DRAGON NOTES MERCANTILE LAW

DRAGON NOTES MERCANTILE LAW

INSTITUTE OF LAW STEERING COMMITTEE FACULTY ADVISER

School of Law and Governance FOR ACADEMICS
CHAIRPERSON JUDGE ROWENA NIEVES A. TAN
University of Asia and the Pacific
HANNAH BARRANTES
DEAN
Atty. MARIA CONCEPCION S. NOCHE ACADEMICS HEAD
REUEL REALIN
SECRETARY
Atty. DELIA S. TANTUICO LOGISTICS HEAD
CRIS TACUBOY

HUMAN RESOURCES HEAD

REM SERRANO

FINANCE HEAD
ANNA MANALO

SECRETARIAT
VANYA NUQUE

OVERALL COORDINATOR
OLIVER M. TUAZON

ASSISTANT COORDINATORS
JOSEMARIA BASSIG
CHRISTIAN ESPAÑO

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DRAGON NOTES MERCANTILE LAW

SUBJECT TEAM
(INSERT)

FACULTY ADVISERS
[INSERT]

SUBJECT HEAD
[INSERT]

COMMITTEE MEMBERS
[INSERT]

DESIGN TEAM

COMMITTEE MEMBERS
KARLA BABA
NATHAN ESPINO
ANGELO GABRILLO
KAYE LEGASPI
COURTNEY TIROL
NAOMI YMBANG

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DRAGON NOTES MERCANTILE LAW

d. Liquidation
5. Legal Tender Power
6. Foreign Exchange Operations
B. Law on Secrecy of Bank Deposits (R.A.
No. 1405, as amended)
1. Purpose
2. Prohibited Acts
TABLE OF CONTENTS 3. Deposits Covered
4. Exceptions
VIII. BANKING LAWS 5. Garnishment of Deposits, including
A. The New Central Bank Act (R.A. No. Foreign Deposits
7653) C. General Banking Law of 2000 (R.A. No.
1. State Policies 8791)
2. Responsibility and Primary Objective 1. Definition and Classification of Banks
of the BSP 2. Distinction of Banks from Quasi-
3. Monetary Board; Powers and Banks and Trust Entities
Functions 3. Bank Powers and Liabilities
4. The BSP and Banks in Distress a. Corporate Powers
a. Conservatorship b. Banking and Incidental Powers
b. Closure 4. Diligence Required of Banks
c. Receivership

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DRAGON NOTES
5. Nature of Bank Funds and Bank
Deposits
6. Stipulation on Interests
7. Grant of Loans and Security
Requirements
a. Ratio of Net Worth to Total
Risk Assets
b. Single Borrower’s Limit
c. Restrictions on Bank Exposure
to DOSRI (Directors, Officers,
Stockholders and their Related
Interests)
I. The New Central Bank Act (RA 7653)
A. State Policies
- The State shall maintain a central monetary
authority that shall function and operate as an
independent and accountable body corporate in
the discharge of its mandated responsibilities
concerning money, banking and credit. (Sec. 1)
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- In line with this policy, and considering its
unique functions and responsibilities, the
central monetary authority established under
this Act, while being a government‐owned
corporation, shall enjoy fiscal and
administrative autonomy (Sec. 1.)
Nature of the BSP
(1) A central monetary authority;
(2) An independent and accountable body; and
(3) A government-owned corporation enjoying
fiscal and administrative autonomy. (Sec. 1)
Capitalization Requirements
The BSP shall have a capitalization of P50B to
be fully subscribed by the Government. (Sec.2,
NCBA)
B. Responsibility and Primary Objectives of
the BSP
The Responsibilities of the BSP:
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(1) To provide policy directions in the areas 2. Custodian of reserves. (Secs. 64‐66, 94,
of money, banking, and credit; 103)
(2) To supervise bank operations; and 3. Clearing channel or house; especially
(3) To regulate the operations of finance where the PCHC does not operate. (Sec.
companies and non‐bank financial 102)
institutions performing quasi‐banking 4. Banker of the government (Secs. 110‐
functions, and similar institutions. (Sec. 116)
3) 5. Financial advisor of the government
(Secs. 123‐124)
The Primary objectives of the BSP: 6. Source of credit (Secs. 61‐63, 81‐
89,109)
(1) To maintain price stability conducive to a 7. Supervisor of the banking system
balanced and sustainable growth of the (Sec.25)
economy. 8. Government agent (Secs. 117‐122)
(2) To promote and maintain monetary
stability and the convertibility of the C. Monetary Board
peso. (Sec. 3) The body through which the powers and
functions of the Bangko Sentral are exercised
Functions of the BSP (Sec 6, NCBA)
1. Issuer of currency. (Sec. 49‐60)

