GENERAL

BANKING ACT

R.A 8791
An Act Providing for the Regulation of the Organization and Operation of Banks,
Quasi – Banks, Trust Entities and for Other Purposes

>> where the State recognizes the vital role of banks providing an environment
conductive to the sustained development of the national economy and the fiduciary
nature of banking that requires high standards of integrity and performance
What is a bank?
• an entity engaged in the lending of funds obtained in the form of deposits
• a financial institution licensed to receive deposits from the public and simultaneously making loans
• an establishment classified as:
1) Universal Banks
2) Commercial Banks
3) Thrift Banks, composed of:
a. Savings and Mortgage Banks
b. Stock Savings and Loan Association
c. Private Development Bank
4) Rural Banks
5) Cooperative Banks
6) Islamic Banks
7) Other classification of banks as determined by the Monetary Board of the Bangko Sentral ng Pilipinas
Universal Banks, are a combination of wholesale banking, retail banking and an investment banking
offering financial services such as insurance – have the authority to exercise, in addition to the powers
authorized for a commercial bank
Commercial Banks, are banks that provides services such as accepting deposits, making business
loans, and offering basic investment products that is operated as a business for profit – have, in
addition to the general powers incident to corporations, all such powers as may be necessary to carry
on the business of commercial banking such as accepting drafts and issuing letters of credit;
discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt;
accepting or creating demand deposits; receiving other types of deposits and deposit substitutes;
buying and selling foreign exchange and gold or silver bullion; acquiring marketable bonds and other
debt securities; and extending credit, subject to such rules as the Monetary Board may promulgate and
may include the determination of bonds and other debt securities eligible for investment, the
maturities and aggregate amount of such investment
Thrift Banks, also known as Savings and Loan Associations – a type of financial institution that
specializes in offering savings accounts and originating home mortgages for consumers
Savings and Mortgage Banks, a savings banks are a financial institution whose primary purpose is
accepting savings deposits and paying interests on those deposits while, mortgage banks are banks
that primarily or exclusively offers loan to clients to purchase real estate, especially of private
residence
Stock Savings, are banks common in the first world countries such as United States where a savings
bank invests small amounts of money for people and is owned by shareholders
Loan Associations, were mutually held financial institutions that greatly increased the accessibility of
home loans guided by a spirit of mutual – self help
Private Development Bank, are unique financial institutions in under – developed countries
specializing in providing high – risk, long term financing for the purpose of industrialization
Rural Banks, are private, unit banking institutions based in the rural areas which mobilize financial
resources and control and extend credits to farmers, cottage industrialists and other rural based
economic operators in their defined area of operation
Cooperative Banks, are banks owned and controlled by a group of people who are also customers of
the bank
Islamic Banks, are bank that complies with shari’ah through the development of Islamic economy
making a profit through equity participation requiring a borrower to give the bank a share in their
profits rather than paying interest
DISTINCTION OF BANKS
FROM QUASI-BANKS AND
TRUST ENTITIES
Banks
These are entities engaged in the lending of funds which are in the form of deposits and are obtained from the public
with at least twenty (20) depositors
 
Quasi-bank
These are entities engaged in the assignment with recourse or acceptance of deposit substitutes for purposes of re-
lending or purchasing of receivables borrowing of funds through the issuance, endorsement or and other obligations
unlike banks, quasi – banks do not accept deposits. Neither are funds obtained insured with the PDIC.
 
Trust entities
These are entities engaged in trust business that act as a trustee or administer any trust or hold property in trust or on
deposit for the use, benefit, or behalf of others. A bank does not act as a trustee.
 BANK POWERS
AND LIABILITIES
 1) CORPORATE POWERS

2)BANKING AND INCIDENTAL POWERS

CORPORATE POWERS

1. All powers provided by the corporation code, like issuance of stocks and entering into merger or consolidation with other
corporation or banks.
 
2. It can only acquire real property when it is needed for business, in settlement of debt incurred in the course of the
business, property as may be mortgaged to it to secure a debt in good faith and property it may acquire during execution sale
to satisfy judgment. Banks cannot acquire real property in settlement of a civil liability arising from crime.

3. A universal and commercial bank can both invest in equity but only universal bank is allowed to invest in equity of non –
allied enterprises.
BANKING AND INCIDENTAL POWERS

Certificate of Authority to Register

This is a requirement before a bank may register or amend their articles of incorporation with SEC. It is issued by the
Monetary Board. The following must be proven by the bank to satisfy the Monetary Board and in order for the latter to grant such
certificate:

1. 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;

