1
Chapter 1
Banks and the Business of Banking
I. Declared Policy Of The State
Section 2 of Republic Act 8791 (General Banking Law of 2000
or GBL) provides:
The State recognizes the vital role of banks
in 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.
II. Definition Of Banks
Banks are defined under the GBL as entities engaged in the
lending of funds obtained in the form of deposits.1 Note however that
banks may engage in other activities allowed by law which will be
discussed in the succeeding chapters of this book.
Other Definitions:
A bank is —
(i)
A moneyed institute2 founded to facilitate the borrowing,
lending and safe-keeping of money3 and to deal, in notes,
bills of exchange, and credits.4
Section 3.2, Republic Act No. 8791.
Talmage vs. Pell 7 N.Y. (3 Seld.) 328, 347, 348.
3
Smith vs. Kansas City Title & Trust Co., 41 S. Ct. 243, 255 U.S. 180, 210, 65
L. Ed. 577.
4
State vs. Cornings Sav. Bank, 115 N.W. 937, 139 Iowa 338; Banks & Banking,
by Zellmann, Vol. 1, p. 46.
1
2
1
2
BANKING LAWS & JURISPRUDENCE
(ii)
An investment company which loans out the money of its
customers, collects the interest and charges a commission
to both lender and borrower, is a bank.5
(iii) Any person engaged in the business carried on by
banks of deposit, of discount, or of circulation is doing a
banking business, although but one of these functions is
exercised.6
(iv) A financial institution with power to issue its promissory
notes intended to circulate as money (known as bank
notes); or to receive the money of others on general deposit,
to form a joint fund that shall be used by the institution for
its own benefit, for one or more of the purposes of making
temporary loans and discounts, of dealing in notes, foreign
and domestic bills of exchange, coin bullion, credits, and
the remission of money; or with both these powers, and
with the privileges, in addition to these basic powers, of
receiving special deposits, and making collection for the
holders of negotiable paper, if the institution sees fit to
engage in such business.7 In funding these businesses,
the bank invests the money that it holds in trust of its
depositors.
III. Nature Of Banking Business
A.
Debtor-Creditor Relationship
The relation existing between a depositor and a bank is that
of creditor and debtor8 and not that of a depositor and a depositary
under the Civil Code.
Article 1980 of the Civil Code of the Philippines provides:
“Art. 1980. Fixed, savings, and current deposits
of money in banks and similar institutions shall be
governed by the provisions concerning loan.’’
Western Investment Banking Co. vs. Murray, 56 P. 728, 730, 731; 6 Ariz 215.
MacLaren vs. State, 124 N.W. 667, 141 Wis. 577, 135 Am. S.R. 55, 18 Ann.
Cas. 826; 9 C.J.S. 30.
7
United Coconut Planters Bank vs. Ramos, G.R. No. 147800, November 11,
2003.
8
Gullas vs. The Philippine National Bank, G.R. No. L-43191, November 13,
1935; Fulton Iron Works Co. vs. China Banking Corporation, 59 Phil. 59 (1933).
5
6
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
3
In Consolidated Bank and Trust Corporation vs. Court of
Appeals, the Supreme Court held:
“The contract between the bank and its
depositor is governed by the provisions of the
Civil Code on simple loan, x x x. There is a debtorcreditor relationship between the bank and its depositor.
The bank is the debtor and the depositor is the
creditor. The depositor lends the bank money and the
bank agrees to pay the depositor on demand. The savings
deposit agreement between the bank and the depositor is
the contract that determines the rights and obligations of
the parties.”
Similarly, in Serrano vs. Central Bank of the Philippines,
the Supreme Court held that “bank deposits are in the nature of
irregular deposits. They are really loans because they earn interest.
x x x. The petitioner here in making time deposits that earn interests
with respondent Overseas Bank of Manila was in reality a creditor
of the respondent Bank and not a depositor. The respondent Bank
was in turn a debtor of petitioner. Failure of the respondent Bank to
honor the time deposit is failure to pay its obligation as a debtor and
not a breach of trust arising from a depositary’s failure to return the
subject matter of the deposit.”
B.
Fiduciary Duty
i.
Section 2 of the GBL expressly imposes fiduciary duty
on banks when it declares that the State recognizes the
“fiduciary nature of banking that requires high standards
of integrity and performance.” This statutory declaration
merely echoes the earlier pronouncement of the Supreme
Court9 requiring banks to “treat the accounts of its
depositors with meticulous care, always having in mind
the fiduciary nature of their relationship.”10
ii.
Jurisprudence had already imposed on banks the same
high standard of diligence long before the enactment
of the GBL. This fiduciary relationship means that the
bank’s obligation to observe “high standards of integrity
9
Simex International (Manila) Inc. vs. Court of Appeals, G.R. No. 88013, March
19, 1990, 183 SCRA 360.
10
Ibid.
4
BANKING LAWS & JURISPRUDENCE
and performance” is deemed written into every deposit
agreement between a bank and its depositor.
iii.
C.
D.
The fiduciary nature of banking requires banks to assume
a degree of diligence higher than that of a good father of
a family. Thus, the bank’s fiduciary duty imposes upon
it a higher level of accountability than that expected of
depositor.11
Not a Trust Agreement
i.
However, the fiduciary nature of a bank-depositor relationship does not convert the contract between the bank
and its depositors from a simple loan to a trust agreement, whether express or implied. Failure by the bank to
pay the depositor is failure to pay a simple loan, and not
a breach of trust.12 The law simply imposes on the bank a
higher standard of integrity and performance in complying with its obligations under the contract of simple loan,
beyond those required of non-bank debtors under a similar contract of simple loan.
ii.
The fiduciary nature of banking does not convert a
simple loan into a trust agreement because banks do not
accept deposits to enrich depositors but to earn money
for themselves. The law allows banks to offer the lowest
possible interest rate to depositors while charging the
highest possible interest rate on their own borrowers. The
interest spread or differential belongs to the bank and not
to the depositors who are not cestui que trust of banks. If
depositors are cestui que trust of banks, then the interest
spread or income belongs to the depositors, a situation
that Congress certainly did not intend in enacting Section
2 of R.A. 8791.
Indispensable Institution
The Supreme Court never fails to stress the remarkable
significance of a banking institution to commercial transactions, in
11
Philippine Banking Corporation vs. Court of Appeals, G.R. No. 127469, January 15, 2004.
12
Serrano vs. Central Bank, G.R. No. L-30511, February 14, 1980, 96 SCRA
96.
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
5
particular, and to the country’s economy in general.13 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.
E.
i.
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.
ii.
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.
iii.
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.14
Impressed with Public Interest
i.
The business of banking is imbued with public interest.
The stability of banks largely depends on the confidence
of the people in the honesty and efficiency of banks. The
depositor’s reasonable expectations from a bank and the
bank’s corresponding duty to its depositor, were pointed
out by the Supreme Court as follows:
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
13
Metropolitan Bank and Trust Company vs. Cabilzo, G.R. No. 154469,
December 6, 2006.
14
Simex International (Manila) Inc. vs. Court of Appeals, 183 SCRA 360, March
19, 1990.
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BANKING LAWS & JURISPRUDENCE
sees fit, confident that the bank will deliver it as and to
whomever he directs.15
ii.
F.
Since the banking business is impressed with public
interest, of paramount importance thereto is the trust
and confidence of the public in general. Consequently,
the highest degree of diligence16 is expected,17 and high
standards of integrity and performance are even required,
of it. By the nature of its functions, a bank is “under
obligation to treat the accounts of its depositors with
meticulous care,18 always having in mind the fiduciary
nature of their relationship.”19
Degree of Diligence
i.
The law imposes on banks high standards in view of
the fiduciary nature of banking.20 As stated earlier, the
new provision in the general banking law is a statutory
affirmation of Supreme Court decisions, starting with
the 1990 case of Simex International vs. Court of
Appeals,21 holding that “the bank is under obligation
to treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of their
relationship.”22
Ibid.
The diligence required of banks is more than that of a pater familias or good
father of a family. Bank of the Philippine Islands vs. Court of Appeals, 383 Phil. 538,
554, February 29, 2000. See Philippine Bank of Commerce vs. Court of Appeals, 336
Phil. 667, 681, March 14, 1997.
17
Philippine Commercial International Bank vs. Court of Appeals, 350 SCRA
446, 472, January 29, 2001.
18
Westmont Bank vs. Ong, 375 SCRA 212, 221, January 30, 2002; Citing Citytrust Banking Corp. vs. IAC, 232 SCRA 559, 564, May 27, 1994.
19
Simex International (Manila) Inc. vs. Court of Appeals, 183 SCRA 360, 367,
March 19, 1990, Per Cruz, J.
20
In the United States, the prevailing rule, as enunciated by the U.S. Supreme
Court in Bank of Marin vs. England, 385 U.S. 99 (1966), is that the bank-depositor
relationship is governed by contract, and the bankruptcy of the depositor does not
alter the relationship unless the bank receives notice of the bankruptcy. However, the
Supreme Court of some states, like Arizona, have held that banks have more than a
contractual duty to depositors, and that a special relationship may create a fiduciary
obligation on banks outside of their contract with depositors. See Stewart vs. Phoenix
National Bank, 49 Ariz. 34, 64 P. 2d 101 (1937); Klein vs. First Edina National Bank,
293 Minn. 418, 196 N.W. 2d 619 (1972).
21
G.R. No. 88013, March 19, 1990, 183 SCRA 360.
22
The ruling in Simex International was followed in the following cases: Bank
of the Philippine Islands vs. Intermediate Appellate Court, G.R. No. 69162, February
15
16
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
7
ii.
The fiduciary nature of banking requires banks to assume
a degree of diligence higher than that of a good father of
a family. Article 1173 of the Civil Code states that the
degree of diligence required of an obligor is that prescribed
by law or contract, and absent such stipulation then the
diligence of a good father of a family.23 Section 2 of the GBL
prescribes the statutory diligence required from banks —
that banks must observe “high standards of integrity and
performance”24 in servicing their depositors.
iii.
In Philippine Bank of Commerce vs. Court of Appeals25
upholding a long standing doctrine, the Supreme Court
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 the said ruling applies only to cases
where banks act under their fiduciary capacity, that is,
as depositary 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.
iv.
Considering the foregoing, a bank is not required to exert
more than the diligence of a good father of a family in
regard to the sale and issuance of foreign exchange
demand draft. It does not involve the handling of deposit,
if any, with the bank. Instead, the relationship involved
was that of a buyer and seller, that is, between the bank
as the seller of the foreign exchange demand draft, and
the buyer of the same.26
21, 1992, 206 SCRA 408; Citytrust Banking Corporation vs. Intermediate Appellate
Court, G.R. No. 84281, May 27, 1994, 232 SCRA 559; Tan vs. Court of Appeals, G.R.
No. 108555, December 20, 1994, 239 SCRA 310; Metropolitan Bank & Trust Co. vs.
Court of Appeals, G.R. No. 112576, October 26, 1994, 237 SCRA 761; Philippine Bank
of Commerce vs. Court of Appeals, 336 Phil. 667 (1997); Firestone vs. Court of Appeals, G.R. No. 113236, March 5, 2001, 353 SCRA 601.
23
The second paragraph of Article 1173 of the Civil Code provides: “If the law or
contract does not state the diligence which is to be observed in the performance, that
which is expected of a good father of a family shall be required.”
24
Bank of Commerce vs. Spouses San Pablo, G.R. No. 167848, April 27, 2007.
25
Reyes vs. Court of Appeals, G.R. No. 118492, August 15, 2001.
26
Ibid.
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BANKING LAWS & JURISPRUDENCE
* Note: Diligence Extends to Financial Institutions:
G.
H.
1.
A government financial institution (e.g., GSIS), like banks,
is expected to exercise greater care and prudence in its
dealings, including those involving registered lands.27
2.
Due diligence required of banks extend even to persons, or
institutions, regularly engaged in the business of lending
money secured by real estate mortgages.28
Treatment of Accounts with Meticulous Care
i.
A bank is under obligation to treat the accounts of its
depositors with meticulous care.29
ii.
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. A
blunder on the part of the bank, such as the dishonor of a
check without good reason, can cause the depositor not a
little embarrassment if not also financial loss and perhaps
even civil and criminal litigation.30
iii.
But there is no law mandating banks to call up their clients
whenever their representatives withdraw significant
amounts from their accounts.
Duty to Keep Records
A bank has a fiduciary duty to keep efficiently a record of its
transactions with its depositors.31 Banks shall have a true and
accurate account, record or statement of their daily transactions,
particularly those referring to their deposit liabilities. The making
of any false entry or the willful omission of entries relevant to
any transaction, is a ground for the imposition of administrative
sanctions and the disqualification from office of any director or
27
Government Service Insurance System vs. Santiago, G.R. No. 155206, October 28, 2003; Cruz vs. Bancom Finance Corporation, 379 SCRA 490 (2002).
28
Adriano vs. Pangilinan, 373 SCRA 544 (2002).
29
Firestone Tire & Rubber Company of the Philippines vs. Court of Appeals,
G.R. No. 113236, March 5, 2001, 353 SCRA 601, 609, citing Philippine Bank of Commerce vs. Court of Appeals, 269 SCRA 695, 699 (1997).
30
Simex International (Manila) Incorporated vs. Court of Appeals, G.R. No.
88013, March 19, 1990.
31
Philippine Banking Corporation vs. Court of Appeals, G.R. No. 127469, January 15, 2004.
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
9
officer responsible therefor. This is without prejudice to their
criminal liability under the New Central Bank Act (NCBA) and/or
the applicable provisions of the Revised Penal Code.
I.
Banks are not Gratuitous Bailees
Banks are not gratuitous bailees of the funds deposited
with them by their customers. Banks are run for gain, and they
solicit deposits in order that they can use the money for that very
purpose.32
J.
Banks not Expected to be Infallible
A bank is not expected to be infallible.33 However, it must bear
the blame for not discovering mistakes if there are established
procedures and the same have not been followed.
Problem:
Spouses A and V opened a joint current account in C Bank with
an initial deposit of P2,250. Prior thereto, A had an existing separate
personal checking account in the same branch. When the spouses
opened their joint current account, the “new accounts” teller of the
bank pulled out from the bank’s files the old and existing signature
card of A for use as ID and reference. By mistake, she placed the
old personal account number of A on the deposit slip for the new
joint checking account of the spouses so that the initial deposit of
P2,250 for the joint checking account was miscredited to A’s personal
account. The spouses subsequently deposited other amounts in their
joint account. However, when V issued a check for P1,639.89 and
another check for P1,160.00, one of the checks was dishonored by the
bank for insufficient funds and a penalty of P20 was deducted from
the account in both instances. In view of the overdrawings, the bank
tried to call up the spouses at the telephone number which they had
given in their application form, but the bank could not contact them
because they actually reside in Porac, Pampanga. The city address
and telephone number which they gave to the bank belonged to V’s
parents. Is the bank liable for damages?
32
San Carlos Milling Co., Ltd. vs. Bank of the Philippines Islands, G.R. No.
37467, December 11, 1933.
33
Bank of the Philippine Islands vs. The Intermediate Appellate Court, G.R.
No. 69162, February 21, 1992.
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BANKING LAWS & JURISPRUDENCE
Yes. The bank is not expected to be infallible but, in this
instance, it must bear the blame for not discovering the mistake of
its teller despite the established procedure requiring the papers and
bank books to pass through a battery of bank personnel whose duty
it is to check and countercheck them for possible errors. Apparently,
the officials and employees tasked to do that did not perform their
duties with due care.34 While the bank’s negligence may not have
been attended with malice and bad faith, nevertheless, it caused
serious anxiety, embarrassment and humiliation to the depositors
for which they are entitled to recover reasonable moral damages.35
The award of reasonable attorney’s fees is proper for the depositors
were compelled to litigate to protect their interest.36 However, the
absence of malice and bad faith renders an award of exemplary
damages improper.37
K.
Dealing with Registered Lands
i.
Banks should exercise more care and prudence in dealing
even with registered lands, than private individuals,
for their business is one affected with public interest.38
Banks keep in trust money belonging to their depositors,
which they should guard against loss by not committing
any act of negligence that amounts to lack of good faith.
Absent good faith, banks would be denied the protective
mantle of the land registration statute, Act 496 (Land
Registration Law), which extends only to purchasers for
value and good faith, as well as to mortgagees of the same
character and description. The rule that persons dealing
with registered lands can rely solely on the certificate of
title does not apply to banks.39
ii.
A mortgagee can rely on what appears on the certificate
of title presented by the mortgagor and an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagor’s title. This rule
is strictly applied to banking institutions. A mortgageebank must exercise due diligence before entering into said
Ibid.
American Express International, Inc. vs. IAC, 167 SCRA 209.
36
Art. 2208, Civil Code.
37
Globe Mackay Cable and Radio Corp. vs. Court of Appeals, 176 SCRA 778.
38
Id. at 88.
39
Manlapat vs. Court of Appeals, G.R. No. 125585, June 8, 2005.
34
35
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
11
contract. Judicial notice is taken of the standard practice
for banks, before approving a loan, to send representatives to the premises of the land offered as collateral and
to investigate who the real owners thereof are.
iii.
In Cavite Development Bank vs. Spouses Lim,40 the Court
explained the doctrine of mortgagee in good faith, thus:
There is, however, a situation where, despite the
fact that the mortgagor is not the owner of the mortgaged
property, his title being fraudulent, the mortgage contract
and any foreclosure sale arising therefrom are given effect
by reason of public policy. This is the doctrine of “the
mortgagee in good faith” based on the rule that all persons
dealing with property covered by the Torrens Certificates
of Title, as buyers or mortgagees, are not required to go
beyond what appears on the face of the title. The public
interest in upholding the indefeasibility of a certificate
of title, as evidence of lawful ownership of the land or of
any encumbrance thereon, protects a buyer or mortgagee
who, in good faith, relied upon what appears on the face
of the certificate of title.
iv.
Indeed, a mortgagee has a right to rely in good faith on
the certificate of title of the mortgagor of the property
given as security, and in the absence of any sign that
might arouse suspicion, the mortgagee has no obligation
to undertake further investigation. This doctrine presupposes, however, that the mortgagor, who is not the
rightful owner of the property, has already succeeded
in obtaining Torrens title over the property in his name
and that, after obtaining the said title, he succeeds in
mortgaging the property to another who relies on what
appears on the title. This does not apply in a situation
where the mortgagor was not the registered owner and
merely represented himself to be the attorney-in-fact.41
v.
In cases where the mortgagee does not directly deal with
the registered owner of real property, the law requires that
a higher degree of prudence be exercised by the mortgagee.
40
381 Phil. 355, 368 (2000) as cited in Ereña vs. Querrer-Kauffman, G.R. No.
165853, June 22, 2006, 492 SCRA 298, 319.
41
Bank of Commerce vs. Sps. San Pablo, G.R. No. 167848, April 27, 2007.
12
BANKING LAWS & JURISPRUDENCE
As enunciated in the case of Abad vs. Guimba:42
x x x While one who buys from the registered owner
does not need to look behind the certificate of title, one who
buys from one who is not a registered owner is expected to
examine not only the certificate of title but all the factual
circumstances necessary for [one] to determine if there
are any flaws in the title of the transferor, or in [the]
capacity to transfer the land. Although the instant case
does not involve a sale but only a mortgage, the same rule
applies inasmuch as the law itself includes a mortgagee
in the term “purchaser.”43
vi.
This principle is applied more strenuously when the
mortgagee is a bank or a banking institution. In the case
of Cruz vs. Bancom Finance Corporation, the Supreme
Court ruled:
Respondent, however, is not an ordinary mortgagee;
it is a mortgagee-bank. As such, unlike private individuals, it is expected to exercise greater care and prudence in
its dealings, including those involving registered lands. A
banking institution is expected to exercise due diligence
before entering into a mortgage contract. The ascertainment of the status or condition of a property offered to it
as security for a loan must be a standard and indispensable part of its operations.44
vii. That the person applying for the loan is other than the
registered owner of the real property being mortgaged
should already raise a red flag and which should induce a
bank to make inquiries into and confirm the authority to
mortgage another’s property. A person who deliberately
ignores a significant fact that could create suspicion in an
otherwise reasonable person is not an innocent purchaser
for value.45
* Note: Any investigation previously conducted on the property offered
as collateral does not preclude a bank from considering new
information on the same property as security for a subsequent
G.R. No. 157002, July 29, 2005, 465 SCRA 356, 369.
Bank of Commerce vs. Sps. San Pablo, G.R. No. 167848, April 27, 2007.
44
Ibid., 429 Phil. 225, 239 (2002).
45
Ibid.
42
43
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
13
loan. In Sps. Omengan vs. Philippine National Bank, G.R. No.
161319, January 23, 2007, it was held that:
“[T]he business of a bank is one affected with public
interest, for which reason the bank 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.”46 Any investigation
previously conducted on the property offered by petitioners as collateral did not preclude PNB from considering
new information on the same property as security for a
subsequent loan. The credit and property investigation
for the original loan of P3 million did not oblige PNB to
grant and release any additional loan. At the time the
original P3 million credit line was approved, the title
to the property appeared to pertain exclusively to petitioners. By the time the application for an increase was
considered, however, PNB already had reason to suspect
petitioners’ claim of exclusive ownership.
viii. Banks have access to more facilities in confirming the
identity of their judgment debtors. It should act more
cautiously, especially if some uncertainty had been
reported by the appraiser tasked to make verifications.
The uncertainty should not be treated as a flimsy matter.
In one case, a bank was held negligent when it placed
more importance on the information regarding the
marketability and market value of the property, utterly
disregarding the identity of the registered owner thereof.
ix.
Unlike private individuals, it behooves banks to exercise
greater care and prudence in their dealings, including
those involving registered lands. A banking institution
is expected to exercise due diligence before entering into
a mortgage contract. The ascertainment of the status or
condition of a property offered to it as a security must be
standard and indispensable part of its operations. A bank
that failed to observe due diligence cannot be accorded
the status of a bona fide mortgagee.
46
United Coconut Planters Bank vs. Ramos, G.R. No. 147800, November 11,
2003, 415 SCRA 596, 609.
14
BANKING LAWS & JURISPRUDENCE
Problems:
1.
A owns an unregistered parcel of land. A sold a portion of
said land to B. Subsequently, an Original Certificate of Title (OCT)
was issued by the Register of Deeds. A then surrendered to X Bank
the owner’s duplicate of the OCT as a consequence of a mortgage. B
died without knowing that an OCT was already issued. Later, C, B’s
heir, upon learning of his right over the land confronted A. Having
failed to obtain possession of the OCT from A, C went to X Bank. C
sought to borrow the owner’s duplicate certificate for the purpose of
photocopying the same and thereafter showing a copy thereof to the
Register of Deeds. X Bank allowed C to bring the owner’s duplicate
certificate outside the bank premises when the latter showed the
Deed of Sale between A and B. C returned the owner’s duplicate
certificate on the same day after having copied the same. C then
brought the copy of the OCT to the Register of Deeds which upon
being presented with the Deed of Sale cancelled the OCT and issued
a Transfer Certificate of Title. Is X Bank liable for damages to
A?
Yes. The act of X Bank of entrusting to C the owner’s duplicate
certificate entrusted to it by A without even notifying A and absent
any prior investigation on the veracity of C’s claim and character
is a patent failure to foresee the risk created by the act. This act
runs afoul of every bank’s mandate to observe the highest degree of
diligence in dealing with its clients. Moreover, A has also the right
to be afforded due process before deprivation or diminution of his
property is effected as the OCT was still in the name of A. Notice
and hearing are indispensable elements of this right which the bank
miserably ignored.47
2.
A bank accepted a property as mortgage despite existence
of structures and occupants other than the mortgagor. Is the bank
negligent?
Yes. Banks, being in the business of extending loans secured
by real estate mortgage, are familiar with rules on land registration.
As such, they are expected to exercise more care and prudence than
private individuals in their dealing with registered lands. Thus, the
suspicion provoking presence of occupants other than the owner
on a land to be mortgaged, it behooved banks to conduct a more
exhaustive investigation on the history of the mortgagor’s title. The
47
Manlapat vs. Court of Appeals, G.R. No. 125585, June 8, 2005.
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
15
banks acceptance in mortgage of the property notwithstanding the
existence of structures on the property and which were in actual,
visible and public possession of a person other than the mortgagor,
constitutes gross negligence amounting to bad faith.48
Mercado vs. Allied Banking Corporation
G.R. No. 171460, July 24, 2007
On 28 May 1992, Perla executed a Special Power of Attorney (SPA) in favor of her husband, Julian D. Mercado (Julian)
over several pieces of real property registered under her name,
authorizing the latter to perform several acts.
On the strength of the aforesaid SPA, Julian, on 12 December 1996, obtained a loan from Allied Banking Corporation
(ABC) in the amount of P3,000,000.00, secured by real estate
mortgage constituted on TCT No. RT-18206 (106338) which
covers a parcel of land with an area of 805 square meters, registered with the Registry of Deeds of Quezon City (“Subject
Property’’).
Still using the Subject Property as security, Julian obtained
an additional loan from ABC in the sum of P5,000,000.00,
evidenced by a Promissory Note he executed on 5 February
1997 as another real estate mortgage (REM).
