PART IV A. GENERAL BANKING LAW (R.A. NO. 8791), LAW ON SECRECY OF DEPOSITS AND RELATED LAWS 1. BANKS — entities engaged in the lending of funds obtained in the form of deposits from the public (Sec. 3.1, General Banking Law, GBL for short). a) b) °) It is required that banks are stock corporations and that its funds are obtained from the public, meaning deposits of twenty (20) or more persons (Sec. 8, GBL). An investment company that performs functions as such.is not a bank. Thus, an investment company that is engaged solely in investing, reinvesting or trading in securities is not engaged in banking (Bafias v. Asia Pacific Finance Corp., G.R. No. 128703, Oct. 18, 2000). However, an i i e and charges a commission to both lender and Roma is engaged in banki ing (Republic v. Security Credit and Acceptance Corporation, G.R. No. L-20583, Jan. 23, 1967). Quasi-Banks — entities engaged in the borrow- ing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes for purposes of relending or purchasing of receivables and other obligations (Sec. 4, GBL). 300 Scanned with CamScannerGO wa PART IV — GENERAL BANKING LAW (R Ai A. NO, LAW ON SECRECY OF DEPOSITS AND RELATED LAIN 301 1) Deposit substitutes are alternative forms of obtaining funds from the public, other than deposits, through the issuance, endorse- ment, or acceptance of debt instruments for the borrower’s own account, for the pur- pose of relending or purchasing of receiv- ables and other obligations (Sec. 95, New Central Bank Act, NCBA for short). 4.01. NATURE OF BUSINESS A bank has a vital role in providing an environ- ment conducive to the sustained national economy. Banking is fiduciary i i igh i i erfor (Sec. 2, GBL). a) Consequences of nature of business: 1) _ It is subject to heavy and close supervision and/or regulation by the Bangko Sentral ng Pilipinas or BSP (Central Bank of the Phil. v. CA, 208 SCRA 652). 2) It is required to exercise utmost diligence in the handling of deposits (Simex Interna- tional [Manila] Incorporated v. CA, 183 SCRA 361). ’ 3) There are special rules on strikes and lock- outs — any strike or lockout involving banks, if unsettled after seven (7) calendar days shall be reported by the BSP to the Secretary of Labor who has two (2) options: (1) he may assume jurisdiction over and decide the dispute or (2) certify the same to the National Labor Relations Commission (NLRC forShort) forcompulsory arbitration. The law also allows the President of the Philippines to, at any time, intervene and assume jurisdiction over such labor dispute in order to settle or terminate the same (Sec. 22, GBL). Scanned with CamScanner302, REVIEWER ON COMMERCIAL LAW 1.02. AUTHORITY TO INCORPORATE AND OPERATE a) b) A banking or quasi-banking corporation cannot be incorporated without authority from the BSP, The Articles of Incorporation to be filed with the Securities and Exchange Commission (SEC for short) should be accompanied by the favorable recommendation of the BSP, otherwise, it shall not be accepted or approved (Sec. 14, GBL). An entity that is performing banking or a quasi- banking function cannot operate without a cer- tificate of authority from the BSP (Sec. 6, GBL). 2. CLASSIFICATION OF BANKS 2.01. Banks are classified under Section 3.2 of the GBL into: a) b) °) d) e) Universal Banks — banks that have authority to exercise, in addition to the powers and functions of commercial banks, powers of an investment house and the power to invest in non-allied enterprises. Commercial Banks — banks that are given all such power necessary to engage in commercial banking in addition to general corporate powers; commercial banking includes the power. to accept drafts, issue letters of credits, discounting and negotiation of negotiable instruments and evidence of debt, accept and create demand deposits and the like. Rural banks — banks that are created to make needed credit available and readily accessible in the rural areas for the purpose of promot- ing comprehensive rural development (R.A. No. 7353). Thrift banks — include savings and mortgage banks, private development banks, and stock savings and loan associations (R.A. No. 7906). Cooperative banks — banks that primarily provide financial, banking and credit services Scanned with CamScannerPART IV — GENERAL BANKING LAW (R.A. NO. 87: A. NO. 8791), LAW ON SECRECY OF DEPOSITS AND RELATED LAWS a to cooperative organizations and their members (Sec. 100, R.A. No. 6938 as amended by R.A. No. 9520). f) Islamic Banks (R.A. No. 6848). g) Other classification of banks as determined by the MB of the BSP. 2.02. DISTINCTIONS a) _ As to capitalization — They have different mini- mum capitalization requirements. b) _ As to purpose — Some of the banks have specific purposes and social functions. Forinstance, Rural Banks are meant to hasten rural development. c) As to powers or functions — There are functions and powers that are not exercised by one that are exercised by others. Some banks may exercise certain powers only upon prior approval of the Monetary Board. Thus: (i) only universal bank and commercial banks can create and accept demand deposits without separate authority from the Monetary Board while other banks must secure authority from the Monetary Board; (ii) only