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General Banking Law

C. General Banking Act (R.A. 8791) Syllabus

I. DEFINATION AND CLASSIFICATION OF BANKS

Definition:

Banks are entities engaged in the lending of funds obtained in


the form of deposits.

Question:

SRKM Inc. is engaged in the purchase of accounts receivables or


installment papers of cars and trucks/chattels. As a source of its
funding it sells bonds from time to time to the public. The proceeds of
the sale of its bonds are utilized by SRKM in its financing operations.

1. Is SRKM a banking institution within the purview of the GBL?


2. What is the effect if a corporation engages in illegal banking?
3. What do mean by deposit?

Answers:

1. SRKM is not a banking institution. It is properly called an institution


dealing with quasi-banking functions- the purchase of deposit
substitutes like accounts receivables. It is not a bank because it
does not receive deposits from or lend its funds regularly, to the
general public.

2. It may be dissolved for performing functions, which is not


authorized to do. A petition for quo warranto under Rule 66 of the
Rules of Court to dissolve the corporation is proper. (Sec. 66, RA
8791)

 What is the meaning of term “deposit”?

Sec. 2 RA 9576, amending Section 4 (f) of Act No. 3591 (PDIC Law), as
amended

The term “deposit” means 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 commercial,
checking, savings, time or thrift account or which is evidenced by
passbook, check and/or certificate of deposit, printed or issued in
accordance with Bangko Sentral rules and regulations and other
applicable laws, together with such other obligations of a bank, which,
consistent with banking usage and practices, the Board of Directors
shall determine and prescribe by regulations to be deposit liabilities of
the Bank: Provided, That any obligation of a bank which is payable at
the office of the bank located outside of the Philippines shall not be a
deposit for any of the purposes of this Act or included as part of the
total deposits or of insured deposit: Provided, further, That, subject to
the approval of the Board of Directors, any insured bank which is
incorporated under the laws of the Philippines which maintains a
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branch outside the Philippines may elect to include for insurance 1 its
deposit obligations payable only at such branch. (As amended by P.D.
1940, 27 June 1984; R.A. 7400, 13 April 1992; R.A. 9302, 12 August
2004)

Deposit means; (1) Unpaid Balance of money, or its equivalent (2),


received by a bank in the usual course of business and for which it has
given or is obliged to give credit to a commercial checking, savings,
time or thrift account, (3) evidence by passbook , check and/or
certificate of deposit, printed or issued in accordance with BSP.

Sec. 4 PDIC Law, RA 3591, as amended

The amount of deposit insurance in banks has been effectively


increased to P 500,000 (RA 9579, April 29, 2009)

 Relationship Between Bank and Depositor.

The relationship between a bank and a client is one of debtor-creditor.


Under Article 1953 of the Civil Code a person who receives a loan or
money or any other fungible things acquires the ownership thereof,
and is bound to pay to the creditor and equal amount of the same kind
and quality. Art. 1980 provides that fixed, savings and current deposits
of money in banks and similar institutions shall be governed by the
provision concerning simple loan.

Alied Banking Corp. v. Lim Sio Wan 549 SCRA 504 (2007)

The relationship between a bank and its depositor is that of creditor


and debtor- a bank has the right to set-off the deposits in its hands for
the payment of depositor’s indebtedness. Equitable PCI Bank v. Ng
Sheung 541 SCRA 223 (2007)

 Classifications of Banks under RA 8791

Universal Bank – expanded commercial bank (commercial bank powers


plus power of an investment house and invest in non-allied enterprises.
They have the highest capitalization2 requirement.

Commercial Bank- Powers of ordinary or regular commercial banks,


(accepting drafts, issuing letters of credit; discounting and negotiating
PN, drafts, bills of exchange, and other evidence of debts, forex,
accepting and creating demand deposits etc.) lower capitalization 3
than Ubanks cannot exercise powers of an investment house and
invest in non-allied enterprises.

In addition to having the powers of a thrift bank, a commercial bank


has the power to accept drafts and issue letters of credit; discount and
negotiate promissory notes, drafts, bills of exchange, and other
evidences of debt; accept or create demand deposits; receive other
types of deposits and deposit substitutes; buy and sell foreign
1

2
P 4.95 B Minimum Capitalization
3
P2.4 B Minimum Capitalization
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exchange and gold or silver bullion; acquire marketable bonds and


other debt securities; and extend credit.

UniBanks and Comm’l. Banks can accept and create demand


deposits(liabilities of BSP & banks w/c are denominated in Phil.
Currency and are subject to payment in legal tender upon demand by
presentation of depositor’s check.

 RA 10641, An Act Allowing Full Entry of Foreign Banks in the


Philippines, Amending for the Purpose RA 77214 dated (July 21,
2014).

The new law, in its Section 6, now allows foreign banks to


bid and take part in the foreclosure of real estate that were
mortgaged to them. It provides that “foreign banks which are
authorized to do banking business in the Philippines through any
of the modes of entry under Section 2 hereof shall be allowed to
bid and take part in foreclosure sales of real property mortgaged
to them, as well as to avail of enforcement and other
proceedings, and accordingly take possession of the mortgaged
property, for a period not exceeding five (5) years from actual
possession.” The law further provides that in no event “shall title
to the property be transferred to such foreign bank. In case said
bank is the winning bidder, it shall, during the said five (5)-year
period, transfer its rights to a qualified Philippine national,
without prejudice to a borrower’s rights under applicable laws.
Should the bank fail to transfer such property within the five (5)-
year period, it shall be penalized one half (1/2) of one (1) percent
per annum of the price at which the property was foreclosed until
it is able to transfer the property to a qualified Philippine
national.”