It appears, however, that there was no property identified
in the SPA as TCT No. RT-18206 (106338) and registered with
the Registry of Deeds of Quezon City. What was identified in
the SPA instead was the property covered by TCT No. RT106338 registered with the Registry of Deeds of Pasig.
Subsequently, Julian defaulted on the payment of his
loan obligations. Thus, ABC initiated extra-judicial foreclosure
proceedings over the Subject Property which was subsequently
sold at public auction wherein the it was declared as the highest
bidder as shown in the Sheriff’s Certificate of Sale dated 15
January 1998.
ABC explained that the discrepancy in the designation
of the Registry of Deeds in the SPA was merely an error that
must not prevail over the clear intention of Perla to include the
subject property in the said SPA. In sum, the property referred
48
Garaygay vs. Court of Appeals, G.R. No. 128229, March 18, 2005.
16
BANKING LAWS & JURISPRUDENCE
to in the SPA Perla executed in favor of Julian as covered by
TCT No. 106338 of the Registry of Deeds of Pasig (now Makati)
and the subject property in the case at bar, covered by RT18206 (106338) of the Registry of Deeds of Quezon City, are one
and the same.
Elaborating, ABC claims to have carefully verified Julian’s authority over the subject property which was validly
contained in the SPA. It stresses that the SPA was annotated
at the back of the TCT of the subject property. Finally, after
conducting an investigation, it found that the property covered
by TCT No. 106338, registered with the Registry of Deeds of
Pasig (now Makati) referred to in the SPA, and the subject
property, covered by TCT No. 18206 (106338) registered with
the Registry of Deeds of Quezon City, are one and the same
property. From the foregoing, ABC concluded that Julian was
indeed authorized to constitute a mortgage over the subject
property. Is ABC a mortgagee in good faith?
No. The property listed in the real estate mortgages
Julian executed in favor of ABC is the one covered by “TCT#RT18206(106338).” On the other hand, the Special Power of
Attorney referred to TCT No. “RT-106338-805 Square Meters
of the Registry of Deeds of Pasig now Makati.” The palpable
difference between the TCT numbers referred to in the real
estate mortgages and Julian’s SPA, coupled with the fact that
the said TCTs are registered in the Registries of Deeds of
different cities, should have put ABC on guard. ABC’s claim
of prudence is debunked by the fact that it had conveniently or
otherwise overlooked the inconsistent details appearing on the
face of the documents, which it was relying on for its rights as
mortgagee, and which significantly affected the identification
of the property being mortgaged. In Arrofo vs. Quiño,49 it was
elucidated that:
[Settled is the rule that] a person dealing with
registered lands [is not required] to inquire further
than what the Torrens title on its face indicates.
This rule, however, is not absolute but admits of
exceptions. Thus, while its is true, x x x that a
person dealing with registered lands need
49
G.R. No. 145794, January 26, 2005, 449 SCRA 284.
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
17
not go beyond the certificate of title, it is
likewise a well-settled rule that a purchaser or
mortgagee cannot close his eyes to facts which
should put a reasonable man on his guard, and
then claim that he acted in good faith under
the belief that there was no defect in the title
of the vendor or mortgagor. His mere refusal to
face up the fact that such defect exists, or his willful
closing of his eyes to the possibility of the existence
of a defect in the vendor’s or mortgagor’s title, will
not make him an innocent purchaser for value,
if it afterwards develops that the title was in fact
defective, and it appears that he had such notice of
the defect as would have led to its discovery had he
acted with the measure of precaution which may be
required of a prudent man in a like situation.
By putting blinders on its eyes, and by refusing to see
the patent defect in the scope of Julian’s authority, easily
discernable from the plain terms of the SPA, ABC cannot now
claim to be an innocent mortgagee.
Further, in the case of Abad vs. Guimba,50 the Supreme
Court laid down the principle that where the mortgagee does
not directly deal with the registered owner of real property, the
law requires that a higher degree of prudence be exercised by
the mortgagee, thus:
While [the] one who buys from the registered
owner does not need to look behind the certificate
of title, one who buys from [the] one who is not [the]
registered owner is expected to examine not only
the certificate of title but all factual circumstances
necessary for [one] to determine if there are any
flaws in the title of the transferor, or in [the] capacity
to transfer the land. Although the instant case does
not involve a sale but only a mortgage, the same
rule applies inasmuch as the law itself includes a
mortgagee in the term “purchaser.”51
50
51
G.R. No. 157002, July 29, 2005, 465 SCRA 356.
Id. at 368-369.
18
BANKING LAWS & JURISPRUDENCE
This principle is applied more strenuously when the
mortgagee is a bank or a banking institution. Thus, in the case
of Cruz vs. Bancom Finance Corporation,52 the Supreme Court
ruled:
Respondent, however, is not an ordinary mortgagee; it is a mortgagee-bank. As such, unlike private individuals, it is expected to exercise greater
care and prudence in its dealings, including those
involving registered lands. A banking institution is
expected to exercise due diligence before entering
into a mortgage contract. The ascertainment of the
status or condition of a property offered to it as security for a loan must be a standard and indispensable
part of its operations.53
Hence, considering that the property being mortgaged
by Julian was not his, and there are additional doubts or
suspicions as to the real identity of the same, ABC should have
proceeded with its transactions with Julian only with utmost
caution. As a bank, ABC must subject all its transactions to the
most rigid scrutiny, since its business is impressed with public
interest and its fiduciary character requires high standards
of integrity and performance.54 Where ABC acted in undue
haste in granting the mortgage loans in favor of Julian and
disregarding the apparent defects in the latter’s authority as
agent, it failed to discharge the degree of diligence required of
it as a banking corporation.
Thus, even granting for the sake of argument that the
subject property and the one identified in the SPA are one
and the same, it would not elevate ABC’s status to that of an
innocent mortgagee. As a banking institution, jurisprudence
stringently requires that ABC should take more precautions
than an ordinary prudent man should, to ascertain the status
and condition of the properties offered as collateral and to
verify the scope of the authority of the agents dealing with
these. The failure of ABC to investigate into the circumstances
surrounding the mortgage of the subject property belies its
contention of good faith.
429 Phil. 225 (2002).
Id. at 239.
54
The General Banking Law of 2000, Section 2.
52
53
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
L.
19
Banks may Exclude Persons in their Premises
Banks are mandated to exercise a higher degree of diligence in
the handling of its affairs than that expected of an ordinary business
enterprise. Banks handle transactions involving millions of pesos and
properties worth considerable sums of money. The banking business
will thrive only as long as it maintains the trust and confidence of its
customers/clients. Indeed, the very nature of their work, the degree
of responsibility, care and trustworthiness expected of officials and
employees of the bank is far greater than those of ordinary officers
and employees in the other business firms. Hence, no effort must
be spared by banks and their officers and employees to ensure
and preserve the trust and confidence of the general public and
its customers/clients, as well as the integrity of its records and the
safety and well-being of its customers/clients while in its premises.
For the said purpose, banks may impose reasonable conditions or
limitations to access by non-employees to its premises and records,
such as the exclusion of non-employees from the working areas for
employees, even absent any imminent or actual unlawful aggression
on or an invasion of its properties or usurpation thereof, provided
that such limitations are not contrary to the law.55
M.
Charging of Interest for Loans
The charging of interest for loans forms a very essential and
fundamental element of the banking business. In fact, it may be
considered to be the very core of the banking’s existence or being.56
IV. Liability For Acts Of Officers And Employees
A bank’s liability as obligor is not merely vicarious but primary,
wherein the defense of exercise of due diligence in the selection and
supervision of its employees is of no moment.
Banks handle daily transactions involving millions of pesos.
By the very nature of their work the degree of responsibility, care
and trustworthiness expected of their employees and officials is far
greater than those of ordinary clerks and employees. Banks are
expected to exercise the highest degree of diligence in the selection
and supervision of their employees.
55
56
UCPB vs. Basco, G.R. No. 142668, August 31, 2004.
Spouses Anastacio-Calina vs. DBP, G.R. No. 159748, July 31, 2007.
20
A.
BANKING LAWS & JURISPRUDENCE
i.
The bank must not only exercise “high standards of
integrity and performance,” it must also insure that its
employees do likewise because this is the only way to
insure that the bank will comply with its fiduciary duty.
ii.
A bank is liable for the wrongful acts of its officers done
in the interest of the bank or in their dealings as bank
representatives but not for acts outside the scope of their
authority.57 A bank holding out its officers and agents
as worthy of confidence will not be permitted to profit
by the frauds they may thus be enabled to perpetrate in
the apparent scope of their employment; nor will it be
permitted to shirk its responsibility for such frauds, even
though no benefit may accrue to the bank therefrom.58
Accordingly, 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 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.59
Negligence of Manager
The bank, as employer, is liable for the negligence or the misdeed
of its branch manager.60 Obviously, confidence in the banking system,
which necessarily includes reliance on bank managers, is vital in
the economic life of our society.61
B.
Negligence of Officers
(i)
As a general rule, a banking corporation is liable for the
wrongful or tortious acts and declarations of its officers or
agents within the course and scope of their employment.
Prudential Bank vs. Court of Appeals, G.R. No. 108957, June 14, 1993, 223
SCRA 350.
58
10 Am Jur 2d, p. 114.
59
Ibid.
60
The Consolidated Bank and Trust Corporation vs. Court of Appeals, G.R. No.
138569, September 11, 2003; Prudential Bank vs. Court of Appeals, G.R. No. 125536,
March 16, 2000, 328 SCRA 264.
61
BPI Family Savings Bank, Inc. vs. First Metro Investment Corporation, G.R.
No. 132390, May 21, 2004.
57
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
21
A bank will be held liable for the negligence of its officers
or agents when acting within the course and scope of their
employment. It may be liable for the tortious acts of its
officers even as regards that species of tort of which malice
is an essential element. A bank is liable for the fraudulent
acts or representations of an officer or agent acting within
the course and apparent scope of his employment or
authority. And if an officer or employee of a bank, in his
official capacity, receives money to satisfy an evidence of
indebtedness lodged with his bank for collection, the bank
is liable for his misappropriation of such sum.
(ii)
C.
If a corporation knowingly permits its officer, or any other
agent, to perform acts within the scope of an apparent
authority, holding him out to the public as possessing
power to do those acts, the corporation will, as against
any person who has dealt in good faith with the corporation through such agent, be estopped from denying such
authority.62
Negligence of Tellers
Likewise, bank’s tellers must exercise a high degree of diligence
in insuring that they return the passbook only to the depositor or his
authorized representative. The tellers know, or should know, that
the rules on savings account provide that any person in possession
of the passbook is presumptively its owner. If the tellers give the
passbook to the wrong person, they would be clothing that person
presumptive ownership of the passbook, facilitating unauthorized
withdrawals by that person.
* Note: Appropriation of money by a teller is not estafa. What is involved is the possession of money in the capacity of a bank
teller. The Supreme Court considered deposits received by a
teller in behalf of a bank as being only in the material possession of the teller. This interpretation applies with equal
force to money received by a bank teller at the beginning of a
business day for the purpose of servicing withdrawals. Such
is only material possession. Juridical possession remains
with the bank. If the teller appropriates the money for personal gain then the felony committed is theft and not estafa.
Further, since the teller occupies a position of confidence,
62
Ibid.
22
BANKING LAWS & JURISPRUDENCE
and the bank places money in the teller’s possession due to
the confidence reposed on the teller, the felony of qualified
theft would be committed.63
D.
Right to Recover from Employees
However, banks may recover from its employees for any
payments made in view of the latter’s negligent or criminal acts.64
The Supreme Court in one case applied the Civil Code provision
that “[W]hoever pays for the damages caused by his dependents or
employees may recover from the latter what he has paid or delivered
in satisfaction of the claim.”
E.
Liability for Damages
It is settled that in order that a plaintiff may maintain an
action for the injuries of which he complains, he must establish that
such injuries resulted from a breach of duty which the defendant
owed to the plaintiff – a concurrence of injury to the plaintiff and
legal responsibility by the person causing it. The underlying basis
for the award of tort damages is the premise that an individual was
injured in contemplation of law; thus there must first be a breach
before damages may be awarded and the breach of such duty should
be the proximate cause of the injury.65
1.
Actual and Compensatory Damages
A deposit being a contract of loan or an obligation consisting in
the payment of money, the damages to be awarded should be similar
to those stated in Rizal Commercial Banking Corporation vs. Alfa
RTW Manufacturing Corporation, citing Eastern Shipping Lines,
Inc. vs. Court of Appeals, to wit:
“II. With regard particularly to an award of interest, in
the concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:
1.
When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
Roque vs. People, G.R. No. 138954, November 25, 2004.
Pacific Banking Corporation vs. Court of Appeals, G.R. No. L-45656, May 5,
1989, citing Art. 2181, Civil Code.
65
Aznar vs. Citibank, N.A., (Philippines), G.R. No. 164273, March 28, 2007;
BPI Express Card Corporation vs. Court of Appeals, 357 Phil. 262, 276 (1998).
63
64
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
23
money, the interest due should be that which may
have been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest from
the time it is judicially demanded. In the absence
of stipulation, the rate of interest shall be 12%
per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject
to the provisions of Article 1169 of the Civil Code.
2.
When an obligation, not constituting a loan or forbearance
of money, is reached, an interest on the amount of damages
awarded may be imposed at the discretion of the court
at the rate of 6% per annum. No interest, however, shall
be adjudged on unliquidated claims or damages except
when or until the demand can be established with
reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially
or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only
from the date the judgment of the court is made (at which
time the quantification of damages may be deemed to
have been reasonably ascertained). The actual base for
the computation of legal interest shall, in any case, be on
the amount finally adjudged.
3.
When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal
interest whether the case falls under paragraph 1
or paragraph 2, above, shall be 12% per annum from
such finality until its satisfaction, this interim period
being deemed to be by then an equivalent to a forbearance
of credit.”
2.
Exemplary Damages
The law allows the grant of exemplary damages by way of example for the public good.66 The public relies on the banks’ fiduciary
duty to observe the highest degree of diligence. The banking sector
is expected to maintain at all times this high level of meticulousness.67
66
67
Prudential Bank vs. Court of Appeals, supra, Note 59.
Ibid.
24
BANKING LAWS & JURISPRUDENCE
3.
Moral Damages
The financial credit of a businessman is a prized and valuable
asset, it being a significant part of the foundation of his business.
Any adverse reflection thereon constitutes some material loss to
him.68
As a general rule, a corporation — being an artificial person
without feelings, emotions and senses, and having existence only in
legal contemplation — is not entitled to moral damages,69 because it
cannot experience physical suffering and mental anguish.70 However,
for breach of the fiduciary duty required of a bank, a corporate client
may claim such damages when its good reputation is besmirched by
such breach, and social humiliation results therefrom.71
It is not enough that one merely suffered sleepless nights,
mental anguish or serious anxiety as a result of the actuations of
the other party. It is also required that a culpable act or omission
was factually established, that proof that the wrongful act or
omission of the defendant is shown as the proximate cause of the
damage sustained by the claimant and that the case is predicated
on any of the instances expressed or envisioned by Arts. 221972 and
Araneta vs. Bank of America, G.R. No. L-25414, July 30, 1971.
LBC Express, Inc. vs. Court of Appeals, 236 SCRA 602, 607, September 21,
1994; See Layda vs. Court of Appeals, 90 Phil. 724, 730, January 29, 1952.
70
Article 2217 of the Civil Code.
71
Bank of the Philippine Islands vs. Casa Montessori Internationale, G.R. No.
149454, May 28, 2004; Morales, THE PHILIPPINE GENERAL BANKING LAW (Annotated
2002), pp. 3-4; Citing Simex International (Manila) Inc. vs. Court of Appeals, supra,
and Mambulao Lumber Co. vs. Philippine National Bank, 130 Phil. 366, 391, January 30, 1968; Simex International (Manila) Incorporated vs. Court of Appeals, G.R.
No. 88013, March 19, 1990.
72
Art. 2219. Moral damages may be recovered in the following and analogous
cases:
(1) A criminal offense resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and
35.
xxx
68
69
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
25
222073 of the Civil Code.74
In culpa contractual or breach of contract, moral damages are
recoverable only if the defendant has acted fraudulently or in bad
faith, or is found guilty of gross negligence amounting to bad faith,
or in wanton disregard of his contractual obligations. The breach
must be wanton, reckless, malicious or in bad faith, oppressive or
abusive.75
* Notes: (i) Although there is a fiduciary relationship between
a bank and its depositors and the extent of diligence
expected of it in handling the accounts entrusted to its
care is more than ordinary, the bank may not be held
responsible for such damages in the absence of fraud,
bad faith, malice, or wanton attitude.76 The Supreme
Court pronounced in BPI Express Card Corporation vs.
Court of Appeals:77
We do not dispute the findings of the lower court
that private respondent suffered damages as a result
of the cancellation of his credit card. However, there
is a material distinction between damages and injury.
Injury is the illegal invasion of a legal right; damage
is the loss, hurt, or harm which results from the injury; and damages are the recompense or compensation
awarded for the damage suffered. Thus, there can be
damage without injury to those instances in which the
loss or harm was not the result of a violation of a legal
duty. In such cases, the consequences must be borne by
the injured person alone, the law affords no remedy for
damages resulting from an act which does not amount
to a legal injury or wrong. These situations are often
called damnum absque injuria.78
(ii)
A depositor has the right to recover reasonable moral
damages even if the bank’s negligence may not have
73
Art. 2220. Willful injury to property may be a legal ground for awarding moral damages if the court should find that, under the circumstances, such damages are
justly due. The same rule applies to breaches of contract where the defendant acted
fraudulently or in bad faith.
74
Equitable Banking Corp. vs. Calderon, G.R. No. 156168, December 14, 2004,
446 SCRA 271, 276.
75
Id. at 277.
76
Moran vs. Court of Appeals, G.R. No. 105836, March 7, 1994.
77
Supra note 57.
78
Id. at 275-276.
26
BANKING LAWS & JURISPRUDENCE
been attended with malice and bad faith, if the former
suffered mental anguish, serious anxiety, embarrassment and humiliation.79 Moral damages are not meant
to enrich a complainant at the expense of defendant.
It is only intended to alleviate the moral suffering she
has undergone. The award of exemplary damages is
justified, on the other hand, when the acts of the bank
are attended by malice, bad faith or gross negligence.
The award of reasonable attorney’s fees is proper where
exemplary damages are awarded. It is proper where depositors are compelled to litigate to protect their interest.80
F.
Respondeat Superior, Diligence in the Selection and
Supervision of Employees
A bank is bound by the negligence of its employees under
the principle of respondeat superior or command responsibility.
The defense of exercising the required diligence in the selection
and supervision of employees is not a complete defense in culpa
contractual, unlike in culpa aquiliana.81
V. Classification Of Banks
Banks are classified into: (CUT-RICO)
(a)
Universal banks;
(b)
Commercial banks;
(c)
Thrift banks, composed of:
(i)
Savings and mortgage banks,
(ii)
Stock savings and loan associations, and
(iii) Private development banks, as defined in the “Thrift
Banks Act” (Republic Act No. 7906).
(d)
Rural banks, as defined in the “Rural Banks Act” (Republic
Act No. 7353);
Civil Code, Article 2217.
Bank of The Philippine Islands vs. Court of Appeals, G.R. No. 136202, January 25, 2007; Prudential Bank vs. Court of Appeals, supra note 26.
81
Cangco vs. Manila Railroad Co., 38 Phil. 769 (1918); De Guia vs. Meralco, 40
Phil. 706 (1920).
79
80
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
A.
27
(e)
Cooperative banks, as defined in the “Cooperative Code”
(Republic Act No. 6938);
(f)
Islamic banks as defined in the “Charter of Al Amanah
Islamic Investment Bank of the Philippines’’ (Republic
Act No. 6848); and
(g)
Other classifications of banks as determined by the
Monetary Board of the Bangko Sentral ng Pilipinas.
(Section 3, GBL)
Business Name
(i)
Only a bank that is granted universal/commercial banking
authority may represent itself to the public as such in
connection with its business name.
(ii)
Thrift Banks may be allowed to adopt and use any name:
Provided, That the words A Thrift Bank, Savings Bank,
A Private Development Bank or A Stock Savings and
Loan Association, as the case may be, are affixed after its
business name.
(iii) Rural Banks/Cooperative Banks may adopt a corporate
name or use a business name/style with the word Rural
or Coop, as the case may be. Said banks may also adopt a
name without such words: Provided, That the identifying
phrase, A Cooperative Bank or A Rural Bank, as the
case may be, is affixed after its business name: Provided,
further, That where the name of the bank is shown on
letterheads, billboards and other advertising materials,
the size of the letters of such phrase shall be at least onehalf (1/2) the size of the business name.
➢
Any bank not organized under the Rural Banks Act
and any person, association, or corporation doing
the business of banking, not authorized under the
Rural Banks Act which shall use the words “Rural
Bank” as part of the name or title of such bank or
of such person, association, or corporations, shall be
punished by a fine of not less than Fifty pesos (P50)
for each day during which said words are so used.82
82
Section 28, Republic Act No. 7353 (An Act Providing for the Creation, Organization and Operation of Rural Banks, and for Other Purposes).
28
B.
BANKING LAWS & JURISPRUDENCE
Universal Banks
Universal banks are large commercial banks licensed by the
Bangko Sentral ng Pilipinas (BSP) “to do both commercial and
investment banking.’’83
A universal bank shall have the authority to exercise:
a.
the powers authorized for a commercial bank,
b.
the powers of an investment house as provided in existing
laws, and
c.
the power to invest in non-allied enterprises. (Section 23,
GBL)
The operations of universal banks are discussed in Chapter 4.
C.
Commercial Banks
A commercial bank shall have:
a.
the general powers incident to corporations,
b.
all such powers as may be necessary to carry on the
business of commercial banking, such as:
(i)
accepting drafts and issuing letters of credit;
(ii)
discounting and negotiating promissory notes, drafts,
bills of exchange, and other evidences of debt;
(iii) accepting or creating demand deposits;
(iv) receiving other types of deposits and deposit substitutes;
(v)
buying and selling foreign exchange and gold or
silver bullion; acquiring marketable bonds and other
debt securities; and
(vi) extending credit, subject to such rules as the Monetary Board may promulgate.
➢
83
These rules may include the determination
of bonds and other debt securities eligible for
investment, the maturities and aggregate
amount of such investment. (Section 29, GBL)
Asian Bonds Glossary (asianbondsonline.adb.org).
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
29
The operations of commercial banks are discussed in
Chapter 4.
D.
Rural Banks
The State recognizes the need to promote comprehensive rural
development with the end in view of attaining acquitable distribution
of opportunities, income and wealth; a sustained increase in the
amount of goods and services produced by the nation for the benefit
of the people; and in expanding productivity as a key raising the
quality of life for all, especially the underprivileged.84
Towards these ends, the State encourages and assists in the
establishment of rural banking system designed to make needed
credit available and readily accessible in the rural areas on
reasonable terms.85
Loans or advances extended by rural banks shall be primarily for the purpose of meeting the normal credit needs of farmers,
fishermen or farm families owning or cultivating land dedicated to
agricultural production as well as the normal credit needs of cooperatives and merchants. In granting of loans, the rural bank shall
give preference to the application of farmers and merchant whose
cash requirements are small.86
In areas where there are no government banks, rural banks
may deposit in private banks more than the amount prescribed by the
Single Borrower’s Limit subject to Monetary Board regulations.87
* Note:
E.
Single Borrower’s limit is discussed in Chapter 4.
Thrift Banks
i.
It is the policy of the State to:
(a)
Recognize the indispensable role of the private sector, to encourage private enterprise, and to provide
incentives to needed investments;
84
Section 1, Republic Act No. 7353 (An Act Providing for the Creation, Organization and Operation of Rural Banks, and for Other Purposes).
85
Ibid.
86
Section 6, Republic Act No. 7353 (An Act Providing for the Creation, Organization and Operation of Rural Banks, and for Other Purposes).
87
Section 17, Republic Act No. 7353 (An Act Providing for the Creation, Organization and Operation of Rural Banks, and for Other Purposes).
30
BANKING LAWS & JURISPRUDENCE
ii.
(b)
Promote economic development pursuant to the
socio-economic program of the government, to expand
industrial and agricultural growth, to encourage the
establishment of more private thrift banks in order to
meet the needs for capital, personal and investment
credit or medium- and long-term loans for Filipino
entrepreneurs;
(c)
Encourage and assist the establishment of thrift bank
system which will promote agriculture and industry
and at the same time place within easy reach of the
people the medium- and long-term credit facilities at
reasonable cost;
(d)
Encourage industry, frugality and the accumulation
of savings among the public, and the members and
stockholders of thrift banks; and
(e)
Regulate and supervise the activities of thrift
banks in order to place their operations on a sound,
stable and efficient basis and to curtail or prevent
acts or practices which are prejudicial to the public
interest.88
“Thrift banks” include savings and mortgage banks, private development banks, and stock savings and loans associations organized under existing laws, and any banking corporation that may be organized for the following
purposes:
(1)
Accumulating the savings of depositors and investing them, together with capital loans secured by
bonds, mortgages in real estate and insured improvements thereon, chattel mortgage, bonds and
other forms of security or in loans for personal or
household finance, whether secured or unsecured, or
in financing for home building and home development; in readily marketable and debt securities; in
commercial papers and accounts receivables, drafts,
bills of exchange, acceptances or notes arising out of
commercial transactions; and in such other investments and loans which the Monetary Board may de-
88
Section 2, Republic Act No. 7906 (An Act Providing for the Regulation of the
Organization and Operations of Thrift Banks, and for Other Purposes).
