
Sec 31. Equity Investments of a Commercial
Bank in Financial Allied Enterprises. — A
commercial bank may own up to one hundred
percent (100%) of the equity of a thrift bank or
a rural bank.
Where the equity investment of a commercial
bank is in other financial allied enterprises,
including another commercial bank, such
investment shall remain a minority holding in
that enterprise.
Sec 32. Equity Investments of a Commercial
Bank in Non-Financial Allied Enterprises. — A
commercial bank may own up to one hundred
percent (100%) of the equity in a non- financial
allied enterprise.
Sec 33. Acceptance of Demand Deposits. — 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.
22
General Banking Law Annotated
 Banks other than UB/KB have to get
prior MB approval in order to accept
or create demand deposits.
Sec 34. Risk-Based Capital. — The Monetary
Board shall prescribe the minimum ratio which
the net worth of a bank must bear to its total
risk assets which may include contingent
accounts.
For purposes of this Section, the Monetary
Board may require that such ratio be
determined on the basis of the net worth and
risk assets of a bank and its subsidiaries,
financial or otherwise, as well as prescribe the
composition and the manner of determining
the net worth and total risk assets of banks and
their subsidiaries: Provided, That in the exercise
of this authority, the Monetary Board shall, to
the extent feasible, conform to internationally
accepted standards, including those of the
Bank for International Settlements (BIS),
relating to risk-based capital requirements:
Provided, further, That it may alter or suspend
compliance with such ratio whenever necessary
for a maximum period of one (1) year:
Provided, finally, That such ratio shall be
applied uniformly to banks of the same
category.
In case a bank does not comply with the
prescribed minimum ratio, the Monetary Board
may limit or prohibit the distribution of net
profits by such bank and may require that part
or all of the net profits be used to increase the
capital accounts of the bank until the minimum
requirement has been met. The Monetary
Board may, furthermore, restrict or prohibit the
acquisition of major assets and the making of
new investments by the bank, with the
exception of purchases of readily marketable
Melicor (D2019)
evidences of indebtedness of the Republic of
the Philippines and of the Bangko Sentral and
any other evidences of indebtedness or
obligations the servicing and repayment of
which are fully guaranteed by the Republic of
the Philippines, until the minimum required
capital ratio has been restored.
In case of a bank merger or consolidation, or
when a bank is under rehabilitation under a
program approved by the Bangko Sentral, the
Monetary Board may temporarily relieve the
surviving bank, consolidated bank, or
constituent bank or corporations under
rehabilitation from full compliance with the
required capital ratio under such conditions as
it may prescribe.
Before the effectivity of the rules which the
Monetary Board is authorized to prescribe
under this provision, Section 22 of the General
Banking Act, as amended, Section 9 of the
Thrift Banks Act, and all pertinent rules issued
pursuant thereto, shall continue to be in force.
 Philosophy behind the net-worth-to-
total risk assets ratio is that a bank
must not be allowed to expand the
volume of its loans and investments in
a manner that is disproportionate to its
net worth.
 Matter of capital adequacy. The
international standards of capital
adequacy grew out of the work of
Basel Committee on banking
Supervision. Acc. To the Committee,
adequate equity capital serves many
purposes:
o It provides a permanent
source of revenue for the
shareholders and funding for
the bank, it is available to bear
23
General Banking Law Annotated
risk and absorb losses; it
provides a base for further
growth and it gives
shareholders a reason to
ensure that a bank is managed
in a safe and adequate
manner.
 1998 Basel Capital Accord that
provided for an 8% solvency (or risk
asset) ratio for banks, as indicative of
minimum acceptable capital adequacy
o Capital as numerator and risk-
weighted assets as
denominator
o For every 100 units of risk-
weighted assets, a bank was to
carry at least 8 units in Tier 1
and/or Tier 2 capital
o Tier 1 was core capital (i.e.
permanent shareholder equity
and disclosed reserves), while
Tier 2 was supplementary
capital (subordinated debt,
undisclosed, and revaluation
reserves). Tier 2 was not to
exceed Tier 1 capital.
o Assets were given 0-100% risk
weighting depending on Type.
(see page 132)
SECTION 35. Limit on Loans, Credit
Accommodations and Guarantees. —
35.1. Except as the Monetary Board may
otherwise prescribe for reasons of national
interest, the total amount of loans, credit
accommodations and guarantees as may be
defined by the Monetary Board that may be
extended by a bank to any person, partnership,
association, corporation or other entity shall at
no time exceed twenty percent (20%) of the
Melicor (D2019)
net worth of such bank. The basis for
determining compliance with single-borrower
limit is the total credit commitment of the bank
to the borrower.
 SBL’s main purpose is to prevent the
bank from making excessive loans and
other credit accommodations to a
single borrower or corporate group,
including guarantees for the account
of such borrower or group.
o It is a device for risk-
amelioration.
 Total amount of loans, credit
accomodations, and guarantees that
may be extended by a bank to any
borrower must not exceed 20% of the
net worth of such bank.
o It is the bank’s total credit
commitment (whether drawn
or undrawn) that must be
considered. (includes
outlanded L/C less margin
deposits, and guarantees”
o Net worth – total of
unimpaired paid in capital
including paid in-surplus,
retained earnings and
undivided profit, net of
unbooked valuation reserves
and other adjustments as may
be required by the BSP.
 20% requirement may be modified by
MB “by reasons of national interest”
 The current SBL is 25%. The 25% may
be increased by:
o an additional 10% of the NW
of the bank under the
circumstances in Sec 35.2.
24
General Banking Law Annotated
o An additional 25% of the NW,
provided that the additional
loans, credit accomodations,
and guarantees are not related
party transactions, not granted
to entities that are DOSRI and
these entities act as “value
chain aggregators of the
lending bank’s clients” (only
for a period of 4 years then
subject to review)
 Related parties – subsidiaries and
affiliates and any party that the bank
exerts direct/indirect control over or
that asserts direct/indirect control over
the bank.
 A separate SBL applies to the
wholesale lending activities of
government banks to participating
financial institutions to end-user
borrowers.
o Thus, SBL of 35% of the net
worth of the government bank
provided that:
1. It shall apply only to
loans granted to PFIs
on a wholesale basis
from on-lending to
end-user borrowers
2. It shall apply only to
laon program funded
by multilateral,
international, or local
development
agencies,
organizations, or
institutions especially
designed for
wholesale lending
Melicor (D2019)
activities of
government banks,
3. The end-user
borrowers of the PFIs
shall be subject to
25% SBL
4. Government banks
shall observe
appropriate criteria in
accredit PFIs and for
the grant/renewal of
credit lines to accredit
PFIs.
Sec 35.2. Unless the Monetary Board
prescribes otherwise, the total amount of loans,
credit accommodations and guarantees
prescribed in the preceding paragraph may be
increased by an additional ten percent (10%) of
the net worth of such bank provided the
additional liabilities of any borrower are
adequately secured by trust receipts, shipping
documents, warehouse receipts or other similar
documents transferring or securing title
covering readily marketable, non-perishable
goods which must be fully covered by
insurance.
Increase by an additional 10% of the NW
provided that:
(1) the additional liabilities of banks are
adequately secured by what are known in civil
law as “documents of title to goods” (such as
trust receipts, shipping documents, or
warehouse receipts), and
(2) the goods covered are readily marketable,
non-perishable and fully insured.
Sec 35.3. The above prescribed ceilings shall
include:
(a) the direct liability of the maker or acceptor
25
General Banking Law Annotated
of paper discounted with or sold to such bank
and the liability of a general indorser, drawer or
guarantor who obtains a loan or other credit
accommodation from or discounts paper with
or sells papers to such bank;
(b) in the case of an individual who owns or
controls a majority interest in a corporation,
partnership, association or any other entity, the
liabilities of said entities to such bank;
(c) in the case of a corporation, all liabilities to
such bank of all subsidiaries in which such
corporation owns or controls a majority
interest; and
(d) in the case of a partnership, association or
other entity, the liabilities of the members
thereof to such bank.