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DRAGON NOTES
Powers and Functions of the Monetary
Board
1. Issue rules and regulations it considers
necessary for the effective discharge of
the responsibilities and exercise of its
powers.
2. Direct the management, operations, and
administration of the Bangko Sentral,
reorganize its personnel, and issue such
rules and regulations as it may deem
necessary or convenient for this purpose.
3. Establish a human resource management
system.
4. Adopt an annual budget for and
authorize such expenditures by the
Bangko Sentral as are in the interest of
the effective administration and
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operations of the Bangko Sentral in
accordance with applicable laws and
regulations.
5. Indemnify its members and other
officials of the Bangko Sentral, including
personnel of the departments performing
supervision and examination functions
against all costs and expenses reasonably
incurred by such persons in connection
with any civil or criminal action. (Sec 15,
NCBA)
D. The BSP and banks in distress
When a bank is distressed, the BSP may
appoint a conservator, receiver, or proceed with
the closure of the bank
Insolvency – When the realizable assets of a
bank are insufficient to meet its liabilities1
1
Ignacio, Larry P., Banking and Allied Laws (2016)
DRAGON NOTES
E. Conservatorship
I. Appointment
Whenever, on the basis of a report submitted by
the appropriate supervising or examining
department, the Monetary Board finds that a
bank or a quasi-bank is in a state of:
(1) Continuing inability; or
(2) Unwillingness to maintain a condition of
liquidity deemed adequate to protect the
interest of depositors and creditors (Sec.
29 NCBA)
(3) The conservator should be competent and
knowledgeable in bank operations and
management. The conservatorship shall
not exceed one (1) year (Sec. 29).
(4) The appointment of a conservator shall
be vested exclusively in the MB. (Sec.
30, NCBA)
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II. Expenses for Conservatorship
The expenses attendant to the conservatorship
shall be borne by the bank or quasi-bank
concerned (Sec.29).
GR: The conservator shall receive
remuneration in an amount not to exceed 2/3 of
the salary of the president of the institution in 1
year, payable in 12 equal monthly payments.
Exception: A conservator connected with the
BSP, in which case said conservator shall not
be entitled to receive any remuneration or
emolument. (Sec. 29, NCBA)
III. Effects of Conservatorship
(1) Bank/Quasi-bank retains juridical
personality;
(2) Not a precondition to the designation of a
receiver (Sec. 30, NCBA), and;
DRAGON NOTES
(3) Perfected transactions cannot be repudiated
(First Philippine International Bank v. CA,
1996)
IV. Powers and Duties of a Conservator
1. To take charge of the assets, liabilities,
and the management thereof;
2. Recognize the management;
3. Collect all monies and debts due said
bank;
4. Exercise all powers necessary to restore
its viability with the power to overrule or
revoke the actions of the previous
management and board of directors of
the bank or quasi‐bank (Sec. 29, NCBA).
V. Termination of Conservatorship
(1) When MB is satisfied that the institution
can continue to operate on its own and
the conservatorship is no longer
necessary; or
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(2) When, on the basis of the report of the
conservator or of its own findings, the
MB determines that the continuance in
business of the institution would involve
probable loss to its depositors or
creditors.
the bank or quasi-bank would then be placed
under receivership if the continuance of
business would result in probable loss based
on the conservator’s reports (Sec. 29, NCBA)
F. Closure
The MB may summarily and without need for
prior hearing close a banking institution and
place it under receivership.
Close now-hear later Doctrine
The law does not contemplate prior notice and
hearing before the bank may be directed to stop
operations and placed under receivership. The
DRAGON NOTES MERCANTILE LAW

purpose is to prevent unwarranted dissipation of which amount to fraud or a dissipation of