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
31
termine as necessary in the furtherance of national
economic objectives;
iii.
89
(2)
Providing short-term working capital, mediumand long-term financing, to businesses engaged in
agriculture, services, industry and housing; and
(3)
Providing diversified financial and allied services for
its chosen market and constituencies specially for
small and medium enterprises and individuals.89
The following are the powers of thrift banks:
(a)
Accept savings and time deposits;
(b)
Open current or checking accounts: Provided, That
the thrift bank has net assets of at least Twenty million pesos (P20,000,000) subject to such guidelines
as may be established by the Monetary Board; and
shall be allowed to directly clear its demand deposit
operations with the Bangko Sentral and the Philippine Clearing House Corporation;
(c)
Act as correspondent for other financial institutions;
(d)
Act as collection agent for government entities,
including but not limited to, the Bureau of Internal
Revenue, Social Security System, and the Bureau of
Customs;
(e)
Act as official depository of national agencies and of
municipal, city or provincial funds in the municipality, city or province where the thrift bank is located,
subject to such guidelines as may be established by
the Monetary Board;
(f)
Rediscount paper with the Philippine National Bank,
the Land Bank of the Philippines, the Development
Bank of the Philippines, and other governmentowned or -controlled corporations. Said institutions
shall specify the nature of paper deemed acceptable
for rediscount, as well as rediscounting rate to be
charged by any of these institutions; and
Section 3, supra.
32
BANKING LAWS & JURISPRUDENCE
(g)
Issue mortgage and chattel mortgage certificates,
buy and sell them for its own account or for the
account of others, or accept and receive them in
payment or as amortization of its loan.
➢
➢
Such mortgage and chattel mortgage certificates shall be issued exclusively in national
currency and exclusively for the financing of
equipment loans, mortgage loans for the acquisition of machinery and other fixed installations, conservation, enlargement or improvement of productive properties and real estate
mortgage loans for:
(1)
the construction, acquisition, expansion
or improvement of rural and urban properties;
(2)
the refinancing of similar loans and mortgages; and
(3)
such other purposes as may be authorized
by the Monetary Board.
A thrift bank shall coordinate the amounts and
maturities of its certificates with those of its
loans, so as to ensure adequate cash receipts
for the payment of principal and interest at
the time they become due. The bank shall
accept its own certificates at least at the actual
price of issue, in any prepayment of loans
which mortgage or chattel mortgage debtors
may wish to make: Provided, That the date of
maturity of the certificates is not later than the
date on which the payment would otherwise
become due, in the absence of the aforesaid
prepayment.
(h)
Purchase, hold and convey real estate under the
same conditions as those governing commercial
banks;
(i)
Engage in quasi-banking and money market operations;
(j)
Open domestic letters of credit;
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
33
(k)
Extend credit facilities to private and government
employees: Provided, That in the case of a borrower
who is a permanent employee or wage earner, the
treasurer, cashier or paymaster of the office employing him is authorized, notwithstanding the provisions of any existing law, rules and regulations to
the contrary, to make deductions from his salary,
wage or income pursuant to the terms of his loan, to
remit deductions to the thrift bank concerned, and
collect such reasonable fee for his services;
(l)
Extend credit against the security of jewelry, precious
stones and articles of similar nature, subject to such
rules and regulations as the Monetary Board may
prescribe; and
(m) Offer other banking services.
Thrift banks may perform the services under (b), (d), (e), (g)
and (i) only upon prior approval of the Monetary Board. It may also
perform commercial banking services, operate under an expanded
banking authority, or exercise such other powers incident to a
corporation with prior approval of the Monetary Board.90
F.
Cooperative Banks
i.
A cooperative bank is one organized by, the majority
shares of which is owned and controlled by, cooperatives
primarily to provide financial and credit services to
cooperatives. The term “cooperative bank” shall include
cooperative rural banks.91
ii.
A cooperative bank may perform the following functions:
(1)
To carry on banking and credit services for the
cooperatives;
(2)
To receive financial aid or loans from the Government
and the Central Bank of the Philippines for and
in behalf of the cooperative banks and primary
cooperatives and their federations engaged in
Section 10, supra.
Section 100, Republic Act No. 6938 (An Act to Ordain a Cooperative Code of
the Philippines).
90
91
34
BANKING LAWS & JURISPRUDENCE
business and to supervise the lending and collection
of loans;
iii.
G.
(3)
To mobilize savings of its members for the benefit of
the cooperative movement;
(4)
To act as a balancing medium for the surplus funds
of cooperatives and their federations;
(5)
To discount bills and promissory notes issued and
drawn by cooperatives;
(6)
To issue negotiable instruments to facilitate the
activities of cooperatives;
(7)
To issue debentures subject to the approval of and
under conditions and guarantees to be prescribed by
the Government;
(8)
To borrow money from banks and other financial
institutions within the limit to be prescribed by the
Central Bank; and
(9)
To carry out all other functions as may be prescribed
by the Cooperative Development Authority: Provided,
That the performance of any banking function shall
be subject to prior approval by the Central Bank of
the Philippines.
Membership of a cooperative bank shall include only
cooperatives and federations of cooperatives.92
Islamic Banks
i.
R.A. 6848 created the Al-Amanah Islamic Investment
Bank of the Philippines, or the Islamic Bank. Its principal
domicile and place of business is in Zamboanga City. It
may establish branches, agencies or other offices at
such places in the Philippines or abroad subject to the
laws, rules and regulations of the Bangko Sentral ng
Pilipinas.93
Section 102, supra.
Section 2, Republic Act No. 6848 (An Act Providing for the 1989 Charter of
the Al-Amanah Islamic Investment Bank of the Philippines, Authorizing its Conduct of Islamic Banking Business and Repealing for this Purpose Presidential Decree
92
93
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
35
ii.
The primary purpose of the Islamic Bank is to promote
and accelerate the socio-economic development of the
Autonomous Region by performing banking, financing and
investment operations and to establish and participate in
agricultural, commercial and industrial ventures based
on the Islamic concept of banking.94
iii.
All business dealings and activities of the Islamic Bank
shall be subject to the basic principles and rulings of
Islamic Shari’a within the purview of the declared policy.
Any zakat or “tithe” paid by the Islamic Bank on behalf
of its shareholders and depositors shall be considered as
part of compliance by the Islamic Bank with its obligation
to appropriate said zakat fund and to disburse it in
legitimate channels to be ascertained first by the Shari’a
Advisory Council.95
iv.
Notwithstanding the provisions of any law to the contrary,
the Islamic Bank is authorized to operate an Investment
House pursuant to Presidential Decree No. 129, as
amended, and as a Venture Capital Corporation pursuant
to Presidential Decree No. 1688 and, by virtue thereof,
carry on the following types of commercial operations:
(1)
The Islamic Bank may have a direct interest as a
shareholder, partner, owner or any other capacity in
any commercial, industrial, agricultural, real estate
or development project under mudarabah form of
partnership or musharaka joint venture agreement
or by decreasing participation, or otherwise invest
under any of the various contemporary Islamic
financing techniques or modes of investment for
profit sharing;
(2)
The Islamic Bank may carry on commercial operations
for the purpose of realizing its investment banking
objectives by establishing enterprises or financing
existing enterprises, or otherwise by participating in
any way with other companies, institutions or banks
Numbered Two Hundred and Sixty-four as Amended by Presidential Decree Numbered Five Hundred and Forty-Two Creating The Philippine Amanah Bank).
94
Section 3, supra.
95
Ibid.
36
BANKING LAWS & JURISPRUDENCE
performing activities similar to its own or which
may help accomplish its objectives in the Philippines
or abroad, under any of the contemporary Islamic
financing techniques or modes of investment for
profit sharing; and
(3)
H.
The Islamic Bank may perform all business ventures
and transactions as may be necessary to carry out the
objectives of its charter within the framework of the
Islamic Bank’s financial capabilities and technical
considerations prescribed by law and convention:
Provided, That these shall not involve any riba or
other activities prohibited by the Islamic Shari’a
principles.
Other Banks
The following are Government-Owned Banks:
(i)
Philippine Veterans Bank
On June 18, 1963, the Philippine Veterans Bank was created
with the enactment of Republic Act No. 3518, which became its
charter. Under the provisions of this law, the P100 million authorized
capital of the Bank will be divided into 510,000 common shares and
490,000 preferred shares with a par value of P100.00. The common
shares were fully subscribed by the Government for and on behalf of
the veterans, their widows and orphans, and paid out of the Veterans
Trust Fund. The preferred shares, which were to be sold to the
veterans at the rate of one share each, were eventually distributed to
them at no cost on their part. While PVB was conceived and created
as a private commercial bank that is owned by the veterans, the law
provided that it shall be a government depository as a gesture of
appreciation by a grateful nation to the veterans for the sacrifices
that they offered on the altar of freedom.96
(ii)
Land Bank of the Philippines
Republic Act No. 3844 (Agricultural Land Reform Code)
created the Land Bank of the Philippines to finance the acquisition
and distribution of agricultural estates for division and resale to
96
Website of Philippine Veterans Bank (www.veteransbank.com.ph).
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
37
small landholders as well as the purchase of the landholding by the
agricultural lessee.97
(iii) Development Bank of the Philippines
In 1947, the government created the Rehabilitation Finance
Corporation (RFC) under R.A. 85 which absorbed the assets and
took over the functions of the Agricultural Industrial Bank. The
RFC provided credit facilities for the development of agriculture,
commerce and industry and the reconstruction of properties damaged
by the war. In 1958, the RFC was reorganized into the Development
Bank of the Philippines. The change in corporate name marked the
shift from rehabilitation to broader activities.98
I.
Non-Stock Savings and Loan Associations
Non-stock savings and loan association is a non-stock, non-profit
corporation engaged in the business of accumulating the savings of
its members and using such accumulations for loans to members to
service the needs of households by providing long-term financing for
home building and development and for personal finance.99
The Association confines its membership to a well-defined group
of persons and cannot transact business with the general public.100
J.
Quasi-Banks
Quasi-banks refer to entities engaged in the borrowing 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.101
In this connection, deposit substitutes is 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,
97
98
Website of Land Bank of the Philippines (www.landbank.com).
Website of Development Bank of the Philippines (www.devbankphil.com.
ph).
Republic Act No. 8367.
Ibid.
101
Section 4, GBL.
99
100
38
BANKING LAWS & JURISPRUDENCE
participations, certificates of assignment and similar instruments
with recourse, and repurchase agreements.102
K.
Offshore Banks
i.
P.D. 1034 (Authorizing The Establishment Of An Offshore
Banking System In The Philippines) has the following
“whereas” clauses:
WHEREAS, conditions conducive to the establishment of an offshore banking system, such as political stability, a growing economy and adequate communication
facilities, among others, exist in the Philippines;
WHEREAS, it is in the interest of developing countries to have as wide access as possible to the sources of
capital funds for economic development;
WHEREAS, an offshore banking system based in
the Philippines will be advantageous and beneficial to the
country by increasing our links with foreign lenders, facilitating the flow of desired investments into the Philippines, creating employment opportunities and expertise
in international finance, and contributing to the national
development effort.
WHEREAS, the geographical location, physical and
human resources, and other positive factors provide the
Philippines with the clear potential to develop as another
financial center in Asia;
ii.
“Offshore Banking” refers to the conduct of banking
transactions in foreign currencies involving the receipt of
funds from external sources and the utilization of such
funds.
“Offshore Banking Unit” means a branch, subsidiary
or affiliate of a foreign banking corporation which is duly
authorized by the Bangko Sentral ng Pilipinas (“BSP’’) to
transact offshore banking business in the Philippines.
iii.
102
Subject to such regulatory guidelines as the Monetary
Board may prescribe, only banks which are organized
under any law other than those of the Republic of the
Section 95, NCBA.
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
39
Philippines their branches, subsidiaries or affiliates,
shall be qualified to operate offshore banking units in
the Philippines. However, local branches of foreign banks
already authorized to accept foreign currency deposits
under the provisions of R.A. 6426103 may opt to apply for
authority to operate an offshore banking unit: Provided,
that, upon their receipt of a corresponding certificate
of authority to operate as an offshore banking unit, the
license to transact business under the provisions of R.A.
6426 shall be deemed automatically withdrawn.
iv.
The Monetary Board of the BSP is authorized to issue
certificates of authority to operate offshore banking units:
Provided, however, that, in issuing such certificates,
the Monetary Board shall take into consideration the
applicant’s liquidity and solvency position, networth and
resources, management, international banking expertise,
contribution to the Philippine economy, and other relevant
factors such as participation in equity of local commercial
banks and appropriate geographic representation.
The Central Bank of the Philippines is authorized to
collect a fee of not less than US$ 20,000.00 upon issuing
any certificate of authority to operate and annually
thereafter on the anniversary date of such certificate.
v.
No application to operate as an offshore banking unit
shall be considered unless the applicant shall have first
submitted to the BSP a sworn undertaking of its head
office or parent or holding company, duly supported by an
appropriate resolution of its board of directors, that, among
other things: (a) it will, on demand, provide the necessary
specified currencies to cover liquidity needs that may
arise or other shortfall that is offshore banking unit may
incur; (b) the operations of its offshore banking unit shall
be managed soundly and with prudence; (c) it will train
and continually educate a specific number of Filipinos in
international banking and foreign exchange trading with
a view to reducing the number of expatriates; (d) it will
provide and maintain in its offshore banking unit net
office funds in the minimum amount of US$ 1,000,000.00
103
“An Act Instituting a Foreign Currency Deposit System in the Philippines
And for other Purposes.’’
40
BANKING LAWS & JURISPRUDENCE
and (e) it will start operations of its offshore banking unit
within 180 days from receipt of its certificate of authority
to operate such unit.
vi.
Transactions of offshore banking units with nonresidents or with other offshore banking units shall be
freely allowed: Provided, that the BSP may establish such
safeguards as may be necessary to prevent circumvention
of applicable foreign exchange regulations. Transactions
of offshore banking units with resident of the Philippines,
including those with local commercial banks and local
branches of foreign banks authorized to receive foreign
currency deposits under Republic Act No. 6426, shall be
subject to applicable law and regulations.
The Monetary Board of the Central Bank of the
Philippines shall promulgate such rules and regulations
as may be necessary to carry out and implement the
provisions of this Decree.
vii. Tax and Other Incentives:
(a)
The provisions of any law to the contrary notwithstanding, the transactions of offshore banking unit
authorized hereunder with non-residents and other
offshore banking units shall be subject to a five per
cent (5%) tax on the net, income from such transactions which shall be in lieu of all taxes on the said
transactions: Provided, however, that transactions
of offshore banking units with local commercial
banks, including branches of foreign banks that may
be authorized by the BSP to transact business with
offshore banking units, shall likewise be subject to
the same tax, except net income from such transactions as may be specified by the Secretary of Finance,
upon recommendation of the Monetary Board, to be
subject to the usual income tax payable by banks.
Any income of non-residents from transactions with
said offshore banking units shall be exempt from
any tax.
(b)
In the case of transaction with residents (other than
other offshore banking units or local commercial
banks including local branches of foreign banks that
may be authorized by the BSP to transact business
with offshore banking units), interest income from
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
41
loans granted to such residents shall be subject only
to a ten per cent (10%) withholding tax as final tax.
(c)
Notwithstanding the provision of any law to the
contrary, foreign personnel may be assigned by any
foreign bank to work in its offshore banking unit
in the Philippines. Such foreign personnel, their
spouses and unmarried children under twenty-one
years of age, shall be issued a multiple entry special
visa, valid for a period of one year, to enter the
Philippines: Provided, however, that a responsible
officer of such foreign bank submits a certificate of
the effect that the person who seeks entry in the
Philippines is an employee of the said foreign bank
and will work exclusively for its offshore banking
unit in the Philippines and that he will be paid by
the foreign bank in the Philippines compensation in
foreign currencies: Provided, further, that in the case
of the spouse and unmarried children mentioned
herein the certificate shall be to the effect that they
are dependents of the foreign personnel working in
the offshore banking unit.
The admission and stay of the foreign personnel and their dependents mentioned in the next
preceding paragraph shall be co-terminous with the
validity of the multiple entry special visa: Provided,
however, that their stay may be extended yearly
upon submission to the Commission on Immigration and Deportation of a sworn certification by a
responsible officer of the offshore banking unit in the
Philippines that such bank’s authority to operate as
an offshore banking unit is valid and subsisting and
that the personnel concerned has been paid in the
Philippines, from the date of original admission, the
compensation mentioned in the next preceding paragraph, for which that tax due thereon has been withheld and paid to the Bureau of Internal Revenue.
The foreign personnel and their respective
spouses and dependents shall be exempt from: the
Payment of all fees due under the immigration and
alien registration laws; securing alien certificates
of registration; and obtaining emigration clearance
42
BANKING LAWS & JURISPRUDENCE
certificates, and all types of clearances required by
any government department or agency, except that
upon their final departure from the Philippines, the
employer of the said foreign personnel shall so advice
in writing the Commission on Immigration and
Deportation at least five (5) working days prior to
such departure, and the finally departing personnel
shall be required to submit to the said office a tax
clearance from the Bureau of Internal Revenue.
(d)
Aliens employed by offshore banking units. There
shall be levied, collected and paid for each taxable
year upon the gross income received by every alien
individual employed by offshore banking units established in the Philippines as salaries, wages, annuities, compensations, remunerations and emoluments from such offshore banking units a tax equal
to fifteen per centum of such gross income.
(e)
The alien executives of offshore banking units shall
enjoy the privileges extended to foreigners coming to
settle in the Philippines for the first time as provided
for under Section 105(h) of the Tariff and Customs
Code, as amended.
(f)
The offshore banking units shall be exempt from all
forms of local licenses, fees, dues, imposts, or any
other local taxes or burdens.
VI. Authority To Engage In Banking And
Quasi-Banking Functions
A.
Authority from the Bangko Sentral
No person or entity shall engage in banking operations or
quasi-banking functions without authority from the Bangko Sentral.
An entity authorized by the Bangko Sentral to perform universal or
commercial banking functions shall likewise have the authority to
engage in quasi-banking functions.
Note that this is consistent with the following provisions of the
Corporation Code:
(i)
No articles of incorporation or amendment to articles of
incorporation of banks, banking and quasi-banking insti-
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
43
tutions, building and loan associations, trust companies
and other financial intermediaries, insurance companies,
public utilities, educational institutions, and other corporations governed by special laws shall be accepted or
approved by the Commission unless accompanied by a favorable recommendation of the appropriate government
agency to the effect that such articles or amendment is in
accordance with law.104
(ii)
B.
The Securities and Exchange Commission shall not accept
for filing the by-laws or any amendment thereto of any
bank, banking institution, building and loan association,
trust company, insurance company, public utility, educational institution or other special corporations governed
by special laws, unless accompanied by a certificate of the
appropriate government agency to the effect that such bylaws or amendments are in accordance with law.105
Determination by the Monetary Board
The determination of whether a person or entity is performing
banking or quasi-banking functions without Bangko Sentral
authority shall be decided by the Monetary Board.
i.
To resolve such issue, the Monetary Board may, through
the appropriate supervising and examining department
of the Bangko Sentral, examine, inspect or investigate the
books and records of such person or entity.
ii.
Upon issuance of this authority, such person or entity
may commence to engage in banking operations or quasibanking functions and shall continue to do so unless such
authority is sooner surrendered, revoked, suspended or
annulled by the Bangko Sentral in accordance with the
GBL or other special laws.
iii.
Existence of a victim actually injured is not necessary
in determining whether an entity is engaged in illegal
banking. In Central Bank of The Philippines vs. Morfe,
G.R. No. L-20119, June 30, 1967, it was held:
104
105
Section 17, Corporation Code (Batas Pambansa Blg. 68).
Section 46, Corporation Code (Batas Pambansa Blg. 68).
44
BANKING LAWS & JURISPRUDENCE
Again, the aforementioned order would seem
to assume that an illegal banking transaction, of
the kind contemplated in the contested action of
the officers of the Bank, must always connote the
existence of a “victim.” If this term is used to denote
a party whose interests have been actually injured,
then the assumption is not necessarily justified. The
law requiring compliance with certain requirements
before anybody can engage in banking obviously
seeks to protect the public against actual, as well as
potential, injury. Similarly, we are not aware of any
rule limiting the use of warrants to papers or effects
which cannot be secured otherwise.
The line of reasoning of respondent Judge
might, perhaps, be justified if the acts imputed to
the Organization consisted of isolated transactions,
distinct and different from the type of business in
which it is generally engaged. In such case, it may be
necessary to specify or identify the parties involved
in said isolated transactions, so that the search and
seizure be limited to the records pertinent thereto.
Such, however, is not the situation confronting us.
The records suggest clearly that the transactions
objected to by the Bank constitute the general
pattern of the business of the Organization. Indeed,
the main purpose thereof, according to its By-laws, is
“to extend financial assistance, in the form of loans,
to its members,” with funds deposited by them.
It is true, that such funds are referred to — in
the Articles of Incorporation and the By-laws — as
their “savings.” and that the depositors thereof are
designated as “members,” but, even a cursory examination of said documents will readily show that
anybody can be a depositor and thus be a “participating member.” In other words, the Organization
is, in effect, open to the “public” for deposit accounts,
and the funds so raised may be lent by the Organization. Moreover, the power to so dispose of said funds
is placed under the exclusive authority of the “founder members,” and “participating members” are expressly denied the right to vote or be voted for, their
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
45
“privileges and benefits,” if any, being limited to
those which the board of trustees may, in its discretion, determine from time to time. As a consequence,
the “membership” of the “participating members” is
purely nominal in nature. This situation is fraught,
precisely, with the very dangers or evils which Republic Act No. 337 seeks to forestall, by exacting
compliance with the requirements of said Act, before
the transactions in question could be undertaken.
C.
Authority of Supervising and Examining Department
The department head and the examiners of the appropriate
supervising and examining department are authorized:
a)
to administer oaths to any such person, employee, officer,
or director of any such entity; and
b)
to compel the presentation or production of such books,
documents, papers or records that are reasonably necessary to ascertain the facts relative to the true functions
and operations of such person or entity.
Failure or refusal to comply with the required presentation or production of such books, documents, papers
or records within a reasonable time shall subject the
persons responsible therefor to penal sanctions provided
under the New Central Bank Act. Persons or entities
found to be performing banking or quasi-banking functions without authority from the Bangko Sentral shall be
subject to appropriate sanctions under the New Central
Bank Act and other applicable laws.106
D.
Extension of Examining Powers
The Bangko Sentral shall, when examining a bank, have the
authority to examine an enterprise which is wholly or majorityowned or controlled by the bank.107
However, note that this is available only when the Bangko
Sentral is examining a bank.
106
107
Section 6, GBL.
Section 7, GBL.
46
BANKING LAWS & JURISPRUDENCE
Interestingly, under the NCBA, the examining powers extend
only to subsidiaries and affiliates engaged in allied activities.108
E.
Certificate of Authority to Register
(i)
(ii)
The Securities and Exchange Commission shall not
register the articles of incorporation of any bank, or any
amendment thereto, unless accompanied by a certificate
of authority issued by the Monetary Board, under its seal.
Such certificate shall not be issued unless the Monetary
Board is satisfied from the evidence submitted to it:
(RPC)
1.
That 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; (R)
2.
That the public interest and economic conditions,
both general and local, justify the authorization; and
(P)
3.
That 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. (C)
The Securities and Exchange Commission shall not register the by-laws of any bank, or any amendment thereto,
unless accompanied by a certificate of authority from the
Bangko Sentral.109
Problems:
1.
A total of 59,463 savings account deposits have been made
by the public with A corporation and its 74 branches. A Corporation
has an aggregate deposit of P1,689,136.74, which has been lent out
to such persons as the corporation deemed suitable therefor. Is the
corporation engaged in banking business?
108
109
Sec. 25, New Central Bank Act.
Section 14, GBL.
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
47
Yes. It is clear that these transactions partake of the nature of
banking.110 Indeed, a bank has been defined as a moneyed institute111
founded to facilitate the borrowing, lending and safe-keeping of
money112 and to deal, in notes, bills of exchange, and credits.113 An
investment company which loans out the money of its customers,
collects the interest and charges a commission to both lender and
borrower, is a bank.114 Any person engaged in the business carried on
by banks of deposit, of discount, or of circulation is doing a banking
business, although but one of these functions is exercised.115 Thus,
authority from the Bangko Sentral is necessary.
2.
An investment company engaged in the purchase of
receivables at a discount. Did it engage in banking business
without authority from the Bangko Sentral?
No. An investment company refers to any issuer which is or
holds itself out as being engaged or proposes to engage primarily
in the business of investing, reinvesting or trading in securities.