 For purposes of computing the SBL,
the maker or acceptor of the paper
discounted with and sole to the bank
will be deemed a Borrower, since each
is primarily liable to the bank under the
paper.
 The contingent liability of the
guarantor to the bank is to be included
in the computation of the SBL.
For SBL purposes:
 The direct liability to the bank of an
individual is to be computed together
with the direct liability of any
corporation, partnership, association or
any other entity that is majority owned
or controlled by such individual.
 The direct liability of a parent
corporation is to be combined with the
direct liabilities of its subsidiaries to the
bank.
 In case of a partnership, association, or
other entity, its direct liability to the
Melicor (D2019)
bank will be added to the direct
liabilities of its members to such bank.
Sec 35.4. Even if a parent corporation,
partnership, association, entity or an individual
who owns or controls a majority interest in
such entities has no liability to the bank, the
Monetary Board may prescribe the
combination of the liabilities of subsidiary
corporations or members of the partnership,
association, entity or such individual under
certain circumstances, including but not limited
to any of the following situations:
(a) the parent corporation, partnership,
association, entity or individual guarantees the
repayment of the liabilities;
(b) the liabilities were incurred for the
accommodation of the parent corporation or
another subsidiary or of the partnership or
association or entity or such individual; or
(c) the subsidiaries though separate entities
operate merely as departments or divisions of
a single entity.
(see illustration in page 144).
Sec 35.5. For purposes of this Section, loans,
other credit accommodations and guarantees
shall exclude:
(a) loans and other credit accommodations
secured by obligations of the Bangko Sentral
or
of the Philippine Government;
(b) loans and other credit accommodations
fully guaranteed by the government as to the
payment of principal and interest;
(c) loans and other credit accommodations
covered by assignment of deposits maintained
in the lending bank and held in the Philippines;
(d) loans, credit accommodations and
26
General Banking Law Annotated
acceptances under letters of credit to the
extent covered by margin deposits; and
(e) other loans or credit accommodations
which the Monetary Board may from time to
time, specify as non-risk items.
There are certain liabilities not counted in the
computation of SBL – non-risk items.
 First two: PH government cannot
become insolvent.
 Letter d: margin covering the letter of
credit is already in possession or
custody of the issuing bank and ready
to be set off for payment
 Assignment of deposits is normally
coupled with a hold out arrangement
that prohibits withdrawal of deposits.
o IN Yau Chu vs. CA – SC
approved that the assignment
of deposits was a pledge but
“as the collateral was also
money or an exchange of
‘peso for peso,’ the procedure
for foreclosure need not be
followed. (security for the debt
is also the money deposited in
the bank)
o The case of Yau Chu serves
the authority for the lending
bank to apply the deposit in
payment of the secured loan
or credit accommodation,
without the arrangement
being deemed an automatic
appropriation of the collateral
upon default by the borrower
or pactum commissorium,
which is prohibited.
o This is a “charge-back”, where
a lending bank can accept, as
Melicor (D2019)
security for a loan from such
bank to a borrower, an
assignment of deposit
maintained locally by such
borrower in such bank.
Following the requirement in the Civil Code,
an “assignment of deposit by way of security”
to be acknowledged by the assigning depositor
before a notary public in order to make such
assignment binding on third persons.
(read more: page 148 on pledge and chattel
mortgage
So that an assignment of deposit would not be
considered a pledge, it should be structured as
follows:
1. It must provide for an absolute
transfer of title to the deposit from the
depositor to the bank. This means it
should not contain the words “by way
of security” or similar language that
negates an absolute conveyance.
2. The deed must clarify that the
assignment is not intended to
discharge the loan until the deposit is
actually applied in payment of the
loan.
3. The deed ought to provide for the
reconveyance of deposit (or what
remains of it) to the depositor upon
full payment of the loan
4. For good measure, there should be a
clause stating that nothing in the deed
is to be construed as creating a
pledge of the deposit, or any other
security interest therein.
It may be comforting to the bank to know that
a hold-out cum set-off arrangement is
27
General Banking Law Annotated
enforceable independent of the absolute
assignment structure.
Monetary Board also considers as non-risk
items “loans and other credit accomodations
secured by US treasury Notes and other
securities issued by central governments and
central banks of foreign countries with the
highest credit quality given by any 2
internationally accepted rating agencies.
Transfer of credit risk to a third party (without
recourse) removes it from SBL.
35.6. Loans and other credit accommodations,
deposits maintained with, and usual guarantees
by a bank to any other bank or non-bank
entity, whether locally or abroad, shall be
subject to the limits as herein prescribed.
 At present, even credit
accommodations to banks and non-
banks abroad, as well as deposit with
them and guaranties in their favor are
covered.
 This shows that a bank may now issue
a guarantee in favor of another bank.
Sec 35.7. Certain types of contingent accounts
of borrowers may be included among those
subject to these prescribed limits as may be
determined by the Monetary Board
SECTION 36. Restriction on Bank Exposure to
Directors, Officers, Stockholders and Their
Related Interests. — No director or officer of
any bank shall, directly or indirectly, for himself
or as the representative or agent of others,
Melicor (D2019)
borrow from such bank nor shall he become a
guarantor, indorser or surety for loans from
such bank to others, or in any manner be an
obligor or incur any contractual liability to the
bank except with the written approval of the
majority of all the directors of the bank,
excluding the director concerned: Provided,
That such written approval shall not be
required for loans, other credit
accommodations and advances granted to
officers under a fringe benefit plan approved
by the Bangko Sentral. The required approval
shall be entered upon the records of the bank
and a copy of such entry shall be transmitted
forthwith to the appropriate supervising and
examining department of the Bangko Sentral.
Dealings of a bank with any of its directors,
officers or stockholders and their related
interests shall be upon terms not less favorable
to the bank than those offered to others.
After due notice to the board of directors of
the bank, the office of any bank director or
officer who violates the provisions of this
Section may be declared vacant and the
director or officer shall be subject to the penal
provisions of the New Central Bank Act.
The Monetary Board may regulate the amount
of loans, credit accommodations and
guarantees that may be extended, directly or
indirectly, by a bank to its directors, officers,
stockholders and their related interests, as well
as investments of such bank in enterprises
owned or controlled by said directors, officers,
stockholders and their related interests.
However, the outstanding loans, credit
accommodations and guarantees which a bank
may extend to each of its stockholders,
directors, or officers and their related interests,
shall be limited to an amount equivalent to
their respective unencumbered deposits and
28
General Banking Law Annotated
book value of their paid-in capital contribution
in the bank: Provided, however, That loans,
credit accommodations and guarantees
secured by assets considered as non-risk by
the Monetary Board shall be 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 Monetary Board shall not be subject to the
individual limit.
The Monetary Board shall define the term
"related interests."
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.
 This provision governs insider lending.
Objective is to prvent the bank from
becomes a “captive source fo finance”
for the DOSRI.
Who is a stockholder?
 Any stockholder of record in the books
of the bank, whose stockholding in the
lending bank, individually or
collectively with the stokcholdings of
his spouse/first degree relative,
partnership in which he/spouse,relative
is general partner, corp, assoc, firm of
which the stockholder/spouse/relative
own more than 50% of subscribed
capital stock of such corp, assoc, or
firm amount to 1% or more of the total
subscribed capital stock of the bank.