universal banks may act as an investment house; (iii) generally, only universal banks and commercial banks may be involved in quasi-banking functions. a) As to who can be directors — Public officers can be directors of Rural Banks while such officers are prohibited from being directors or officers of other types of banks. e) As to incorporators — Consistent with the provi- sions of the Corporation Code, incorporators of banks are natural persons. The exception is with respect to rural banks which can be organized or established by cooperatives and corporations primarily organized to hold equities in rural banks. Scanned with CamScanner8) REVIEWER ON COMMERCIAL LAW As to foreign equity —A rural bank must be whol- ly owned by Filipinos while other banks require only forty percent (40%) Filipino ownership of their voting stocks. As to necessity of public offering — Public offering of shares is necessary for domestic banks seek- ing authority to act as universal bank while there is no such requirement for other banks. 3.. FUNCTIONS OF BANKS 3.01. BASIC FUNCTIONS 3.02. a) Deposit Function b) Loan Function OTHER FUNCTIONS Universal banks and commercial banks (as well as other banks depending on the type of bank and/or the corresponding authority given by the Monetary Board) may also exercise any of the following functions: a) b) °) d) e) Receive in custody funds, documents and valu- able objects; 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 secu- rities; Make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business; Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant oF administrator of investment management/advi- sory/consultancy accounts; and Rent out safety deposit boxes. Scanned with CamScannerPART IV — GENERAL BANKING LAW (R.A. NO. LAW ON SECRECY OF DEPOSITS AND RELATED Laws 8 3.03. PROHIBITED ACTS a) b) Banks are Ste from engaging in insur- Outsourcing of functions are i ( generally prohib- ited. Example: A bank cannot hire apts com- pany to accept deposits. 4, DEPOSIT FUNCTION 4.01. Simple Loan Fixed, savings and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan (Art, 1980, Civil Code). Under the rule, the i i Consequences: a) b) °) The bank can make use as its own the money deposited. Said amount is not being held in trust for the depositor nor is it bei ing (Tang Tiong Tick v. American Aphothecar- ies, 65 Phil. 414). Third persons who may havea right to the money deposited cannot hold the bank responsible The duty of the bank is to its creditor-depositor and not to third persons (Fulton Iron Works v. Chinabank, 55 Phil. 208). If a third person has a valid right over the money deposited, he must prove the same before a court of competent jurisdiction. The officers of the bank cannot be held liable for estafa if they authorized the use of the money deposited by the depositor. There would be no liability for estafa under Article 315(1)(b) of the Revised Penal Code even if the bank failed to return the amount deposited (Guingona v. City Fiscal of Manila, 128 SCRA 577). The bank has the rij set off the deposits with ion. It can the indebtedness of the Scanned with CamScanner306 REVIEWER ON COMMERCIAL LAW depositor that are due and demandable (Gullas v. PNB, 62 Phil. 519). 4,02. DEPOSITORS a) b) Minors — they can open bank accounts in their own right provided that: 1) _ they are at least seven years of age, 2) they are able to read and write and have sufficient discretion, 3) they are not otherwise disqualified by any other incapacity, 4) it should only be savings or time deposits (Sec. 1, P.D. No. 734). Note: Parents may nevertheless deposit for their minor children and guardians for their wards (Sec. 1, P.D. No. 734). ‘ With respect to Thrift Banks, the law states that if any guardian shall give notice in writ- ing to any thrift bank not to make payments of deposits, dividends, or interest to the minor of whom he is the guardian, then such payment shall be made only to the guardian (Sec. 22, Thrift *Banks Act of 1995). Married Women — they are allowed to open bank accounts without the assistance of their husbands (R.A. No. 7192). 4.03. KINDS OF DEPOSITS The basic types of deposits are: a) demand deposits, b) savings account, c) NOW Accounts, and d) time deposits. a) ‘DEMAND DEPOSITS — all those liabilities of banks which are denominated in Philippine cur- rency and are subject to payment in legal tender upon demand by presentation of checks subject to the following rules: 1) Generally, only a universal bank or com- Scanned with CamScannerPART IV — GENERAL BANKING LAW (R.A. LAW ON SECRECY OF DEPOSITS AND RELATI® awe” mercial bank can accept or create demand deposits. 2) A bank, other than a universal bank or commercial bank cannot accept demand deposits except upon prior approval of the Monetary Board. 3) Temporary overdrawing against current accounts shall not be allowed unless caused by normal bank charges and other fees incidental to handling such accounts. 4) Drawings against uncollected deposits (i.e., uncleared checks) are generally prohibited. b) SAVINGS ACCOUNT. This is the most com- mon type of deposit and is usually evidenced by a passbook. 