Thus, the provision removes the prohibition against foreign


banks bidding or taking part in any sale of such real property in
case of foreclosure. To this extent, the new law amends Section 1
of Republic Act No. 1335, as amended by R.A. 4882 in 1967, which
provides as follows:

“Section 1. Any provision of law to the contrary


notwithstanding, private real property may be mortgaged in favor
of any individual, corporation or association, but the mortgage or
4
An Act Liberalizing Foreign Entry and Scope of Operations of Foreign Banks in the Philippines and for
other Purposes
5
RA 133 June 14, 1947 AN ACT TO AUTHORIZE THE MORTGAGE OF PRIVATE REAL PROPERTY IN
FAVOR OF ANY INDIVIDUAL, CORPORATION, OR ASSOCIATION SUBJECT TO CERTAIN CONDITIONS
Section 1. Any provision of law to the contrary notwithstanding, private real property may be mortgaged for
a period not exceeding five years, renewable for another five, in favor of any individual, corporation, or
association, but the mortgagee or his successor in interest, if disqualified to acquire or hold lands of the
public domain in the Philippines, shall not bid or take part in any sale of such real property as a
consequence of such mortgage.
Section 2. All laws, orders, or regulations, or parts thereof inconsistent with the provisions of this Act, are
repealed or modified accordingly.
Section 3. This Act shall take effect upon its approval.
Approved: June 14, 1947
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his successor in interest, if disqualified to acquire or hold lands of


the public domain in the Philippines, shall not take possession of
the mortgaged property during the existence of the mortgage
and shall not take possession of mortgaged property except after
default and for the sole purpose of foreclosure, receivership,
enforcement or other proceedings and in no case for a period of
more than five years from actual possession and shall not bid or
take part in any sale of such real property in case of foreclosure:
provided, that said mortgagee or successor in interest may take
possession of said property after default in accordance with the
prescribed judicial procedures for foreclosure and receivership
and in no case exceeding five years from actual possession.”

Observations

The lifting of the prohibition applies only to foreign banks allowed


to operate in the Philippines under R.A. 7721, as amended. It
does not affect non-bank creditors taking mortgages of real
estate. Other foreign creditors may not still bid or participate in
the foreclosure of real estate. The prohibition contained in section
1 of R.A. 133, as amended, stays with respect to them.

Secondly, foreign banks can only bid and take part in the
foreclosure of real estate mortgaged to them. It does not
authorize them to participate in the foreclosure of assets
mortgaged to other banks.
Indeed, R.A. 10641 does not expressly repeal Section 1 of R.A.
133, as amended.

Most importantly, note the phrase “foreign banks which are


authorized to do banking business in the Philippines through any
of the modes of entry under Section 2 hereof” in the new
law. Take particular note of the sub-phrase: “through any of the
modes of entry under Section 2”.

Section 2 of R.A. 7721, as amended by R.A. 10641, in turn,


provides:

SEC. 2. Modes of Entry. – The Monetary Board may authorize


foreign banks to operate in the Philippine banking system through
any one of the following modes of entry: (i) by acquiring,
purchasing or owning up to one hundred (100) percent of the
voting stock of an existing bank; (ii) by investing in up to one
hundred (100) percent of the voting stock of a new banking
subsidiary incorporated under the laws of the Philippines; or (iii)
by establishing branches with full banking.

The question then is asked: Is the prohibition under Section 1 of


R.A. 133, as amended, still applicable to foreign banks that have
already gained entry in the Philippine banking system prior to
R.A. 7221?
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Well, the question may be more academic than real, but it may
be worth clarifying the issue soonest to prevent legal
complications in the future. After all, there are strong legal
arguments supporting the view that these foreign banks should
be allowed to bid and participate in the foreclosure of real estate.

Thrift Banks6- these are savings and mortgage banks, stock savings
and loan associations, and private development bank, which are
governed by Thrift Bank Act RA 7906

A thrift bank has the power to accept savings and time deposits, act as
a correspondent with other financial institutions and as a collection
agent for government entities, issue mortgages, engage in real estate
transactions and extend credit. In addition, thrift banks may also
maintain checking accounts, act as a depository for government
entities and local government units and engage in quasi-banking and
money market operations subject to the approval of the Bangko
Sentral.

 Rural Banks7 – Banks mandated to make needed credit available


and readily accessible in the rural areas on reasonable terms,
govern by RA 7353

Note: Under RA 10574 (23 July 2012) IRR is outlined in BSP Circular 809

 Allowing the infusion of Foreign Equity in the Capital of Rural


Banks
 Non-Filipino citizens may own, acquire or purchase up to 60% of
the Voting Stocks in a Rural Bank
 The percentage of foreign-owned voting stocks shall be
determined by the citizenship of the individual or corporate
stockholders of the rural bank. Under Sec. 5 of the said law it
provides in part:

“ Non-Filipino citizens may become members of the Board


of Directors of a rural bank but their participation in the Board
shall be limited to their proportionate share in the equity of the
rural bank: Provided, however, That at least one (1) independent
director shall be elected to the Board of Directors.”

 "No director or officer of any rural bank shall, either directly or


indirectly, for himself or as the representative or agent of
another, borrow any of the deposits or funds of such banks, nor
shall he become a guarantor, indorser, or surety for loans from
such bank to others, or in any manner be an obligor for money
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
6
P325m Minimum Capitalization with Head Office in Metro Manila; P52 m without Head Office in Metro Manila
7
P26 m within Metro Manila; Cities of Cebu and Davao P13m, 1 st, 2nd, & 3rd Class Cities and 1st class Municipalities
P6.5m; 4th, 5th, 6th class Cities and 2nd, 3rd, and 4th class Municipalities P3.9m; 5th and 6th class municipalities P2.6m
Page 6 of 23 6

transmitted forthwith to the appropriate supervising department.


The director/officer of the bank who violates the provisions of this
section shall be immediately dismissed from his office and shall
be penalized in accordance with Section 26 of this Act.
 "The Monetary Board may regulate the amount of credit
accommodations that may be extended directly to the directors,
officers or stockholders of rural banks of banking institutions.
However, the outstanding credit accommodations which a rural
bank may extend to each of its stockholders owning two percent
(2%) or more of the subscribed capital stock, its directors, or
officers shall be limited to an amount equivalent to the
respective outstanding deposits and book value of the paid-in
capital contributions in the bank."