What are related interests? (see page 161)
(1) spouse/relative
Melicor (D2019)
(2) Partnership – general partner
(3) Co-owner of DOSRI with property or
interest or right mortgaged, pledged
or assigned to secure loan/credit
accomodations, except when security
covers co-owners undivided interest
(4) Corp, where DOSRI hold at least 20%
of the Subscribed capital
(5) Wholly owned corp
(see the rest of the list)
 BY way of added control, a DOSRI
borrower is required to waive the
secrecy of his deposits of whatever
nature in all banks in the PH.
 The existing DOSRI rules have three
ceilings:
o Individual ceiling
o Aggregate ceiling
o Ceiling on unsecured loans
Individual Ceiling
 Total allowable outstanding direct
credit accomodations (as well as
guarantees) to each DOSRI – which is
an amount equivalent to his
unencumbered deposits in the lending
bank plus the books value of his paid
in capital contribution in the bank
 The ff. are excluded from the limit
o Loans, other credit
accomodations, and
guarantees secured by assets
considered as non-risk by the
MB (see page 164)
o Loans and other credit
accomodations to bank
officers under a BSP approved
fringe benefit plan
29
General Banking Law Annotated
o Loans, credit accomodations,
and guarantees extended by a
cooperative bank to its
cooperative stockholders.
Ceiling on unsecured loans
 Unsecured credit accomodations must
not exceed 30% of the DOSRI’s total
credit accommodation.
Aggregate ceiling
 Total allowable direct and indirect
credit accomodations to DOSRI. Under
the Manual, the aggregate ceiling is
15% of the total loan portfolio of the
bank or 100% of the combined capital
accounts, whichever is lower.
Before a bank can extend a DOSRI loan, there
must be a specific board resolution which must
be passed without the participation of the
interested director.
Sanctions – position of violator may be
declared vacant after due notice to the Board
of directors. There is also a penal provision.
The DOSRI rules do not cover the ff.
transactions:
(1) advances against accrued
compensation, or for the purpose of
providing payment of authorized
travel/legitimate expenses; maternity
and other leave credits
(2) the increase in the amount of
outstanding credit accomodations as a
result of addition charges or advances
made by the bank to protect its
interest such as taxes, insurance, etc.
Melicor (D2019)
(3) the discount of bills of exchange drawn
in good faith against already existing
values
(4) transactions with a foreign bank which
has stockholdings in the local bank
where the foreign bank acts as
guarantor through the issuance of L/C
or assignment of a deposit in a
currency eligible as part of the
international reserves and help in a
bank in the PH to secure other credit
accommodations granted to another
person or entity (see page 167)
(5) interbank call loan transactions
DOSRI will not be subject to the DOSRI rules
for their credit availments, unless they:
(i) fail to reimburse the bank in full on or before
the payment due date, or
(ii) at the outset, opt for deferred payment
scheme, and the availment is booked by the
bank.
Related Parties
 broadly defined as including the bank’s
subsidiaries as well as affiliates and any
party (including their subsidiaries,
affiliates, and special entities) that the
bank exerts direct/indirect control over
or that exerts direct/indirect control
over the bank;
 such other person/juridical entity
whose interests may pose potential
conflict with the interest of the financial
institution.
o In turn, “close family members”
are “persons related to the
bank’s directors, officers, and
stockholders within the second
degree of consanguinity or
30
General Banking Law Annotated
affinity, legitimate or common-
law.”
Sec 37. Loans and Other Credit
Accommodations Against Real Estate. —
Except as the Monetary Board may otherwise
prescribe, loans and other credit
accommodations against real estate shall not
exceed seventy-five percent (75%) of the
appraised value of the respective real estate
security, plus sixty percent (60%) of the
appraised value of the insured improvements,
and such loans may be made to the owner of
the real estate or to his assignees.
The course of action to limit overexposure to
real estate, is to limit the loanable value of real
estate given as collateral.
 The Monetary Board prescribed a real
estate stress test (REST), which
combines a macroprudential overlay of
severe stress test scenario, the
principle of loss absorbency through a
minimum capital thresholds and
heightened supervisory response.
 Loans shall not be made unless title to
the real estate shall be in the
mortgagor.
Sec 38. Loans and Other Credit
Accommodations on Security of Chattels and
Intangible Properties. — Except as the
Monetary Board may otherwise prescribe,
loans and other credit accommodations on
security of chattels and intangible properties,
such as, but not limited to, patents, trademarks,
trade names, and copyrights shall not exceed
seventy-five percent (75%) of the appraised
value of the security, and such loans and other
credit accommodations may be made to the
Melicor (D2019)
title-holder of the chattels and intangible
properties or his assignees.
Sec 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. (75a)
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.
 The purpose of the loan or credit is to
be stated in the borrowing application
and in the loan documentation itself.
 If the proceeds of the loan are used for
any other purpose, the lending bank
will have the right to accelerate the
maturity of the loan and demand its
immediate repayment.
o In addition, if the loan is in
foreign currency and has been
approved by the Bangko
Sentral, the borrower is
watchlisted by the BSP if there
is deviation from the declared
purpose of such loan.
 In practice, it is usual for a loan
agreement to contain a borrower’s
31
General Banking Law Annotated
representation as to the purpose of the
loan. Any deviation from such purpose
will amount to a misrepresentation and
trigger a default under the agreement.
o A default may in turn cause
the acceleration of the loan.
Effectively, therefore, a loan
with a term may be converted
into a demand loan, by
contractual stipulation.
o Even without such stipulation,
however, the lending bank has
the option, under Sec 39, to
preterminate a loan used for
another purpose.
Sec 40. Requirement for Grant of Loans or
Other 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 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.
Melicor (D2019)
In formulating rules and regulations under this
Section, the Monetary Board shall recognize
the peculiar characteristics of microfinancing,
such as cash flow-based lending to the basic
sectors that are not covered by traditional
collateral.
 “know your customer” is a fundamental
tenet in banking.
 Borrowing applicants will be required
to state their assets and liabilities, and
their income and expenditures among
other things.
 “Truth in borrowing” process, a
functional counterpart of the lending
bank’s disclosures under the Truth in
Lending Act.
o Rule that persons dealing with
registered lands rely solely on
certificate of title does not
apply to banks.
 As in Sec 39, the lending bank has the
option to preterminate the loan if any
statement in the application pertaining
to the credit worthiness of the
borrower proves to be false or
incorrect in any material respect. This
option may be reinforced by
appropriate clauses in the loan
agreement.
Sec 41. Unsecured Loans or Other Credit
Accommodations. — The Monetary Board is
hereby authorized to issue such regulations as
it may deem necessary with respect to
unsecured loans or other credit
accommodations that may be granted by
banks.
32
General Banking Law Annotated
 Sec 41 refers to unsecured or clean
loans or credits.
 A bank is required to exercise proper
caution before granting credit
accomodations against personal
securities, by ascertaining that the
borrowers, co-makers, endorsers,
sureties, or guarantors are financially
capable of fulfilling their obligations to
the bank.
 Manual requires the signature of at
least one co-maker in case of
unsecured loans/credit acc. To an
individual, unless the principal
borrower has the finanacial capacity
and a good track record of paying his
obligations
 Microfinance loans are to be exempted
from the rules that may be issued by
the Monetary Board, provided:
o Well-defined standards, credit
policies, and procedures for
microfinance loans which are
in conformity with
microfinance international best
practices
o Specific measures to be
undertaken to ensure
collection such as close
supervision of borrowers’
projects and operations; and
o Loan portfolio and other risk
assets review system required:
(1) an adequate loan tracking
system that allows daily
monitoring of the status of
loan releases, collection, and
arreages, any restructuring or
refinancing; and (2) a regular
Melicor (D2019)
monitoring of past due loans
and portfolio at risk.