the bank’s assets and as a valid exercise of the assets (Sec 30, NCBA).
police power to protect the depositors, (5) Notification to the BSP or public
creditors, stockholders and the general public. announcement of a bank holiday (Sec 53,
(Central Bank of the Philippines v. CA, G.R. General Banking Law).
No. 76118 Mar. 30, 1993) (6) Suspension of payment of its deposit
liabilities continuously for more than 30
Grounds for closure days (Sec 53, GBL).
(7) Persisting in conducting its business in
(1) Inability to pay liabilities as they become an unsafe or unsound manner (Sec 56,
due in the ordinary course of business GBL).
(Sec. 30, NCBA).
(2) Insufficiency of realizable assets to meet Bank Holiday:
its liabilities (Sec 30, NCBA). When a bank or quasi-bank suspends the
(3) Inability to continue business without payment of its deposit liabilities continuously
involving probable losses to its for more than 30 days
depositors and creditors (Sec 30, NCBA).
(4) willful violation of a cease and desist G. Receivership
order under Section 37 that has become
final, involving acts or transactions Definition:

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DRAGON NOTES
One appointed if bank is already insolvent
which means that its liabilities are greater than
its assets.
I. Grounds for Receivership
When the MB finds that a bank or quasi-bank:
(1) Is unable to pay its liabilities as they
become due in the ordinary course of business.
Exception: This shall not include inability to
pay caused by extraordinary demands induced
by financial panic in the banking community;
(2) Has insufficient realizable assets, as
determined by the BSP, to meet its
liabilities; or
(3) Cannot continue in business without
involving probable losses to its
depositors or creditors; or
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MERCANTILE LAW
(4) Has willfully violated a cease-and-desist
order under Sec. 37 that has become
final, involving acts or transactions
which amount to fraud or a dissipation of
the assets of the institution. Special rule:
in this situation, the MB may act
summarily and without hearing (Sec. 30,
NCBA)
II. Appointment of a Receiver
The appointment of a receiver shall be vested
exclusively in the MB, and the designation of a
conservator is not a precondition to the
designation of a receiver (Sec. 30, NCBA)
Acting receiver:
(1) If a banking institution: the PDIC
(2) If a quasi-bank: any person of recognized
competence in banking or finance
III. Duties of a Receiver
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(1) Immediately gather and take charge of all
the assets and liabilities of the institution
(2) Administer the same for the benefit of its
creditors, and exercise the general
powers of a receiver under the Revised
Rules of Court
(3) But shall not, with the exception of
administrative expenditures, pay or
commit any act that will involve the
transfer or disposition of any asset of the
institution:
Provided, That the receiver may deposit
or place the funds of the institution in
non-speculative investments.
Note:
The assets of the institution under
receivership and liquidation shall be
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deemed in custodia legis and shall be
exempt from any order of garnishment,
levy, attachment, or execution (Sec. 30,
NCBA).
H. Liquidation
I. Notice
If the receiver determines that the institution
cannot be rehabilitated or permitted to resume
business in accordance with the next preceding
paragraph, the MB shall notify in writing the
board of directors of its findings and direct the
receiver to proceed with the liquidation of the
institution (Sec. 30, NCBA).
II. Procedure for Liquidation
(1) The receiver shall file ex parte with the
proper RTC, and without requirement of prior
notice or any other action, a petition for
assistance in the liquidation of the institution
DRAGON NOTES
pursuant to the liquidation plan adopted by the
PDIC.
(2) Upon acquiring jurisdiction, the court shall,
upon motion by the receiver after due notice:
(a) Adjudicate disputed claims against
the institution;
(b) Assist the enforcement of individual
liabilities of the stockholders, directors,
and officers; and
(c) Decide on other issues as may be
material to implement the liquidation
plan
(3) The receiver shall convert the assets of the
institutions to money, dispose of the same to
creditors and other parties, for the purpose of
paying the debts of such institution in
accordance with the rules on concurrence and
preference of credit under the Civil Code. [Sec.
30, NCBA]
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III. Effects of Receivership/Liquidation
(1) Retention of juridical personality;
(2) Suspension of operations
(3) Assets are deemed in custodia legis,
exempt from garnishment, levy or
execution;
(4) Stay of execution of judgment to prevent
depletion of bank assets;
(5) Bank is not liable to pay interest on
deposits which accrued during the period
of suspension of operation;
(6) Restriction of bank’s capacity to do new
business (new loans, deposits) but with
obligation to collect pre-existing debts.
I. Legal Tender Power
DRAGON NOTES
All notes and coins issued by the BSP shall be
fully guaranteed by the Government of the
Republic of the Philippines and shall be legal
tender in the Philippines for all debts, both
public and private (Sec. 52, NCBA)
Limitations on coins:
1. 1‐Peso, 5‐Peso and 10‐Peso coins: In
amounts not exceeding P1,000.00
2. 25 centavo coin or less: In amounts not
exceeding P100.00 (Circular No. 537,
2006)
Rules on Legal Tender:
1. Notes and coins called in for replacement
shall remain legal tender for a period of one
year from the date of call.
2. After that period, they shall cease to be legal
tender during the following year or for such
longer period as MB may determine.
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MERCANTILE LAW
3. After the expiration of this latter period, the
notes and coins which have not been exchanged
shall cease to be a liability of BSP and shall be
demonetized. (Sec. 57)
Legal Character:
Checks representing demand deposits do not
have legal tender power and their acceptance in
the payment of debts, both public and private, is
at the option of the creditor.
However, a check which has been cleared and
credited to the account of the creditor shall be
equivalent to a delivery to the creditor of cash
in an amount equal to the amount credited to
his account (Sec. 60).
J. Foreign Exchange Operations
Rate of exchange
DRAGON NOTES MERCANTILE LAW