Cooperative banks- These are banks organized primarily to make


financial and credit services available to cooperative. RA 6938

Islamic bank – Banks whose business dealings and activities are


subject the basic principles and ruling of Islamic Shari’a . RA 6848

Other banks as determined by MB

Private and Government –owned banks

2.DISTINCTION OF BANKS FROM QUASI-BANKS AND TRUST


ENTITIES

Banks are entities engaged in the lending of funds obtained in the


form of deposits. A Quasi-Bank shall refer to a nonbank financial
institution authorized by BSP to engage in quasi-banking functions
and to borrow funds from more than nineteen (19) lenders through the
issuance, endorsement or assignment with recourse or acceptance of
deposit substitutes8 as defined in Section 95 of RA 7653 (New
Central Bank Act) for the purpose of relending or purchasing of
receivables and other obligations.( Sec. 3 (c) RA 9474 Lending
Company Regulation Act of 2007). Trust Entities are corporation or
a person duly authorized by the MB to engaged in trust business to act
as trustee or administer any trust or hold property in trust or on
deposit for the use, benefit or behalf of others.

Q. Who can cause the prosecution of violations of banking laws?

A. BSP under RA 7653

Section 3. Responsibility and Primary Objective. — The Bangko


Sentral shall provide policy directions in the areas of money,
banking, and credit. It shall have supervision over the
operations of banks and exercise such regulatory powers
as provided in this Act and other pertinent laws over the

8
Sec. 95 Definition of Deposit Substitutes. The term is defined as an alternative form of obtaining funds from the
public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for borrower’s own
account, for the purpose of relending or purchasing of receivables and other obligations. These instruments may
include, but need not be limited to, bankers acceptances, promissory notes, participations, certificates of assignment
and similar instruments with recourse and purchase agreements.
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operations of finance companies and non-bank financial


institutions performing quasi-banking functions, hereafter
referred to as quasi-banks, and institutions performing similar
functions.

The primary objective of the Bangko Sentral is to maintain price


stability conducive to a balanced and sustainable growth of the
economy. It shall also promote and maintain monetary stability
and the convertibility of the peso.

Can private individual file a case for violations of banking laws?

Yes. Since Banking laws violations constitute a public offense, the


prosecution of which is a matter of public interest, anyone even
private individuals can denounce such violations before the
prosecuting officers.
Perez v. MB 20 SCRA 592

 RA 7653 (New Central Bank Act)

Section 25. Supervision and Examination. — The Bangko Sentral shall


have supervision over, and conduct periodic or special examinations
of, banking institutions and quasi-banks, including their subsidiaries
and affiliates engaged in allied activities.

What is the meaning of Subsidiary and Affiliate in Banking?

For purposes of this section, a subsidiary means a corporation more


than fifty percent (50%) of the voting stock of which is owned by a
bank or quasi-bank and an affiliate means a corporation the voting
stock of which, to the extent of fifty percent (50%) or less, is owned by
a bank or quasi-bank or which is related or linked to such institution or
intermediary through common stockholders or such other factors as
may be determined by the Monetary Board.

The department heads and the examiners of the supervising and/or


examining departments are hereby authorized to administer oaths to
any director, officer, or employee of any institution under their
respective supervision or subject to their examination and to compel
the presentation of all books, documents, papers or records necessary
in their judgment to ascertain the facts relative to the true condition of
any institution as well as the books and records of persons and entities
relative to or in connection with the operations, activities or
transactions of the institution under examination, subject to the
provision of existing laws protecting or safeguarding the secrecy or
confidentiality of bank deposits as well as investments of private
persons, natural or juridical, in debt instruments issued by the
Government.

No restraining order or injunction shall be issued by the court enjoining


the Bangko Sentral from examining any institution subject to
supervision or examination by the Bangko Sentral, unless there is
convincing proof that the action of the Bangko Sentral is plainly
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arbitrary and made in bad faith and the petitioner or plaintiff files with
the clerk or judge of the court in which the action is pending a bond
executed in favor of the Bangko Sentral, in an amount to be fixed by
the court. The provisions of Rule 589 of the New Rules of Court insofar
as they are applicable and not inconsistent with the provisions of this
section shall govern the issuance and dissolution of the restraining
order or injunction contemplated in this section.

3. BANK POWERS AND LIABILITIES

a) Corporate powers

Sec. 23 of the Corp. Code – corporate powers shall be exercised, and


all business conducted and all property controlled and held by the
BOD.

Every director must own at least one (1) share of the capital stock of
the corporation, which share shall stand in his name on the STB.

Sec.15. of RA 8791 GBL

Independent director- is a person other than an officer or employee of


the bank, its subsidiaries or affiliates or related interest.

Independent director as defined under SRC RA 8799 (Sec.38)- person


other than officer or employee of the corporation, its parent or
subsidiaries, or any individual having a relationship with the
corporation, which would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director.

 What is fit and proper rule?

In order to maintain the quality of bank management and afford better


protection to depositors and the public in general , the MB shall:

- prescribe, pass upon and review the qualifications and


disqualifications of individuals elected / appointed bank directors/
officers; ( In determining whether an individual is fit and proper
to hold position of a director/officer, due regard shall be given to
his integrity, experience, education, training, and competence)

- after due notice to the BOD of the bank, the MB may disqualify ,
suspend, remove any bank director/officer who commits or omits
an act w/c render him unfit for the position.

b) Banking and incidental powers

4. DILIGENCE REQUIRED OF BANKS - relevant jurisprudence

9
Rule 58 Preliminary Injunction
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UNITED COCONUT PLANTERS BANK, petitioner, vs. TEOFILO C. RAMOS,


respondent. 415 SCRA 596 G.R. No. 147800 Nov. 11, 2003

Banks and Banking: Loans; The business of a bank is one affected with
public interest, for which reason the banks should guard against loss
due to negligence or bad faith; In approving the loan of an applicant,
the bank concerns itself with proper information regarding its debtors.-
It bears stressing that the petitioner is a banking corporation, a
financial institution