Securities include commercial papers evidencing indebtedness of any
person, financial or non-financial entity, irrespective of maturity,
issued, endorsed, sold, transferred or in any manner conveyed to
another with or without recourse, such as promissory notes. Purchase
of receivables at a discount, is well within the purview of “investing,
reinvesting or trading in securities” which an investment company
is authorized to perform and does not constitute a violation of
the banking laws.116 Indubitably, what is prohibited by law is for
investment companies to lend funds obtained from the public through
receipts of deposit, which is a function of banking institutions.117
110
Republic of the Philippines vs. Security Credit and Acceptance Corporation,
G.R. No. L-20583, January 23, 1967.
111
Talmage vs. Pell, 7 N.Y. (3 Seld. ) 328, 347, 348.
112
Smith vs. Kansas City Title & Trust Co., 41 S. Ct. 243, 255 U.S. 180, 210,
65 L. Ed. 577.
113
State vs. Cornings Sav. Bank, 115 N.W. 937, 139 Iowa 338; Banks & Banking, by Zellmann, vol. 1, p. 46.
114
Western Investment Banking Co. vs. Murray, 56 P. 728, 730, 731; 6 Ariz
215.
115
Maclaren vs. State, 124 N.W. 667, 141 Wis. 577, 135 Am. S.R. 55, 18 Ann.
Cas. 826; 9 C.J.S. 30.
116
Bañas vs. Asia Pacific Finance Corporation, G.R. No. 128703, October 18,
2000.
117
Ibid.
48
BANKING LAWS & JURISPRUDENCE
VII. Service of Summons Upon Banks
A.
Service under the Rules of Court
i.
Sec.11, Rule 14 of the Rules of Court provides:
Service upon domestic private juridical entity. When
the defendant is a corporation, partnership or association
organized under the laws of the Philippines with a juridical personality, service may be made on the president,
managing partner, general manager, corporate secretary,
treasurer, or in-house counsel.
ii.
Sec. 12, Rule 14 of the Rules of Court provides:
Service upon foreign private juridical entity. When
the defendant is a foreign private juridical entity which
has transacted business in the Philippines, service may
be made on its resident agent designated in accordance
with law for that purpose, or, if there be no such agent, on
the government official designated by law to that effect,
or on any of its officers or agents within the Philippines.
* Note: See related discussion on service to foreign banks in Chapter
6.
B.
Strict Compliance is Necessary
i.
Basic is the rule that a strict compliance with the mode of
service is necessary to confer jurisdiction of the court over
a corporation. The officer upon whom service is made must
be one who is named in the statute; otherwise, the service
is insufficient.118 The purpose is to render it reasonably
certain that the corporation will receive prompt and
proper notice in an action against it or to insure that the
summons be served on a representative so integrated
with the corporation that such person will know what to
do with the legal papers served on him.
ii.
In this connection, service of summons on a branch
manager is invalid. Thus, it was held that:
118
Bank of the Philippine Islands vs. Sps. Santiago, G.R. No. 169116, March
28, 2007; Delta Motors Corp. vs. Pamintuan, G.R. No. L-41667, April 30, 1976, 70
SCRA 598.
CHAPTER 1 — BANKS AND THE BUSINESS OF BANKING
49
Applying the aforestated principle in the case at
bar, we rule that the service of summons on BPI’s Branch
Manager did not bind the corporation for the branch
manager is not included in the enumeration of the statute
of the persons upon whom service of summons can be
validly made in behalf of the corporation. Such service is
therefore void and ineffectual.119
iii.
However, whatever defect that attended the service of
an original summons would be promptly and accordingly
cured upon the issuance and the proper service of new
summons. In the case of The Philippine American Life and
General Insurance Company vs. Brevea,120 the Supreme
Court ruled:
A case should not be dismissed simply because
an original summons was wrongfully served. It
should be difficult to conceive, for example, that when a
defendant personally appears before a Court complaining
that he had not been validly summoned, that the case
against him should be dismissed. An alias summons
can be actually served on said defendant.
xxxx
x x x It is not pertinent whether the summons is
designated as an “original” or an “alias” summons
as long as it has adequately served its purpose. What
is essential is that the summons complies with the
requirements under the Rules of Court and it has
been duly served on the defendant together with
the prevailing complaint. x x x Moreover, the second
summons was technically not an alias summons but more
of a new summons on the amended complaint. It was not
a continuation of the first summons considering that it
particularly referred to the amended complaint and not
to the original complaint. (Emphases supplied.)
119
Bank of the Philippine Islands vs. Sps. Santiago, G.R. No. 169116, March
28, 2007.
120
The Philippine American Life and General Insurance Company vs. Breva,
G.R. No. 147937, November 11, 2004, 442 SCRA 217, 223-225.
50
BANKING LAWS & JURISPRUDENCE
Chapter 2
Organization, Management And
Administration Of Banks,
Quasi-Banks And Trust Entities
I. Organization Of Banks
A.
Conditions
The Monetary Board may authorize the organization of a bank
or quasi-bank subject to the following conditions: (SPC)
1.
B.
That the entity is a stock corporation; (S)
➢
The Monetary Board may prescribe rules and
regulations on the types of stock a bank may issue,
including the terms thereof and rights appurtenant
thereto to determine compliance with laws and
regulations governing capital and equity structure
of banks.
➢
Banks shall issue par value stocks only.1
2.
That its funds are obtained from the public, which shall
mean twenty (20) or more persons; and (P)
3.
That the minimum capital requirements prescribed by the
Monetary Board for each category of banks are satisfied.
(C)
Capabilities
The Monetary Board shall take into consideration their capability in terms of their financial resources and technical expertise
and integrity. The bank licensing process shall incorporate an assessment of:
1
Section 9, GBL.
50
CHAPTER 2 — ORGANIZATION, MANAGEMENT AND
ADMINISTRATION OF BANKS, QUASI-BANKS AND TRUST ENTITIES
C.
a)
the bank’s ownership structure,
b)
directors and senior management,
c)
its operating plan, and
d)
internal controls, as well as
e)
its projected financial condition and capital base.2
51
Capital Requirements
1.
Banks to be established shall comply with the required
minimum capital enumerated below or as may be prescribed by the
Monetary Board:
Type of Bank
Amounts
(In Million Pesos)
a. Universal Banks
4,950.0
b. Commercial Banks
2,400.0
c.
Thrift Banks
— With head office within Metro
Manila
325.0
— With head office outside Metro
Manila
52.0
d. Rural Banks
— within Metro Manila
26.0
— Cities of Cebu and Davao
13.0
— In 1st, 2nd & 3rd class cities and
1st class municipalities
6.5
— In 4th, 5th & 6th class cities and in
2nd, 3rd & 4th class
municipalities
3.9
— In 5th & 6th class municipalities
2.6
2.
At least 25% of the total authorized capital stock shall
be subscribed by the subscribers of the proposed bank, and at least
2
Section 8, GBL.
52
BANKING LAWS & JURISPRUDENCE
25% of such subscription shall be paid-up, provided that in no case
shall the paid-up capital be less than the minimum required capital
stated above.
This is consistent with Section 13 of the Corporation Code to
wit:
Sec. 13. Amount of capital stock to be subscribed and paid
for purposes of incorporation. — At least twenty-five percent
(25%) of the authorized capital stock as stated in the
articles of incorporation must be subscribed at the time
of incorporation, and at least twenty-five percent (25%)
of the total subscription must be paid upon subscription,
the balance to be payable on a date or dates fixed in the
contract of subscription without need of call, or in the
absence of a fixed date or dates, upon call for payment
by the board of directors: Provided, however, That in no
case shall the paid-up capital be less than five thousand
pesos (P5,000.00).
D.
Incorporators/Subscribers
(i)
The incorporators/subscribers and proposed directors and
officers must be persons of integrity and of good credit
standing in the business community. The subscribers
must have adequate financial strength to pay for their
proposed subscriptions in the bank.
(ii)
The incorporators/subscribers and proposed directors
and officers must not have been convicted of any crime
involving moral turpitude, and unless otherwise allowed
under the provisions of existing laws are not officers and
employees of a government agency, instrumentality,
department or office charged with the supervision of, or
the granting of loans to banks.
(iii) A bank may be organized with not less than five (5) nor
more than fifteen (15) incorporators. In case there are more
than fifteen (15) persons initially interested in organizing
and investing in the proposed bank, the excess may be
listed among the original subscribers in the Articles of
Incorporation.
* Note: Cooperatives may organize a rural bank. Upon consultation
with the rural banks in the area, duly established cooperatives and corporations primarily organize to hold equities
CHAPTER 2 — ORGANIZATION, MANAGEMENT AND
ADMINISTRATION OF BANKS, QUASI-BANKS AND TRUST ENTITIES
53
in rural banks may organize a rural bank and/or subscribe
to the shares of stock of any rural bank: Provided, That a
cooperative or corporation owning or controlling the whole
or majority of the voting stock of the rural bank shall be
subject to special examination and to such rules and regulations as the Monetary Board may prescribe.3
E.
Bank Branches
(i)
Universal or commercial banks may open branches or
other offices within or outside the Philippines upon prior
approval of the Bangko Sentral. Branching by all other
banks shall be governed by pertinent laws. A bank may,
subject to prior approval of the Monetary Board, use any
or all of its branches as outlets for the presentation and/or
sale of the financial products of its allied undertaking or of
its investment house units.
(ii)
A bank authorized to establish branches or other offices
shall be responsible for all business conducted in such
branches and offices to the same extent and in the same
manner as though such business had all been conducted
in the head office. A bank and its branches and offices
shall be treated as one unit.4
II. Stockholdings
A.
Treasury Stocks
(i)
The GBL provides that no bank shall:
a)
purchase or acquire shares of its own capital stock;
or
b)
accept its own shares as a security for a loan.
The exception is when otherwise authorized
by the Monetary Board. In every case, the stock so
purchased or acquired shall, within six (6) months
from the time of its purchase or acquisition, be sold
or disposed of at a public or private sale.5
3
Section 4, Republic Act No. 7353 (An Act Providing for the Creation, Organization and Operation of Rural Banks and for Other Purposes).
4
Section 20, GBL.
5
Section 10, GBL.
54
BANKING LAWS & JURISPRUDENCE
(ii)
At common law a corporation has no lien upon the shares
of stockholders for any indebtedness to the corporation6
and there is no statute creating such lien. No bank shall
make any loan or discount on the security of the shares
of its own capital stock, nor be the purchaser or holder of
any such shares, unless such security or purchase shall be
necessary to prevent loss upon a debt previously contracted
in good faith, and stock so purchased or acquired shall,
within six months from the time of its purchase, be sold or
disposed of at public or private sale, or, in default thereof,
a receiver may be appointed to close up the business of
the bank in accordance with law.”7
(iii) Section 35 of the United States National Banking Act of
1864 contains a similar provision and it has been held
in various decisions of the United States Supreme Court
that a bank organized under that Act can have no lien
on its own stock for the indebtedness of the stockholders
even when the by-laws provide that the shares shall be
transferable only on the books of the corporation and
that no such transfer shall be made if the holder of the
shares is indebted to the corporation.8 The reasons for
this doctrine are obvious; if banking corporations were
given a lien on their own stock for the indebtedness of
the stockholders, the prohibition against granting loans
or discounts upon the security of the stock would become
largely ineffective.9
B.
Foreign Stockholdings
The GBL provides:
(i)
Foreign individuals and non-bank corporations may own
or control up to forty percent (40%) of the voting stock of
a domestic bank. This rule shall apply to Filipinos and
domestic non-bank corporations.10
Jones on Liens, 3d Ed., Sec. 375.
Fua Cun (alias Tua Cun) vs. Summers, G.R. No. L-19441, March 27, 1923.
8
Jones on Liens, 3d Ed., Sec. 384; First National Bank of South Bend vs. Lanier
and Handy, 11 Wall., 369; Bullard vs. National Eagle Bank, 18 Wall., 589; First
National Bank of Xenia vs. Stewart and Mcmillan, 107 U.S., 676.
9
Fua Cun (alias Tua Cun) vs. Summers, G.R. No. L-19441, March 27, 1923.
10
Section 11, GBL.
6
7
CHAPTER 2 — ORGANIZATION, MANAGEMENT AND
ADMINISTRATION OF BANKS, QUASI-BANKS AND TRUST ENTITIES
55
* Note: This provision is ambiguous. It appears that foreign individuals and non-bank corporations may only control up to forty
percent (40%) of the voting stock. On the other hand, Filipinos and domestic non-bank corporations may also control
only up to forty percent of the voting stock. What happens
then to the remaining twenty percent (20%)?
The same has been clarified as follows:
a) Foreign individuals and non-bank corporations may own
or control up to forty percent (40%) of the voting stock of
a domestic bank: Provided, That the aggregate foreignvoting stocks owned by the foreign individuals and nonbank corporations in a domestic bank shall not exceed
forty percent (40%) of the outstanding voting stock of the
bank. The percentage of foreign-owned voting stock in a
bank shall be determined by the citizenship of the individual stockholders in that bank.
b) A Filipino individual and a domestic non-bank corporation may each own up to forty percent (40%) of the voting stock of a domestic bank. There shall be no aggregate
ceiling on the ownership by such individuals and corporations in a domestic bank.
(ii)
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
corporation which is a stockholder in a bank shall follow
the citizenship of the controlling stockholders of the
corporation, irrespective of the place of incorporation.11
Thus, the citizenship of the corporation which is a
stockholder of a bank shall follow the citizenship of the
controlling stockholders of the corporation, irrespective
of the place of incorporation. The term “controlling
stockholders” shall refer to individuals holding more than
fifty percent (50%) of the voting stock of the corporate
stockholders of the bank.
(iii) At least 60% of voting stock of any commercial bank shall
be owned by Filipino citizens. For any thrift bank, at
least 40% of its voting stock shall be owned by Filipino
citizens. Subject to Section 4 of Republic Act. No. 7353
11
Ibid.
56
BANKING LAWS & JURISPRUDENCE
(Rural Banks Act), all of the capital stock of any rural
bank shall be fully owned and held, directly or indirectly,
by Filipino citizens or corporations, associations or cooperatives qualified under Philippine laws to own and hold
such capital stock.
* Note: In determining the nationality of banks, the control test
is applied. The war-time test, investment test, place of
incorporation test, and principal place of business test do
not apply:
C.
Acquisition Of Voting Stock In A Domestic Bank
The GBL provides for the following rules:
(i)
Within seven (7) years from the effectivity of the GBL and
subject to guidelines issued pursuant to the Foreign Banks
Liberalization Act, the Monetary Board may authorize a
foreign bank to acquire up to one hundred percent (100%)
of the voting stock of only one (1) bank organized under
the laws of the Republic of the Philippines.
(ii)
Within the same period, the Monetary Board may
authorize any foreign bank, which prior to the effectivity
of the GBL availed itself of the privilege to acquire up to
sixty percent (60%) of the voting stock of a bank under the
Foreign Banks Liberalization Act and the Thrift Banks
Act, to further acquire voting shares of such bank to the
extent necessary for it to own one hundred percent (100%)
of the voting stock thereof.
(iii) In the exercise of this authority, the Monetary Board shall
adopt measures as may be necessary to ensure that at all
times the control of seventy percent (70%) of the resources
or assets of the entire banking system is held by banks
which are at least majority-owned by Filipinos. Any right,
privilege or incentive granted to a foreign bank under this
Section shall be equally enjoyed by and extended under
the same conditions to banks organized under the laws of
the Republic of the Philippines.12
* Note: See discussion on foreign banks in Chapter 6.
12
Section 73, GBL.
CHAPTER 2 — ORGANIZATION, MANAGEMENT AND
ADMINISTRATION OF BANKS, QUASI-BANKS AND TRUST ENTITIES
D.
57
Family Groups or Related Interests
Stockholdings of individuals related to each other within the
fourth degree of consanguinity or affinity, legitimate or commonlaw, shall be considered family groups or related interests and must
be fully disclosed in all transactions by such an individual with the
bank.13
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.14
III. Board Of Directors
A.
Number of Directors
The provisions of the Corporation Code to the contrary
notwithstanding, there shall be at least five (5), and a maximum of
fifteen (15) members of the board of directors of bank, two (2) of whom
shall be independent directors.
Except for the requirement of two independent directors,
this requirement under the GBL is similar to Section 10 of the
Corporation Code:
Number and qualifications of incorporators. — Any
number of natural persons not less than five (5) but not more
than fifteen (15), all of legal age and a majority of whom are
residents of the Philippines, may form a private corporation for
any lawful purpose or purposes. Each of the incorporators of a
stock corporation must own or be a subscriber to at least one (1)
share of the capital stock of the corporation.
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. 15
An “independent director” means a person other than an officer
or employee of the bank, its subsidiaries or affiliates or related
interests.
Section 12, GBL.
Section 13, GBL.
15
Sec. 7, R.A. 7721.
13
14
58
BANKING LAWS & JURISPRUDENCE
Specifically, an independent director shall mean a person who —
B.
a.
Is not or has not been an officer or employee of the bank/
quasibank/trust entity, its subsidiaries or affiliates or
related interests during the past three (3) years counted
from the date of his election;
b.
Is not a director or officer of the related companies of the
institution’s majority stockholder;
c.
Is not a majority shareholder of the institution, any of its
related companies, or of its majority shareholder;
d.
Is not a relative within the fourth degree of consanguinity
or affinity, legitimate or common-law of any director,
officer or majority shareholder of the bank/quasi-bank/
trust entity, or any of its related companies;
e.
Is not acting as a nominee or representative of any
director or substantial shareholder of the bank/quasibank/trust entity, any of its related companies or any of
its substantial shareholders; and
f.
Is free from any business or other relationship with the
institution or any of its major stockholders which could
materially interfere with the exercise of his judgment, i.e.,
has not engaged and does not engage in any transaction
with the institution, any of its related companies or any of
its substantial shareholders, whether by himself or with
other persons or through a firm of which he is a partner
or a company of which he is a director or substantial
shareholder, other than transactions which are conducted
at arms length and could not materially interfere or
influence with the exercise of his judgments.
Directors of Merged or Consolidated Banks
In the case of a bank merger or consolidation, the number of
directors shall not exceed twenty-one.16
C.
Meetings
The meetings of the board of directors may be conducted through
modern technologies such as, but not limited to, teleconferencing and
16
Section 17, GBL.
CHAPTER 2 — ORGANIZATION, MANAGEMENT AND
ADMINISTRATION OF BANKS, QUASI-BANKS AND TRUST ENTITIES
59
video-conferencing.17 Banks shall include in their bylaws a provision
that meetings of their board of directors shall be held only within
the Philippines.
In relation to this, Section 25 of the Corporation Code
provides:
Corporate officers, quorum. — Immediately after their
election, the directors of a corporation must formally organize
by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be
a resident and citizen of the Philippines, and such other officers
as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that
no one shall act as president and secretary or as president and
treasurer at the same time.
The directors or trustees and officers to be elected shall
perform the duties enjoined on them by law and the by-laws of
the corporation. Unless the articles of incorporation or the bylaws provide for a greater majority, a majority of the number of
directors or trustees as fixed in the articles of incorporation shall
constitute a quorum for the transaction of corporate business,
and every decision of at least a majority of the directors or
trustees present at a meeting at which there is a quorum shall
be valid as a corporate act, except for the election of officers
which shall require the vote of a majority of all the members of
the board.
Directors or trustees cannot attend or vote by proxy at
board meetings.
D.
Compensation and other Benefits of Directors and
Officers
To protect the funds of depositors and creditors, the Monetary
Board may regulate the payment by the bank to its directors and
officers of compensation, allowance, fees, bonuses, stock options,
profit sharing and fringe benefits only in exceptional cases and when
the circumstances warrant, such as but not limited to the following:
(CUU)
a.
17
When a bank is under comptrollership or conservatorship;
or (C)
Section 15, GBL.
60
BANKING LAWS & JURISPRUDENCE
b.
When a bank is found by the Monetary Board to be conducting business in an unsafe or unsound manner; or (U)
c.
When a bank is found by the Monetary Board to be in an
unsatisfactory financial condition. (Section 18, GBL) (U)
* Note: This is somewhat absurd. The Monetary Board may only
regulate the compensation and benefits of directors and
officers to protect the depositors and creditors only when the
bank is in trouble. Sec. 30 of the Corporation Code provides
the remedy:
Compensation of directors. — In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors,
except for reasonable per diems: Provided, however, That
any such compensation other than per diems may be granted
to directors by the vote of the stockholders representing at
least a majority of the outstanding capital stock at a regular
or special stockholders’ meeting. In no case shall the total
yearly compensation of directors, as such directors, exceed
ten (10%) percent of the net income before income tax of the
corporation during the preceding year.
IV. Fit And Proper Rule
A.
Powers of the Monetary Board
The GBL provides the following rules:
1.
To maintain the quality of bank management and afford
better protection to depositors and the public in general,
the Monetary Board shall prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed bank directors or officers and disqualify those found unfit.
2.
After due notice to the board of directors of the bank, the
Monetary Board may disqualify, suspend or remove any
bank director or officer who commits or omits an act which
render him unfit for the position.
3.
In determining 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. (CITEE)18
18
Section 16, GBL.
CHAPTER 2 — ORGANIZATION, MANAGEMENT AND
ADMINISTRATION OF BANKS, QUASI-BANKS AND TRUST ENTITIES
B.
61
Disqualifications19
a.
19
The following are permanently disqualified from being
directors:
1.
Persons who have been convicted by final judgment
of a court for offenses involving dishonesty or breach
of trust such as, but not limited to, estafa, embezzlement, extortion, forgery, malversation, swindling,
theft, robbery, falsification, bribery, violation of
B.P. Blg. 22 (Bouncing Checks Law), violation of
anti-graft and corrupt practices act (R.A. 3019) and
prohibited acts and transactions under Section 7 of
R.A. 6713 (Code of Conduct and Ethical Standards
for Public Officials and Employees);
2.
Persons who have been convicted by final judgment
of a court sentencing them to serve a maximum term
of imprisonment of more than six years;
3.
Persons who have been convicted by final judgment
of the court for violation of banking laws, rules and
regulations;
4.
Persons who have been judicially declared insolvent,
spendthrift or incapacitated to contract; or
5.
Directors, officers or employees of closed banks/
quasi-banks/trust entities who were found to be
culpable for such institution’s closure as determined
by the monetary board;
6.
Directors and officers of banks, quasi-banks and
trust entities found by the monetary board as administratively liable for violation of banking laws,
rules and regulations where a penalty of removal
from office is imposed, and which finding of the monetary board has become final and executory; and
7.
Directors and officers of banks, quasi-banks and
trust entities or any person found by the monetary
board to be unfit for the position of directors or officers
because they were found administratively liable by
another government agency for violation of banking
Circular No. 513, Series of 2006.
62
BANKING LAWS & JURISPRUDENCE
laws, rules and regulations or any offense/violation
involving dishonesty or breach of trust, and which
finding of said government agency has become final
and executory.
b.
The following are temporarily disqualified from being
directors:
1.
Persons who refuse to fully disclose the extent of their
business interest or any material information to the
appropriate supervising and examining department
when required pursuant to a provision of law or of
a circular, memorandum, rule or regulation of the
BSP. This disqualification shall be in effect as long
as the refusal persists;
2.
Directors who have been absent or who have not
participated for whatever reasons in more than
fifty percent (50%) of all meetings, both regular
and special, of the board of directors during their
incumbency, and directors who failed to physically
attend for whatever reasons in at least twenty-five
percent (25%) of all board meetings in any year, except
that when a notarized certification executed by the
corporate secretary has been submitted attesting
that said directors were given the agenda materials
prior to the meeting and that their comments/
decisions thereon were submitted for deliberation/
discussion and were taken up in the actual board
meeting, said directors shall be considered present
in the board meeting. This disqualification applies
only for purposes of the immediately succeeding
election;
3.
Persons who are delinquent in the payment of their
obligations:
a.
Delinquency in the payment of obligations
means that an obligation of a person with a
bank/quasi-bank/trust entity where he/she is a
director or officer, or at least two obligations
with other banks/financial institution, under
different credit lines or loan contracts, are past
due (pursuant to Secs. X306 and 4308Q of the
Manual of Regulations for Banks).
CHAPTER 2 — ORGANIZATION, MANAGEMENT AND
ADMINISTRATION OF BANKS, QUASI-BANKS AND TRUST ENTITIES
b.
63
Obligations shall include all borrowings from a
bank/quasi-bank obtained by:
i.
A director or officer for his own account or
as the representative or agent of others or
where he/she acts as a guarantor, indorser, or surety for loans from such financial
institutions;
ii.
The spouse or child under the parental
authority of the director or officer;
iii.
Any person whose borrowings or loan proceeds were credited to the account of, or
used for the benefit of a director or officer;
iv.
A partnership of which a director or officer, or his/her spouse is the managing
partner or a general partner owning a
controlling interest in the partnership;
and
v.
A corporation, association or firm whollyowned or majority of the capital of which
is owned by any or a group of persons
mentioned in the foregoing items (i), (ii)
and (iv);
This disqualification shall be in effect as long
as the delinquency persists.
4.
Persons who have been convicted by a court for
offenses involving dishonesty or breach of trust
such as, but not limited to, estafa, embezzlement,
extortion, forgery, malversation, swindling, theft,
robbery, falsification, bribery, violation of B.P. Blg.
22, violation of anti-graft and corrupt practices act
(R.A. 3019), and prohibited acts and transactions
under Section 7 of R.A. 6713 (Code Of Conduct
And Ethical Standards For Public Officials And
Employees), violation of banking laws, rules and
regulations or those sentenced to serve a maximum
term of imprisonment of more than six years but
whose conviction has not yet become final and
executory;
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BANKING LAWS & JURISPRUDENCE
5.