1) Banks are prohibited from issuing/accept- ing withdrawal slips or any other similar instruments designed to effect withdrawals of savings deposits without requiring the depositors concerned to present their pass- books and accomplishing the necessary withdrawal slips, except for bank autho- rized by the BSP to adopt the no passbook withdrawal system (Sec. X214, Manual of Regulations for Banks, or “Manual”). 2) The requirement of presentation of pass- books is usually included in the terms and conditions printed in the passbooks. A bank is negligent if it allows the withdrawal without requiring the presentation of a passbook (BPI v. CA). c) NEGOTI RAWAL — interest-bearing deposit accounts that combine the payable on demand feature of checks and investment feature of savings accounts. d) TIME DEPOSIT — an account with fixed term. Scanned with CamScanner308 REVIEWER ON COMMERCIAL LAW INTERESTS — Demand, savings, NOW accounts, time deposits and deposit substitutes shall not be subject to interest ceilings (Sec. X242, Manual). 4,04. Other Accounts. — Bank account may be opened by one individual or by two or more persons. Whenever two (2) or more persons open an account, the same may be an “and/or account” or an “and” account. a) b) Anonymous Accounts are prohibited (R.A. No, 9160 as amended by R.A. No. 9194; BSP Circular No. 251, July 21, 2000). Exception: Foreign currency deposits'which may be a “numbered account.” However, the law requires that necessary measures are undertaken by the bank to record and establish the true identity of the depositor (Sec. 8, R.A. No. 6426 as amended, Foreign Currency Deposits Act). Joint accounts may be the subject of a survi- i whereby the co-depositors agree to permit either of them to withdraw the whole deposit during their lifetime and transfer- ring the balance to the survivor upon the death of one of them (Vitug v. CA, G.R. No. 82027, March 29, 1990). 4.05. SECRECY OF BANK DEPOSITS A. PESO DEPOSITS All deposits of whatever nature with banks or banking institutions in the Philippines includ- ing investments in bonds issued by the Govern- ment of the Philippines, its political subdivisions and its instrumentalities, are considered abso- lutely confidential and may not be examined, inquired or looked into by any person, govern- Tis} official, bureau or office (Sec. 2, R.A. No. a) Exceptions: 1) When there is written permission of the depositor or investor; Scanned with CamScannerPART IV — GENERAL BANKING LAW (R.A. NO. 8791), 30: LAW ON SECRECY OF DEPOSITS AND RELATED LAWS 2) 3) a” 8) 10) Impeachment cases; Upon the order of a competent court in cases of bribery or dereliction of duty of public officials; Upon the order of a competent court in cases where the money deposited or invested is the subject of litigation; Upon order of the competent court or tribunal in cases involving unex- plained wealth under the Anti-Graft and Corrupt Practices Act, R.A. No. 3019 (Bangko Filipino v. Purisima, 161 SCRA 576); Upon inquiry by the Commissioner of Internal Revenue for the purpose of determining the net estate of a de- ceased depositor; Upon the order of a competent court or in proper cases by the Anti-Money Laundering Council. where there is probable cause of money laundering and in some instances even without court order (Sec. 11, R.A. No. 9160); Disclosure to the Treasurer of the Philippines for dormant deposits for at least ten (10) years under the Unclaimed Balances Act (Sec. 2, R.A. No. 3936). Report of banks to Anti-Money Laun- dering Council. (AMLC) of covered” a 9, R.A. No. 9160 as amended). Upon order of the Court of Appeals, examination by law enforcement officers in terrorism cases under the Human Security Act of 2007 (Secs. 27 and 28, R.A. No. 8372). Scanned with CamScanner310 REVIEWER ON COMMERCIAL LAW b) °) Non:disclosure without Court order of any information relative to the funds or proper. ties of its clients is also required (Sec. 55[b], GBL). However, bank deposits shall con- tinue to be governed by the Law on Secrecy of Bank Deposits. Example: A bank cannot disclose matters relating to the trust ac- counts of the client with the bank both un- der Section 55(b) of the GBL and R.A. No, 1405 (Ejercito v. Sandiganbayan, 509 SCRA 140 [2006]). Subject matter of litigation. The inquiry into bank deposits allowable under R.A. No. 1405 must be premised on the fact that the subject of the action. (1) Example: The criminal Information filed with the trial court charged the accused with qualified theft by abusing his employer’s trust and confidence and stealing. cash in the amount of P1,534,135.50. On the premise that the accused had deposited the stolen amounts to her personal banking account, the prosecution moved for the issuance of subpoena duces tecum| ad testificandum against the respective managers or records custodians of the bank, The trial court granted the motion and issued the corresponding subpoena. The Supreme Court ruled that there is violation of the law on secrecy of bank deposits. The High Court explained that the admission of testimonial and documentary evidence relative to respondent's Security Bank account serves no other purpose than to establish the existence of such account, its nature and the amount Scanned with CamScannerPART IV — GENERAL BANKING LAW (R.A. NO. 8791 LAW ON SECRECY OF DEPOSITS AND RELATED Taw " kept in it. It constitutes an attempt by the prosecution at an impermissible inquiry into a bank deposit account the privacy and confidentiality of which is protected by law (BSB Group, Inc. v. Sally Go, G.R. No. 168644, Feb. 16, 2010). 