Comfort Letters
 Classifiable as unsecured would be
loans backed by the so-called comfort
letters.
 A comfort letter is usually issued by a
parent company to induce a bank to
extend a loan to a subsidiary or an
affiliate. It is not a guarantee at all and
its enforceability against the insurer is
doubtful considering that it merely
states an intention of the issuier, for
instance, to “maintain the fiscal
integrity” of the proposed borrower –
kanguage that provides, at best, a
“cold comfort” to the bank.
 Reasins:
o Parent may be subject to a
loan agreement that prohibits
the issuance of guarantees
o Parent’s guarantee obligations
may be required to appear as
a footnote in its financial
statements, and this may not
be acceptable to it.
 In contrast a comfort letter is not
required to be footnoted.
Sec 42. Other Security Requirements for Bank
Credits. — The Monetary Board may, by
regulation, prescribe further security
requirements to which the various types of
bank credits shall be subject, and, in
accordance with the authority granted to it in
Section 106 of the New Central Bank Act, the
Board may by regulation, reduce the maximum
ratios established in Sections 36 and 37 of this
33
General Banking Law Annotated
Act, or, in special cases, increase the maximum
ratios established therein.
Sec 43. Authority to Prescribe Terms and
Conditions of Loans and Other Credit
Accommodations. — The Monetary Board
may, similarly, in accordance with the authority
granted to it in Section 106 of the New Central
Bank Act, and taking into account the
requirements of the economy for the effective
utilization of long-term funds, prescribe the
maturities, as well as related terms and
conditions for various types of bank loans and
other credit accommodations. Any change by
the Board in the maximum maturities shall
apply only to loans and other credit
accommodations made after the date of such
action.
The Monetary Board shall regulate the interest
imposed on microfinance borrowers by lending
investors and similar lenders, such as, but not
limited to, the unconscionable rates of interest
collected on salary loans and similar credit
accommodations.
 The Monetary Board is authorized
under Sec 106 of the New Central Bank
Act to issue such regulation as it may
deem necessary with respect to the
max permissible maturities of the loans
and invesmstments which banks may
make, and the kind and amount of
security to be required against the
various type of credit operations of the
banks, with a view to promoting
“liquidity and solvency” of the bankins
system.
Melicor (D2019)
Sec 44. Amortization on Loans and Other
Credit Accommodations. — 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
five (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 five (5) years from the date on which
the loan or other credit accommodation is
granted. (79a)
In case of loans and other credit
accommodations to microfinance 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.
The term “amortization” is derived from the
Latin word “admortire” meaning “to bring
death”
 Purpose is to terminate or extinguish
the loan.
 The amortization schedule is to be
adapted tot eh nature of the
operations being financed. Thus, if the
borrower comes from the so-called
micro-finance sector, the schedule is to
34
General Banking Law Annotated
take into account the projected cash
flow of the borrower.
o For instance, microfinance
loans may be amortized on a
daily, weekly, monthly, or bi-
monthly basis, depending on
the cash flow condition of the
borrowers.
 If the maturity of the loan or credit
accommodation exceeds 5 years, there
must be annual amortizations. The law
however, does not require equal or
substantially equal amortizations. It is
possible to have balloon-type
installment, where the last or the last
few is larger than the earlier ones.
 Implication: loan with a maturity of not
more than 5 years may be a “bullet
loans” one which may be paid in one
lump sum at the very end of the
maturity period.
o This means that the grace
period may extend up to 5
years assuming a five-year
loans.
o However, in the case of
agricultural and fisheries
projects with long gestation
periods, the initial amortization
may be deferred to up to 7
years based on the economic
life of the project.
Sec 45. Prepayment of Loans and Other Credit
Accommodations. — 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
Melicor (D2019)
conditions as may be agreed upon between
the bank and its borrower.
“subject to such reasonable terms and
conditions as may be agreed upon between
the bank and its borrower”
 The prepayment clause in a loan or
credit agreement normally provides for
the application of the prepaid amount
against installments in the inverse
order of maturity so as not to disrupt
the regular and periodic flow of
payments to the bank.
Sec 46. Development Assistance Incentives. —
The Bangko Sentral shall provide incentives to
banks which, without government guarantee,
extend loans to finance educational institutions,
cooperatives, hospitals and other medical
services, socialized or low-cost housing, local
government units and other activities with
social content.
Sec 47. Foreclosure of Real Estate Mortgage. —
In the event of foreclosure, whether judicially or
extrajudicially, of any mortgage on real estate
which is security for any loan or other credit
accommodation granted, the mortgagor or
debtor 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
by paying the amount due under the mortgage
deed, with interest thereon at the rate specified
in the mortgage, and all the costs and
expenses incurred by the bank or institution
from the sale and custody of said property less
the income derived therefrom. However, the
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General Banking Law Annotated
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 the confirmation of the auction sale
and administer the same in accordance with
law. 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 foreclosure
proceeding.
Notwithstanding Act 3135, juridical persons
whose property is being sold pursuant to an
extrajudicial foreclosure, shall have the right to
redeem the property in accordance with this
provision until, but not after, the registration of
the certificate of foreclosure sale with the
applicable Register of Deeds which in no case
shall be more than three (3) months after
foreclosure, whichever is earlier. Owners of
property that has been sold in a foreclosure
sale prior to the effectivity of this Act shall
retain their redemption rights until their
expiration.
Sec 48. Renewal or Extension of Loans and
Other Credit Accommodations. — 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.
Sec 49. Provisions for Losses and Write-Offs. —
All debts due to any bank on which interest is
past due and unpaid for such period as may be
Melicor (D2019)
determined by the Monetary Board, unless the
same are well-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.
A real estate mortgage may be foreclosed
judicially or extrajudicially.
 IN judicial foreclosure, there is no right
of redemption but only an equity of
redemption. The right if redemption is
only in cases of extrajudicial
foreclosure
 However, if mortgagee is a bank, there
exists always a right of redemptions,
whether foreclosure is judicial or
extrajudicial
(see page 187)
Sec 48. Provisions for Losses and Write-Offs. —
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 well-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.
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General Banking Law Annotated
Writing off of loans, other credit
accommodations, advances and other assets
shall be subject to regulations issued by the
Monetary Board.
 Banking supervisors must be satisfied
that banks establish and adhere to
adequate policies, practices, and
procedures for evaluating the
qualifying of assets and the adequacy
of loan loss provisions and loan loss
reserves.
 Under Sec 49, a bank loan becomes a
“bad debt” if the interest thereon is
past due and unpaid for such period as
may be determined by the Monetary
Board, unless it is well-secured and in
the process of being collected
o To cushion, the bank is
required to set aside reserve
for bad debts and other
doubtful accounts or
contingencies.
(See page 195)
Sec 50. Major Investments. — For the purpose
of enhancing bank supervision, the Monetary
Board shall establish criteria for reviewing
major acquisitions or investments by a bank
including corporate affiliations or structures
that may expose the bank to undue risks or in
any way hinder effective supervision.
Sec 51. Ceiling on Investments in Certain
Assets. — Any bank may acquire real estate as
shall be necessary for its own use in the
conduct of its business: Provided, however,
That the total investment in such real estate
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and improvements thereof, including bank
equipment, shall not exceed fifty percent (50%)
of combined capital accounts: Provided,
further, That 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, unless otherwise
provided by the Monetary Board.
Sec 52. Acquisition of Real Estate by Way of
Satisfaction of Claims. — Notwithstanding the
limitations of the preceding Section, a bank
may acquire, hold or convey real property
under the following circumstances:
52.1. Such as shall be mortgaged to it in good
faith by way of security for debts;
52.2. Such as shall be conveyed to it in
satisfaction of debts previously contracted in
the course of its dealings; or
52.3. 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 the
circumstances enumerated in the above
paragraph shall be disposed of by the bank
within a period of five (5) years or as may be
prescribed by the Monetary Board: Provided,
however, That the bank may, after said period,
continue to hold the property for its own use,
subject to the limitations of the preceding
Section.