Directors and officers of closed banks/quasi-banks/
trust entities pending their clearance by the
Monetary Board;
6.
Directors disqualified for failure to observe/discharge their duties and responsibilities prescribed
under existing regulations. This disqualification applies until the lapse of the specific period of disqualification or upon approval by the Monetary Board on
recommendation by the appropriate supervising and
examining department of such directors’ election/reelection;
7.
Directors who failed to attend the special seminar for
board of directors. This disqualification applies until
the director concerned had attended such seminar;
8.
Persons dismissed/terminated from employment for
cause. This disqualification shall be in effect until
they have cleared themselves of involvement in
the alleged irregularity or upon clearance, on their
request, from the monetary board after showing
good and justifiable reasons;
9.
Those under preventive suspension; or
10.
Persons with derogatory records as certified by,
or on the official files of, the judiciary, National
Bureau of Investigation, Philippine National Police,
quasi-judicial bodies, other government agencies,
international police, monetary authorities and
similar agencies or authorities of foreign countries
for irregularities or violations of any law, rules and
regulations that would adversely affect the integrity
of the director/officer or the ability to effectively
discharge his duties. This disqualification applies
until they have cleared themselves of the alleged
irregularities/violations or after a lapse of five (5)
years from the time the complaint, which was the
basis of the derogatory record, was initiated;
11.
Directors and officers of banks, quasi-banks and
trust entities found by the Monetary Board as administratively liable for violation of banking laws,
rules and regulations where a penalty of removal
from office is imposed, and which finding of the Mon-
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65
etary Board is pending appeal before the appellate
court, unless execution or enforcement thereof is restrained by the court;
C.
12.
Directors and officers of banks, quasi-banks and
trust entities or any person found by the Monetary
Board to be unfit for the position of directors or
officers because they were found administratively
liable by another government agency for violation of
banking laws, rules and regulations or any offense/
violation involving dishonesty or breach of trust, and
which finding of said government agency is pending
appeal before the appellate court, unless execution
or enforcement thereof is restrained by the court;
13.
Directors and officers of banks, quasi-banks and
trust entities found by the Monetary Board as
administratively liable for violation of banking laws,
rules and regulations where a penalty of suspension
from office or fine is imposed, regardless whether the
finding of the Monetary Board is final and executory
or pending appeal before the appellate court, unless
execution or enforcement thereof is restrained by the
court. The disqualification shall be in effect during
the period of suspension or so long as the fine is not
fully paid.
Disqualifications/Prohibitions under the Corporation
Code
The Corporation Code provides:
Section 27. Disqualification of directors, trustees or officers. — No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or
a violation of this Code committed within five (5) years prior to
the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation.
D.
Disqualifications/Prohibitions under the NCBA
The NCBA provides for the following:
“Section 9. Disqualifications. — In addition to the disqualifications imposed by Republic Act No. 6713, a member
of the Monetary Board is disqualified from being a director,
officer, employee, consultant, lawyer, agent or stockholder of
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BANKING LAWS & JURISPRUDENCE
any bank, quasi-bank or any other institution which is subject
to supervision or examination by the Bangko Sentral, in which
case such member shall resign from, and divest himself of any
and all interests in such institution before assumption of office
as member of the Monetary Board.
The members of the Monetary Board coming from the
private sector shall not hold any other public office or public
employment during their tenure.
No person shall be a member of the Monetary Board if
he has been connected directly with any multilateral banking
or financial institution or has a substantial interest in any
private bank in the Philippines, within one (1) year prior to his
appointment; likewise, no member of the Monetary Board shall
be employed in any such institution within two (2) years after
the expiration of his term except when he serves as an official
representative of the Philippine Government to such institution.’’
(Emphasis supplied)
“Section 27. Prohibitions. — In addition to the prohibitions
found in Republic Act Nos. 3019 and 6713, personnel of the
Bangko Sentral are hereby prohibited from:
(a)
being an officer, director, lawyer or agent, employee, consultant or stockholder, directly or indirectly, of any institution subject to supervision or examination by the Bangko Sentral, except non-stock savings and loan associations
and provident funds organized exclusively for employees
of the Bangko Sentral, and except as otherwise provided
in this Act;
(b)
directly or indirectly requesting or receiving any gift, present or pecuniary or material benefit for himself or another,
from any institution subject to supervision or examination
by the Bangko Sentral;
(c)
revealing in any manner, except under orders of the court,
the Congress or any government office or agency authorized
by law, or under such conditions as may be prescribed by
the Monetary Board, information relating to the condition
or business of any institution. This prohibition shall not be
held to apply to the giving of information to the Monetary
Board or the Governor of the Bangko Sentral, or to any
person authorized by either of them, in writing, to receive
such information; and
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(d)
E.
67
borrowing from any institution subject to supervision or
examination by the Bangko Sentral shall be prohibited
unless said borrowings are adequately secured, fully
disclosed to the Monetary Board, and shall be subject to
such further rules and regulations as the Monetary Board
may prescribe: Provided, however, That personnel of the
supervising and examining departments are prohibited
from borrowing from a bank under their supervision or
examination.’’ (Emphasis supplied)
Disqualification/Prohibition under the PDIC (Philippine
Deposit Insurance Corporation) Law
The PDIC law provides:
“SECTION 17. Except with the written consent of the
Corporation (PDIC), no person shall serve as a director, officer,
or employee of an insured bank who has been convicted, or
who is hereafter convicted, of any criminal offense involving
dishonesty or a breach of trust. For each willful violation of
this prohibition, the bank involved shall be subject to a penalty
of not more than P100 for each day this prohibition is violated,
which the Corporation may recover for its use.’’
F.
Disqualification/Prohibition under Republic Act No.
7353 (An Act Providing For The Creation, Organization And
Operation Of Rural Banks, And For Other Purposes)
R.A. 7353 provides:
“Sec. 5. All members of the Board of Directors of the rural
bank shall be citizens of the Philippines at the time of their
assumption to office: Provided, however, That nothing in this
Act shall be construed as prohibiting any appointive or elective
public official from serving as director, officer, consultant or in
any capacity in the bank.’’
G.
Disqualification/Prohibition under Appendix 38, Manual
of Regulations for Banks (Guidelines For The Organization
Of Cooperative Banks)
Appendix 38 of the MORB provides:
“Sec. 10. Limitation on officership/directorship. — Any
officer or employee of the CDA (Cooperative Development
Authority) shall be disqualified to be elected or appointed to any
position in a Coop Bank. Elective officials of the Government,
68
BANKING LAWS & JURISPRUDENCE
except barangay officials, shall also be ineligible to become
officers and directors of Coop Banks.’’
H.
Prohibition on Public Officials
Except as otherwise provided in the Rural Banks Act, 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 is incident to financial assistance provided
by the government or a government-owned or -controlled corporation
to the bank or unless otherwise provided under existing laws.20
The pertinent provision of the Rural Banks Act states:
All members of the Board of Directors of the rural
bank shall be citizens of the Philippines at the time of their
assumption to office: Provided, however, That nothing in this
Act shall be construed as prohibiting any appointive or elective
public official from serving as director, officer, consultant or in
any capacity in the bank.21
V. Banking Days And Hours
A.
Number of Days and Hours
The GBL provides for the following guidelines:
(i)
Unless otherwise authorized by the Bangko Sentral in
the interest of the banking public, all banks including
their branches and offices shall transact business on all
working days for at least six (6) hours a day. In addition,
banks or any of their branches or offices may open for
business on Saturdays, Sundays or holidays for at least
three (3) hours a day.
(ii)
Banks which opt to open on days other than working
days shall report to the Bangko Sentral the additional
days during which they or their branches or offices shall
transact business.
Section 19, GBL.
Section 5, Republic Act No. 7353 (An Act Providing for the Creation, Organization and Operation of Rural Banks and for Other Purposes).
20
21
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69
(iii) Working days mean Mondays to Fridays, except if such
days are holidays.22
B.
Rules and Regulations
In connection with banking days and hours, the following are
the pertinent rules and regulations:
i.
22
All banks, including their branches and offices, doing
business in the Philippines, shall observe for the conduct
of their business a regular banking week of five (5) days,
except when such days are holidays. The regular banking
week should fall on Mondays to Fridays unless otherwise
authorized by the BSP in the interest of the banking
public. On these days, said institution shall transact
business for at least six (6) hours each day.
a.
For purposes of servicing deposits and withdrawals,
banks may, at their discretion, remain open beyond
the minimum six (6) hours and for as long as they
find it necessary, even before 8:00 AM or after 8:00
PM.
b.
Banks may, after prior written notice, also remain
open beyond the minimum six (6) hours for banking
services other than the servicing of deposits and
withdrawals but in no case shall such banking hours
start earlier than 8:00 AM nor extend beyond 8:00
PM.
c.
Branches of banks at any international airport or
major fish port are allowed to operate on flexible
banking hours within a twenty-four (24)-hour period,
subject to the condition that the individual bank’s
management will inform the BSP of the schedule of
its banking hours which shall in no case be less than
six (6) hours a day.
d.
The banking days and hours selected for each of the
offices of banks shall be reported in writing to the
appropriate supervising and examining department
of the BSP. Banks may change the banking days and
hours previously reported to the BSP by giving prior
Section 21, GBL.
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BANKING LAWS & JURISPRUDENCE
written notice: Provided, That changes in banking
days or hours shall not be made oftener than once
every thirty (30) days, except during emergencies.
e.
Emergency shall mean (a) condition of an area
or locality proclaimed by the President of the
Philippines as in a state of emergency; or (b) an
event or occasion or a combination of circumstances
equivalent to a public calamity resulting from fire,
flood, or like disaster, or through some unusual
occurrence or pressing necessity not reasonably
subject to anticipation calling for immediate action
or remedy.
f.
The prior written notice to the BSP on changes in
banking days and hours shall be given through the
fastest means of communication, at least seven (7)
banking days before the intended effectivity of the
change in banking hours or days.
g.
In case a bank, due to an emergency, has to open
outside, or close during, the banking hours or days
reported to the BSP, a written report submitted
within twenty-four (24) hours from opening or
closing, as the case may be, will suffice. The report
shall state the specific nature of the emergency and
the period the bank opened or closed or shall open or
close by reason of emergency.
ii.
Subject to compliance with other relevant laws, banks,
including their branches and offices, may opt to observe a
banking week in excess of the five (5) days after reporting
to the BSP the additional days during which such banks
or their branches or offices shall transact business for at
least three (3) hours each day.
iii.
Without the need for prior approval of the BSP, and even
in the absence of an approved local holiday, banks and/
or their branches or other offices are allowed to close on
certain days in celebration of important historical and/or
religious events in the locality where these banks operate:
Provided, That said closure has the prior approval of the
bankers’ association in the locality and in the case of bank
branches, their respective head offices: Provided, further,
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71
That said closure will only be allowed in the municipality
or city where the festivities are centered.
iv.
Banks and/or their branches or other offices shall submit,
either individually or through their head offices, to the
appropriate supervising and examining department
of the BSP a prior notice of their intended closure on
account of a specific local festivity, together with a copy of
the resolution of the local bankers association approving
said closure, at least two (2) days after the date of said
resolution.
v.
The required notice shall be supported by a certification
that:
a.
On the date of the temporary closure, the bank and/or
branch will maintain a skeletal force to handle “outof-town” clearing items (in line with the provisions
of Section X603 of the MORB);
b.
The notice of the bank’s closure and the reason
thereof shall be posted conspicuously in the bank’s
premises; and
c.
For branches of banks, the closure has the prior
approval of their respective head offices.23
VI. Automated Teller Machines
A.
Off-Site Automated Teller Machines (ATMs)
Banks may establish off-site ATMs, subject to the following
conditions:
(1)
Banks shall submit a report to the appropriate department
of the BSP on ATMs which they establish;
(2)
The off-site ATMs shall be installed only in centers of
activity like shopping centers, supermarkets, hospitals,
university campuses: Provided, That adequate internal
control and security measures shall be adopted and
submitted to the BSP; and
(3)
Only banks which have shown general compliance with
23
Section X156 of the MORB as amended by Circular No. 500, Series of 2005.
72
BANKING LAWS & JURISPRUDENCE
laws, rules and regulations shall be allowed to open offsite ATMs.
B.
Mobile ATMs
Banks may also establish mobile ATMs, subject to the following
conditions:
(1)
The mobile ATMs should be allowed to visit only centers
of activity as mentioned in Item A(2) above and should
confine their itinerary to Metro Manila until further
notice;
(2)
The bank shall secure insurance coverage or adopt a
self-insurance scheme to protect itself against losses of
whatever nature in its mobile ATM operations; and
(3)
The bank shall notify the supervising and examining
department of the BSP of the actual date a mobile ATM
becomes operational and when no longer in operation.
VII. Independent Auditor
The following are the rules with respect to financial audit of
banks:
(i)
The Monetary Board may require a bank, quasi-bank
or trust entity to engage the services of an independent
auditor to be chosen by the bank, quasi-bank or trust
entity concerned from a list of certified public accountants
acceptable to the Monetary Board.
(ii)
The term of the engagement shall be as prescribed by
the Monetary Board which may either be on a continuing
basis where the auditor shall act as resident examiner, or
on the basis of special engagements, but in any case, the
independent auditor shall be responsible to the bank’s,
quasi-bank’s or trust entity’s board of directors. A copy of
the report shall be furnished to the Monetary Board.
(iii) The Monetary Board may also direct the board of directors
of a bank, quasi-bank, trust entity and/or the individual
members thereof, to conduct, either personally or by a
committee created by the board, an annual balance sheet
audit of the bank, quasi-bank or trust entity to review the
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73
internal audit and control system of the bank, quasi-bank
or trust entity and to submit a report of such audit.24
VIII. Financial Statements
Every bank, quasi-bank or trust entity shall submit to the
appropriate supervising and examining department of the Bangko
Sentral financial statements in such form and frequency as may be
prescribed by the Bangko Sentral. Such statements, which shall be
as of a specific date designated by the Bangko Sentral, shall show the
actual financial condition of the institution submitting the statement,
and of its branches, offices, subsidiaries and affiliates, including the
results of its operations, and shall contain such information as may
be required in Bangko Sentral regulations.25
A.
Publication of Financial Statements
The following are rules regarding publication of financial
statements:
(i)
Every bank, quasi-bank or trust entity, shall publish a
statement of its financial condition, including those of its
subsidiaries and affiliates, in such terms understandable
to the layman and in such frequency as may be prescribed
by the Bangko Sentral, in English or Filipino, at least
once every quarter in a newspaper of general circulation
in the city or province where the principal office, in the
case of a domestic institution, or the principal branch or
office in the case of a foreign bank, is located, but if no
newspaper is published in the same province, then in a
newspaper published in Metro Manila or in the nearest
city or province.
(ii)
The Bangko Sentral may by regulation prescribe the
newspaper where the statements shall be published. The
Monetary Board may allow the posting of the financial
statements of a bank, quasi-bank or trust entity in
public places it may determine, in lieu of the publication
required in the preceding paragraph, when warranted by
the circumstances.
24
25
Section 58, GBL.
Section 60, GBL.
74
BANKING LAWS & JURISPRUDENCE
(iii) Additionally, banks shall make available to the public in
such form and manner as the Bangko Sentral may prescribe
the complete set of its audited financial statements as
well as such other relevant information including those
on enterprises majority-owned or controlled by the bank,
that will inform the public of the true financial condition
of a bank as of any given time.
(iv) In periods of national and/or local emergency or of
imminent panic which directly threaten monetary and
banking stability, the Monetary Board, by a vote of at
least five (5) of its members, in special cases and upon
application of the bank, quasi-bank or trust entity, may
allow such bank, quasibank or trust entity to defer for a
stated period of time the publication of the statement of
financial condition required herein. (Section 61, GBL)
* Notes:
1.
Consolidated financial statements refer to the combined
statement of condition/balance sheet and statement of income and expenses of two (2) or more corporate entities as
they would appear if they were one (1) organization, after
eliminating the effects of intercompany transactions.
2.
Subsidiary refers to a corporation or firm more than fifty
percent (50%) of the outstanding voting stock of which is
directly or indirectly owned, controlled or held with power to vote by a bank. A domestic subsidiary is any subsidiary domiciled in the Philippines and incorporated under
the laws of the Philippines, while a foreign subsidiary is
a subsidiary incorporated and organized under the laws
of a foreign country.
3.
Affiliate refers to an entity linked directly or indirectly to
a bank by means of:
(a) Ownership, control or power to vote, of ten percent
(10%) or more of the outstanding voting stock of the
entity, or vice-versa;
(b) Interlocking directorship or officership, except in cases involving independent directors as defined under
existing regulations;
(c) Common stockholders owning ten percent (10%) or
more of the outstanding voting stock of each financial
intermediary and the entity;
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75
(d) Management contract or any arrangement granting
power to the bank to direct or cause the direction of
management and policies of the entity, or vice-versa;
and
(e) Permanent proxy or voting trusts in favor of the bank
constituting ten percent.
4.
The financial statements of allied undertakings shall be
consolidated with those of the investing bank only when
the allied undertaking is a subsidiary and a financial
allied undertaking.
5.
In the case of non-financial allied undertakings and affiliates, consolidation may be required on a case-to-case
basis as may be determined by the appropriate supervising and examining department of the BSP.
6.
Financial statements of all domestic and foreign subsidiaries shall be consolidated with those of the investing domestic parent bank, except:
(a) Subsidiaries about to be disposed of;
(b) Subsidiaries where control is being exercised on a
temporary basis;
(c) Subsidiaries whose financial statements bear a closing date different from that of the investing bank’s
financial statements and/or:
(i)
The difference in closing days exceeds three (3)
months or more;
(ii)
The closing date of all the statements are not expressly indicated;
(iii) The necessity of the difference to closing dates is
not explained; and
(iv) Changes in accounting periods of the affiliate/
constituent companies are not disclosed, together with their financial statements.
(d) Subsidiaries whose business activities are dissimilar
from those of the investing bank that the presentation
of separate financial statement would provide better
information; and
(e) Foreign subsidiaries located in places where:
(i)
There are foreign exchange restrictions;
(ii)
The rates of exchange fluctuate widely;
(iii) There are unfavorable legislation in force; and
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BANKING LAWS & JURISPRUDENCE
(iv) The foreign government concerned is undergoing a process of change.
IX. Publication Of Capital Stock
A bank, quasi-bank or trust entity incorporated under the laws
of the Philippines shall not publish the amount of its authorized or
subscribed capital stock without indicating at the same time and
with equal prominence, the amount of its capital actually paid-up.
No branch of any foreign bank doing business in the Philippines
shall in any way announce the amount of the capital and surplus of
its head office, or of the bank in its entirety without indicating at the
same time and with equal prominence the amount of the capital, if
any, definitely assigned to such branch. In case no capital has been
definitely assigned to such branch, such fact shall be stated in, and
shall form part of the publication.26
X. Settlement Of Disputes
The provisions of any law to the contrary notwithstanding, the
Bangko Sentral shall be consulted by other government agencies or
instrumentalities in actions or proceedings initiated by or brought
before them involving controversies in banks, quasi-banks or trust
entities arising out of and involving relations between and among
their directors, officers or stockholders, as well as disputes between
any or all of them and the bank, quasi-bank or trust entity of which
they are directors, officers or stockholders.27
XI. Strikes And Lockouts
A.
Unsettled Labor Disputes
The banking industry is indispensable to the national interest
and, notwithstanding the provisions of any law to the contrary, any
strike or lockout involving banks, if unsettled after seven (7) calendar
days shall be reported by the Bangko Sentral to the Secretary of
Labor who may assume jurisdiction over the dispute and28 decide
Section 62, GBL.
Section 63, GBL.
28
The GBL uses the word “or” instead of “and.” It is submitted that assumption of jurisdiction is futile if no decision will be made. The Labor Code has a similar
provision, to wit: Art. 263(g) When, in his opinion, there exists a labor dispute caus26
27
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77
it or certify the same to the National Labor Relations Commission
for compulsory arbitration. However, the President of the Philippines
may at any time intervene and assume jurisdiction over such labor
dispute in order to settle or terminate the same.29
B.
Reports of Strikes and lockouts
Banks through their president or chief executive officer shall
immediately apprise the Deputy Governor of the Supervision and
Examination Sector of the BSP on the status of strikes/lockouts
involving their banks, if unsettled after seven (7) calendar days.
The bank shall disclose the following pertinent information on
the strike/ lockout:
a.
Cause of the strike/lockout and bank management’s
position on its legality; and
b.
Bank operations affected.
XII. Laws Governing Other Types Of Banks
The organization, ownership and capital requirements, powers,
supervision and general conduct of business of thrift banks, rural
banks and cooperative banks shall be governed by the provisions
of the Thrift Banks Act, the Rural Banks Act, and the Cooperative
Code, respectively. The organization, ownership and capital
requirements, powers, supervision and general conduct of business
of Islamic banks shall be governed by special laws.
The provisions of the GBL, however, insofar as they are not
in conflict with the provisions of the Thrift Banks Act, the Rural
Banks Act, and the Cooperative Code shall likewise apply to thrift
banks, rural banks, and cooperative banks, respectively. However,
for purposes of prescribing the minimum ratio which the net worth
of a thrift bank must bear to its total risk assets, the provisions of
the GBL shall govern.30
ing or likely to cause a strike or lockout in an industry indispensable to the national
interest, the Secretary of Labor and Employment may assume jurisdiction over the
dispute and decide it or certify the same to the Commission for compulsory arbitration. x x x.”
29
Section 22, GBL.
30
Section 71, GBL.
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BANKING LAWS & JURISPRUDENCE
Chapter 3
Deposit Functions of Banks
I. Kinds Of Deposits
A.
Demand Deposits
Demand deposits are “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 (depositor’s) checks.’’1
Banks may accept or create demand deposits subject to
withdrawal by check. A Universal Bank and Commercial Bank may
accept or create demand deposits subject to withdrawal by check,
without prior authority from the BSP. A Thrift Bank/Rural Bank/
Cooperative Bank may accept or create demand deposits upon prior
authority of the BSP. The GBL and NCBA provide:
A bank other than a universal or commercial bank cannot accept
or create demand deposits except upon prior approval of, and subject
to such conditions and rules as may be prescribed by the Monetary
Board. (Section 33, GBL)
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 the NCBA. (Section 58, NCBA)
* Note: Manner of Making the Deposit
In one case, the Supreme Court made the following observations:
1
See Section 58, Republic Act No. 7653 (The New Central Bank Act).
78
CHAPTER 3 — DEPOSIT FUNCTIONS OF BANKS
79
In the ordinary and usual course of banking operations,
current account deposits are accepted by the bank on the
basis of deposit slips prepared and signed by the depositor,
or the latter’s agent or representative, who indicates therein the current account number to which the deposit is to be
credited, the name of the depositor or current account holder, the date of the deposit, and the amount of the deposit either in cash or checks. The deposit slip has an upper portion
or stub, which is detached and given to the depositor or his
agent; the lower portion is retained by the bank. In some instances, however, the deposit slips are prepared in duplicate
by the depositor. The original of the deposit slip is retained
by the bank, while the duplicate copy is returned or given to
the depositor.2
1.
Temporary Overdrawings; Drawings Against Uncollected Deposits
The following regulations shall govern temporary overdrawings
and drawings against uncollected deposits (DAUDs).
a.
Temporary overdrawings. Temporary overdrawings
against current account shall not be allowed, unless
caused by normal bank charges and other fees incidental to handling such accounts. Banks which violate these
regulations shall be subject to a fine of one-tenth of one
percent (1/10 of 1%) per day of violation, computed on the
basis of the amount of overdrawing or fines in amounts
as may be determined by the Monetary Board, but not
to exceed P30,000 a day for each violation, whichever is
lower. Technical overdrawings arising from “force posting” in-clearing checks shall be debited by banks under
“Returned Checks and Other Cash Items Not in Process
of Collection” which is part of “Other Assets” in the Statement of Condition. Items to be lodged under this account
shall consist only of in-clearing checks which may result
in “technical overdrawn” accounts and shall be immediately reversed the following day. The checks lodged under
“Returned Checks, etc.” shall either be returned or honored the following day before clearing. The items to be
used as cover for the honored checks should only consist
of any of the following:
(1)
Cash;
2
Philippine Bank of Commerce vs. Court of Appeals, G.R. No. 97626, March
14, 1997.
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BANKING LAWS & JURISPRUDENCE
(2)
Cashier’s, Manager’s or Certified Checks;
(3)
Bank Drafts;
(4)
Postal Money Orders;
(5)
Treasury Warrants;
(6)
Duly funded “On us” Checks; and
(7)
Fund transfers/credit memos within the same
bank representing proceeds of loans granted under
existing regulations.
Peso demand deposit accounts maintained by foreign
correspondent banks with commercial banks shall not be
subject to the above-mentioned regulations: Provided,
That: (a) The maintenance of non-resident correspondent
bank’s peso checking accounts and overdrawings therefrom are covered by reciprocal arrangement; (b) Temporary overdrawings are covered within fifteen (15) days
from the date overdrawings are incurred; and (c) Such accounts are credited only through foreign exchange inward
remittance.
b.