'B. FOREIGN CURRENCY DEPOSITS The above-enumerated exceptions do not apply to foreign currency deposits. There is only one exception under the Foreign Currency * Deposits Act (Intengan v. CA, G.R. No. 128996, Feb. 15, 2002) although another is provided for under the Anti-Money Laundering Law. Therefore, the exceptions are: a) when there is written consent of depositor under Section 8 of the Foreign Currency Deposits Act; b) under Section 11 of the Anti-Money Laun- dering Act; and c) under Sections 27 and 28 of the Human Security Act. C. SECRECY OF DEPOSITS UNDER THE ANTI- MONEY LAUNDERING LAW The Anti-Money Laundering Council (AMLC) may inquire into deposits upon order of the court when there is th : epublic Act No. 9160 as amen ded Act No. 9194. However, a “necessary when the offense or unlawful activity involved is any of the following: a) Kidnapping for ransom under Article 267 of Act No. 3815, otherwise known as the Revised Penal Code, as amended; Scanned with CamScanner312 REVIEWER ON COMMERCIAL LAW b) Sections 4,5, 7,8, 9, 10, 12, 13, 14, 15 and 16 of Republic Act No. 9165 otherwise known as the Comprehensive Dangerous Drugs Act of 2002; and ©) Hijacking and other violations under Republic Act No. 6235; destructive arson and murder, as defined under the Revised Penal Code, as amended, including those perpetrated by terrorists against non- combatant persons and similar targets. 4.06. GARNISHMENT Bank accounts may be garnished by the creditors of the depositor. There is iolati on Secrecy of Bank Deposits if the accounts are garnished (China Bank v. Ortega, 49 SCRA 356 [1973]). The amount 0 a 0 e it 0 ature does not cover ippi ‘ommercial and Industrial Bank, et al. v. The Hon. CA, et al., 193 SCRA 452). a) Deposits that are exempt from garnishment 1) Foreign Currency Deposits (Sec. 8, FCDA). Note: The Supreme Court ruled in Salvacion, et al. v. Central Bank of the Phil- ippines, et al. (Aug. 21, 1997), by way of exception that foreign currency deposits of an American tourist who was found guilty of repeatedly raping a twelve (12)-year old child is subject to garnishment. 2) Those exempt under the Rules of Civil Pro- cedure like provision for the family for four months (Sec. 13 of Rule 39 of the 1997 Rules of Civil Procedure). 4.07. DEPOSIT INSURANCE (R.A. No. 3591) All deposits in banks are insured with the Phil- ippine Deposit Insurance Corporation or PDIC (Sec. 4, R.A. No. 3591 as amended). Scanned with CamScannerPART IV — GENERAL BANKING LAW (R.A. NO. 8791), 313 LAW ON SECRECY OF DEPOSITS AND RELATED LAWS a) Meaning of Deposit — the unpaid balance of money or its equivalent received by a bank in the usual course of business and for which it has given or is obliged to give credit to a commer- cial, checking, savings, time or thrift account, or issued in accordance with BSP rules and regu- lations and other applicable laws. Additionally, this may also include such other obligations of a bank, which, consistent with banking usage and practices, the PDIC Board shall determine and prescribe by regulations to be deposit liabilities of the bank . (1) In the case of any negotiable certificate of deposit, the owner or holder thereof shall be recognized as a depositor ONLY if his name is registered as owner /holder thereof in the books of the issuing bank. b) Insured deposit — the amount due to any bona fide depositor for legitimate depositsinan insured bank net of any obligation of the depositor to the insured bank as of the date of closure, but not to exceed Five Hundred Thousand Pesos (P500,000.00). (1) Can the maximum deposit insurance be adjusted? Yes, the maximum deposit insurance cover may be adjusted in such amount, for such a period, and/or for such deposit products, provided the following are complied with: (i) The Monetary Board has determined that there is a condition that threatens the monetary and financial stability of the banking system that may have systemic consequences, as defined in Section 17 of Republic Act No. 3591; (ii) the adjustments is approved by a unanimous vote of the Board of Directors of PDIC in a meeting called for the purpose and chaired by the Secretary of Finance; and (iii) the adjustments are approved by the President of the Philippines. Scanned with CamScanner314 ¢) d) REVIEWER ON COMMERCIAL LAW Deposits Not Covered by Insurance. The PDIC shall not pay deposit insurance for the following accounts or transactions, whether denominated, documented, recorded or booked as deposit by the bank: @) @ @ @ The amount in excess of insured deposit of Five Hundred Thousand Pesos (P500,000.00); Deposit that is payable in a place outside the Philippines (Example: in foreign branch- es); Investment products such as bonds and securities, trust accounts, and other similar instruments; Deposit accounts or transactions which are unfounded, or that are fictitious or fraudu- lent; Deposit accounts or transactions constitut- id unsound banking practice/s; and Deposits that are determined to be the