Sec 53. Other Banking Services. — In addition
to the operations specifically authorized in this
Act, a bank may perform the following services:
53.1. Receive in custody funds, documents and
valuable objects;
37
General Banking Law Annotated
53.2. 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;
53.3. Make collections and payments for the
account of others and perform such other
services for their customers as are not
incompatible with banking business;
53.4. Upon prior approval of the Monetary
Board, act as managing agent, adviser,
consultant or administrator of investment
management/advisory/consultancy accounts;
and
53.5. Rent out safety deposit boxes.
The bank shall perform the services permitted
under Subsections 53.1, 53.2, 53.3 and 53.4 as
depositary or as an agent. Accordingly, it shall
keep the funds, securities and other effects
which it receives duly separate from the bank's
own assets and liabilities.
The Monetary Board may regulate the
operations authorized by this Section in order
to ensure that such operations do not
endanger the interests of the depositors and
other creditors of the bank.
In case a bank or quasi-bank notifies the
Bangko Sentral or publicly announces a bank
holiday, or in any manner suspends the
payment of its deposit liabilities continuously
for more than thirty (30) days, the Monetary
Board may summarily and without need for
prior hearing close such banking institution and
place it under receivership of the Philippine
Deposit Insurance Corporation.
 Banks do not need to be licensed by
SEC to become securities brokers.
 A bank may be authorized by the MB
to act as managing agent, adviser,
consultant, or administrator or
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investment/management/advisory/con
sultancy accounts.
o However, such authority will
not be sufficient to enable
such bank to engage in trust
and other fiduciary business.
“is the contractual relation between a
commercial bank and another party in a
contract of rent of a safety deposit box with
respect to its contents placed by the latter one
of bailor and bailee or one of lessor and
lessee?
 Court ruled that contract was not a
lease and the stipulation that the bank
was not a depository of the contents of
the box and hence assumed no liability
is not valid.
 Renting out of safety deposit boxes
was related to receiving in custody
funds, documents, and valuable
objects, and services were to be
performed by banks as depositories.
(see page 212).
Sec 54. Prohibition to Act as Insurer. — A bank
shall not directly engage in insurance business
as the insurer.
UB can:
(i) form an insurance company as a subsidiary
(ii) Engage in insurance-related activities
through bancassurance or cross-selling of
insurance products.
 Written agreement between the bank
and the insurance company, w/ prior
approval of the insurance
commissioner and the monetary
board.
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General Banking Law Annotated Melicor (D2019)

Sec 55. Prohibited transactions. No director, loan or other credit accommodation;

officer, employee, or agent of any bank shall: or
(4) Offer any director, officer, employee or
(1) Make false entries in any bank report
agent of a bank any gift, fee,
or statement or participate in any
commission, or any other form of
fraudulent transaction, thereby
compensation in order to influence
affecting the financial interest of, or
such persons into approving a loan or
causing damage to, the bank or any
other credit accommodation
person;
application.
(2) Without order of a court of competent
(5) No examiner, officer or employee of
jurisdiction, disclose to any
the Bangko Sentral or of any
unauthorized person any information
department, bureau, office, branch or
relative to the funds or properties in
agency of the Government that is
the custody of the bank belonging to
assigned to supervise, examine, assist
private individuals, corporations, or any
or render technical assistance to any
other entity: Provided, That with
bank shall commit any of the acts
respect to bank deposits, the
enumerated in this Section or aid in
provisions of existing laws shall prevail;
the commission of the same.
(3) Accept fees or commissions or any
other form of remuneration in The making of false reports or
connection with the approval of a loan misrepresentation or suppression of material
or other credit accommodation from facts by personnel of the Bangko Sentral ng
said bank; Pilipinas shall constitute fraud and shall be
(4) Overvalue or aid in overvaluing any subject to the administrative and criminal
security for the purpose of influencing sanctions provided under the New Central
in any way the actions of the bank or Bank Act.
any bank; or
(5) Outsource inherent banking functions Consistent with the provisions of Republic Act
No. 1405, otherwise known as the Banks
No borrower of a bank shall:
Secrecy Law, no bank shall employ casual or
(1) Fraudulently overvalue property
nonregular personnel or too lengthy
offered as security for a loan or other
probationary personnel in the conduct of its
credit accommodation from the bank;
business involving bank deposits.
(2) Furnish false or make
misrepresentation or suppression of
The following cases are additional exceptions
material facts for the purpose of
to the Secrecy of bank Deposits Law and
obtaining, renewing, or increasing a
Foreign Currency Deposit Act:
loan or other credit accommodation or
(1) Prosecution for unexplained wealth
extending the period thereof;
under Anti-Graft and Corrupt Practices
(3) Attempt to defraud the said bank in
Act
the event of a court action to recover a

39
General Banking Law Annotated
(2) Covered transaction reports or a
suspicious transaction reports by a
bank to the AMLC
(3) INquiry by the AMLC after obtaining
order from a competent course (which
has establishing probable cause).
(4) CIR inquiry
(5) BSP inquiry pursuant to periodic or
special examination.
(6) PDIC inquiry due to unsafe or unsound
banking practice.
Sec 56. Conducting Business in an Unsafe or
Unsound Manner. — In determining whether a
particular act or omission, which is not
otherwise prohibited by any law, rule or
regulation affecting banks, quasi-banks or trust
entities, may be deemed as conducting
business in an unsafe or unsound manner for
purposes of this Section, the Monetary Board
shall consider any of the following
circumstances:
56.1. The act or omission has resulted or may
result in material loss or damage, or abnormal
risk or danger to the safety, stability, liquidity or
solvency of the institution;
56.2. The act or omission has resulted or may
result in material loss or damage or abnormal
risk to the institution's depositors, creditors,
investors, stockholders or to the Bangko
Sentral or to the public in general;
56.3. The act or omission has caused any
undue injury, or has given any unwarranted
benefits, advantage or preference to the bank
or any party in the discharge by the director or
officer of his duties and responsibilities through
manifest partiality, evident bad faith or gross
inexcusable negligence; or
56.4. The act or omission involves entering
into any contract or transaction manifestly and
Melicor (D2019)
grossly disadvantageous to the bank, quasi-
bank or trust entity, whether or not the director
or officer profited or will profit thereby.
Whenever a bank, quasi-bank or trust entity
persists in conducting its business in an unsafe
or unsound manner, the Monetary Board may,
without prejudice to the administrative
sanctions provided in Section 37 of the New
Central Bank Act, take action under Section 30
of the same Act and/or immediately exclude
the erring bank from clearing, the provisions of
law to the contrary notwithstanding.
Sec 57. 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. Neither shall the bank nor quasi-
bank declare dividends, if at the time of
declaration:
57.1 Its clearing account with the Bangko
Sentral is overdrawn; or
57.2 It is deficient in the required liquidity floor
for government deposits for five (5) or more
consecutive days; or
57.3 It does not comply with the liquidity
standards/ratios prescribed by the Bangko
Sentral for purposes of determining funds
available for dividend declaration; or
57.4 It has committed a major violation as may
be determined by the Bangko Sentral.