RURAL BANK OF STA. IGNACIA, INC. vs. DIMATULAC 401 SCRA G.R. No.
142015 April 29,2003

Sales: Land Titles; Banks and Banking; Judicial Notice; The rule that
persons dealing with registered lands can rely solely on the certificate
of title does not apply to banks; Judicial notice may be taken of the
common practice of banks, before approving a loan, to send a
representative to the premises of the land offered as collateral and
duly investigate who are the true owners thereof,- The rule that person
dealing with registered lands can rely solely on the certificate of title
does not apply to banks. The degree of diligence required of banks is
more than that of a good father of a family; in keeping with their
responsibility to exercise the necessary care and prudence in dealing
even with a registered or titled property. The business of a bank is
affected with public interest, holding in trust the money of the
depositors, which the bank should guard against loss to rely merely on
the protective mantle of the land registration law, which is normally
accorded only to purchasers or mortgagees for value and in good faith.
In the present case, while petitioner sent a representative to verify the
original TCT on file with the Register of Deeds, no ocular inspection of
the premise took place. Judicial notice may be taken of the common
practice of banks, before approving a loan, to send a representative to
the premises of the land offered as collateral and duly investigate who
are the true owners thereof. Failure to do so is negligence on the part
of a bank. Had petitioner taken extra steps, time and effort in dealing
with the property it purchased by conducting proper ocular inspection
of the premises, it could have discovered early the presence of settlers
therein who are land reform beneficiaries.

HEIRS OF EDUARDO MANLAPAT vs. COURT OF APPEALS 459 SCRA 412


G.R. No. 125585

Same; same; Banks and Banking; Banks their business being


impressed with public interest, are expected to exercise more care and
prudence than private individuals in their dealings, even those
involving registered lands- the highest degree of diligence is expected,
and high standards of integrity and performance are even required of
them.- The Cruzes resorted to such means to protect their interest in
the property that right fully belongs to them only because of the bank
officers’ acquiescence thereto. The Cruzes could not have secured a
separate TCT in the name of Ricardo without the bank’s approval.
Banks, their business being impressed with public interest, are
expected to exercise more care and prudence than private individuals
in their dealings, even those involving registered lands. The highest
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degree is expected, and high standards of integrity and performance


are even required of it.

In Rural Bank of Compostela v. CA 271 SCRA 76, 88, April 8, 1997, we


held that a bank failed to observe due diligence was not mortgagee in
good faith. In the words of the ponencia:

“ xxxx [T]the rule that persons dealing with registered lands can
rely solely on the on the certificate of title does not apply to banks.

“Banks indeed, should exercise more care and prudence in


dealing even with registered lands, that private individuals, for their
business in one affected with public interest, keeping in trust money
belonging to their depositors, which they should guard against loss by
not committing any act of negligence which amounts to lack of good
faith by which they would be denied the protective mantle of the land
registration statute, Act [No] 496, extended only to purchasers for
value and in good faith, as well as mortgagees of the same character
and descriptions.”

The banking system has become an indispensable institution in the


modern world and plays a vital role in the economic life of every
civilized society. Whether as mere passive entities for the safe-keeping
and saving of money or as active instruments of business and
commerce, banks have attained a ubiquitous presence among the
people, who have come to regard them with respect and even
gratitude and most of all, confidence. (Simex International [Manila],
Inc. vs. Court of Appeals, G.R. No. 88013, March 19, 1990, 183 SCRA
360).

BANKS FIDUCIARY DUTY TO DEPOSITORS

A banking corporation is liable to innocent third persons where


the representation is made in the course of its business by an agent
acting within the general scope of his authority even though, in the
particular case, the agent is secretly abusing his authority and
attempting to perpetrate a fraud upon his principal or some other
person, for his own ultimate benefit. ( PHILIPPINE BANKING
CORPORATION vs. COURT OF APPEALS and MARCOS GR No. 127469.
January 15, 2004.)

DOCTRINE OF APPARENT AUTHORITY

Advance Paper Corporation and George Haw v. Arma Traders


Corp., Manuel Ting et al., G.R. 176897 Dec. 11, 2013

The doctrine of apparent authority provides that a


corporation will be estopped from denying the agent’s
authority if it knowingly permits one of its officers or any
other agent to act within the scope of an apparent authority,
and it holds him out to the public as possessing the power to
do those acts.76 The doctrine of apparent authority does not
Page 11 of 23 11

apply if the principal did not commit any acts or conduct


which a third party knew and relied upon in good faith as a
result of the exercise of reasonable prudence. Moreover, the
agent’s acts or conduct must have produced a change of
position to the third party’s detriment. 77

76
People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals, G.R. No. 117847,
October 7, 1998, 297 SCRA 170, 184-185, citing Francisco v. Government Service
Insurance System, Nos. L-18287 and L-18155, March 30, 1963, 7 SCRA 577, 583;
and Maharlika Publishing Corporation v. Tagle, No. L-65594, July 9, 1986, 142 SCRA 553,
566.

Banate v. Philippine Countryside Rural Bank (Liloan, Cebu), Inc., G.R. No. 163825, July 13,
77

2010, 625 SCRA 21, 34, citing Yun Kwan Byung v. Philippine Amusement and Gaming
Corporation, G.R. No. 163553, December 11, 2009, 608 SCRA 107, 132.

High degree of Diligence Does Not Cover Transactions


Outside of Bank Deposits

Reyes v. CA 363 SCRA 51 (2001)

Held. No., when the circumstances show that all efforts were
made by Respondent Bank to avoid such mistake. In
Philippine Bank of Commerce v. CA., upholding a long
standing doctrine, it was ruled that the degree of diligence
required of banks, is more than that of a good father of a
family where the fiduciary nature of their relationship with
their depositors is concerned. In other words banks are duty
bound to treat the deposit accounts of their depositors with
the highest degree of care. But said ruling applies only to the
cases where banks are under their fiduciary capacity, that is,
as depository of the deposits of their depositors. But the
same higher degree of diligence is not expected to be
exerted by banks in commercial transactions that do not
involve their fiduciary relationship with their depositors.