pro- ceeds of an unlawful activity as defined under Republic Act No. 9160 or the Anti- Money Laundering Law; Deposit accounts that resulted from split- ting of deposit; and Money placements by the head office of a foreign bank in its branch in the Phils. There is only one entity. (PDIC ». Citibank, N.A., No. 170290, April 11, 2012). it — this occurs whenever a deposit account with an outstanding balance of more than P500,000.00 under the name. of persons is broken down and transferred to two or more accounts in the name of persons o: Rika: eset coco’ hip inthe Scanned with CamScannerPART IV — GENERAL BANKING LAW (R.A. NO. 8791), 315 LAW ON SECRECY OF DEPOSITS AND RELATED LAWS e. 2. This is a criminal act and the deposits are not entitled to any insurance payment. e) Determination of Amount Due: In determin- ing such amount due to any depositor, there shall be a A joint account regardless of whether the conjunction “and,” “or,” “and/or” is used, shall be insured separately from any indi- vidually-owned deposit account; /@) If the account is held jointly by two or more natural persons, or by two or more juridical persons or entities, the 1 1 ities, unless a different shar- ing is stipulated in the document of depos- it; (3) If the account is held by a juridical. person aa a : 1 the maximum insured deposit shall be i (4) The aggregate of the. interest of each co- owner over several joint accounts, whether owned by the same. or different combina- ‘entities, shall likewise be subject to the maximum insured deposit of Five Hundred Thousand Pesos (P500,000.00). Scanned with CamScanner316 REVIEWER ON COMMERCIAL LAW f) WHEN PAYMENT IS MADE. The proceeds of the insurance shall be paid by the PDIC to the depositor whenever the insured bank is closed on account of insolvency. An insured bank shal] be deeme ave been closed.on account of in- Board of the BSP (Sec. 10[b], R.A. No. 3591 as amended by R.A. No. 7400). g) The liability of the PDIC for insured deposits rests upon the exi its with i d not on the negotiability or non-negotiabil- ity of the certificates evidencing these deposits. In fact, the claimant cannot recover even if he can present a negotiable certificate of deposit if there is actually no deposit (Philippine Deposit In- surance Corp. v. CA, 283 SCRA 462 [1997]). The claim must be filed within 2 years from actual takeover by the receiver. PROBLEMS: as X Bank was closed by the Monetary Board on account of insolvency. At the time it was closed, A has three accounts with X Bank and each account has an out- standing balance of P250,000.00 or a total amount of P750,000.00. How much can A recover from the PDIC? A can recover only P500,000.00. The PDIC law provides that if a depositor has two or more accounts with the same bank, the maximum coverage pertains to the sum of all such accounts. JA has a time deposit with MB Bank. On May 22, 1999, the Monetary Bank issued a resolution placing MB Bank under receivership. After the issuance of such Resolution but before the receipt thereof by MB Bank on May 26, 1987, JA went to MB Bank pre- terminating his time deposits and re-depositing the funds into 28 new time deposits under the names of several co-depositors. Of the new time deposits, JA pre-terminated 8 and withdrew the value thereof. Scanned with CamScannerPART IV — GENERAL BANKING LAW (R.A. NO. 8791), 317 LAW ON SECRECY OF DEPOSITS AND RELATED LAWS : When a claim was made on the remaining 20 time deposits, the PDIC rejected the claim on the ground that they were not deposits made in the usual course of business. Did PDIC validly reject the claim? A: No, PDIC did not validly reject the claim. MB Bank and its client should be given the benefit of the doubt that they were not aware that the Monetary Board Resolution had been passed. Mere conjectures that MB Bank had actual knowledge of its impending closure do not suffice. The Resolution could not thus have nullified the transactions that were entered into prior to the receipt of the Resolution by MB Bank (Philippine Deposit Insurance Corp. v. CA, et al., G.R. No. 126911, April 30, 2003). 4.08. UNCLAIMED BALANCES a) Deposits that have become dormant for a period of ten.(10) years may be ‘government. b) _ Initially, there should be notice to the depositor of the unclaimed balance (Sec. 2, R.A. No. 3936; RCBC v. Hi-Tri Dev. Corp., G.R. No. 192413, June 13, 2012). Thereafter, the bank (including build- ing and loan associations and trust companies) is required to report (sworn statement) to the Treasurer of the Philippines the existence of such deposits. The Treasurer will in turn inform the Solicitor General who will then initiate the prop- er escheat proceedings in Court. ¢) Publication of a list of unclaimed balances is also required in order to safeguard the right of the depositors, their heirs and successors in interest to due process (Act No. 3936). d) Such unclaimed balances, together with the in- crease and proceeds thereof, shall be deposited with the Treasurer of the Philippines to the credit of the Government of the Republic of the Philip- pines to be used as the Congress may direct. Scanned with CamScanner318 REVIEWER ON COMMERCIAL LAW Unclaimed balances — include credits or depos- its of money, bullion, security or other evidence of indebtedness of any kind, and interest there- on with banks, buildings and loan associations, and trust corporations, as hereinafter defined, in favor of any person known to be dead or who has not made further deposits or withdrawals during the preceding ten years or more (Sec. 1, Act No. 3936). 