(1) The Monetary Board shall determine the additional costs or expenses involved in each
rates at which the Bangko Sentral shall type of transactions (Sec. 74, NCBA).
buy and sell spot exchange
II, Law on Secrecy of Bank Deposits (R.A.
(2) shall establish deviation limits from the No. 1405, as amended)
effective exchange rate or rates as it may
deem proper. A. Purpose
(1) To encourage deposit in banking
(3) The Monetary Board shall similarly institutions; and
determine the rates for other types of
foreign exchange transactions by the (2) To discourage private hoarding so that
Bangko Sentral, including purchases and banks may lend such funds and assist in
sales of foreign notes and coins (Sec. 74, the economic development of the
NCBA) country.

Limitations: B. Prohibited Acts

The margins between the effective exchange (1) Examination/inquiry/looking into all
rates and the rates thus established may not deposits of whatever nature with banks or
exceed the corresponding margins for spot banking institutions in the Philippines
exchange transactions by more than the (including investment in bonds issued by the

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DRAGON NOTES
government) by any person,
official or office (Sec. 2)
(2) Disclosure by any official or employee of
any banking institution to any authorized
person of any information concerning said
deposit (Sec. 3)
C. Deposits Covered
General Rule:
(1) All deposits of whatever nature with banks
or banking institutions found in the
Philippines2; or
(2) Investments in bonds issued by the
Philippine government, its branches, and
institutions. (Sec. 2, R.A. 1405)
2
Exclusions: Money-market placement is not covered by RA 1405
because it is not deposited in the bank.
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government Special rule:
The confidentiality of foreign-currency deposits
is governed by the Foreign Currency Deposit
Act (RA 6426).
Under the same law, all authorized foreign
currency deposits are considered of an
absolutely confidential nature and, except upon
the written permission of the depositors, in no
instance shall be examined, inquired or looked
into by any person, government official, bureau
or office whether judicial or administrative
private.
D. Exceptions
Instances where examination or disclosure of
information about deposits is allowed:
(1) Upon written consent of the depositor.
(Sec. 2)
(2) In cases of impeachment. (Sec. 2)
DRAGON NOTES
(3) Upon order of competent court in cases
of bribery or dereliction of duty of public
officials. (Sec. 2)
(4) In cases where the money deposited or
invested is the subject matter of the
litigation. (Sec. 2)
(5) Upon order of the Commissioner of
Internal Revenue in respect of the bank
deposits of a decedent for the purpose of
determining such decedent’s gross estate.
(Sec. 6[F][1], NIRC)
(6) Upon the order of the Commissioner of
Internal Revenue in respect of bank
deposits of a taxpayer who has filed an
application for compromise of his tax
liability by reason of financial incapacity
to pay his tax liability. (Sec. 6[f]
[1],NIRC)
(7) In case of dormant accounts/deposits for
at least 10 years under the Unclaimed
Balances Act. (Sec. 2, Act No. 3936).
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(8) When the examination is made by the
BSP to insure compliance with the AML
Law in the course of a periodic or special
examination
(9) With a court order:
a. In cases of unexplained wealth
under Sec. 8 of the Anti‐Graft and
Corrupt Practices Act (PNB v.
Gancayco, L‐18343, Sept. 30,
1965)
b. In cases filed by the
Ombudsman and upon the latter’s
