Basic Function of Banks

LOAN FUNCTION

Grant, Purpose, and Requirement of Loans, Secs. 39 and 40, GBL

Mobilization of savings and allocating resources.

Only in amounts and for the periods of time essential for the
effective completion of the operations to be financed.

Purpose: Stated. If not used for the said purpose, terminate the
loan and demand for immediate repayment.

Grant, Purpose, and Requirement of Loans, Secs. 39 and 40, GBL

Capacity of Debtor to fulfill his commitment.

Statement of assets and liabilities and the like
Financial Statements submitted to the BIR for taxation purposes.
If false or incorrect, bank may terminate the loan and demand repayment
or liquidation of the obligation.
Prohibited Transactions Secs. 55.1(c), 55.1(d), and 55.2, GBL

55.1. No director, officer, employee, or agent of any bank shall

(c) Accept gifts, fees or commissions or any other form of
remuneration in connection with the approval of a loan or other credit
accommodation from said bank;
(d) Overvalue or aid in overvaluing any security for the purpose of
influencing in any way the actions of the bank or any bank; or
Prohibited Transactions Secs. 55.1(c), 55.1(d), and 55.2, GBL

55.2. No borrower of a bank shall

(a) Fraudulently overvalue property
(b) Furnish false or make misrepresentation or suppression of material
facts
(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
SINGLE BORROWERS LIMIT
Total amount of loans, credit accommodations and guarantees that may be
extended to any person, partnership, association, corporation or other
entity shall at no time exceed 25% of the net worth of a bank. (Sec. 35,
GBL)
+ 10%, adequately secured, unless MB prescribes otherwise
Exceptions:

MB otherwise prescribe for reasons of national interest.

Deposits of rural banks with government-owned of

controlled

financial institutions.

RESTRICTIONS ON BANK EXPOSURE TO DOSRI

No director or officer of any bank shall directly or indirectly, for himself or
as the representative or agent of others, borrow from such bank nor shall
he become a guarantor, indorser or surety for loans form such bank or
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
directors of the bank, excluding the director concerned. (Sec. 36, GBL)

ARMS LENGTH RULE

Account should be upon terms not less favorable to the bank than those
offered to others.
EXTENT OF LOAN TO DOSRI
In excess of five percent (5%) of the capital and surplus of the bank, or in
the maximum amount permitted by law, whichever is lower.
Waiver of the secrecy of his deposits. (Sec. 26, NCBA)

Interest Art. 1956, Civil Code

No ceiling Sec. 1-a, 4-a, 45 of Usury Law; Bacolor v. Bango Filipino

Savings and Mortgage Bank, Dagupan City Branch, 515 SCRA 79
(2007)

For sometime now, usury has been legally non-inexistent and that
interest can now be charged as lender and borrower may agree
upon.

In the absence of stipulation

Escalation clause; when allowable Art. 1308, Civil Code; Philippine

National Bank v. Court of Appeals, 196 SCRA 536 (1991)
1. There can be an increase in interest if increased by law or by the Monetary
Board; and
2. In order for such a stipulation to be valid, it must include a provision for
reduction of the stipulated interest in the event that the applicable
maximum rate of interest is reduced by law or by the Monetary Board.

Floating rates of interest Consolidated Bank and Trust Corporation

(Solid Bank) v. Court of Appeals, 356 SCRA 671 (2001)
A stipulation for a floating rate of interest in a letter of credit in which

there is no reference rate set either by it or by the central bank, leaving the
determination thereof to the sole will and control of the lender bank is
invalid.
Basic Function of Banks

DEPOSIT FUNCTION

entities that only extend loans but do not accept deposits from the
public is not considered performing banking business.
Nature of Deposit

Deposits as Simple Loans

A person who receives a loan of money or any other
fungible thing acquires the ownership thereof, and is
bound to pay to the creditor an equal amount of the same
kind and quality.

RELATIONSHIP OF BANK AND DEPOSITOR

Debtor and Creditor : Contract of Loan Art. 1980, NCC
fixed, savings and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple loans.
However, unlike ordinary contracts of simple loan, bank deposits are
subject to special rules provided for by special laws as well as BSP
regulations.
Serrano v. Central Bank
Bank deposits are in the nature of irregular deposits. They are really loans
because they earn interest
Failure of the respondent bank to honor the time deposit is failure to pay
its obligations as a debtor and not a breach of trust arising from a
depositarys failure to return the subject matter of the deposit.
Bank as Debtor

Deposit is voluntary agreement; Know Your Customer standards

Bank acquires ownership of money deposited; obligation to pay amount,
but no obligation to return the same money BPI Family Bank v. CA,
Franco, 538 SCRA 184 (2007)
Specific or determinate thing v. generic and fungible.
Obligation is to pay in equal amount upon demand, but not the exact same
thing deposited.