5. LOAN FUNCTION OF BANKS 5.01. BASIC RULES/RESTRICTIONS a) b) °) d) Abank shall grant loans and other credit accom- modations 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 accommo- dations shall be consistent with safe and sound banking practices. Before granting a loan or other credit accom- modation, a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank. PAYMENTS 1) Amortization schedule of bank loans and other credit accommodations shall be adapted to the nature of the operations to be financed (Sec. 44, GBL). 2) Loans and other credit accommodations with maturities of more than five years, provisions must be made for periodic amortization payments, but such payments must be made at least annually (Ibid.). 3) A borrower may at any time prior to the agreed maturity date prepay, in whole or in part, the unpaid balance of any bank loan and other credit accommodation, subject Scanned with CamScannerPART IV — GENERAL BANKING LAW (R.A. NO. 8791), 319 LAW ON SECRECY OF DEPOSITS AND RELATED LAWS to such reasonable terms and conditions as may be agreed upon between the bank and its borrower (Sec. 45, GBL). e) SINGLE BORROWER'S LIMIT 1) CEILING — the total amount of loans, credit accommodations and guarantees that may be extended by a bank to any person, partnership, association, corpora- tion or other entity shall at no time exceed i %) of the net k (as increaset ircular 425). The basis for determining compliance with single-borrower limit is the total credit commitment of the bank to the borrower (Sec. 35.1, GBL). The total amount of loans, credit ac- commodations and guarantees prescribed in the preceding paragraph may be in- creased 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 (Sec. 35.2, GBL). 5.02. DOSRI ACCOUNTS Restrictions (not total prohibition) are imposed on borrowings and security arrangement by directors, officers and stockholders of the bank directors, officers, stockholders and their related interests (hence, the term DOSRI). a) REQUISITES UNDER ART. 26, NCBA aD The borrower is a director, officer or any stockholder of a bank (and related inter- ests); Scanned with CamScannerREVIEWER ON COMMERCIAL LAW 2 3) He contracts a loan or any form of financial accommodation; The loan or financial accommodation is from: (1) his bank, or (2) a bank that is a subsidiary of a bank holding company of which both his bank and lending bank are subsidiaries, (3) a bank in which a control- ling proportion of the shares is owned by the same interest that owns a controlling proportion of the shares of his bank; and The loan or financial accommodation of the director, officer or stockholder, singly or with that of his related interest, is in excess. f the capital and surplus of the lending bank or in the maximum amount permitted by law, whichever is lower. b) RESTRICTIONS UNDER THE GBL DOSRI Accounts are subject to the follow- ing rules under Section 36 of the GBL: 4d) 2» Procedural Requirement. The account should be upon written approval of the majority of all the directors of the lending bank excluding the director concerned. Arms Length Rule. The account should be to the bank than those offered to others. Reportorial Requirement. The resolution approving the loan shall be entered in the records of the bank and a copy of the entry shall be transmitted forthwith to the Super- vising and Examination Sector of the BSP. Aggregate Ceilings. 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 invest- Scanned with CamScannerPART IV — GENERAL BANKING LAW (R.A. NO. 879 A. NO. 8791), LAW ON SECRECY OF DEPOSITS AND RELATED Dns = ments of such bank in enterprises owned or controlled by said directors, officers, stockholders and their related interests. The Manual of Regulations for Banks provide that the aggregate is fifteen percent (15%) of the total loan portfolio of the bank or one hundred percent (100%) of the combined capital accounts whichever is lower. 5) Individual Ceilings. The outstanding loans, credit accommodations and guar- antees 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 unen- cumbered deposits and book value of their paid-in capital contribution in the bank. It should be noted however that the ceilings do not apply to loans, credit accom- modations and guarantees (1) secured by assets considered by the Monetary Board as non-risk items, (2) under a fringe benefit plan approved by the BSP, and (3) extend- ed by cooperative banks to its cooperative stockholders. c) RESTRICTIONS UNDER SEC. 26, NCBA 1) The borrower shall be required by the lend- ing bank to wai i = i e - The directors, officers or stock- holders are required to make such waiver if they themselves are the borrowers. 2) The accounts are subject to examination but any information obtained from an exami- nation of his deposits shall be held strictly confidential and may be used by examin- ers only in connection with the supervisory and examination responsibility or by the Bangko Sentral in an appropriate legal ac- Scanned with CamScanner322 REVIEWER ON COMMERCIAL LAW tion it has initiated involving the deposit account. 