In GSIS v. Santiago 414 SCRA 563 (2003)

The due diligence required of banks extend even to persons,


or institutions regularly engaged in the business of lending
money secured by real estate mortgage, such as GSIS.

5. NATURE OF BANK FUNDS AND BANK DEPOSITS

In People v. Ong 204 SCRA 942 (1991)

All kinds of bank deposits, whether fixed, savings, or current are to be


treated as loans and are to be covered by the law on loans.
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Refer also to Article 1980 in relation to Article 1953 Civil Code.

6. STIPULATION ON INTERESTS

What is the requisite for the stipulation on escalation clause of interest


in the PN to be valid?

1. That there can be an increase in interest if increased by law or by


the MB, and
2. 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 the MB.
 Interest rate of 5.5% or 66% pa. is contrary to morals hence void.
Medel et al v. CA, Nov. 27, 1998 (299 SCRA 481)
 In the case of Toledo v. Hyden G.R. No. 172139 Dec. 8, 2010 interest
rate of 6% to 7% per month has been held valid because the
borrower was fully aware and even took advantage of the said
transaction and is guilty of estoppel.
 In Sps. Rodolfo and Guevarra v. Commoner Lending Corporation
Inc., G.R. No. 204672 Feb. 18, 2015, interest rate of three percent
(3%) per month and higher are excessive, iniquitous,
unconscionable, and exorbitant, hence illegal and void for being
contrary to morals citing Agner v. BPI Family Savings Bank, Inc. G.R.
No. 182963, June 3, 2013, 697 SCRA 89, 102.
 Where the disclosure statements, as well as the credit agreements,
do not provide for any increase in the specified interest rates, none
would be permitted. New Sampaguita Builders Construction, Inc. v.
PNB 435 SCRA 565
 Non-allowance of Unstipulated Penalty Charges of Bank could not be
accepted since no proof was adduced thereof read State Investment
House v. CA 361 SCRA 201 (2001)
 Floating Interests Rates and Escalation Clauses: Stipulation for a
floating rate of interest in a LC in which there is no reference 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.
Consolidated Bank v. CA 356 SCRA 671
 Courts without authority to Not Apply stipulated Interests. The
limitation is applicable only when no rate is fixed by the parties.

7. GRANT OF LOANS AND SECUIRTY REQUIREMENTS

a) Ratio of net worth to total risk assets

b) Single borrower’s limit

What are SBL rules?


Page 13 of 23 13

Single Borrowers’ Limit Rules – Rules promulgated by BSP w/c regulate


the total amount of loans, credit accommodations and guarantees that
may be extended by a bank to any person, partnership, corporation or
other entity. The rules seek to protect the bank from making excessive
loans to a single borrower by providing a ceiling of 20% of the net
worth of the bank concerned, subject to possible increase by an
additional 10% under certain conditions. The basis for determining
compliance with the SBL is the total credit commitment of the bank to
the borrower. (Sec. 25 RA 8791)

DOSRI (Directors, Officers, Stockholders and their Related Interest)


rules which regulate the amount of credit accommodations that a bank
may extend to its DOSRI. The bank’s credit accommodation must be
regular course of business and on terms not less favorable to the bank
than those offered to non-DOSRI.

c) Restrictions on bank exposure to DOSRI (directors, officers,


stockholders and their related interests)

DOSRI Rules (Sec. 36) Directors Officers, Stockholders and Related


Interest
Regulate the amount of credit accommodations to DOSRI. Prohibitions
to Directors of Officers to directly or indirectly , for himself or as the
representative or agent of others to borrow from such bank or act as
guarantor, endorser or surety, obligor or incur any contractual liability ,
except the transactions is in pare passu10.

DOSRI- Directors Officers, Stockholders and their related interests.


Rules regulating the grant of credit accommodations that bank may
extend to its DOSRI. Credit accommodation should be pare pasu
(regular course of business and on terms not less favorable to the bank
than those offered to non-DOSRI).

RA 7653 BSP ACT

Section 26. Bank Deposits and Investments. — Any director, officer or


stockholder who, together with his related interest, contracts a loan or
any form of financial accommodation from: (1) his bank; or (2) from a
bank (a) which is a subsidiary of a bank holding company of which both
his bank and the lending bank are subsidiaries or (b) in which a
controlling proportion of the shares is owned by the same interest that
owns a controlling proportion of the shares of his bank, 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, shall be required by the
lending bank to waive the secrecy of his deposits of whatever nature in
all banks in the Philippines. Any information obtained from an
examination of his deposits shall be held strictly confidential and may
be used by the examiners only in connection with their supervisory and
examination responsibility or by the Bangko Sentral in an appropriate
legal action it has initiated involving the deposit account.

8. PENALTIES FOR VIOLATIONS


10
Equally, without preference
Page 14 of 23 14

a) Fine, imprisonment
b) Suspension or removal of director or officer

(Sections 36 and 37 RA 7653)

Section 36. Proceedings Upon Violation of This Act and Other Banking
Laws, Rules, Regulations, Orders or Instructions. — Whenever a bank or
quasi-bank, or whenever any person or entity willfully violates this Act
or other pertinent banking laws being enforced or implemented by the
Bangko Sentral or any order, instruction, rule or regulation issued by
the Monetary Board, the person or persons responsible for such
violation shall unless otherwise provided in this Act be punished by a
fine of not less than Fifty thousand pesos (P50,000) nor more than Two
hundred thousand pesos (P200,000) or by imprisonment of not less
than two (2) years nor more than ten (10) years, or both, at the
discretion of the court.

Whenever a bank or quasi-bank persists in carrying on its business in


an unlawful or unsafe manner, the Board may, without prejudice to the
penalties provided in the preceding paragraph of this section and the
administrative sanctions provided in Section 37 of this Act, take action
under Section 30 of this Act.