Drawings against uncollected deposits. DAUDs shall be
prohibited except when the drawings are made against
uncollected deposits representing manager’s/cashier’s/
treasurer’s checks, treasury warrants, postal money
orders and duly funded “on us” checks which may be
permitted at the discretion of each bank.
2.
Current Accounts of Bank Officers and Employees
The following officers and employees of banks are prohibited
from maintaining demand deposits or current accounts with the
banking office in which they are assigned:
a.
All officers;
b.
Employees of the bank’s cash department/cash units;
and
c.
Other employees who have direct and immediate responsibility in the handling of transactions and/or records pertaining to demand deposits or current accounts.
The above-mentioned prohibition shall include the spouses
and relatives within the second degree of consanguinity and affinity
CHAPTER 3 — DEPOSIT FUNCTIONS OF BANKS
81
of the officers and employees covered by the prohibition, and the
business interests of such officers and employees, their spouses and
relatives within the second degree of consanguinity and affinity, in
single proprietorships, or partnerships or corporations in which such
officers and employees, individually or as a group, own or control at
least a majority of the capital of the partnership or the outstanding
subscribed capital stock (voting and non-voting) of the corporation.
3.
Checks
A check is a bill of exchange drawn on a bank payable on
demand. Thus, a check is a written order addressed to a bank or
persons carrying on the business of banking, by a party having
money in their hands, requesting them to pay on presentment, to a
person named therein or to bearer or order, a named sum of money.3
Fixed savings and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple
loan. In other words, the relationship between the bank and the
depositor is that of a debtor and creditor. By virtue of the contract of
deposit between the banker and its depositor, the banker agrees to
pay checks drawn by the depositor provided that said depositor has
money in the hands of the bank.4
4.
Duty of Banks to Honor Checks
(i)
Where the bank possesses funds of a depositor, it is
bound to honor his checks to the extent of the amount
of his deposits. The failure of a bank to pay the check of
a merchant or a trader, when the deposit is sufficient,
entitles the drawer to substantial damages without any
proof of actual damages. Conversely, a bank is not liable
for its refusal to pay a check on account of insufficient
funds, notwithstanding the fact that a deposit may
be made later in the day. Before a bank depositor may
maintain a suit to recover a specific amount from his
bank, he must first show that he had on deposit sufficient
funds to meet his demand.5
(ii)
A bank performs its full duty where, upon the receipt
of a check drawn against an account in which there are
Moran vs. Court of Appeals, G.R. No. 105836, March 7, 1994.
Ibid.
5
Ibid.
3
4
82
BANKING LAWS & JURISPRUDENCE
insufficient funds to pay it in full, it endeavors to induce
the drawer to make good his account so that the check
can be paid, and failing in this, it protests the check on
the following morning and notifies its correspondent bank
by the telegraph of the protest. It cannot, therefore, be
held liable to the payee and holder of the check for not
protesting it upon the day when it was received.6
(iii) Banks must ensure that the amount of the checks should
be paid only to its designated payee. The fact that the
drawee bank did not discover the irregularity seasonably
constitutes negligence in carrying out the bank’s duty to
its depositors.
5.
Responsibilities of Drawer
A drawer must remember his responsibilities every time he
issues a check. He must personally keep track of his available balance
in the bank and not rely on the bank to notify him of the necessity to
fund certain checks he previously issued. A check, as distinguished
from an ordinary bill of exchange, is supposed to be drawn against a
previous deposit of funds for it is ordinarily intended for immediate
payment.7
6.
Duty of Banks to Know Signatures
A bank is bound to know the signatures of its customers; and if
it pays a forged check, it must be considered as making the payment
out of its own funds, and cannot ordinarily charge the amount so
paid to the account of the depositor whose name was forged.8
7.
No Obligation to Make Partial Payment
A bank is under no obligation to make part payment on
a check, up to only the amount of the drawer’s funds, where the
check is drawn for an amount larger than what the drawer has on
deposit. Such a practice of paying checks in part has never existed.
Upon partial payment, the check holder could not be called upon
to surrender the check, and the bank would be without a voucher
affording a certain means of showing the payment. The rule is
Ibid.
Ibid.
8
San Carlos Milling Co., Ltd. vs. Bank of the Philippine Islands, 59 Phil. 59, 66,
December 11, 1933; 7 C. J., 683.
6
7
CHAPTER 3 — DEPOSIT FUNCTIONS OF BANKS
83
based on commercial convenience, and any rule that would work
such manifest inconvenience should not be recognized. A check is
intended not only to transfer a right to the amount named in it, but
to serve the further purpose of affording evidence for the bank of the
payment of such amount when the check is taken up.9
8.
No Duty to Make Up the Deficiency from Other
Accounts
Where a depositor has two accounts with a bank, an open
account and a savings account, and draws a check upon the open
account for more money than the account contains, the bank may
rightfully refuse to pay the check, and is under no duty to make up
the deficiency from the savings account.10
9.
Legal Character of Checks Representing Demand
Deposits
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. (Section 60,
NCBA)
10. Cross-Check
In State Investment House vs. IAC,11 the Supreme Court
enumerated the effects of crossing a check, thus: (1) that the check
may not be encashed but only deposited in the bank; (2) that the
check may be negotiated only once — to one who has an account
with a bank; and (3) that the act of crossing the check serves as a
warning to the holder that the check has been issued for a definite
purpose so that such holder must inquire if the check has been
received pursuant to that purpose.
11. Cashier’s Check
A cashier’s check is really the bank’s own check and may be
treated as a promissory note with the bank as the maker. The check
Moran vs. Court of Appeals, G.R. No. 105836, March 7, 1994
Ibid.
11
G.R. No. 72764, July 13, 1989, 175 SCRA 310.
9
10
84
BANKING LAWS & JURISPRUDENCE
becomes the primary obligation of the bank which issues it and
constitutes a written promise to pay upon demand. In New Pacific
Timber & Supply Co. Inc. vs. Señeris, the Supreme Court took judicial
notice of the “well-known and accepted practice in the business sector
that a cashier’s check is deemed as cash.” This is because the mere
issuance of a cashier’s check is considered acceptance thereof.12
12. Set-Off
i.
A bank may debit the personal account of a depositor for
an amount erroneously credited to the depositor’s sole
proprietorship account because the latter being a sole
proprietorship has no separate and distinct personality
from the depositor. In Bank of the Philippine Islands vs.
Court of Appeals, G.R. No. 136202, January 25, 2007, the
Supreme Court ruled:
Consequently, petitioner, as the collecting bank, had
the right to debit Salazar’s account for the value of the
checks it previously credited in her favor. It is of no moment
that the account debited by petitioner was different from
the original account to which the proceeds of the check were
credited because both admittedly belonged to Salazar, the
former being the account of the sole proprietorship which
had no separate and distinct personality from her, and the
latter being her personal account.
The right of set-off was explained in Associated Bank
vs. Tan:13
A bank generally has a right of set-off over the deposits
therein for the payment of any withdrawals on the part
of a depositor. The right of a collecting bank to debit a
client’s account for the value of a dishonored check that
has previously been credited has fairly been established
by jurisprudence. To begin with, Article 1980 of the Civil
Code provides that “[f]ixed, savings, and current deposits of
money in banks and similar institutions shall be governed
by the provisions concerning simple loan.”
Hence, the relationship between banks and depositors
has been held to be that of creditor and debtor. Thus, legal
12
13
BPI vs. Roxas, G.R. No. 157833, October 15, 2007.
G.R. No. 156940, December 14, 2004, 446 SCRA 282.
CHAPTER 3 — DEPOSIT FUNCTIONS OF BANKS
85
compensation under Article 1278 of the Civil Code may
take place “when all the requisites mentioned in Article
1279 are present xxx.’’
ii.
While, banks have the right of set-off, the issue of whether
it acted judiciously is an entirely different matter.14 As
businesses affected with public interest, and because of
the nature of their functions, banks are under obligation
to treat the accounts of their depositors with meticulous
care, always having in mind the fiduciary nature of their
relationship.15
iii.
It must be emphasized that the law imposes a duty of
diligence on the collecting bank to scrutinize checks
deposited with it, for the purpose of determining their
genuineness and regularity. The collecting bank, being
primarily engaged in banking, holds itself out to the
public as the expert on this field, and the law thus holds it
to a high standard of conduct.16 The taking and collection
of a check without the proper indorsement amount to a
conversion of the check by the bank.17
iv.
Crossing of the check with the phrase “Payee’s Account
Only,” is a warning that the check should be deposited
only in the account of the payee. Thus, it is the duty of the
collecting bank to ascertain that the check be deposited in
payee’s account only. Therefore, it is the collecting bank
which is bound to scrutinize the check and to know its
depositors before it could make the clearing indorsement
“all prior indorsements and/or lack of indorsement
guaranteed.”18
Id.
Prudential Bank vs. Court of Appeals, G.R. No. 125536, March 16, 2000, 328
SCRA 264; Simex International [Manila], Inc. vs. Court of Appeals, G.R. No. 88013,
March 19, 1990, 183 SCRA 360; BPI vs. IAC, G.R. No. 69162, February 21, 1992, 206
SCRA 408.
16
Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corp., G.R.
No. L-74917, January 20,1988, 157 SCRA 188.
17
Bank of the Philippine Islands vs. Court of Appeals, G.R. No. 136202, January 25, 2007; Associated Bank vs. Court of Appeals, G.R. No. 89802, May 7, 1992,
208 SCRA 465; City Trust Banking Corp. vs. IAC, G.R. No. 84281, May 27, 1994, 232
SCRA 559.
18
Philippine Commercial International Bank vs. Court of Appeals, G.R. No.
121413, January 29, 2001.
14
15
86
BANKING LAWS & JURISPRUDENCE
In Banco de Oro Savings and Mortgage Bank vs. Equitable
Banking Corporation, it was ruled:
“Anent petitioner’s liability on said instruments, this
court is in full accord with the ruling of the PCHC’s Board of
Directors that:
‘In presenting the checks for clearing and for payment, the defendant made an express guarantee on the
validity of “all prior endorsements.” Thus, stamped at
the back of the checks are the defendant’s clear warranty:
ALL PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without such warranty,
plaintiff would not have paid on the checks.’
13. Relationship of Payee or Holder and the Bank
It is a well-settled rule that the relationship between the payee
or holder of commercial paper and the bank to which it is sent for
collection is, in the absence of an agreement to the contrary, that of
principal and agent.19 A bank which receives such paper for collection
is the agent of the payee or holder.20
Even if diversion of the amount of a check payable to the collecting bank in behalf of the designated payee may be allowed, still
such diversion must be properly authorized by the payor. Otherwise
stated, the diversion can be justified only by proof of authority from
the drawer, or that the drawer has clothed his agent with apparent
authority to receive the proceeds of such check.21
14. Encashment of Checks
Banking business requires that the one who first cashes and
negotiates the check must take some precautions to learn whether
or not it is genuine. And if the one cashing the check through
indifference or other circumstance assists the forger in committing
the fraud, he should not be permitted to retain the proceeds of the
check from the drawee whose sole fault was that it did not discover
the forgery or the defect in the title of the person negotiating the
instrument before paying the check. For this reason, a bank which
cashes a check drawn upon another bank, without requiring proof
Ibid.
Ibid.
21
Ibid.
19
20
CHAPTER 3 — DEPOSIT FUNCTIONS OF BANKS
87
as to the identity of persons presenting it, or making inquiries with
regard to them, cannot hold the proceeds against the drawee when
the proceeds of the checks were afterwards diverted to the hands of a
third party. In such cases the drawee bank has a right to believe that
the cashing bank (or the collecting bank) had, by the usual proper
investigation, satisfied itself of the authenticity of the negotiation of
the checks. Thus, one who encashed a check which had been forged
or diverted and in turn received payment thereon from the drawee,
is guilty of negligence which proximately contributed to the success
of the fraud practiced on the drawee bank. The latter may recover
from the holder the money paid on the check.
B.
Savings Deposits
1.
Servicing Deposits Outside Bank Premises
Banks may be authorized by the BSP to solicit and accept
deposits outside their bank premises, subject to the following
conditions:
a.
The financial condition of the bank applying for authority
to solicit and collect savings deposits outside its bank
premises is sound and the operations and the quality
of the management thereof could reasonably assure the
safety of the funds which may be entrusted to its deposit
collectors and/or solicitors;
b.
The proposed area where applicant bank intends to solicit
shall be clearly defined;
c.
Solicitation of deposits shall only be confined within
a locality where there are no other banks in operation,
or where it can be clearly established that the deposit
potentials of the said locality are still untapped; and
d.
Applicant bank shall institute and maintain the following
minimum safeguards:
(1)
All deposit solicitors shall be initially bonded for
at least P1,000 subject to the increase thereof to
approximate their daily collections;
(2)
Deposit solicitors shall be provided with proper
identification cards with photograph and signature
of each respective solicitor, certified to by the
appropriate officer of the bank. Said identification
88
BANKING LAWS & JURISPRUDENCE
cards shall be worn by each solicitor at all times at
the upper breast of his outer garment when soliciting
deposits;
(3)
Adequate insurance coverage for funds in transit
(representing deposits collected outside banking
premises) shall be secured by applicant bank from
insurance companies not included in the list of companies blacklisted by the Insurance Commissioner;
(4)
Deposit slips shall be in booklet form, prenumbered,
in triplicate copies and in three (3) colors — the
original to be issued to the depositor, the second
copy to be used for posting reference, and the third
copy to be retained in the booklet;
(5)
All collections shall be turned over to the cashier
at the end of each day accompanied by a Collection
Summary Report to be accomplished in duplicate
which shall contain the following minimum
information:
(a)
Date of the report,
(b)
Names and addresses of the depositors,
(c)
Deposit slip numbers,
(d)
Amounts of deposit,
(e)
Savings account and passbook numbers, and
(f)
Name and signature of solicitor rendering the
report.
(6)
Depositors shall always be required to accomplish
a Signature Card when opening an account, which
card shall be used always as reference in checking
the genuineness/authenticity of signatures affixed on
withdrawal slips or authorizations for withdrawal;
(7)
Deposits/withdrawals shall be recorded by the
bookkeeper or any ledger clerk, except any bank
solicitor, in the depositor’s ledger cards and passbooks
on the same day that such deposits/withdrawals
are accepted. Passbooks shall be returned to the
depositors not later than the following business
day;
CHAPTER 3 — DEPOSIT FUNCTIONS OF BANKS
2.
89
(8)
At the end of each month, depositors shall be advised
in writing of the balances of their deposits with
the bank, the advise slips of which shall never be
handcarried by the solicitors themselves; and
(9)
Places of assignments of bank solicitors shall be
rotated at least quarterly.
Individual and Joint Accounts
A deposit may be either individual or joint account. A joint
account may be an “and” account or an “and/or” account. In an
“and’’ account, the signature of both co-depositors are required for
withdrawals. On the other hand, in case of an “and/or” either one
of the co-depositors may deposit and withdraw from the account
without the knowledge, consent and signature of the other.22
3.
Withdrawals
Banks are prohibited from issuing/accepting withdrawal slips
or any other similar instruments designed to effect withdrawals
of savings deposits without requiring the depositors concerned
to present their passbooks and accomplishing the necessary
withdrawal slips, except for banks authorized by the BSP to adopt
the no passbook withdrawal system.
* Note: As previously stated, there is no law mandating banks to call
up their clients whenever their representatives withdraw
significant amounts from their accounts.
C.
Negotiable Order of Withdrawal (NOW) Accounts
1.
Authority to accept Negotiable Order of Withdrawal
Accounts
Negotiable Order of Withdrawal (NOW) accounts are
interest-bearing deposit accounts that combine the payable
on demand feature of checks and investment feature of
savings accounts. A Universal Bank/Commercial Bank
may offer NOW accounts without prior authority of the
Monetary Board. A Thrift Bank/Rural Bank Cooperative
Bank may accept NOW accounts upon prior approval of
the Monetary Board.
22
Viray, Handbook on Bank Deposits, 1998 Edition.
90
BANKING LAWS & JURISPRUDENCE
2.
Rules on Servicing NOW Accounts
The following rules shall be observed in servicing
NOW accounts:
D.
a.
Prior to or simultaneous with the opening of a NOW
account, the bank shall inform the depositor of its
terms and conditions.
b.
The bank shall be responsible for the proper identification of its depositors; it shall require, among other
things, two (2) specimen signatures and such other
pertinent information.
c.
Deposits shall be covered by deposit slips in duplicate duly validated and initialed by the teller receiving the deposit. A copy of the deposit slip shall be
furnished the depositor.
d.
NOW accounts shall be kept and maintained
separately from the regular savings deposits.
e.
Blank NOW forms shall be prenumbered and shall be
controlled as in the case of unissued blank checks.
f.
A bank statement shall be sent to each depositor at
the end of each month for confirmation of balances.
g.
Banks must use the form prescribed by present rules
for NOW accounts.
Time Deposits
Time deposit is defined as “one the payment of which cannot
legally be required within such a specified number of days.”23
1.
Term of Time Deposits
Time deposits shall be issued for a specific period of term.
2.
Special Time Deposits
Authority shall be automatically granted to any accredited
banking institution which may participate in the supervised credit
program to accept special time deposits from the Agrarian Reform
Fund Commission with interest lower than the rate allowed on time
23
10 Am Jur 2d Sec. 652, citing 12 Cfr Sec. 204.2 (C)(1).
CHAPTER 3 — DEPOSIT FUNCTIONS OF BANKS
91
deposits accepted from the general public. Such deposits shall be
exempt from the legal reserve requirements, as an exception to the
existing policies on the matter.
3.
Certificates of Time Deposit (CTD)
The following are the rules regarding issuance of CTDs:
a.
b.
Negotiable Certificates of Time Deposit (NCTDs)
(i)
Universal Banks/Commercial Banks may issue
NCTDs without approval of the BSP.
(ii)
Thrift Banks/Rural Banks/Cooperative Banks may
issue NCTDs upon the prior approval of the BSP.
Non-Negotiable Certificates of Time Deposit
Banks may issue long-term non-negotiable taxexempt certificates of time deposit without approval of
the BSP.
E.
Deposit Substitute Operations (Quasi-Banking Functions)
The essential elements of quasi-banking are:
a.
Borrowing funds for the borrower’s own account;
b.
Twenty (20) or more lenders at any one time;
c.
Methods of borrowing are issuance, endorsement, or acceptance of debt instruments of any kind, other than deposits, such as acceptances, promissory notes, participations, certificates of assignments or similar instruments
with recourse, trust certificates, repurchase agreements,
and such other instruments as the Monetary Board may
determine; and
d.
The purpose of which is (1) relending, or (2) purchasing
receivables or other obligations.
* Notes:
(i)
Borrowing shall refer to all forms of obtaining or raising funds through any of the methods and for any of the
purposes provided in (d) above whether the borrower’s
liability thereby is treated as real or contingent.
92
BANKING LAWS & JURISPRUDENCE
(ii)
For the borrower’s own account shall refer to the assumption of liability in one’s own capacity and not in
representation, or as an agent or trustee, of another.
(iii) Purchasing of receivables or other obligations shall
refer to the acquisition of claims collectible in money,
including interbank borrowings or borrowings between
financial institutions, or of acquisition of securities,
of any amount and maturity, from domestic or foreign
sources.
(iv) Relending shall refer to the extension of loans by an
institution with antecedent borrowing transactions.
Relending shall be presumed, in the absence of express
stipulations, when the institution is regularly engaged
in lending.
(v)
F.
Regularly engaged in lending shall refer to the practice
of extending loans, advances, discounts or rediscounts
as a matter of business, as distinguished from isolated
lending transactions.
Foreign Currency Deposits
1.
Authority to Deposit Foreign Currencies
Any person, natural or juridical, may deposit with such
Philippine banks in good standing, as may, upon application, be
designated by the Central Bank for the purpose, foreign currencies
which are acceptable as part of the international reserve, except
those which are required by the Central Bank to be surrendered.24
2.
Authority of Banks to accept Foreign Currency
Deposits
The banks designated by the Central Bank shall have the
authority:
(1)
To accept deposits and to accept foreign currencies in
trust;
Numbered accounts for recording and servicing of
said deposits are allowed.
(2)
24
pines).
To issue certificates to evidence such deposits;
Section 2, Republic Act No. 6426 (Foreign Currency Deposit Act of the Philip-
CHAPTER 3 — DEPOSIT FUNCTIONS OF BANKS
93
(3)
To discount said certificates;
(4)
To accept said deposits as collateral for loans subject to
such rules and regulations as may be promulgated by the
Central Bank from time to time; and
(5)
To pay interest in foreign currency on such deposits.25
3.
Foreign Currency Cover Requirements
Except as the Monetary Board may otherwise prescribe or
allow, the depository banks shall:
(i)
maintain at all times a one hundred percent foreign
currency cover for their liabilities,
(ii)
of which cover at least fifteen percent shall be in the form
of foreign currency deposit with the Central Bank,
(iii) and the balance in the form of foreign currency loans or
securities, which loan or securities shall be of short-term
maturities and readily marketable,
(iv) Such foreign currency loans may include loans to domestic
enterprises which are export-oriented or registered with
the Board of Investments, subject to the limitations to be
prescribed by the Monetary Board on such loans,
(v)
Except as the Monetary Board may otherwise prescribe
or allow, the foreign currency cover shall be in the same
currency as that of the corresponding foreign currency
deposit liability,
(vi) The Central Bank may pay interest on the foreign
currency deposit, and if requested shall exchange the
foreign currency notes and coins into foreign currency
instruments drawn on its depository banks.
Depository banks which, on account of networth, resources,
past performance, or other pertinent criteria, have been qualified
by the Monetary Board to function under an expanded foreign
currency deposit system shall be exempt from the requirement of
maintaining fifteen percent (15%) of the cover in the form of foreign
currency deposit with the Central Bank. Subject to prior Central
25
pines).
Section 3, Republic Act No. 6426 (Foreign Currency Deposit Act of the Philip-
94
BANKING LAWS & JURISPRUDENCE
Bank approval when required by Central Bank regulations, said
depository banks may extend foreign currency loans to any domestic
enterprise, without the limitations prescribed regarding maturity
and marketability, and such loans shall be eligible for purposes of
the 100% foreign currency cover prescribed.26
4.
Withdrawability and Transferability of Foreign
Currency Deposits
There is no restriction on the withdrawal by the depositor of
his deposit or on the transferability of the same abroad except those
arising from the contract between the depositor and the bank.27
G.
Anonymous and Numbered Accounts
Anonymous accounts or accounts under fictitious names
should not be kept/allowed. In case where numbered accounts is
allowed (i.e., foreign currency deposits), banks/non-bank financial
institutions should ensure that the client is identified in an official
or other identifying documents.
The following are related laws:
i.
Revised Penal Code
“Art. 178. Using fictitious name and concealing true name.
— The penalty of arresto mayor and a fine not to exceed 500
pesos shall be imposed upon any person who shall publicly use
a fictitious name for the purpose of concealing a crime, evading
the execution of a judgment or causing damage.
Any person who conceals his true name and other personal
circumstances shall be punished by arresto menor or a fine not
to exceed 200 pesos.’’
ii.
Civil Code
“Art. 379. The employment of pen names or stage names
is permitted, provided it is done in good faith and there is no
injury to third persons. Pen names and stage names cannot be
usurped.
Art. 380. Except as provided in the preceding article, no
person shall use different names and surnames.’’
26
Section 4, Republic Act No. 6426 (Foreign Currency Deposit Act of the Philip-
pines).
27
pines).
Section 5, Republic Act No. 6426 (Foreign Currency Deposit Act of the Philip-
CHAPTER 3 — DEPOSIT FUNCTIONS OF BANKS
iii.
95
Commonwealth Act No. 142 as amended by Republic Act
No. 6085
“Sec. 1. Except as a pseudonym solely for literary, cinema,
television, radio or other entertainment purposes and in athletic
events where the use of pseudonym is a normally accepted
practice, no person shall use any name different from the one
with which he was registered at birth in the office of the local
civil registry, or with which he was baptized for the first time,
or, in case of an alien, with which he was registered in the
Bureau of Immigration upon entry; or such substitute name as
may have been authorized by a competent court: Provided, That
persons, whose births have not been registered in any local civil
registry and who have not been baptized, have one year from
the approval of this act within which to register their names in
the civil registry of their residence. The name shall comprise the
patronymic name and one or two surnames.
Sec. 2. Any person desiring to use an alias shall apply for
authority therefor in proceedings like those legally provided to
obtain judicial authority for a change of name, and no person
shall be allowed to secure such judicial authority for more than
one alias. The petition for an alias shall set forth the person’s
baptismal and family name and the name recorded in the civil
registry, if different, his immigrant’s name, if an alien, and his
pseudonym, if he has such names other than his original or real
name, specifying the reason or reasons for the use of the desired
alias. The judicial authority for the use of alias the Christian
name and the alien immigrant’s name shall be recorded in the
proper local civil registry, and no person shall use any name or
names other, than his original or real name unless the same is
or are duly recorded in the proper local civil registry.