5.03. COLLATERALS A. VALUE OF COLLATERALS The loan shall not exceed 75% of the ap- praised value of the real property plus 60% of the appraised value of the improvement or 75% of the appraised value of the chattel (Secs. 37 and 38, GBL). B. FORECLOSURE OF MORTGAGE (Sec. 47, GBL) a) Redemption Period 1) Redemption Period for Natural Per- sons The mortgagor or debtor, who is a natural person, whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the prop- erty. The one-year redemption period should be counted from the date of the registration of the certificate of sale with the Register of Deeds (See Section 1[3] of Supreme Court Circular A.M. No. 99-10-05, as further amended on Aug. 7, 2001). 2) Redemption Period for Juridical Per- sons A juridical person, whose property has been sold pursuant to an extraju- dicial foreclosure, shall have the right to redeem the property but not after the registration of the certificate of foreclosure sale with the proper Regis- ter of Deeds which in no case shall be Scanned with CamScannerPART IV — GENERAL BANKING LAW (R.A. NO. 8791), 323 LAW ON SECRECY OF DEPOSITS AND RELATED LAWS more than three (3) months after fore- closure, whichever is earlier. b) | Redemption Price : Redemption may be exercised by pay- ing the amount due under the mortgage deed, with interest thereon at the rate speci- fied in the mortgage, and all the costs and expenses incurred by the bank or institu- tion from the sale and custody of said prop- erty less the income derived therefrom (Sec. 47, GBL). c) Possession The purchaser at the auction sale con- cerned whether in a judicial or extrajudi- cial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirma- tion of the auction sale and administer the same in accordance with law (Ibid.). d) Injunction and Bond Any petition in court to enjoin or res- train 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 foreclo- sure proceeding (Ibid.). 8. PROHIBITED ACTS OF BORROWERS (Sec. 55.2) No borrower of a bank shall: a) Fraudulently overvalue property offered as security for aloan or other credit accommodation from the bank; b) Furnish false or make misrepresentation or suppression of material facts for the purpose Scanned with CamScanner324 REVIEWER ON COMMERCIAL LAW, of obtaining, renewing, or increasing a loan.or other credit accommodation or extending the period thereof; c) Attempt to defraud the said bank in the event of a court action to recover a loan or other credit accommodation; or d) Offer any director, officer, employee or agent of a bank any gift, fee, commission, or any other form of compensation in order to influence such persons into approving a loan or other credit accommodation application. 7. OWNERSHIP OF BANKS 7.01. FOREIGN OWNERSHIP a) Individuals and non-banks (Sec. 11, GBL) 1) Foreign individuals and non-bank corpora- tions may own or control up to forty per- cent (40%) of the voting stock of a domestic bank. 2) 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 corpora- tion which is a stockholder in a bank shall follow the citizenship of the controlling | stockholders of the corporation, irrespec- j tive of the place of incorporation. Control- ling stockholders refer to individuals hold- ing more than fifty percent (50%) of the voting stock of the corporate stockholder of the bank. b) Foreign Banks Foreign banks are not subject to the 40% limitation prescribed under Section 11 of the GBL. The law prescribes 60% as the maximum foreign bank equity (R.A. No. 7721). However, Section 73 of the GBL allows the acquisition Scanned with CamScannerPART IV — GENERAL BANKING LAW (R.A. .A. NO. LAW ON SECRECY OF DEPOSITS AND RELATED Awe = beyond the 60% limit within a period of seven (7) years from the effectivity of the GBL. Within that seven (7) year period, with pri- or authority from the Monetary Board, foreign banks may acquire 100% of the voting stocks of an existing bank or invest in up to 100% of the voting stocks of a new subsidiary (Sec. 73, GBL). 7.02. FILIPINO STOCKHOLDINGS a) Section 11 of the GBL provides that the rule — limiting ownership and control of voting stocks to forty percent (40%) of voting stock — shall apply to Filipinos and domestic non-bank corporations. b) While the restriction on foreigners refers to the total equity participation, the restriction on Fili- pinos and domestic non-bank corporations refer to individual equity participation. STOCKHOLDINGS OF FAMILY GROUPS OR RELATED INTERESTS a) The law does not prohibit ownership of the stock by members of the same family or related interests. However, the law provides that 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 (Sec. 12, GBL). b) Two or more corporations owned or controlled by the same family group or same group of per- sons shall be considere i s and must be fully disclosed in all transactions by such corporations or related groups of persons with the bank (Sec. 13, GBL). Unlike the former law, the GBL does not im- pose a limit on the number of shares that can be 7.03. c) Scanned with CamScanner326 REVIEWER ON COMMERCIAL LAW owned by the