Section 37. Administrative Sanctions on Banks and Quasi-banks. —


Without prejudice to the criminal sanctions against the culpable
persons provided in Sections 34, 35, and 36 of this Act, the Monetary
Board may, at its discretion, impose upon any bank or quasi-bank, their
directors and/or officers, for any willful violation of its charter or by-
laws, willful delay in the submission of reports or publications thereof
as required by law, rules and regulations; any refusal to permit
examination into the affairs of the institution; any willful making of a
false or misleading statement to the Board or the appropriate
supervising and examining department or its examiners; any willful
failure or refusal to comply with, or violation of, any banking law or any
order, instruction or regulation issued by the Monetary Board, or any
order, instruction or ruling by the Governor; or any commission of
irregularities, and/or conducting business in an unsafe or unsound
manner as may be determined by the Monetary Board, the following
administrative sanctions, whenever applicable:
(a) fines in amounts as may be determined by the Monetary Board to
be appropriate, but in no case to exceed Thirty thousand pesos
(P30,000) a day for each violation, taking into consideration the
attendant circumstances, such as the nature and gravity of the
violation or irregularity and the size of the bank or quasi-bank;

(b) suspension of rediscounting privileges or access to Bangko Sentral


credit facilities;

(c) suspension of lending or foreign exchange operations or authority


to accept new deposits or make new investments;

(d) suspension of interbank clearing privileges; and/or

(e) revocation of quasi-banking license.


Page 15 of 23 15

Resignation or termination from office shall not exempt such director or


officer from administrative or criminal sanctions.

The Monetary Board may, whenever warranted by circumstances,


preventively suspend any director or officer of a bank or quasi-bank
pending an investigation: Provided, That should the case be not finally
decided by the Bangko Sentral within a period of one hundred twenty
(120) days after the date of suspension, said director or officer shall be
reinstated in his position: Provided, further, That when the delay in the
disposition of the case is due to the fault, negligence or petition of the
director or officer, the period of delay shall not be counted in
computing the period of suspension herein provided.

The above administrative sanctions need not be applied in the order of


their severity.

Whether or not there is an administrative proceeding, if the institution


and/or the directors and/or officers concerned continue with or
otherwise persist in the commission of the indicated practice or
violation, the Monetary Board may issue an order requiring the
institution and/or the directors and/or officers concerned to cease and
desist from the indicated practice or violation, and may further order
that immediate action be taken to correct the conditions resulting from
such practice or violation. The cease and desist order shall be
immediately effective upon service on the respondents.

The respondents shall be afforded an opportunity to defend their action


in a hearing before the Monetary Board or any committee chaired by
any Monetary Board member created for the purpose, upon request
made by the respondents within five (5) days from their receipt of the
order. If no such hearing is requested within said period, the order shall
be final. If a hearing is conducted, all issues shall be determined on the
basis of records, after which the Monetary Board may either reconsider
or make final its order.

The Governor is hereby authorized, at his discretion, to impose upon


banking institutions, for any failure to comply with the requirements of
law, Monetary Board regulations and policies, and/or instructions
issued by the Monetary Board or by the Governor, fines not in excess
of Ten thousand pesos (P10,000) a day for each violation, the
imposition of which shall be final and executory until reversed,
modified or lifted by the Monetary Board on appeal.
---

RA 7653

Section 30. Proceedings in Receivership and Liquidation. — Whenever,


upon report of the head of the supervising or examining department,
the Monetary Board finds that a bank or quasi-bank:

(a) is unable to pay its liabilities as they become due in the ordinary
course of business: Provided, That this shall not include inability to pay
caused by extraordinary demands induced by financial panic in the
banking community;
Page 16 of 23 16

(b) has insufficient realizable assets, as determined by the Bangko


Sentral, to meet its liabilities; or

(c) cannot continue in business without involving probable losses to its


depositors or creditors; or

(d) has willfully violated a cease and desist order under Section 37
that has become final, involving acts or transactions which amount to
fraud or a dissipation of the assets of the institution; in which cases,
the Monetary Board may summarily and without need for prior hearing
forbid the institution from doing business in the Philippines and
designate the Philippine Deposit Insurance Corporation as receiver of
the banking institution.

For a quasi-bank, any person of recognized competence in banking or


finance may be designed as receiver.

The receiver shall immediately gather and take charge of all the assets
and liabilities of the institution, administer the same for the benefit of
its creditors, and exercise the general powers of a receiver under the
Revised Rules of Court 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. The receiver shall determine as soon as
possible, but not later than ninety (90) days from take over, whether
the institution may be rehabilitated or otherwise placed in such a
condition so that it may be permitted to resume business with safety to
its depositors and creditors and the general public: Provided, That any
determination for the resumption of business of the institution shall be
subject to prior approval of the Monetary Board.

If the receiver determines that the institution cannot be rehabilitated or


permitted to resume business in accordance with the next preceding
paragraph, the Monetary Board shall notify in writing the board of
directors of its findings and direct the receiver to proceed with the
liquidation of the institution. The receiver shall:
(1) file ex parte with the proper regional trial court, and without
requirement of prior notice or any other action, a petition for
assistance in the liquidation of the institution pursuant to a liquidation
plan adopted by the Philippine Deposit Insurance Corporation for
general application to all closed banks. In case of quasi-banks, the
liquidation plan shall be adopted by the Monetary Board. Upon
acquiring jurisdiction, the court shall, upon motion by the receiver after
due notice, adjudicate disputed claims against the institution, assist
the enforcement of individual liabilities of the stockholders, directors
and officers, and decide on other issues as may be material to
implement the liquidation plan adopted. The receiver shall pay the cost
of the proceedings from the assets of the institution.

(2) 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 of the Philippines and he may,
Page 17 of 23 17

in the name of the institution, and with the assistance of counsel as he


may retain, institute such actions as may be necessary to collect and
recover accounts and assets of, or defend any action against, the
institution. The assets of an institution under receivership or liquidation
shall be deemed in custodia legis in the hands of the receiver and
shall, from the moment the institution was placed under such
receivership or liquidation, be exempt from any order of garnishment,
levy, attachment, or execution.
The actions of the Monetary Board taken under this section or under
Section 29 of this Act shall be final and executory, and may not be
restrained or set aside by the court except on petition for certiorari on
the ground that the action taken was in excess of jurisdiction or with
such grave abuse of discretion as to amount to lack or excess of
jurisdiction. The petition for certiorari may only be filed by the
stockholders of record representing the majority of the capital stock
within ten (10) days from receipt by the board of directors of the
institution of the order directing receivership, liquidation or
conservatorship.