Sec 58 Independent Auditor. — The Monetary
Board may require a bank, quasi-bank or trust
entity to engage the services of an
independent auditor to be chosen by the bank,
quasi-bank or trust entity concerned from a list
of certified public accountants acceptable to
40
General Banking Law Annotated
the Monetary Board. The term of the
engagement shall be as prescribed by the
Monetary Board which may either be on a
continuing basis where the auditor shall act as
resident examiner, or on the basis of special
engagements, but in any case, the
independent auditor shall be responsible to the
bank's, quasi-bank's or trust entity's board of
directors. A copy of the report shall be
furnished to the Monetary Board. The
Monetary Board may also direct the board of
directors of a bank, quasi-bank, trusty entity
and/or the individual members thereof, to
conduct, either personally or by a committee
created by the board, an annual balance sheet
audit of the bank, quasi-bank or trust entity to
review the internal audit and control system of
the bank, quasi-bank or trust entity and to
submit a report of such audit.
Sec 59. Authority to Regulate Electronic
Transactions. — The Bangko Sentral shall have
full authority to regulate the use of electronic
devices, such as computers, and processes for
recording, storing and transmitting information
or data in connection with the operations of a
bank, quasi- bank or trust entity, including the
delivery of services and products to customers
by such entity.
SECTION 60. Financial Statements. — Every
bank, quasi-bank or trust entity shall submit to
the appropriate supervising and examining
department of the Bangko Sentral financial
statements in such form and frequency as may
be prescribed by the Bangko Sentral. Such
statements, which shall be as of a specific date
designated by the Bangko Sentral, shall show
Melicor (D2019)
the actual financial condition of the institution
submitting the statement, and of its branches,
offices, subsidiaries and affiliates, including the
results of its operations, and shall contain such
information as may be required in Bangko
Sentral regulations. (n)
SECTION 61. Publication of Financial
Statements. — Every bank, quasi-bank or trust
entity, shall publish a statement of its financial
condition, including those of its subsidiaries
and affiliates, in such terms understandable to
the layman and in such frequency as may be
prescribed by the Bangko Sentral, in English or
Filipino, at least once every quarter in a
newspaper of general circulation in the city or
province where the principal office, in the case
of a domestic institution, or the principal
branch or office in the case of a foreign bank, is
located, but if no newspaper is published in the
same province, then in a newspaper published
in Metro Manila or in the nearest city or
province.
The Bangko Sentral may by regulation
prescribe the newspaper where the statements
prescribed herein shall be published.
The Monetary Board may allow the posting of
the financial statements of a bank, quasi-bank
or trust entity in public places it may
determine, in lieu of the publication required in
the preceding paragraph, when warranted by
the circumstances.
Additionally, banks shall make available to the
public in such form and manner as the Bangko
Sentral may prescribe the complete set of its
audited financial statements as well as such
other relevant information including those on
enterprises majority-owned or controlled by
the bank, that will inform the public of the true
financial condition of a bank as of any given
time.
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General Banking Law Annotated
In periods of national and/or local emergency
or of imminent panic which directly threaten
monetary and banking stability, the Monetary
Board, by a vote of at least five (5) of its
members, in special cases and upon
application of the bank, quasi-bank or trust
entity, may allow such bank, quasi- bank or
trust entity to defer for a stated period of time
the publication of the statement of financial
condition required herein. (n)
SECTION 62. Publication of Capital Stock. — A
bank, quasi-bank or trust entity incorporated
under the laws of the Philippines shall not
publish the amount of its authorized or
subscribed capital stock without indicating at
the same time and with equal prominence, the
amount of its capital actually paid up.
No branch of any foreign bank doing business
in the Philippines shall in any way announce
the amount of the capital and surplus of its
head office, or of the bank in its entirety
without indicating at the same time and with
equal prominence the amount of the capital, if
any, definitely assigned to such branch. In case
no capital has been definitely assigned to such
branch, such fact shall be stated in, and shall
form part of the publication. (82)
SECTION 63. Settlement of Disputes. — The
provisions of any law to the contrary
notwithstanding, the Bangko Sentral shall be
consulted by other government agencies or
instrumentalities in actions or proceedings
initiated by or brought before them involving
controversies in banks, quasi- banks or trust
entities arising out of and involving relations
between and among their directors, officers or
stockholders, as well as disputes between any
or all of them and the bank, quasi-bank or trust
entity of which they are directors, officers or
stockholders. (n)
Melicor (D2019)
SECTION 64. Unauthorized Advertisement or
Business Representation. — No person,
association, or corporation unless duly
authorized to engage in the business of a bank,
quasi-bank, trust entity, or savings and loan
association as defined in this Act, or other
banking laws, shall advertise or hold itself out
as being engaged in the business of such bank,
quasi-bank, trust entity, or association, or use
in connection with its business title, the word or
words "bank", "banking", "banker", "quasi-
bank", "quasi- banking", "quasi-banker",
"savings and loan association", "trust
corporation", "trust company" or words of
similar import or transact in any manner the
business of any such bank, corporation or
association. (6)
SECTION 65. Service Fees. — The Bangko
Sentral may charge equitable rates,
commissions or fees, as may be prescribed by
the Monetary Board for supervision,
examination and other services which it renders
under this Act. (n)
SECTION 66. Penalty for Violation of this Act.
— Unless otherwise herein provided, the
violation of any of the provisions of this Act
shall be subject to Sections 34, 35, 36 and 37 of
the New Central Bank Act. If the offender is a
director or officer of a bank, quasi-bank or
trust entity, the Monetary Board may also
suspend or remove such director or officer. If
the violation is committed by a corporation,
such corporation may be dissolved by quo
warranto proceedings instituted by the Solicitor
General
42
General Banking Law Annotated
Sec 67. Conservatorship. — The grounds and
procedures for placing a bank under
conservatorship, as well as, the powers and
duties of the conservator appointed for the
bank shall be governed by the provisions of
Section 29 and the last two paragraphs of
Section 30 of the New Central Bank Act:
Provided, That this Section shall also apply to
conservatorship proceedings of quasi-banks
Sec68 Voluntary Liquidation. — In case of the
voluntary liquidation of any bank organized
under the laws of the Philippines, or of any
branch or office in the Philippines of a foreign
bank, written notice of such liquidation shall be
sent to the Monetary Board before such
liquidation is undertaken, and the Monetary
Board shall have the right to intervene and take
such steps as may be necessary to protect the
interests of creditors. (86)
SECTION 69. Receivership and Involuntary
Liquidation. — The grounds and procedures
for placing a bank under receivership or
liquidation, as well as the powers and duties of
the receiver or liquidator appointed for the
bank shall be governed by the provisions of
Sections 30, 31, 32, and 33 of the New Central
Bank Act: Provided, That the petitioner or
plaintiff files with the clerk or judge of the court
in which the action is pending a bond,
executed in favor of the Bangko Sentral, in an
amount to be fixed by the court. This Section
shall also apply to the extent possible to the
receivership and liquidation proceedings of
quasi-banks. (n)
SECTION 70. Penalty for Transactions After a
Bank Becomes Insolvent. — Any director or
officer of any bank declared insolvent or placed
Melicor (D2019)
under receivership by the Monetary Board who
refuses to turn over the bank's records and
assets to the designated receivers, or who
tampers with banks records, or who
appropriates for himself or another party or
destroys or causes the misappropriation and
destruction of the bank's assets, or who
receives or permits or causes to be received in
said bank any deposit, collection of loans
and/or receivables, or who pays out or permits
or causes to be paid out any funds of said
bank, or who transfers or permits or causes to
be transferred any securities or property of said
bank shall be subject to the penal provisions of
the New Central Bank Act
SECTION 71. Other Banking Laws. — The
organization, ownership and capital
requirements, powers, supervision and general
conduct of business of thrift banks, rural banks
and cooperative banks shall be governed by
the provisions of the Thrift Banks Act, the Rural
Banks Act, and the Cooperative Code,
respectively.