same family or related interest. However, this should be without prejudice to the forty percent (40%) restrictions imposed by Section 11 of the GBL. 8. DIRECTORS AND OFFICERS 8.01. COMPOSITION OF BOARD (Secs. 15 and 19, GBL) a) b) °) d) There shall be at least five (5), and a maximum of fifteen (15) members of the board of directors of a bank, two (2) of whom shall be independent directors. However, in case of merged or consoli- dated banks, the maximum number of directors is ues one (21). An “indspandanbelinestay’ shall mean a person 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. The law provides that no appointive or elective public official, whether full-time or. part-time, shall at the same time serve as officer of any private bank, save in cases where such service or unless other- wise provided under existing laws. By way of exception, Section 5 of the Rural provides that nothing in the said Act “shall be construed as prohibiting any aanaintiestomlaaiueianistet from serving as 8.02. MEETINGS The meetings of the board of directors may be conducted through modern technologies such as, Scanned with CamScannerPART IV — GENERAL BANKING LAW (R.A. NO. 8791), 327 LAW ON SECRECY OF DEPOSITS AND RELATED LAWS but not limited to, teleconferencing and video-confe- rencing (Sec. 15, GBL). 8.03. QUALIFICATIONS a) Fit and Proper Rule Under the “fit and proper rule,” the Mone- tary Board is authorized to pass rules providing d dor appoi ank directors or O a due notice (Sec. 16, GBL). The law further provides that “In deter- mining 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.” (Sec. 16, GBL). 9. REGULATIONS TO MAINTAIN LIQUIDITY AND SECURITY Certain regulatory provisions in the General Banking Law as well as the New Central Bank Act are geared towards the purpose of maintaining liquidity and security. These regulations include those relating to loans and other matters: a) The Monetary Board shall prescribe the mini- mum ratio which the net worth of a bank must bear to its total risk assets which may include contingent accounts (Sec, 34, GBL). b) The law imposes limits on loans, credit accom- modations and guarantees that may be extended by banks. c) Limitation is placed on the bank's exposure to directors, officers, stockholders and their related interest (DOSRI Accounts, See Sec. 36, GBL). d) The law imposes restrictions on the value of collaterals on loans. Scanned with CamScanner328 REVIEWER ON COMMERCIAL LAW, e) The Monetary Board may provide for restric- tions on unsecured loans (Sec. 41, GBL). f) The Monetary Board may prescribe the maturi- ties and other terms and conditions for various types of loans and accommodations (Sec. 43, GBL). g) The law provides restrictions on dividend decla- rations (Sec. 57, GBL). 9.01. DIVIDENDS Dividend declaration is prohibited in the follow- ing instances: a) if itis greater than its accumulated net profits then on hand, deducting therefrom its losses and bad debts; b) _ if its clearing account with the Bangko Sentral is overdrawn; or c) _ if itis deficient in the required liquidity floor for government deposits for five (5) or more consec- utive days; or d) if it does not comply with the liquidity stan- dards/ratios prescribed by the Bangko Sentral for purposes of determining funds available for dividend declaration; or e) if it has committed a major violation as may be determined by the Bangko Sentral. 10. OWNERSHIP OF REAL PROPERTY 10.01. Any bank may acquire real estate as shall be neces- sary for its own use in the conduct of its business. However, the total investment in such real estate and improvements thereof, including bank equipment, shall not exceed fifty percent (50%) of combined capi- tal accounts. a) Unless otherwise provided by the Monetary Board, the equity investment of a bank in es Scanned with CamScannerPART IV — GENERAL BANKING LAW (R.A. NO. 8791), 32: LAW ON SECRECY OF DEPOSITS AND RELATED LAWS i another corporation engaged primarily in real estate shall be considered as part of the bank’s total investment in real estate (Sec. 51, GBL). 10.02. However, a bank may acquire, hold or convey real property under the following circumstances: a) Such as shall be mortgaged to it in good faith by way of security for debts; b) Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; or c) Such as it shall purchase at sales under judg- ments, 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 para- graph shall be disposed of by the bank within a period of five (5) years or as may be prescribed by the Monetary Board. After said period, the bank may continue to hold the property for its own use, subject to the limitations mentioned earlier, that is, the investment should not be more than 50% of the combined capital accounts (Sec. 52, GBL). 1. LOAN TO BANKS 11.01. LOANS WITHOUT COLLATERAL The BSP may extend loans and advances to banking institutions for a period of not more than seven (7) days without any collateral for the purpose of providing liquidity (Sec. 83, NCBA). 11.02. EMERGENCY LOANS The BSP, upon the approval of at least five (5) members of the Monetary Board, may also grant emergency loans or advances in the amount not exceeding fifty percent (50%) of its total deposits and Scanned with CamScanner