The designation of a conservator under Section 29 of this Act or the


appointment of a receiver under this section shall be vested
exclusively with the Monetary Board. Furthermore, the designation of a
conservator is not a precondition to the designation of a receiver.

c) Dissolution of bank

D. Philippine Deposit Insurance Corporation Act

1. Basic policy
2. Concept of insured deposits
3. Liability to depositors
a) Deposit liabilities required to be insured with PDIC
b) Commencement of liability
c) Deposit accounts not entitled to payment
d) Extent of liability
e) Determination of insured deposits
f) Calculation of liability
(i) Per depositor, per capacity rule
(ii) Joint accounts
(iii) Mode of payment
(iv) Effect of payment of insured deposit
(v) Payments of insured deposits as preferred credit under Art. 2244,
Civil
Code
(vi) Failure to settle claim of insured depositor
(vii) Failure of depositor to claim insured deposits
(a) Examination of banks and deposit accounts
(b) Prohibition against splitting of deposits
(c) Prohibition against issuances of TROs, etc.

What is the Bank of International Settlements?


Page 18 of 23 18

- It is an international organization based on Basle Switzerland


which was established by the Hague Agreement of Jan. 20, 1930.
Its stockholders are central banks and not government. It is
called the bank for central banks.

- BIS assists central banks in managing and investing their forex


reserves.

- It is also a service organization providing professional,


organizational and material logistics for central bank
cooperation in all areas of common interest.
- Basle Accord- is aimed at raising the standards of safety and
soundness of in the world’s banking business in a manner
consistent with fair competition

Could bank issue no par value stocks? (Sec.9; See also Sec. 6, Corp.
Code) NO11

Could bank acquire its own shares (Sec.10) (Sec. 9, 37 and 81 of Corp.
Code)

No Bank shall purchase or acquire shares of its own capital stock or


accept its own shares as security for a loan, except when authorized by
the MB; provided in every case the stock so purchased or acquired
shall, within 6 months from the time of its purchase or acquisition, be
sold or disposed of at a public auction or private sale.

What is the total number of voting stocks of a domestic bank that


could be owned?

Filipino individual and Domestic Non-Bank Corp-40% of the outstanding


voting stock of a domestic bank

Foreign Individual and Foreign Non-Bank Corp. – 40 % ibid

RA 7721 An Act Liberalizing the Entry of Foreign Banks) Phil. Corp.


listed in the PSE or long
standing for at least 10 years shall have the right to acquire or
purchase at least 60% of voting
stock of domestic bank.

Under Sec. 73 RA 8791 foreign bank may own up to 100% of the


voting stock of only 1 existing domestic bank w/n 7 years from the
effectivity of RA 8791 ( June 13, 2000)

Modes of Entry of Foreign Banks (Sec. 2, RA 7721, May 18, 1994)

Subject to the authority of the MB

(1)Acquiring/purchasing 60% voting stock of an existing bank

11
Sec. 9, Treasury Shares, Sec. 6., Classification of shares. Banks, trust companies, insurance
companies, public utilities , and building and loan associations shall not be permitted to issue no-
par value shares of stock.
Page 19 of 23 19

(2)Investing in up to 60% of the voting stock of a new banking


subsidiary incorporated under

the laws of PH

(3)Establishing branches with full banking authority

Provided that Foreign Bank may avail itself of only one (1) mode of
entry.

Stockholdings in a bank deemed owned by family group/related


interest

Stockholdings of individuals related to each other within the 4 th degree


of consanguinity or affinity,
legitimate or common –law shall be considered family groups or related
interests. Such
relationships must be fully disclosed in all transactions by such
individuals with the bank. Section 12, GBL RA 8791

Two or more corporations owned or controlled by the same family


group or same group of persons shall be considered related interests
and must be fully disclosed in all transactions by such
corporations or related groups of persons with the bank. Section 13,
GBL RA 8791

Could an elective and appointive public official serve as an officer of a


private bank?

No, whether part-time or full-time, except under Rural Bank Act 7353
(director/officer/consultant) save in cases where service is incident to
financial assistance provided by the government or gocc.

Microfinancing

The grant of small loans (microfinance loan) to the basic sectors, as


described int eh Social Reform and Poverty Alleviation Act o f1997 ( RA
8425), and other loans to the poor and low-income households for their
microenterpises and small businesses so as to enable them to raise
their income levels and improve their living standards. These loans are
granted on the basis of the borrower’s cash flow and are typically
unsecured.

Could bank acquire real estate? (Sec.51)

Yes, if it is necessary for its own use in the conduct of its business.
Provided, however, that the total investment in such real estate and
improvements thereof including bank equipment, shall not exceed 50%
of combined capital accounts. Provided further that the equity
investment if a bank in another corporation engaged primarily in real
Page 20 of 23 20

estate shall be considered as part of the bank’s total investment in real


estate, unless otherwise provided by the MB.

Notwithstanding the limitations thereof under Section 52, banks may


acquire, hold or convey real property under the ff. circumstances:

1. Such as shall be mortgaged to it in good faith by way of


security for debts
2. conveyed in satisfaction of debts previously contracted
in the course of its dealings; or
3. Such as it shall purchase at sales under judgments,
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 above circumstances shall
be disposed of w/n 5 years or as may be prescribed by the MB.

Can a bank acquire real property by virtue of deed of transfer from its
former employee in satisfaction of a civil liability arising from the
criminal offense of qualified theft?

No, since the debts referred to are those resulting from previously
contracted in the course of its dealings. Reg. of Deeds of Manila v.
Chinabank 4 SCRA 1145

What are SBL rules?

