EVDabhbsDNo.XIX.

Industry Bank, which has a net worth of P1 Billion, extended a loan to

Celestial Properties Inc. amounting to P270 Million. The loan was secured by a mortgage over a
vast commercial lot in the Fort Bonifacio Global City, appraised at P350 Million. After audit,
the Banko Sentral ng Pilipinas gave notice that the loan to Celestial Properties exceeded the
single borrower’s limit of 25% of the bank’s net worth under a recent BSP Circular. In light of
other previous similar violations of the credit limit requirement, the BSP advised Industry Bank
to reduce the amount of the loan to Celestial Properties under pain of severe sanctions. When
Industry Bank informed Celestial Properties that it intended to reduce the loan by P50 Million,
Celestial Properties countered that the bank should first release a part of the collateral worth
P50 Million. Industry Bank rejected the counter-proposal, and referred the matter to you as
counsel. How would you advise Industry Bank to proceed, with its best interests in mind? (5%)
SUGGESTED ANSWER:
With a net worth of P1.0 Billion, the maximum loan exposure of the bank to Celestial
Properties can reach up to P250.0 Million. The bank should proceed with to reduce the
loan of Celestial properties by P20.0 Million, but should not release any part of the
collateral by the amount of reduction.
The collateral is a single commercial lot in the Fort, covered by a single title and beings essentially indivisible in
character, the mortgage cannot be “partially released.” Besides, since a real estate mortgage cannot be
“partially released.” Besides, since a real estate mortgage is merely a collateral contract, it can be enforced only
to the amount of the loan; and the moment the loan exposure is reduced, then automatically, reduction of the
collateral coverage of the real estate mortgage follows.