authority to examine and have
access to bank accounts and
records (Marquez v. Desierto, GR
138569, Sept. 11, 2003)
(10) Without a court order: If the AMLC
determines that a particular deposit or
DRAGON NOTES
investment with any banking institution
is related to the following:
a. Destructive Arson
b. Kidnapping
c. Murder
d. Hijacking
e. Violation of the Dangerous
Drugs Act.
Jurisprudence on unexplained wealth
Cases of unexplained wealth are similar to
cases of bribery or dereliction of duty and no
reason is seen why these two classes of cases
cannot be excepted from the rule making bank
deposits confidential. The policy as to one
cannot be different from the policy as to the
other. This policy expresses the motion that a
public office is a public trust and any person
who enters upon its discharge does so with the
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full knowledge that his life, so far as relevant to
his duty, is open to public scrutiny. (PNB v.
Gancayco, G.R. No. L‐18343, Sept. 30, 1965)
E. Garnishment of Deposits, including
Foreign Deposits
General rule:
The prohibition against examination of or
inquiry into a bank deposit under Republic Act
1405 does not preclude its being garnished to
insure satisfaction of a judgment (PCIB v. CA,
G.R. No. 84526, Jan. 28, 1991).
Exception: Foreign Currency Deposits
Foreign currency deposits shall be exempt from
attachment, garnishment, or any other order or
process of any court, legislative body,
government agency or any administrative body
whatsoever. (Sec 8. R.A. 6426)
DRAGON NOTES
Exception to the Exception:
The garnishment of a foreign currency deposit
should be allowed to prevent injustice and for
equitable grounds, otherwise, it would negate
Article 10 of the New Civil Code which
provides that “in case of doubt in the
interpretation or application of laws, it is
presumed that the lawmaking body intended
right and justice to prevail. (Salvacion vs.
Central Bank of the Philippines, G.R. 94723,
August 21, 1997)
Penalties
(1) Imprisonment of not more than 5 years;
or
(2) Fine of not more than P20,000; or
(3) Both, in the discretion of the court (Sec.
5, RA 1405)
III. General Banking Law (R.A. 8791)
A. Definition and Classification of Banks
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Bank – Entities engaged in the lending of funds
obtained in the form of deposits (Sec.
3.1, GBL)
Universal banks ‐ Primarily governed by the
General Banking Law (GBL), can
exercise the powers of an investment
house and invest in non‐allied enterprises
and have the highest capitalization
requirement.
Commercial banks ‐ Ordinary banks governed
by the GBL which have a lower
capitalization requirement than universal
banks and can neither exercise the
powers of an investment house nor invest
in non‐allied enterprises.
Rural banks – Mandated to make needed
credit available and readily accessible in
the rural areas on reasonable terms
DRAGON NOTES MERCANTILE LAW

(2) Commercial Banks (KB)

Cooperative banks – Those banks organized (3) Thrift Banks (RA 7906)
whose majority shares are owned and (a) Savings and mortgage banks
controlled by cooperatives primarily to (b) Stock savings and loan
provide financial and credit services to associations
cooperatives. It shall include cooperative (c) Private development banks
rural banks. (4) Rural Banks (RA 7353)
(5) Cooperative Banks (RA 6938)
Islamic banks – Banks whose business (6) Islamic Banks (RA 6848)
dealings and activities are subject to the (7) Other classification of banks as may be
basic principles and rulings of Shari’a determined by the Monetary Board of the
law BSP