Sec. 3. No person having been baptized with a name
different from that with which he was registered at birth in
the local civil registry, or in case of an alien, registered in the
Bureau of Immigration upon entry, or any person who obtained
judicial authority to use an alias, or who uses a pseudonym,
shall represent himself in any public or private transaction or
shall sign or execute any public or private document without
stating or affixing his real or original name and all names or
aliases or pseudonym he is or may have been authorized to use.
Sec. 4. Six months from the approval of this act and subject
to the provisions of section 1 hereof, all persons who have used
any name and/or names and alias or aliases different from those
authorized in section one of this act and duly recorded in the
local civil registry, shall be prohibited to use such other name or
names and/or alias or aliases.’’
96
BANKING LAWS & JURISPRUDENCE
II. Administration Of Deposits
A.
Specimen Signatures, ID Photos
All banking institutions are required to set a minimum of three
(3) specimen signatures to be simultaneously required from each
of their depositors and to update the specimen signatures of their
depositors every five (5) years or sooner, at the discretion of the
bank. Banks may, at their option, require their depositors to submit
ID photos together with the specimen signatures.28
BSP Circular No. 564, Series of 2007 provides for the list of
valid identification cards, as follows:
i.
28
Clients who engage in a financial transaction with the
covered institutions for the first time shall be required to
present the original and submit a copy of at least two valid
photo-bearing identification documents issued and signed
by an official authority. Valid IDs include the following:
•
Passport
•
Driver’s license
•
Professional Regulations Commission (PRC) ID
•
National Bureau of Investigation (NBI) clearance
•
Police clearance
•
Postal ID
•
Voter’s ID
•
Barangay certification
•
Government Service and Insurance System (GSIS)
e-Card
•
Social Security System (SSS) card
•
Philhealth card
•
Senior Citizen Card
•
Overseas Workers Welfare Administration (OWWA)
ID
•
OFW ID
•
Seaman’s Book
X262.1, Manual of Regulation for Banks.
CHAPTER 3 — DEPOSIT FUNCTIONS OF BANKS
B.
97
•
Alien Certification of Registration/Immigrant Certificate of Registration
•
Government office ID [e.g. Armed Forces of the
Philippines (AFP), Home Development Mutual Fund
(HDMF) IDs]
•
Certification from the National Council for the
Welfare of Disabled Persons (NCWDP)
•
Department of Social Welfare and Development
(DSWD) Certification
•
Other valid IDs issued by the Government and its
instrumentalities
ii.
Students who are beneficiaries of an OFW and who are
not yet of voting age shall also be required to present
two IDs. For transactions involving remittance claims,
a photo-bearing school ID signed by the principal or
head of school is considered as one of the two acceptable
IDs. Other IDs may include birth certificate, library ID,
and membership IDs duly issued by any association or
organization within the college or university and signed
by the pertinent authority issuing the ID.
iii.
Banks and non-bank financial institutions shall require
their clients to submit clear copies of the two valid IDs
on a one-time basis only, or at the commencement of a
business relationship. They shall require their clients to
submit an updated photo and other relevant information
whenever the need for it arises.
iv.
Financial transactions may include remittances, among
others, as falling under the definition of transaction.
Under the Anti-Money Laundering Act of 2001, as
amended, a financial transaction is “any act establishing
any right or obligation or giving rise to any contractual
or legal relationship between the parties thereto. It also
includes any movement of funds by any means with a
covered institution.”
Minors and Corporations As Depositors
1.
Minors
Minors are vested with special capacity and power, in their
own right and in their own names, to make savings or time deposits
98
BANKING LAWS & JURISPRUDENCE
with and withdraw the same as well as receive interests thereon
from banking institutions, without the assistance of their parents or
guardians, provided the following requisites are met:
1.
at least seven years of age,
2.
able to read and write,
3.
have sufficient discretion, and
4.
not otherwise disqualified by any other incapacity.
Parents may nevertheless deposit for their minor children and
guardians for their wards.
Deposits in Thrift Banks
Minors in their own rights and in their own names may make
deposits and withdraw the same, and may receive dividends and
interest: Provided, however, That, if any guardian shall give notice
in writing 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.29
2.
Corporations
Corporations may open bank accounts as follows:
C.
(i)
Incorporation Stage — In case the payment of subscription
is in cash, the Securities and Exchange Commission
requires a Bank Certificate of deposit of paid-up capital
notarized in place where signed.
(ii)
Post Incorporation — In opening a bank account, the
Board of Directors issues a resolution authorizing the
signatories and specifying the depositary bank.
Time of Payment of Interest on Time Deposits/Deposit
Substitutes
Interest or yield on time deposit/deposit substitute may be paid
at maturity or upon withdrawal or in advance: Provided, however,
That interest or yield paid in advance shall not exceed the interest
for one (1) year.30
29
Section 22, Republic Act No. 7906 (An Act Providing for the Regulation of the
Organization and Operations of Thrift Banks, and for Other Purposes).
30
X242.1, Manual of Regulations for Banks.
CHAPTER 3 — DEPOSIT FUNCTIONS OF BANKS
99
* Notes: Interest Rates — the cost of borrowing money or the amount
paid for lending money expressed as a percentage of the
principal.
Interest Rate Differential — the difference or margin
between interest rates such as the difference between
domestic and foreign interest rates.
D.
E.
Treatment of Matured Time Deposits/Deposit Substitutes
(i)
A time deposit not withdrawn or renewed on its due
date shall be treated as a savings deposit and shall earn
interest from maturity to the date of actual withdrawal or
renewal at a rate applicable to savings deposits.
(ii)
A deposit substitute instrument not withdrawn or
renewed on its maturity date shall from said date become
payable on demand and shall earn an interest or yield
from maturity to actual withdrawal or renewal at a rate
applicable to a deposit substitute with a maturity of fifteen
(15) days. Banks performing quasi-banking functions
shall continue to consider matured and unwithdrawn
deposit substitutes as such and subject to reserves.31
Clearing Cut-off Time
As a general rule, all deposits and withdrawals during regular
banking hours shall be credited or debited to deposit liability accounts
on the date of receipt or payment thereof: Provided, however, That
a bank may set a clearing cut-off time for its head office not earlier
than two (2) hours before the start of clearing at the BSP, and not
earlier than three and one-half (3-1/2) hours before the start of
clearing for all its branches, agencies and extension offices doing
business in the Philippines, after which time, deposits received shall
be booked as hereinafter provided: Provided, further, That banks
which are located in areas where there are no BSP regional/clearing
arrangements may set a clearing cut-off time not earlier than two
(2) hours before the start of their local clearing after which time,
deposits received shall be booked likewise as hereinafter provided.32
31
32
X242.2, Manual of Regulations for Banks.
X261.1, Manual of Regulations for Banks.
100
F.
BANKING LAWS & JURISPRUDENCE
Booking of Cash Deposits
Cash deposits received after the selected clearing cut-off time
until the close of the regular banking hours shall be booked as
deposits on the day of receipt.33
G.
Booking of Non-cash Deposits
Deposits of checks including “on us” checks, manager’s/
cashier’s/treasurer’s checks and demand drafts, which are drawn
against the depository bank and all its offices, as well as treasury
warrants and postal money orders, received after the selected
clearing cut-off time until the close of the regular banking hours,
may, at the option of the bank, be booked as deposits on the day of
receipt. Other non-cash deposits received after the selected clearing
cut-off time shall be treated as contingent accounts on the day of
receipt and shall be booked as deposits the following banking day.34
H.
Booking of Deposits After Regular Banking Hours
Deposits, whether cash or non-cash, received after the close of
the regular banking hours shall be treated as contingent accounts
on the day of receipt and shall be booked as deposits the following
banking day.35
I.
Average Daily Balance
i.
Banks may impose and collect service charges and/or
maintenance fees on savings and demand deposit accounts, whether active or dormant, that fall below the required minimum monthly average daily balance (ADB),
subject to the following conditions:
a)
the imposition of such charges or fees is clearly stated
among the terms and conditions of the deposit;
b)
the rate or amount of such charges or fees is properly
disclosed among the terms and conditions of the
deposit;
c)
the deposit account balances have fallen below
the required minimum monthly ADB for dormant
X261.3, Manual of Regulations for Banks.
X261.4, Manual of Regulations for Banks.
35
X261.5, Manual of Regulations for Banks.
33
34
CHAPTER 3 — DEPOSIT FUNCTIONS OF BANKS
101
accounts and for at least two (2) consecutive months
for active accounts;
d)
the required minimum monthly ADB of deposits are
properly disclosed among the terms and conditions
of the deposit; and
e)
in the case of charges and fees for dormant accounts
or dormancy fee, the period of dormancy shall be
properly disclosed among the terms and conditions
of the deposit, and that the depositors shall be
informed by registered mail with return card on his
last known address at least sixty (60) days prior to
the imposition of dormancy fee.
ii.
Any change in the terms and conditions for the imposition
of service charges and/or maintenance fees, e.g., increase
in the amount of such charges and fees or increase
in the required minimum monthly ADB of deposits,
shall take effect only after due notice to the depositor:
Provided, That information by regular mail, statement
of account messages, electronic mail, courier delivery
and/or other alternative modes of communication on the
depositor’s last known address at least sixty (60) days
prior to implementation shall be considered sufficient
notice: Provided, further, That failure of the depositor
to manifest or register his objection to the new service
charges and maintenance fees or any change in their
terms and conditions in writing within thirty (30) days
from receipt of written notice of amendment shall be
deemed to constitute acceptance of such changes.
iii.
Banks shall likewise post said information on their
respective websites, automated teller machine (ATM) onscreen messages, and in conspicuous places within the
bank premises and other places near the bank’s own ATM
at least sixty (60) days prior to implementation.
III. Survivorship Agreement
A.
Definition
There is survivorship agreement when joint (and several)
owners of a deposit agree that either of them could withdraw any
102
BANKING LAWS & JURISPRUDENCE
part or the whole of said account during the lifetime of both, and the
balance, if any, upon the death of either, belonged to the survivor.36
It is an aleatory contract supported by law a lawful consideration
— the mutual agreement of the joint depositors permitting either
of them to withdraw the whole deposit during their lifetime, and
transferring the balance to the survivor upon the death of one of
them.37 Article 1790 of the Civil Code provides:
ART. 1790. By an aleatory contract one of the parties
binds himself, or both reciprocally bind themselves, to give or
to do something as an equivalent for that which the other party
is to give or do in case of the occurrence of an event which is
uncertain or will happen at an indeterminate time.
Furthermore, “it is well established that a bank account may
be so created that two persons shall be joint owners thereof during
their mutual lives, and the survivor take the whole on the death of
the other. The right to make such joint deposits has generally been
held not to be done with by statutes abolishing joint tenancy and
survivorship generally as they existed at common law.” (7 Am. Jur.,
299.)
B.
Survivorship Agreement not Invalid Per Se but may be
Violative of Law
Although the survivorship agreement is per se not contrary to
law, its operation or effect may be violative of the law. For instance,
if it be shown in a given case that such agreement is a mere cloak
to hide an inofficious donation, to transfer property in fraud of
creditors, or to defeat the legitime of a forced heir, it may be assailed
and annulled upon such grounds.38
IV. Nature Of Bank Deposits
A.
Nature
Based on existing jurisprudence, the following are the
nature of bank deposits:
(i)
It should be noted that fixed, savings, and current deposits
of money in banks and similar institutions are that true
Vitug vs. Court of Appeals, G.R. No. 82027, March 29, 1990.
Rivera vs. Peoples Bank and Trust Co., G.R. No. L-47757, April 7, 1942.
38
Vitug vs. Court of Appeals, G.R. No. 82027, March 29, 1990.
36
37
CHAPTER 3 — DEPOSIT FUNCTIONS OF BANKS
103
deposits are considered simple loans and, as such, are not
preferred credits.39
(ii)
Bank deposits are in the nature of irregular deposits.
They are really loans because they earn interest.40 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.41 Current and saving deposits, are loans to a
bank because it can use the same. A depositor is in reality
a creditor of the Bank and not a depositor. The Bank is in
turn a debtor of depositor. Failure of the Bank to honor the
time deposit is failure to pay its obligation as a debtor and
not a breach of trust arising from a depositary’s failure to
return the subject matter of the deposit.42
(iii) The relationship between the depositor and the Savings
and Loan Association is that of creditor and debtor;
consequently, the ownership of the amount deposited
was transmitted to the Bank upon the perfection of the
contract and it can make use of the amount deposited
for its banking operations, such as to pay interests on
deposits and to pay withdrawals. While the Bank has the
obligation to return the amount deposited, it has, however,
no obligation to return or deliver the same money that
was deposited. And, the failure of the Bank to return
the amount deposited will not constitute estafa through
misappropriation punishable under Article 315, par. 1(b)
of the Revised Penal Code, but it will only give rise to civil
liability.43
(iv) The contract between the bank and its depositor is
governed by the provisions of the Civil Code on simple
39
Guingona, Jr. vs. The City Fiscal of Manila, G.R. No. L-60033, April 4, 1984;
Central Bank of the Philippines vs. Morfe, 63 SCRA 114, 119 (1975); Art. 1980, Civil
Code; In Re Liquidation of Mercantile Batik of China Tan Tiong Tick vs. American
Apothecaries, Co., 66 Phil. 414; Pacific Coast Biscuit Co. vs. Chinese Grocers Association, 65 Phil. 375; Fletcher American National Bank vs. Ang Chong Um, 66 Pwl 385;
Pacific Commercial Co. vs. American Apothecaries Co., 65 Phil. 429; Gopoco Grocery
vs. Pacific Coast Biscuit Co., 65 Phil. 443.
40
Bank of the Philippine Islands vs. Court of Appeals, G.R. No. 104612, May
10, 1994.
41
Serrano vs. Central Bank of the Philippine, 96 SCRA 102 (1980); Art. 1980,
Civil Code; Gullas vs. Phil. National Bank, 62 Phil. 519.
42
Guingona, Jr. vs. The City Fiscal of Manila, G.R. No. L-60033, April 4, 1984.
43
Ibid.
104
BANKING LAWS & JURISPRUDENCE
loan.44 Article 1980 of the Civil Code expressly provides
that “x x x savings x x x deposits of money in banks and
similar institutions shall be governed by the provisions
concerning simple loan.” There is a debtor-creditor
relationship between the bank and its depositor. The
bank is the debtor and the depositor is the creditor. The
depositor lends the bank money and the bank agrees to pay
the depositor on demand. The savings deposit agreement
between the bank and the depositor is the contract that
determines the rights and obligations of the parties.45
(v)
B.
A bank ultimately acquires ownership of the deposits,
but such ownership is coupled with a corresponding
obligation to pay the depositor an equal amount on
demand. Although the bank owns the deposits, it cannot
prevent the depositor from demanding payment of the
bank’s obligation by drawing checks against his current
account, or asking for the release of the funds in his
savings account. Thus, when the depositor issues checks
drawn against his current account, he has every right as
creditor to expect that those checks will be honored by
the bank as debtor. A bank does not have a unilateral
right to freeze the accounts of a depositor based on its
mere suspicion that the funds therein were proceeds of
a scam the depositor was allegedly involved in. To grant
any bank the right to take whatever action it pleases
on deposits which it supposes are derived from shady
transactions, would open the floodgates of public distrust
in the banking industry.46
Set-Off
It may be stated as a general rule that when a depositor is
indebted to a bank, and the debts are mutual, that is, between the
same parties and in the same right-the bank may apply the deposit,
or such portion thereof as may be necessary, to the payment of the
debt due it by the depositor, provided there is no express agreement
44
Article 1953 of the Civil Code provides: “A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay the
creditor an equal amount of the same kind and quality.”
45
The Consolidated Bank and Trust Corporation vs. Court of Appeals, G.R. No.
138569, September 11, 2003.
46
BPI Family Bank vs. Franco G.R. No. 123498, November 23, 2007.
CHAPTER 3 — DEPOSIT FUNCTIONS OF BANKS
105
to the contrary and the deposit is not specifically applicable to some
other particular purpose.47
V. Duties Of Banks
A.
Meticulous Care
By the nature of its functions, a bank is required to take
meticulous care of the deposits of its clients, who have the right to
expect high standards of integrity and performance from it. Among
its obligations in furtherance thereof is knowing the signatures of
its clients. Depositors are not estopped from questioning wrongful
withdrawals, even if they have failed to question those errors in the
statements sent by the bank to them for verification.48
B.
Payment to Proper Party
Where the ownership of the deposit remained undetermined, a
bank, as the debtor with respect thereto, had no right to pay to persons
other than those in whose favor the obligation was constituted or
whose right or authority to receive payment is indisputable. The
payment of the money deposited with the bank that will extinguish
its obligation to the creditor-depositor is payment to the person of
the creditor or to one authorized by him or by the law to receive it.
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. The payment, even if done in good faith, will not extinguish
the obligation to the true depositor.49
C.
In Case of Death of Depositor
The National Internal Revenue Code provides:
“If a bank has knowledge of the death of a person,
who maintained a bank deposit account alone, or jointly
with another, it shall not allow any withdrawal from the
47
Tan Tiong Tick vs. American Apothecaries Co., G.R. No. 43682, March 31,
1938.
48
Bank of the Philippine Islands vs. Casa Montessori Internationale, G.R. No.
149454, May 28, 2004.
49
Bank of the Philippine Islands vs. Court of Appeals, G.R. No. 104612, May
10, 1994.
106
BANKING LAWS & JURISPRUDENCE
said deposit account, unless the Commissioner has certified
that the taxes imposed thereon by this Title have been
paid: Provided, however, That the administrator of the
estate or any one (1) of the heirs of the decedent may, upon
authorization by the Commissioner, withdraw an amount
not exceeding Twenty thousand pesos (P20,000) without
the said certification. For this purpose, all withdrawal
slips shall contain a statement to the effect that all of the
joint depositors are still living at the time of withdrawal
by any one of the joint depositors and such statement shall
be under oath by the said depositors.’’50
VI. Secrecy Of Bank Deposits51
A.
Purposes
The Secrecy of Bank Deposits Act has the following
purposes:
B.
(i)
To give encouragement to the people to deposit their
money in banking institutions; and
(ii)
To discourage private hoarding so that the same may be
properly utilized by banks in authorized loans to assist in
the economic development of the country.
Privacy
Zones of privacy are recognized and protected in our laws. The
Civil Code provides that “[e]very person shall respect the dignity,
personality, privacy and peace of mind of his neighbors and other
persons” and punishes as actionable torts several acts for meddling
and prying into the privacy of another. It also holds public officer
or employee or any private individual liable for damages for any
violation of the rights and liberties of another person, and recognizes
the privacy of letters and other private communications. The
Revised Penal Code makes a crime of the violation of secrets by an
officer, revelation of trade and industrial secrets, and trespass to
dwelling. Invasion of privacy is an offense in special laws like the
Anti-Wiretapping Law, the Secrecy of Bank Deposits Act, and the
Intellectual Property Code.
50
51
Section 97, NIRC.
Republic Act No. 1405.
CHAPTER 3 — DEPOSIT FUNCTIONS OF BANKS
C.
107
Absolute Confidentiality
All deposits of whatever nature with banks or banking
institutions in the Philippines including investments in bonds issued
by the Government of the Philippines, its political subdivisions and
its instrumentalities, are considered as of an absolutely confidential
nature and may not be examined, inquired or looked into by any
person, government official, bureau or office.
It shall be unlawful for any official or employee of a banking
institution to disclose to any person any information concerning said
deposits.
1.
Prohibition against inquiry into or disclosure of
deposits under Republic Act No. 8367 (An Act Providing For
The Regulation Of The Organization And Operation Of Non-Stock
Savings And Loan Associations):
“All deposits of whatever nature with an Association
(Savings and Loan) in the Philippines are hereby considered as
of an absolutely confidential nature and may not be examined,
inquired or looked into by any person, government official,
bureau or office, except upon written permission of the depositor,
or in cases of impeachment, or upon order of a competent court
in cases of bribery or dereliction of duty of public officials, or in
cases where the money deposited or invested is the subject matter
of litigation.52 It shall be unlawful for any official or employee
of an Association to disclose to any person any information
concerning said deposits, except in the cases mentioned in the
preceding paragraph of this section. Any official or employee
of an Association who violates this section shall be punished
under Republic Act No. 1405, as amended.’’53
2.
Foreign Currency Deposits:
All foreign currency deposits54 are of an absolutely confidential
nature and, except upon the written permission of the depositors,
in no instance shall such foreign currency deposits be examined,
inquired or looked into by any person, government official, bureau
or office whether judicial or administrative or private. Said foreign
Section 6, Republic Act No. 8367.
Ibid.
54
Authorized under this Act, as amended by Presidential Decree No. 1035, as
well as foreign currency deposits authorized under Presidential Decree No. 1034.
52
53
108
BANKING LAWS & JURISPRUDENCE
currency deposits shall be exempt from attachment, garnishment, or
any other order or process of any court, legislative body, government
agency or any administrative body whatsoever.55
3.
Confidentiality of Deposits in Islamic Banks:
“Banking transactions relating to all deposits of whatever
nature are confidential and may not be examined, inquired or looked
into by any person, government official, bureau or office except:
1.
inspection by the bank’s auditor, or
2.
upon written permission by the depositor, or
3.
in cases where the money deposited or the transaction
concerned is the subject of a court order.
It shall be unlawful for any official or employee of the Islamic
Bank or any person as may be designated by the Board of Directors
to examine or audit the books of the Bank to disclose or reveal to any
person any confidential information except under the circumstances
mentioned in the preceding paragraph.’’56
VII. Exceptions To Secrecy Of Deposits
A.
Exceptions under the Bank Secrecy Law:
(i)
Upon written permission of the depositor, or
(ii)
In cases of impeachment, or
(iii) Upon order of a competent court in cases of bribery or
dereliction of duty of public officials, or
(iv) In cases where the money deposited or invested is the
subject matter of the litigation.
Example:
a.
55
Where the bank inadvertently caused the transfer
of the amount of US$1,000,000.00 instead of only
US$1,000.00, the Court sanctioned the examination
Section 8, Republic Act No. 6426 (Foreign Currency Deposit Act of the Philip-
pines).
Section 17, Republic Act No. 6848 (An Act Providing for the 1989 Charter
of the Al-Amanah Islamic Investment Bank of the Philippines, authorizing its conduct of Islamic Banking Business, and repealing for this purpose Presidential Decree
Numbered Two Hundred and Sixty-Four as amended by Presidential Decree Numbered Five Hundred And Forty-Two, creating the Philippine Amanah Bank).
56
CHAPTER 3 — DEPOSIT FUNCTIONS OF BANKS
109
of the bank accounts where part of the money was
subsequently caused to be deposited.57
b.
B.
If a case is aimed at recovering the amount converted by defendants therein for their own benefit,
necessarily, an inquiry into the whereabouts of the
illegally acquired amount extends to whatever is
concealed by being held or recorded in the name of
persons other than the one responsible for the illegal
acquisition.
Garnishment
The Rules of Court provides:
“Garnishment of debts and credits. — The officer may levy
on debts due the judgment obligor and other credits, including
bank deposits, financial interests, royalties, commissions and
other personal property not capable of manual delivery in the
possession or control of third parties. Levy shall be made by
serving notice upon the person owing such debts or having in his
possession or control such credits to which the judgment obligor
is entitled. The garnishment shall cover only such amount as
will satisfy the judgment and all lawful fees.
The garnishee shall make a written report to the court
within five (5) days from service of the notice of garnishment
stating whether or not the judgment obligor has sufficient funds
or credits to satisfy the amount of the judgment. If not, the
report shall state how much funds or credits the garnishee holds
for the judgment obligor. The garnished amount in cash, or
certified bank check issued in the name of the judgment obligee,
shall be delivered directly to the judgment obligee within ten
(10) working days from service of notice on said garnishing
requiring such delivery, except the lawful fees which shall be
paid directly to the court.
In the event there are two or more garnishees holding
deposits or credits sufficient to satisfy the judgment, the
judgment obligor, if available, shall have the right to indicate
the garnishee or garnishees who shall be required to deliver
the amount due; otherwise, the choice shall be made by the
judgment obligee.
57
Mellon Bank, N.A. vs. Magsino, G.R. No. L-61011, October 18, 1990.
110
BANKING LAWS & JURISPRUDENCE
The executing sheriff shall observe the same procedure
under paragraph (a) with respect to delivery of payment to the
judgment obligee.’’58
Note the properties exempt from execution under the
Rules of Court:
“Property exempt from execution.59 Except as otherwise
expressly provided by law, the following property, and no other,
shall be exempt from execution:
(a)
The judgment obligor’s family home as provided by law,
or the homestead in which he resides, and land necessarily
used in connection therewith;
(b)
Ordinary tools and implements personally used by him in
his trade, employment, or livelihood;
(c)
Three horses, or three cows, or three carabaos, or other
beasts of burden such as the judgment obligor may select
necessarily used by him in his ordinary occupation;
(d)
His necessary clothing and articles for ordinary personal
use, excluding jewelry;
(e)
Household furniture and utensils necessary for housekeeping, and used for that purpose by the judgment obligor
and his family, such as the judgment obligor may select,
of a value not exceeding one hundred thousand pesos;
(f)
Provisions for individual or family use sufficient for four
months;
(g)
The professional libraries and equipment of judges,
lawyers, physicians, pharmacists, dentists, engineers,
surveyors, clergymen, teachers, and other professionals,
not exceeding three hundred thousand pesos in value;
(h)
One fishing boat and accessories not exceeding the total
value of one hundred thousand pesos owned by a fisherman
and by the lawful use of which he earns his livelihood;
(i)
So much of the salaries, wages, or earnings of the judgment
obligor of his personal services within the four months
58
59
Section 9(c), 1997 Revised Rules of Civil Procedure.