2. That the public interest and economic conditions, both general and local, justify the authorization; and

3. The amount of capital, the financing, organization, direction and administration, as well as the integrity and responsibility of the
organizers and administrators reasonably assure the safety of deposits and the public interest.
DILIGENCE REQUIRED OF
BANKS
In view of Fiduciary Nature of Banking
The banking system is an indispensable 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. Thus, even the humble wage – earner has not hesitated to entrust his
life’s savings to the bank of his choice, knowing that they will be safe in its custody and will even
earn some interest for him. The ordinary person, with equal faith, usually maintains a modest
checking account for security and convenience in the settling of his monthly bills and the payment of
ordinary expenses. As for business entities, the bank is a trusted and active associate that can help in
the running of their affairs, not only in the form of loans when needed but more often in the conduct
of their day – to – day transactions like the issuance or encashment of checks.
In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether
such account consists only of a few hundred pesos or of millions. The bank must record every single
transaction accurately, down to the last centavo and as promptly as possible. This has to be done if the
account is to reflect at any given time the amount of money the depositor can dispose of as he sees fit,
confident that the bank will deliver it as and to whomever he directs.
As a business, affected with public interest and because of the nature of its functions, the bank is
under obligations to treat the accounts of its depositors with meticulous care, always having in mind
the fiduciary nature of their relationship
NATURE OF BANK FUNDS
AND BANK DEPOSITS
Deposit function of banks

•The function of the bank to receive a thing, primarily money, from depositors with the obligation of
safely keeping it and returning the same.
Kinds of deposits between a bank
and its depositors
1. As debtor – creditor

2. Special Kinds of Deposits

3. As trustee – trustor
Trust account – a savings account, established under a trust agreement containing funds administered
by the bank for the benefit of the trustor or another person or persons.

4. As agent – principal
Special Kinds of Deposits

a. Demand deposits – all those liabilities of banks which are denominated in the Philippine currency
and are subject to payment in legal tender upon demand by representation of checks.
 
b. Savings deposits – the most common type of deposit and is usually evidenced by a passbook.

c. Negotiable order of withdrawal account (NOWA) – Interest-bearing deposit accounts that combine
the payable on demand feature of checks and investment feature of saving accounts.

d. Time deposit – an account with fixed term; payment of which cannot be legally required within
such a specified number of days.
Nature of a bank deposit

All kinds of bank deposits are loan. 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 being kept for safekeeping
 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
 

Risked based capital

The minimum ratio prescribed by the Monetary Board which the net worth of a bank must bear to its
total risk assets which may include contingent accounts.
SINGLE BORROWER’S LIMIT
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
Loans and other credit accommodations secured by (Real Estate Mortgage) REM shall not exceed
75% of the appraised value of the real estate security plus 60% of the appraised value of the insured
improvements (Cost Model) CM/intangible property such as patents, trademarks, etc. shall not exceed
75% of the appraised value of the security
The total amount of loans, credit accommodations and guarantees prescribed in may be increased by
an additional 10% of the net worth of such bank provided that additional liabilities are adequately
secured by trust receipt, shipping documents, warehouse receipts and other similar documents which
must be fully covered by an insurance
Loans being contractual, the period of payment may be subject to stipulation by the parties. In the
case of amortization, the amortization schedule has no fixed period as it depends on the project to be
financed such that if it was capable of raising revenues, it should be at least once a year with a grace
period of 3 years if the project to be financed is not that profitable which could be deferred up to 5
years if the project was not capable of raising revenues
Loans granted to DOSRI:
a. Director

b. Officer

c. Stockholder, having at least 1% ownership over the bank

d. Related Interests, such as DOS’s spouses, their relatives within the first degree whether by
consanguinity or affinity, partnership whereby DOS is a partner or a corporation where DOS owns at
least 20%.
 RESTRICTIONS ON BANK
EXPOSURE TO DOSRI
(DIRECTORS, OFFICERS,
STOCKHOLDERS AND THEIR
RELATED INTERESTS)
 Three restrictions imposed by law on DOSRI transactions
No director or officer of any bank shall, directly or indirectly, for himself or as the representative or
agent of others:

1. borrow from such bank;

2. become a guarantor, endorser or surety for loans from such banks to others; or
3. in any manner be an obligor or incur any contractual liability to the bank
PROHIBITED ACTS OF
BORROWERS
No director or officer of any banking institution shall, either directly or indirectly, for himself or as the
representative or agent of others, borrow any of the deposits of funds of 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 for moneys borrowed from the bank or loaned by it, except with the written approval of the
majority of the directors of the bank, excluding the director concerned. Any such approval shall be
entered upon the records of the corporation and a copy of such entry shall be transmitted forthwith to
the Superintendent of Banks.
FLOATING INTEREST RATES
AND ESCALATION CLAUSES
A floating interest rate is an interest rate that moves up and down with the market or an index and can
also be referred to as a variable interest rate because it can vary over the duration of the debt
obligation. It aims to provide investors with a flexible interest income in a rising rate environment.

An escalation clause is one which the contract fixes a base price but contains a provision that in the
event of specified costs increases, the seller or contractor may raise the price up to a fixed percentage
of the base and serve to maintain fiscal stability and to retain the value of money in long term
contracts
PENALTIES FOR
VIOLATIONS
The office of any director or officer of a bank who violates the provisions of this section shall
immediately become vacant and the director or officer shall be punished by imprisonment of not less
than one (1) year nor more than ten (10) years and by a fine of not less than one thousand (1, 000.00)
nor more than ten thousand (10, 000.00) pesos.