Elements of a bank B. Distinction of Banks from Quasi-

(1) Must be authorized by law
(2) Accept funds, in the form of a deposit
from the public; and
(3) Lends funds to the public
Classifications of Banks
(1) Universal Banks (UB)
Banks and Trust Entities
Quasi-banks
These are entities engaged in the borrowing of
funds through the issuance, endorsement or
assignment with recourse or acceptance of
deposit substitutes for purposes of re‐lending or

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DRAGON NOTES MERCANTILE LAW

purchasing of receivables and other obligations

(Sec 4, GBL). C. Bank Powers and Liabilities

Trust Entities I. Corporate Powers

These are entities engaged in trust business that All powers provided by the corporation code
act as a trustee or administer any trust or hold like issuance of stocks and entering into merger
property in trust or on deposit for the use, or consolidation with other corporation or
benefit of others (Sec. 79, GBL). banks.

Deposit substitutes Universal Banks

Funds obtained from the public, other than
deposits, through the issuance, endorsement, or
acceptance of deposit-substitute instruments for
the borrower's own account, for the purpose of
relending or purchasing of receivables and
other obligations.
It includes bankers’ acceptances, promissory
notes, participations, certificates of assignment
and similar instruments with recourse, and
repurchase agreements. (Sec. 95, NCBA)
(1) Corporate powers (Sec. 36, Corporation
Code)
(2) Banking and incidental powers
(3) Powers of an Investment House
(4) Power to invest in non-allied enterprises
(Sec. 23, GBL)
(5) Power to invest in allied enterprises
(Sec. 24, GBL)
Commercial Banks

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DRAGON NOTES MERCANTILE LAW

(1) Corporate powers (Sec. 36, Corporation XPN: Prior approval of, and subject to
Code) such conditions and rules as may be
(2) Banking and incidental powers prescribed by the Monetary Board
(Sec. 29, GBL) (5) Receiving other types of deposits and
(3) Power to invest in allied enterprises deposit substitutes
(Sec. 30, GBL) (6) Buying and selling foreign exchange and
gold or silver bullion
II. Banking and Incidental Powers (7) Acquiring marketable bonds and other
All such powers as may be necessary to carry debt securities
on the business of commercial banking (Sec. (8) Extending credit
29, GBL)
Doctrines
(1) Accepting drafts Presumption of ownership of deposits
(2) Issuing letters of credit It is presumed that money deposited in a bank
(3) Discounting and negotiating promissory account belongs to the person in whose name
notes, drafts, bills of exchange, and other the deposit account is opened.
evidence of debt
(4) Accepting or creating demand deposits No duty to set-off
GR: Only UB/KB may create or accept A bank is under no duty or obligation to make
demand deposits (Sec. 33, GBL) an application or set-off against the deposit
accounts of a borrower. To apply the deposit to