The organization, ownership and capital
requirements, powers, supervision and general
conduct of business of Islamic banks shall be
governed by special laws.
The provisions of this Act, however, insofar as
they are not in conflict with the provisions of
the Thrift Banks Act, the Rural Banks Act, and
the Cooperative Code shall likewise apply to
thrift banks, rural banks, and cooperative
banks, respectively. However, for purposes of
prescribing the minimum ratio which the net
worth of a thrift bank must bear to its total risk
assets, the provisions of Section 33 of this Act
shall govern.
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General Banking Law Annotated
SECTION 72. Transacting Business in the
Philippines. — The entry of foreign banks in the
Philippines through the establishment of
branches shall be governed by the provisions
of the Foreign Banks Liberalization Act.
The conduct of offshore banking business in
the Philippines shall be governed by the
provisions of the Presidential Decree No. 1034,
otherwise known as the "Offshore Banking
System Decree." (14a)
SECTION 73. Acquisition of Voting Stock in a
Domestic Bank. — Within seven (7) years from
the effectivity of this Act and subject to
guidelines issued pursuant to the Foreign
Banks Liberalization Act, the Monetary Board
may authorize a foreign bank to acquire up to
one hundred percent (100%) of the voting
stock of only one (1) bank organized under the
laws of the Republic of the Philippines.
Within the same period, the Monetary Board
may authorize any foreign bank, which prior to
the effectivity of this Act availed itself of the
privilege to acquire up to sixty percent (60%) of
the voting stock of a bank under the Foreign
Banks Liberalization Act and the Thrift Banks
Act, to further acquire voting shares of such
bank to the extent necessary for it to own one
hundred percent (100%) of the voting stock
thereof.
In the exercise of this authority, the Monetary
Board shall adopt measures as may be
necessary to ensure that at all times the control
of seventy percent (70%) of the resources or
assets of the entire banking system is held by
banks which are at least majority-owned by
Filipinos.
Any right, privilege or incentive granted to a
foreign bank under this Section shall be equally
enjoyed by and extended under the same
conditions to banks organized under the laws
Melicor (D2019)
of the Republic of the Philippines. (Secs. 2 and
3, RA 7721)
SECTION 74. Local Branches of Foreign Banks.
— In the case of a foreign bank which has
more than one (1) branch in the Philippines, all
such branches shall be treated as one (1) unit
for the purpose of this Act, and all references
to the Philippine branches of foreign banks
shall be held to refer to such units. (68)
SECTION 75. Head Office Guarantee. — In
order to provide effective protection of the
interests of the depositors and other creditors
of Philippine branches of a foreign bank, the
head office of such branches shall fully
guarantee the prompt payment of all liabilities
of its Philippine branch. (69)
Residents and citizens of the Philippines who
are creditors of a branch in the Philippines of a
foreign bank shall have preferential rights to
the assets of such branch in accordance with
existing laws. (19)
Head office is liable for the liabilities of the
branch. However, the head office will not be
liable if it is clearly stipulated that the
obligation to pay restricted to the branch and
no else. Expectedly, this led to the
incorporation of contractual stipulation to that
effect in the agreement between the bank and
its clients.
SECTION 76. Summons and Legal Process. —
Summons and legal process served upon the
Philippine agent or head of any foreign bank
designated to accept service thereof shall give
jurisdiction to the courts over such bank, and
service of notices on such agent or head shall
be as binding upon the bank which he
represents as if made upon the bank itself.
44
General Banking Law Annotated
Should the authority of such agent or head to
accept service of summons and legal processes
for the bank or notice to it be revoked, or
should such agent or head become mentally
incompetent or otherwise unable to accept
service while exercising such authority, it shall
be the duty of the bank to name and designate
promptly another agent or head upon whom
service of summons and processes in legal
proceedings against the bank and of notices
affecting the bank may be made, and to file
with the Securities and Exchange Commission a
duly authenticated nomination of such agent.
In the absence of the agent or head or should
there be no person authorized by the bank
upon whom service of summons, processes
and all legal notices may be made, service of
summons, processes and legal notices may be
made upon the Bangko Sentral Deputy
Governor In-Charge of the supervising and
examining departments and such service shall
be as effective as if made upon the bank or its
duly authorized agent or head.
In case of service for the bank upon the
Bangko Sentral Deputy Governor In-Charge of
the supervising and examining departments,
the said Deputy Governor shall register and
transmit by mail to the president or the
secretary of the bank at its head or principal
office a copy, duly certified by him, of the
summons, process, or notice. The sending of
such copy of the summons, process, or notice
shall be a necessary part of the services and
shall complete the service. The registry receipt
of mailing shall be prima facie evidence of the
transmission of the summons, process or
notice. All costs necessarily incurred by the said
Deputy Governor for the making and mailing
and sending of a copy of the summons,
process, or notice to the president or the
Melicor (D2019)
secretary of the bank at its head or principal
office shall be paid in advance by the party at
whose instance the service is made. (17)
SECTION 77. Laws Applicable. — In all matters
not specifically covered by special provisions
applicable only to a foreign bank or its
branches and other offices in the Philippines,
any foreign bank licensed to do business in the
Philippines shall be bound by the provisions of
this Act, all other laws, rules and regulations
applicable to banks organized under the laws
of the Philippines of the same class, except
those that provide for the creation, formation,
organization or dissolution of corporations or
for the fixing of the relations, liabilities,
responsibilities, or duties of stockholders,
members, directors or officers of corporations
to each other or to the corporation. (18)
SECTION 78. Revocation of License of a
Foreign Bank. — The Monetary Board may
revoke the license to transact business in the
Philippines of any foreign bank, if it finds that
the foreign bank is insolvent or in imminent
danger thereof or that its continuance in
business will involve probable loss to those
transacting business with it. After the
revocation of its license, it shall be unlawful for
any such foreign bank to transact business in
the Philippines unless its license is renewed or
reissued. After the revocation of such license,
the Bangko Sentral shall take the necessary
action to protect the creditors of such foreign
bank and the public. The provisions of the New
Central Bank Act on sanctions and penalties
shall likewise be applicable.
SECTION 79. Authority to Engage in Trust
Business. — Only a stock corporation or a
person duly authorized by the Monetary Board
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General Banking Law Annotated
to engage in trust business shall act as a
trustee or administer any trust or hold property
in trust or on deposit for the use, benefit, or
behoof of others. For purposes of this Act, such
a corporation shall be referred to as a trust
entity. (56a; 57a)
SECTION 80. 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 of a like character and
with similar aims.
No trust entity shall, for the account of the
trustor or the beneficiary of the trust, purchase
or acquire property from, or sell, transfer,
assign or lend money or property to, or
purchase debt instruments of, any of the
departments, directors, officers, stockholders,
or employees of the trust entity, relatives within
the first degree of consanguinity or affinity, or
the related interests, of such directors, officers
and stockholders, unless the transaction is
specifically authorized by the trustor and the
relationship of the trustee and the other party
involved in the transaction is fully disclosed to
the trustor or beneficiary of the trust prior to
the transaction.