Bank as Debtor

Deposit is voluntary agreement; Know Your Customer standards

Circular No. 251 (07/07/00), as amended by Circular No, 333 (05/30/02)
Know your client policy
Report to AMLC any suspicious transactions, not to allow anonymous
accounts or accounts under fictitious names.

KYC Policy

Circular No. 258 (09/06/00)

Establish and record the true identity of clients under a numbered

account system as authorized under existing banking rules and
regulations.

Circular No. 279 (04/02/01)

Phase out within 1 year all anonymous or fictitious accounts

and
submit annually a certification that there is monitoring of

compliance with existing AMLA regulations.

Bank as Debtor

Payment to proper party-depositor Bank of the Philippine Islands v.

Court of Appeals, 232 SCRA 302 (1994)
Payment made by the debtor to the wrong party does not extinguish the
obligation as to the creditor who is without fault or negligence, even if the
debtor acted in utmost good faith and by mistake as to the person of the
creditor, or through error induced by fraud of a third person.
Bank as Debtor

Deposits are not preferred credits Central Bank v. Morfe, 63 SCRA 114
(1975)
A contrary rule or practice would be productive of injustice, mischief and
confusion. To recognize such judgments as entitled to priority would mean
that depositors in insolvent banks, after learning that the bank is insolvent
as shown by the fact that it can no longer pay withdrawals or that it has
closed its doors or has been enjoined by the Monetary Board from doing
business, would rush to the courts to secure judgments for the payment of
their deposits.

Bank as Debtor

Bank has right to compensation Bank of the Philippine Islands v. Court

of Appeals, 512 SCRA 620 (2007)
The relationship between banks and depositors has been held to be that of
creditor and debtor. Thus, legal compensation may take place.

Banks Duty of Utmost Care Sec. 2, GBL

Declaration Of Policy. - The State recognizes the vital role of banks

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.
Kinds of Deposit
Demand Deposits Secs. 58-60, NCBA
Savings Deposits
Negotiable Order of Withdrawal (NOW) Accounts
Time Deposits
Foreign Currency Deposits Secs. 2 and 3, Foreign Currency Denominated
Accounts

Capacity of Depositors

Minors Sec. 1, Presidential Decree No. 734; Sec. 22, Thrift Banks Act
Married Women Sec. 5, Republic Act No. 7192
Corporations: Through signatories designated by Board of Directors
Sec. 23, Corporation Code
Bank Officers and Employees: GR: Prohibited from maintaining demand
deposits or current accounts in banking office where they are assigned
Sec. X204, MRB

Opening of Deposit Accounts

Know Your Customer Standards: At least 3 specimen signatures updated

every 5 years, ID optional
Prohibitions:

Anonymous Accounts/Fictitious Names Sec. 9(a), AMLA

Pseudonyms Art. 178, Revised Penal Code
Exception: Numbered accounts Sec. 9(a), AMLA; Sec. 3(1), FCDA
Joint Accounts Arts. 485, 1207 and 1208, Civil Code
Other Services/Functions/Operations
Sec. 53, pars. 1-3, GBL

Custodian of Funds, Documents, Valuable Objects Sec. 53.1, GBL

Financial Agent Sec. 53.2, GBL
Collection/Payment Agent Sec. 53.3, GBL
Financial Adviser Sec. 53.4, GBL
Renting Out Safety Deposit Boxes Sec. 53.5, GBL; CA Agro-Industrial
Development Corporation v. Court of Appeals, 219 SCRA (1993)
Issue Guarantees See Sec. 74, General Banking Act
Credit Card Operations

Prohibited Acts
Insurance business Sec. 54, GBL; Sec. 2, Insurance Code

 Outsourcing of bank functions Sec. 55(1)(e), GBL

Penalty for Violations Sec. 66, GBL; Sec. 34-37, NCBA

Perez v. Monetary Board, 20 SCRA 592 (1967)
Fine, imprisonment
Suspension or removal of director or officer
Dissolution of bank