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DRAGON NOTES
the payment of a loan is a privilege, a right of
set-off which the bank has the option [but not
the obligation] to exercise. (BPI v. CA and
Eastern Plywood, 1994)
Safety deposit boxes
The rent of safety deposit boxes is a special
kind of deposit and cannot be characterized as
an ordinary contract of lease because the full
and absolute possession and control of the
deposit box is not given to the renters. The
prevailing rule is that the relation between the
bank renting out and the renter is that of bailor
and bailee the bailment being for hire and
mutual benefit. (CA Agro-industrial Dev. Corp.
v. CA, 1983)
D. Diligence Required of Banks
Extraordinary Diligence
The banking industry is impressed with public
interest. As such, the highest degree of
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diligence is expected, and high standards of
integrity and performance are even required.
Banks must treat depositors’ accounts with
meticulous care and always to have in mind the
fiduciary nature of its relationship with them.
(Metrobank v. Rosales, 2014)
Fiduciary Duty of Banks
Failure on the part of the bank to satisfy the
degree of diligence required of banks may
warrant the award of damages.
Banks are expected to exercise the highest
degree of diligence in the selection and
supervision of their employees (PCI Bank v.
CA, 2001).
E. Nature of Bank Funds and Bank
Deposits
Bank deposits are the function of the bank to
receive a thing, primarily money, from
DRAGON NOTES
depositors with the obligation of safely keeping
it and returning the same.
The relationship between a depositor and a
bank is that of a creditor and debtor in relation
to the bank’s deposit functions (Gullas vs.
PNB, G.R. No. L-43191, November 13, 1935)
The contract between the bank and its depositor
is governed by the provisions of the NCC on
simple loan (Consolidated Bank and Trust
Corporation vs. CA, G.R. No. 138569,
September 11, 2003).
Anonymous Accounts
General rule:
Anonymous accounts or those under fictitious
names are prohibited. (R.A. 9160 as amended
by by R.A. 9194; BSP Circular No. 251, July
21, 2000)
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Exception:
In case where numbered accounts is allowed
such as in foreign currency deposits. However,
banks/non‐bank financial institutions should
ensure that the client is identified in an official
or other identifying documents. (Sec. 8, R.A.
6426 as amended)
F. Stipulation on Interests
The Monetary Board may 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.
DRAGON NOTES
The Monetary Board shall regulate the interest
imposed on micro finance 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 (Sec. 43, GBL)
G. Grant of Loans and Security
Requirements
Ratio of Net Worth to Total Risk Assets
Net worth
The total of the unimpaired paid‐in surplus,
retained earnings and undivided profit, net of
valuation reserves and other adjustments as
may be required by the BSP. (Sec. 24.2, GBL)
General Rule:
A bank must conform to the risk-based capital
ratio prescribed by the MB whereby it must
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have a sufficient net worth relative to total risk
assets, which may include contingent accounts
However, the MB may require or suspend
compliance with such ratio whenever necessary
for a maximum period of one year and that such
ratio shall be applied uniformly to banks of the
same category (Sec. 34, GBL)
Exceptions:
(1) In case of a bank merger or consolidation;
(2) When a bank is under rehabilitation under a
program approved by the BSP; (Sec. 34, GBL)
Effect of non-compliance
1. Distribution of net profits may be limited or
prohibited and MB 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;
DRAGON NOTES
2. Acquisition of major assets and making of
new investments may be restricted.
Exception:
Purchases of evidence of indebtedness
guaranteed by the Government (Sec. 34).
Single Borrower’s Limit
1. The total amount of loans, credit
accommodations and guarantees that the bank
could grant should at no time exceed 25% of
the bank’s net worth. (Sec 35.1, GBL)
Exception:
As the Monetary Board may otherwise
prescribe for reasons of national interest.
2. The total amount of loans, credit
accommodations and guarantees prescribed in
(a) may be increased by an additional 10% of
the net worth of such bank provided that
26
MERCANTILE LAW
additional liabilities are adequately secured by
trust receipt, shipping documents, warehouse
receipts and other similar documents which
must be fully covered by an insurance. (Sec.
35.2, GBL)
3. Loans and other credit accommodations
secured by REM shall not exceed 75% of the
appraised value of the real estate security plus
60% of the appraised value of the insured
improvements (Sec. 37, GBL)
Restrictions on Bank Exposure to DOSRI
(Directors, Officers, Stockholders and their
Related Interests)
Loans granted to DOSRI:
a. Director
b. Officer
c. Stockholder, which should at least 1%
(if below 1% ‐ not anymore covered)
DRAGON NOTES MERCANTILE LAW

d. Related Interests, such as DOS’s the portfolio or 100% of the net worth,
spouses, their relatives within the first whichever is lower.) (Sec. 36.4, GBL)
degree whether by consanguinity or Arm’s Length Rule for DOSRI
affinity, partnership whereby DOS is a Any dealings of a bank with any of its DOSRI
partner or a corporation where DOS shall be upon terms not less favorable to the
owns at least 20%. bank than those offered to others. (Sec. 36.2,
GBL)
Requirements for Compliance with DOSRI Note: No favorable treatment
Accounts
1. Procedural requirement ‐ Loan must be
approved by the majority of all the directors not
including the director concerned. CB approval
is not necessary; however, there is a need to
inform them prior to the transaction. Loan must
be entered in the books of the corporation. (Sec.
36)

2. Substantive requirement ‐ Loan must not

exceed the paid in contribution and
unencumbered deposits. (Not to exceed 15% of

27