The Monetary Board shall promulgate such
rules and regulations as may be necessary to
prevent circumvention of this prohibition or the
evasion of the responsibility herein imposed on
a trust entity. (56)
SECTION 81. Registration of Articles of
Incorporation and By-Laws of a Trust Entity. —
The Securities and Exchange Commission shall
not register the articles of incorporation and
by-laws or any amendment thereto, of any
Melicor (D2019)
trust entity, unless accompanied by a certificate
of authority issued by the Bangko Sentral. (n)
SECTION 82. Minimum Capitalization. — A
trust entity, before it can engage in trust or
other fiduciary business, shall comply with the
minimum paid-in capital requirement which will
be determined by the Monetary Board. (n)
SECTION 83. Powers of a Trust Entity. — A
trust entity, in addition to the general powers
incident to corporations, shall have the power
to:
1. 83.1. Act as trustee on any mortgage
or bond issued by any municipality,
corporation, or any body politic and to
accept and execute any trust
consistent with law;
2. 83.2. 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 depositary 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;
3. 83.3. Act as the executor of any will
when it is named the executor thereof;
4. 83.4. 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;
5. 83.5. Accept and execute any trust for
the holding, management, and
administration of any estate, real or
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General Banking Law Annotated
personal, and the rents, issues and
profits thereof; and
6. 83.6. Establish and manage common
trust funds, subject to such rules and
regulations as may be prescribed by
the Monetary Board. (58)
SECTION 84. Deposit for the Faithful
Performance of Trust Duties. — Before
transacting trust business, every trust entity
shall deposit with the Bangko Sentral as
security for the faithful performance of its trust
duties, cash or securities approved by the
Monetary Board in an amount equal to not less
than Five hundred thousand pesos
(P500,000.00) or such higher amount as may
be fixed by the Monetary Board: Provided,
however, That the Monetary Board shall
require every trust entity to increase the
amount of its cash or securities on deposit with
the Bangko Sentral whenever in its judgment
such increase is necessary by reason of the
trust business of such entity: Provided, further,
That the paid-in capital and surplus of such
entity must be at least equal to the amount
required to be deposited with the Bangko
Sentral in accordance with the provisions of
this paragraph. Should the capital and surplus
fall below said amount, the Monetary Board
shall have the same authority as that granted
to it under the provisions of the fifth paragraph
of Section 34 of this Act.
A trust entity so long as it shall continue to be
solvent and comply with laws or regulations
shall have the right to collect the interest
earned on such securities deposited with the
Bangko Sentral and, from time to time, with the
approval of the Bangko Sentral, to exchange
the securities for others. If the trust entity fails
Melicor (D2019)
to comply with any law or regulation, the
Bangko Sentral shall retain such interest on the
securities deposited with it for the benefit of
rightful claimants. All claims arising out of the
trust business of a trust entity shall have
priority over all other claims as regards the
cash or securities deposited as above provided.
The Monetary Board may not permit the cash
or securities deposited in accordance with the
provisions of this Section to be reduced below
the prescribed minimum amount until the
depositing entity shall discontinue its trust
business and shall satisfy the Monetary Board
that it has complied with all its obligations in
connection with such business. (65a)
SECTION 85. Bond of Certain Persons for the
Faithful Performance of Duties. — Before an
executor, administrator, guardian, trustee,
receiver or depositary appointed by the court
enters upon the execution of his duties, he
shall, upon order of the court, file a bond in
such sum, as the court may direct.
Upon the application of any executor,
administrator, guardian, trustee, receiver,
depositary or any other person in interest, the
court may, after notice and hearing, order that
the subject matter of the trust or any part
thereof be deposited with a trust entity. Upon
presentation of proof to the court that the
subject matter of the trust has been deposited
with a trust entity, the court may order that the
bond given by such persons for the faithful
performance of their duties be reduced to such
sums as it may deem proper: Provided,
however, That the reduced bond shall be
sufficient to secure adequately the proper
administration and care of any property
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General Banking Law Annotated
remaining under the control of such persons
and the proper accounting for such property.
Property deposited with any trust entity in
conformity with this Section shall be held by
such entity under the orders and direction of
the court. (59)
SECTION 86. Exemption of Trust Entity from
Bond Requirement. — No bond or other
security shall be required by the court from a
trust entity for the faithful performance of its
duties as court- appointed trustee, executor,
administrator, guardian, receiver, or depositary.
However, the court may, upon proper
application with it showing special cause
therefor, require the trust entity to post a bond
or other security for the protection of funds or
property confided to such entity. (59)
SECTION 87. Separation of Trust Business from
General Business. — The trust business and all
funds, properties or securities received by any
trust entity as executor, administrator,
guardian, trustee, receiver, or depositary 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, or
securities shall likewise be kept separate and
distinct from the accounts of the general
business of the trust entity. (61)
SECTION 88. Investment Limitations of a Trust
Entity. — Unless otherwise directed by the
instrument creating the trust, the lending and
investment of funds and other assets acquired
by a trust entity as executor, administrator,
Melicor (D2019)
guardian, trustee, receiver or depositary of the
estate of any minor or other incompetent
person shall be limited to loans or investments
as may be prescribed by law, the Monetary
Board or any court of competent jurisdiction.
(63a)
SECTION 89. Real Estate Acquired by a Trust
Entity. — Unless otherwise specifically directed
by the trustor or the nature of the trust, real
estate acquired by a trust entity in whatever
manner and for whatever purpose, shall
likewise be governed by the relevant provisions
of Section 52 of this Act. (64a)
SECTION 90. Investment of Non-Trust Funds.
— The investment of funds other than trust
funds of a trust entity which is a bank, financing
company or an investment house shall be
governed by the relevant provisions of this Act
and other applicable laws. (64)
SECTION 91. Sanctions and Penalties. — A trust
entity or any of its officers and directors found
to have willfully violated any pertinent
provisions of this Act, shall be subject to the
sanctions and penalties provided under Section
66 of this Act as well as Sections 36 and 37 of
the New Central Bank Act. (63)
SECTION 92. Exemption of Trust Assets from
Claims. — No assets held by a trust entity in its
capacity as trustee shall be subject to any
claims other than those of the parties
interested in the specific trusts. (65)
SECTION 93. Establishment of Branches of a
Trust Entity. — The ordinary business of a trust
entity shall be transacted at the place of
business specified in its articles of
incorporation. Such trust entity may, with prior
48
General Banking Law Annotated Melicor (D2019)

approval of the Monetary Board, establish provisions of this Act are hereby repealed. The
branches in the Philippines, and the said entity provisions of paragraph 8, Section 8, Republic
shall be responsible for all business conducted Act No. 3591, as amended by Republic Act No.
in such branches to the same extent and in the 7400, are likewise repealed. (90a)
same manner as though such business had all
been conducted in the head office. SECTION 96. Separability Clause. — If any
provision or section of this Act or the
For the purpose of this Act, the trust entity and application thereof to any person or
its branches shall be treated as one unit. circumstance is held invalid, the other
provisions or sections of this Act, and the
SECTION 94. Phase Out of Bangko Sentral application of such provision or section to
Powers Over Building and Loan Associations. other persons or circumstances, shall not be
affected thereby. (n)
— Within a period of three (3) years from the
effectivity of this Act, the Bangko Sentral shall SECTION 97. Effectivity Clause. — This Act shall
phase out and transfer its supervising and take effect fifteen (15) days following its
regulatory powers over building and loan publication in the Official Gazette or in two (2)
associations to the Home Insurance and national newspapers of general circulation.
Guaranty Corporation which shall assume the
same. Until otherwise provided by law, building
and loan associations shall continue to be
governed by Sections 39 to 55, Chapter VI of
the General Banking Act, as amended,
including such rules and regulations issued
pursuant thereto. Upon assumption by the
Home Insurance and Guaranty Corporation of
supervising and regulatory powers over
building and loan associations, all references in
Sections 39 to 55 of the General Banking Act,
as amended, to the Bangko Sentral and the
Monetary Board shall be deemed to refer to
the Home Insurance and Guaranty Corporation
and its board of directors, respectively. (n)

SECTION 95. Repealing Clause. — Except as

may be provided for in Sections 34 and 94 of
this Act, the General Banking Act, as amended,
and the provisions of any other law, special
charters, rule or regulation issued pursuant to
said General Banking Act, as amended, or parts
thereof, which may be inconsistent with the

49