Single Borrower’s Limit. These are rules promulgated by the BSP to


regulate loans, credit accommodations and guarantees that banks may
extend to any person. The current limit is 20% of the net worth of the
bank, subject to possible increase of 10% under certain conditions.

Purpose: to protect banks from over exposure or making excessive


loans to a single borrower.

Degree of diligence required in banking.

-more than that of a good father of a family; highest degree of


diligence

-bank’s liability as an obligor is not merely vicarious, but primary

- State recognizes the “fiduciary nature of banking that requires high


standards of integrity and performance” Sec. 2 RA 8791.
Read PNB v. Pike 470 SCRA328

“It bears emphasizing that negligence of banking institutions should


never be countenanced- though its employees may be the ones
negligent, a bank’s liability as an obligor is not merely vicarious but
primary, as banks are expected to exercise the highest degree of
diligence in the selection and supervision of their employees.”

RA 7653 BSP
Page 21 of 23 21

Section 58. Definition. — For purposes of this Act, the term "demand
deposits" means all those liabilities of the Bangko Sentral and of other
banks which are denominated in Philippine currency and are subject to
payment in legal tender upon demand by the presentation of checks.

Section 59. Issue of Demand Deposits. — Only banks duly authorized


to do so may accept funds or create liabilities payable in pesos upon
demand by the presentation of checks, and such operations shall be
subject to the control of the Monetary Board in accordance with the
powers granted it with respect thereto under this Act.

Section 60. 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:
Provided, however, That 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.

RA 7653 BSP Act

Section 95. Definition of Deposit Substitutes. — The term "deposit


substitutes" is defined as an alternative form of obtaining funds from
the public, other than deposits, through the issuance, endorsement, or
acceptance of debt instruments for the borrower's own account, for the
purpose of relending or purchasing of receivables and other
obligations. These instruments may include, but need not be limited to,
bankers acceptances, promissory notes, participations, certificates of
assignment and similar instruments with recourse, and repurchase
agreements. The Monetary Board shall determine what specific
instruments shall be considered as deposit substitutes for the purposes
of Section 94 of this Act: Provided, however, That deposit substitutes of
commercial, industrial and other non-financial companies for the
limited purpose of financing their own needs or the needs of their
agents or dealers shall not be covered by the provisions of Section 94
of this Act.

What is a draft? (Used normally in international commerce to effect


payment)

A draft is a bill of exchange. It is an order written by an exporter /seller


instructing an importer /buyer or its agent to pay a specified amount of
money at a specified time.

The person/business opening /initiating the draft is called the maker,


drawer or originator. The party to whom the draft is addressed is the
drawee. The drawee is asked to honor the draft, i.e. to pay the amount
requested according to the stated terms. The drawee is either the
buyer, in which case the draft is called a Trade Draft, or buyer’s bank,
in which case the draft is called a Bank Draft.
Page 22 of 23 22

 Distinguish the Investigation and Examination Powers of PDIC of


banks pursuant to its charter PD 3591, as amended by RA 9576.
(5%)

Suggested Answers:

(CEBU), INC., G.R. No. 176438 January 24, 2011


PHILIPPINE DEPOSIT INSURANCE CORPORATION (PDIC), Petitioner,
vs.
PHILIPPINE COUNTRYSIDE RURAL BANK, INC., RURAL BANK OF
CARMEN (CEBU), INC., BANK OF EAST ASIA (MINGLANILLA,
CEBU), INC., and PILIPINO RURAL BANK Respondents.

Examination involves an evaluation of the current status of a bank and


determines its compliance with the set standards regarding solvency,
liquidity, asset valuation, operations, systems, management, and
compliance with banking laws, rules and regulations.

Investigation, on the other hand, is conducted based on specific


findings of certain acts or omissions, which are subject of a complaint
or a Final Report of Examination.

Clearly, investigation does not involve a general evaluation of the


status of a bank. An investigation zeroes in on specific acts and
omissions uncovered via an examination, or which are cited in a
complaint.

An examination entails a review of essentially all the functions and


facets of a bank and its operation. It necessitates poring through
voluminous documents, and requires a detailed evaluation thereof.
Such a process then involves an intrusion into a bank’s records.

In contrast, although it also involves a detailed evaluation, an


investigation centers on specific acts of omissions and, thus, requires a
less invasive assessment.

The practical justification for not requiring the Monetary Board


approval to conduct an investigation of banks is the administrative
hurdles and paperwork it entails, and the correspondent time to
complete those additional steps or requirements. As in other types of
investigation, time is always of essence, and it is prudent to expedite
the proceedings if an accurate conclusion is to be arrived at, as an
investigation is only as precise as the evidence on which it is based.
The promptness with which such evidence is gathered is always of
utmost importance because evidence, documentary evidence in
particular, is remarkably fungible. A PDIC investigation is conducted to
"determine[e] whether the allegations in a complaint or findings in a
final report of examination may properly be the subject of an
administrative, criminal or civil action." 76 In other words, an
investigation is based on reports of examination and an examination is
conducted with prior Monetary Board approval. Therefore, it would be
unnecessary to secure a separate approval for the conduct of an
investigation. Such would merely prolong the process and provide
unscrupulous individuals the opportunity to cover their tracks.
Page 23 of 23 23

Indeed, while in a literary sense, the two terms may be used


interchangeably, under the PDIC Charter, examination and
investigation refer to two different processes. To reiterate, an
examination of banks requires the prior consent of the Monetary Board,
whereas an investigation based on an examination report, does not.

JSS (Joint and Solidary Signature) is a common banking practice


requiring a major stockholder or corporate officer, as an additional
security for loans granted to corporate borrowers. There are at least
two reasons for this: First, in case of default, the creditor’s recourse ,
which is normally limited to the corporate properties under the veil of
separate corporate personality , would extend to the personal assets of
the surety. Second, such surety would be compelled to ensure that the
loan would be used fro the purpose agreed upon, and that it would be
paid by the corporation.

Security Bank v. Cuenca 341 SCRA 781 (2000)

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