Section 13, Rule 39, 1997 Revised Rules of Civil Procedure.
CHAPTER 3 — DEPOSIT FUNCTIONS OF BANKS
111
preceding the levy as are necessary for the support of his
family;
(j)
Lettered gravestones;
(k)
Monies benefits, privileges, or annuities accruing or in any
manner growing out of any life insurance;
(l)
The right to receive legal support, or money or property
obtained as such support, or any pension or gratuity from
the Government;
(m) Properties specially exempt by law.
But no article or species of property mentioned in
this section shall be exempt from execution issued upon
a judgment recovered for its price or upon a judgment of
foreclosure of a mortgage thereon.’’ (Emphasis supplied)
The prohibition against examination of or inquiry into a bank
deposit does not preclude its being garnished to insure satisfaction
of a judgment. Indeed there is no real inquiry in such a case, and
if the existence of the deposit is disclosed the disclosure is purely
incidental to the execution process. It is hard to conceive that it was
ever within the intention of Congress to enable debtors to evade
payment of their just debts, even if ordered by the Court, through
the expedient of converting their assets into cash and depositing
the same in a bank. It was not the intention of the lawmakers to
place bank deposits beyond the reach of execution to satisfy a final
judgment.60
C.
Secrecy and Exemption from Attachment and Garnishment of Foreign Currency Deposits Cannot be Used as
Device for Wrongdoing
The application of the law depends on the extent of its justice.
Exemption from attachment, garnishment, or any other order or
process of any court, legislative body, government agency or any
administrative body whatsoever, is not applicable to a foreign
transient, otherwise, injustice would result especially to a citizen
aggrieved by a foreign guest.61 It cannot be used as a device for
60
61
1997.
China Banking Corporation vs. Ortega, G.R. No. L-34964, January 31, 1973.
Salvacion vs. Central Bank of the Philippines, G.R. No. 94723, August 21,
112
BANKING LAWS & JURISPRUDENCE
wrongdoing, and in so doing, acquitting the guilty at the expense of
the innocent.
➢
Foreign currency deposits of a foreigner who was convicted
of the crime of rape committed against a Filipino child
may be garnished and attached to satisfy the judgment.
* Note: Interestingly, the Supreme Court in one case62 did not
interfere with the following resolution of the Ombudsman:
“In Salvacion vs. Central Bank and China Bank, 278
SCRA 27 (1997), the Highest Tribunal adopted the opinion
of the Office of the Solicitor General (OSG) that only foreign
currency deposits of foreign lenders and investors are given
protection and incentives by the law, and further ruled
that the Foreign Currency Deposits Act cannot be utilized
to perpetuate injustice. Following such pronouncements, it
is respectfully submitted that foreign currency deposits of
Filipino depositors, including herein complainant, are not
covered by the Foreign Currency Deposits Act, and are thus
not exempt from the processes duly-issued by the BIR.”
Thus, the Supreme Court held:
“We do not perceive any grave abuse of discretion on
the part of the public respondents when they issued the
aforecited rulings. We, thus, defer to the policy of noninterference in the conduct of preliminary investigations. We
have invariably stated that it is not sound practice to depart
from the policy of non-interference in the Ombudsman’s
exercise of discretion to determine whether or not to file
information against an accused. The rule is based not only
upon respect for the investigatory and prosecutory powers
granted by the Constitution to the Office of the Ombudsman
but upon practicality as well. Otherwise, the functions
of the courts will be grievously hampered by innumerable
petitions assailing the dismissal of investigatory proceedings
conducted by the Office of the Ombudsman with regard
to complaints filed before it, in much the same way that
the courts would be absolutely swamped if they could be
compelled to review the exercise of discretion on the part of
the fiscals or prosecuting attorneys each time they decided
to file an information in court or dismissed a complaint
by a private complainant. Thus, in the absence of a clear
case of abuse of discretion, this Court will not interfere with
the discretion of the Ombudsman, who, depending on his
62
Estrada vs. Desierto, G.R. No. 156160, December 9, 2004.
CHAPTER 3 — DEPOSIT FUNCTIONS OF BANKS
113
own findings and considered evaluation of the case, either
dismisses a complaint or proceeds with it.”
The Supreme Court however was quick to add:
A cautionary word. A declaration by this Court that the
public respondents did not gravely abuse their discretion in
issuing the resolutions dismissing petitioner’s complaint
does not necessarily translate to a declaration of assent in
the findings of fact and conclusions of law contained therein. With respect specifically to the resolution for violation of
Section 8 of Rep. Act. No. 6426, public respondents relied on
the “whereas” clause of P.D. No. 1246 which amended Rep.
Act No. 6426 and on the Salvacion case to conclude that only
non-residents who are not engaged in trade and business
are under the mantle of protection of Section 8 of Rep. Act
No. 6426. Assuming that such reliance is erroneous as contended by petitioner, this Court, on petition for certiorari,
cannot correct the same as the error is not of a degree that
would amount to a clear case of abuse of discretion of the
grave and malevolent kind. It is axiomatic that not every
erroneous conclusion of law or fact is abuse of discretion. As
adverted to earlier, this Court will interfere in the Ombudsman’s findings of fact and conclusions of law only in clear
cases of grave abuse of discretion.
D.
Graft and Corruption
While Republic Act No. 1405 provides that bank deposits are
absolutely confidential and therefore may not be examined, inquired
or looked into, except in those cases enumerated therein, the AntiGraft Law directs in mandatory terms that bank deposits shall be
taken into consideration in its enforcement, notwithstanding any
provision of law to the contrary. The only conclusion possible is
that the Anti-Graft Law is intended to amend Republic Act 1405 by
providing an additional exception to the rule against the disclosure
of bank deposits.63
Cases of unexplained wealth are similar to cases of bribery
and dereliction of duty and no reason why these two classes of cases
cannot be excepted from the rule making bank deposits confidential.
The policy as to one cannot be different from the policy as to the
other. This policy expresses the notion that a public office is a public
trust and any person who enters upon its discharge does so with
full knowledge that his life, so far as relevant to his duty, is open
63
Philippine National Bank vs. Gancayco, 15 SCRA 91.
114
BANKING LAWS & JURISPRUDENCE
to pubic scrutiny. The inquiry into illegally acquired property or
property not legitimately acquired extends to cases where such
property is concealed by being held by or recorded in the name of
other persons.64
E.
Authority to Inquire into Bank Deposits under the AntiMoney Laundering Act
The AMLC may inquire into or examine any particular deposit
or investment with any banking institution or non-bank financial
institution upon order of any competent court in cases of violation,
when it has been established that:
(i)
there is probable cause that the deposits or investments
are related to an unlawful activity; or
(ii)
a money laundering offense.
No court order shall be required in the following unlawful
activities:
F.
(1)
Kidnapping for ransom (Article 267, Revised Penal Code,
as amended);
(2)
Violations of the Comprehensive Dangerous Drugs Act
of 2002 (Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16,
Republic Act No. 9165);
(3)
Hijacking and other violations under Republic Act No.
6235 (An Act Prohibiting Certain Acts Inimical To Civil
Aviation, And For Other Purposes);
(4)
Destructive arson and murder including those perpetrated
by terrorists against non-combatant persons and similar
targets.
Periodic or Special Examination
The Bangko Sentral ng Pilipinas (BSP) may inquire into or
examine any deposit or investment with any banking institution or
non-bank financial institution when the examination is made in the
course of a periodic or special examination, in accordance with the
rules of examination of the BSP.65
64
Banco Filipino Savings and Mortgage Bank vs. Purisima, G.R. No. L-56429,
May 28, 1988.
65
Republic Act No. 9160 (An Act Defining the Crime of Money Laundering,
CHAPTER 3 — DEPOSIT FUNCTIONS OF BANKS
115
Disclosure is also allowed in an examination made in the course
of a special or general examination of a bank that is specifically
authorized by the Monetary Board after being satisfied that there is
reasonable ground to believe that a bank fraud or serious irregularity
has been or is being committed and that it is necessary to look into
the deposit to establish such fraud or irregularity.
Another exception to the confidentiality of deposits is the
examination made by an independent auditor hired by the bank to
conduct its regular audit provided that the examination is for audit
purposes only and the results thereof shall be for the exclusive use
of the bank.66
* Note: Examination by auditor as an exception to the secrecy of
bank deposits can no longer be found in the statute books.
Nevertheless, it can find basis in opinions of authors, banking
experts and practitioners. Moreover, common sense would tell
that disclosure is a natural consequence of examination.
G.
In Camera Inspection by the Ombudsman
Section 15(8) of Republic Act No. 6770 (The Ombudsman Act of
1989) provides as one of the powers of the Ombudsman:
(8)
Administer oaths, issue subpoena and subpoena duces
tecum, and take testimony in any investigation or inquiry,
including the power to examine and have access to bank
accounts and records.
Before an in camera inspection may be allowed to the
Ombudsman, there must be a pending case before a court of competent
jurisdiction. Further, the account must be clearly identified, the
inspection limited to the subject matter of the pending case before
the court of competent jurisdiction. The bank personnel and the
account holder must be notified to be present during the inspection,
and such inspection may cover only the account identified in the
pending case.67
Investigation by the Office of the Ombudsman is not considered
pending litigation before any court of competent authority. The
Providing Penalties Therefor and for Other Purposes) as amended by Sec. 8, R.A. No.
9194, March 7, 2003.
66
Marquez vs. Desierto, G.R. No. 135882, June 27, 2001; Citing Union Bank of
the Philippines vs. Court of Appeals.
67
Marquez vs. Desierto, G.R. No. 135882, June 27, 2001.
116
BANKING LAWS & JURISPRUDENCE
investigation would not warrant the opening of the bank account for
inspection.68 To allow the opening of a bank account is to allow the
Office of the Ombudsman to fish for additional evidence.
H.
Preliminary Attachment
Section 10, Rule 57 of the Rules of Court provides:
Examination of party whose property is attached and
persons indebted to him or controlling his property; delivery of
property to sheriff. Any person owing debts to the party whose
property is attached or having in his possession or under his
control any credit or other personal property belonging to such
party, may be required to attend before the court in which the
action is pending, or before a commissioner appointed by the
court, and be examined on oath respecting the same. The party
whose property is attached may also be required to attend for the
purpose of giving information respecting his property, and may
be examined on oath. The court may, after such examination,
order personal property capable of manual delivery belonging
to him, in the possession of the person so required to attend
before the court, to be delivered to the clerk of the court or
sheriff on such terms as may be just, having reference to any
lien thereon or claim against the same, to await the judgment
in the action.
Section 10, Rule 57 is not incompatible with the law on secrecy
of bank deposits because it provides an exception “in cases where the
money deposited or invested is the subject matter of the litigation.”
I.
Disclosure of Dormant Accounts
Section 2 of Act No. 3936 (An Act Requiring Banks, Trust
Companies, Savings And Mortgage Banks, Mutual Building And
Loan Associations, And Banking Institutions Of Every Kind To
Transfer Unclaimed Balances Held By Them To The Insular
Treasury, And For Other Purposes) provides:
Immediately after the taking effect of this Act and within
the month of January of every odd year, all banks shall forward
to the Insular Treasurer a statement, under oath of their
respective managing officers, of all credits and deposits held
by them in favor of persons known to be dead, or who have not
68
Ibid.
CHAPTER 3 — DEPOSIT FUNCTIONS OF BANKS
117
made further deposits or withdrawals during the preceding ten
years or more, arranged in alphabetical order according to the
names of depositors, and showing:
(a)
The names and last known place of residence or postoffice addresses of the persons in whose favor such credit
or deposits stand;
(b)
The amount and date of the outstanding credit or deposit
and whether the same is in money or in security, and if
the latter, the nature of the same;
(c)
The date when the person in whose favor the credit or
deposit stands died, if known, or the date when he made
his last deposit or withdrawal; and
(d)
The interest due on such credit or deposit, if any, and the
amount thereof.
Immediately upon receipt of the above statement the
Insular Treasurer shall publish the same once a week for
three consecutive weeks in at least two newspapers of general
circulation in the locality where the bank or banks are situated,
if there be any, and if there is none, in the City of Manila, one
in English and one in Spanish. The cost of such publication
shall be paid by the Treasury Bureau and the latter shall be
reimbursed out of the escheated fund.
It shall be the duty of the Insular Treasurer to inform
the Attorney-General from time to time of the existence of
unclaimed balances held by banks.
J.
Authority of the Commissioner of Internal Revenue to
Inquire into Deposits
Section 6 of the 1997 National Internal Revenue Code
provides:
(F) Authority of the Commissioner to inquire into Bank
Deposit Accounts. — Notwithstanding any contrary provision
of Republic Act No. 1405 and other general or special laws, the
Commissioner is hereby authorized to inquire into the bank
deposits of:
(1)
a decedent to determine his gross estate; and
(2)
any taxpayer who has filed an application for compromise
of his tax liability under Sec. 204(A)(2) of this Code by
reason of financial incapacity to pay his tax liability.
118
BANKING LAWS & JURISPRUDENCE
In case a taxpayer files an application to compromise the
payment of his tax liabilities on his claim that his financial position
demonstrates a clear inability to pay the tax assessed, his application
shall not be considered unless and until he waives in writing his
privilege under Republic Act No. 1405 or under other general or
special laws, and such waiver shall constitute the authority of the
Commissioner to inquire into the bank deposits of the taxpayer.
K.
Waiver by DOSRI
The NCBA provides:
“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.’’
Problem:
A and B opened a joint foreign currency savings account with
Interbank to hold funds which “belonged entirely and exclusively” to
A, to “facilitate the funding of certain business undertakings” of both
of them and which funds were to be “temporarily (held) in trust” by
B, who “shall turnover the same to A upon demand.” Withdrawals
from the account were always made through their joint signatures.
When their business relationship turned sour, B unilaterally closed
their joint account, withdrew the remaining balance of Deutschmark
(DM) 269,777.37 and placed the money in his own personal account
with the same bank. A thus sought an injunctive writ to prevent B
CHAPTER 3 — DEPOSIT FUNCTIONS OF BANKS
119
from withdrawing the money at any time. Is B’s deposit protected
by the law on secrecy of bank deposits?
No. By depositing those funds in a joint ‘and/or’ account, A did
not convey ownership thereof to B and B could not convert those
funds to his personal and exclusive ownership and use. The privileges
extended by the statute are actually enjoyed, and are invocable only,
by A, because A is the owner of the foreign exchange fund subject of
the case.
B is still not entitled to the confidentiality provisions of the law.
For, as already noted, B is not the owner of such foreign currency
funds.
120
BANKING LAWS & JURISPRUDENCE
Chapter 4
Investments, Loans and Other
Functions of Banks
I. Operations Of Universal Banks
A.
Powers of a Universal Bank
As earlier stated, universal bank shall have the authority to
exercise:
(i)
the powers authorized for a commercial bank,
(ii)
the powers of an investment house,1 and
(iii) the power to invest in non-allied enterprises.2
B.
Equity Investments of a Universal Bank
A universal bank may invest in the equities of allied and nonallied enterprises as may be determined by the Monetary Board.
a.
Allied enterprises may either be financial or nonfinancial.
b.
Except as the Monetary Board may otherwise prescribe:
b.1) The total investment in equities of allied and nonallied enterprises shall not exceed fifty percent (50%)
of the net worth of the bank; and
b.2) The equity investment in any one enterprise, whether
allied or non-allied, shall not exceed twenty-five
percent (25%) of the net worth of the bank.
1
2
As provided in existing laws.
Section 23, GBL.
120
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
c.
121
Net worth means the total of the unimpaired paid-in
capital including paid-in surplus, retained earnings
and undivided profit, net of valuation reserves and other
adjustments as may be required by the Bangko Sentral.
The acquisition of such equity or equities is subject to the prior
approval of the Monetary Board which shall promulgate appropriate
guidelines to govern such investments.3
C.
Equity Investments of a Universal Bank in Financial
Allied Enterprises
(i)
A universal bank can own up to one hundred percent
(100%) of the equity in a thrift bank, a rural bank or a
financial allied enterprise.
(ii)
A publicly-listed universal or commercial bank may own
up to one hundred percent (100%) of the voting stock of
only one other universal or commercial bank.4
The following are Financial Allied Undertakings:5
a.
Leasing companies including leasing of stalls and spaces
in a commercial establishment: Provided, That bank
investment in/acquisition of shares of such leasing
company shall be limited/applicable only in cases of
conversion of outstanding loan obligations into equity;
b.
Banks;
c.
Investment houses;
d.
Financing companies;
e.
Credit card companies;
f.
Financial institutions catering to small and medium scale
industries including venture capital corporation (VCC);
g.
Companies engaged in stock brokerage/securities dealership; and
h.
Companies engaged in foreign exchange dealership/
brokerage.
Section 24, GBL.
Section 25, GBL.
5
Sec. X377, Manual of Regulations for Banks.
3
4
122
BANKING LAWS & JURISPRUDENCE
In addition, Universal Banks may invest in the following as
financial allied undertakings:
D.
(1)
Insurance companies; and
(2)
Holding company: Provided, That the investments of such
holding company are confined to the equities of allied
undertakings and/or non-allied undertakings of Universal
Banks allowed under BSP regulations. The Monetary
Board may declare such other activities as financial allied
undertakings of banks. The determination of whether the
corporation is engaged in a financial allied undertaking
shall be based on its primary purpose as stated in its
articles of incorporation and the volume of its principal
business.
Equity Investments of a Universal Bank in Non-Financial
Allied Enterprises
A universal bank may own up to one hundred percent (100%)
of the equity in a non-financial allied enterprise.6
The following are Non-Financial Allied Undertakings:7
(1)
Warehousing companies;
(2)
Storage companies;
(3)
Safe deposit box companies;
(4)
Companies primarily engaged in the management of
mutual funds but not in the mutual funds themselves;
(5)
Management corporations engaged or to be engaged in an
activity similar to the management of mutual funds;
(6)
Companies engaged in providing computer services;
(7)
Insurance agencies/brokerages;
(8)
Companies engaged in home building and home development;
(9)
Companies providing drying and/or milling facilities for
agricultural crops such as rice and corn;
6
7
Section 26, GBL.
Sec. X380, Manual of Regulations for Banks.
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
123
(10)
Service bureaus, organized to perform for and in behalf
of banks and non-bank financial institutions the services
allowed to be outsourced: Provided, That data processing
companies may be allowed to invest up to forty percent
(40%) in the equity of service bureaus;
(11)
Philippine Clearing House Corporation (PCHC), Philippine Central Depository, Inc. and Fixed Income Exchange;
and
(12)
Such other similar activities as the Monetary Board
may declare as non-financial allied undertakings of
banks. Universal Banks may further invest in health
maintenance organizations (HMOs).
* Note: Incidentally, rural banks/cooperative banks may invest,
as a non-financial allied undertaking, in the equities of
companies engaged in the following:
E.
(1)
Warehousing and other post-harvest facilities;
(2)
Fertilizer and agricultural chemical and pesticides
distribution;
(3)
Farm equipment distribution;
(4)
Trucking and transportation of agricultural products;
(5)
Marketing of agricultural products;
(6)
Leasing; and
(7)
Other undertakings as may be determined by the Monetary Board.
Equity Investments of a Universal Bank in Non-Allied
Enterprises
The equity investment of a universal bank, or of its wholly
or majority-owned subsidiaries, in a single non-allied enterprise
shall not exceed thirty-five percent (35%) of the total equity in that
enterprise nor shall it exceed thirty-five percent (35%) of the voting
stock in that enterprise.8
8
Section 27, GBL.
124
F.
BANKING LAWS & JURISPRUDENCE
Investments in Non-Allied or Non-Related Undertakings9
Only Universal Banks may invest in the equity of an enterprise
engaged in non-allied or non-related activities.
The following are non-allied undertakings eligible for investment by universal banks:
G.
a.
Enterprises engaged in physically productive activities in
agriculture, mining and quarrying, manufacturing, public
utilities, construction, wholesale trade and community
and social services following the industrial groupings in
the Philippine Standard Industrial Classification (PSIC);
b.
Industrial park projects and/or industrial estate developments;
c.
Financial and commercial complex projects (including
land development and buildings constructed thereon)
arising from or in connection with the Government’s
privatization program; and
d.
Such other broad categories as the Monetary Board may
declare as appropriate.
Equity Investments in Quasi-Banks
To promote competitive conditions in financial markets, the
Monetary Board may further limit to forty percent (40%) equity
investments of universal banks in quasi-banks. This rule shall also
apply in the case of commercial banks.10
II. Operations Of Commercial Banks
A.
Powers of a Commercial Bank
As stated earlier, commercial bank shall have:
a.
the general powers incident to corporations,
b.
all such powers as may be necessary to carry on the
business of commercial banking, such as:
9
Sec. 1381, Manual of Regulations for Banks.
Section 28, GBL.
10
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
125
(i)
accepting drafts and issuing letters of credit;
(ii)
discounting and negotiating promissory notes, drafts,
bills of exchange, and other evidences of debt;
(iii) accepting or creating demand deposits;
(iv) receiving other types of deposits and deposit substitutes;
(v)
buying and selling foreign exchange and gold or
silver bullion; acquiring marketable bonds and other
debt securities; and
(vi) extending credit, subject to such rules as the Monetary Board may promulgate.
➢
B.
These rules may include the determination
of bonds and other debt securities eligible for
investment, the maturities and aggregate
amount of such investment.11
Issuance of Letters Of Credit
1.
Nature
A letter of credit is a financial device developed by merchants
as a convenient and relatively safe mode of dealing with sales of
goods to satisfy the seemingly irreconcilable interests of a seller,
who refuses to part with his goods before he is paid, and a buyer,
who wants to have control of the goods before paying. To break the
impasse, the buyer may be required to contract a bank to issue a
letter of credit in favor of the seller so that, by virtue of the letter of
credit, the issuing bank can authorize the seller to draw drafts and
engage to pay them upon their presentment simultaneously with the
tender of documents required by the letter of credit. The buyer and
the seller agree on what documents are to be presented for payment,
but ordinarily they are documents of title evidencing or attesting to
the shipment of the goods to the buyer.12
It is an engagement by a bank or other person made at the
request of a customer that the issuer will honor drafts or other
demands for payment upon compliance with the conditions specified
Section 29, GBL.
Reliance Commodities, Inc. vs. Daewoo Industrial Co., Ltd., G.R. No. 100831,
December 17, 1993.
11
12
126
BANKING LAWS & JURISPRUDENCE
in the credit. Through a letter of credit, the bank merely substitutes
its own promise to pay for one of its customers who in return promises
to pay the bank the amount of funds mentioned in the letter of credit
plus credit or commitment fees mutually agreed upon.13
Commercial letters of credit have come into general use in
international sales transactions where much time necessarily elapses
between the sale and the receipt by a purchaser of the merchandise,
during which interval great price changes may occur. Buyers and
sellers struggle for the advantage of position. The seller is desirous
of being paid as surely and as soon as possible, realizing that the
vendee at a distant point has it in his power to reject on trivial
grounds merchandise on arrival, and cause considerable hardship
to the shipper. Letters of credit meet this condition by affording
celerity and certainty of payment. Their purpose is to insure to a
seller payment of a definite amount upon presentation of documents.
The bank deals only with documents. It has nothing to do with the
quality of the merchandise. Disputes as to the merchandise shipped
may arise and be litigated later between vendor and vendee, but they
may not impede acceptance of drafts and payment by the issuing
bank when the proper documents are presented.14
By this arrangement a banker advances money to an intending
importer, and thereby lends the aid of capital, of credit, or of business
facilities and agencies abroad, to the enterprise of foreign commerce.
Much of this trade could hardly be carried on by any other means,
and therefore it is of the first importance that the fundamental factor
in the transaction, the banker’s advance of money and credit, should
receive the amplest protection. Accordingly, in order to secure that
the banker shall be repaid at the critical point — that is, when the
imported goods finally reach the hands of the intended vendee — the
banker takes the full title to the goods at the very beginning; he takes
it as soon as the goods are bought and settled for by his payments
or acceptances in the foreign country, and he continues to hold that
title as his indispensable security until the goods are sold in the
United States and the vendee is called upon to pay for them. This
security is not an ordinary pledge by the importer to the banker, for
the importer has never owned the goods, and moreover he is not able
to deliver the possession; but the security is the complete title vested
13
Prudential Bank vs. Intermediate Appellate Court, G.R. No. 74886, December 8, 1992.
14
Hibernia Bank and Trust Co. vs. J. Aron & Co., Inc., 134 Misc. 18, 21-22,
N.Y.S. 486, 490-491.
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
127
originally in the bankers, and this characteristic of the transaction
has again and again been recognized and protected by the courts. Of
course, the title is at bottom a security title, as it has sometimes been
called, and the banker is always under the obligation to reconvey;
but only after his advances have been fully repaid and after the
importer has fulfilled the other terms of the contract.15
Once the credit is established, the seller ships the goods to the
buyer and in the process secures the required shipping documents
or documents of title. To get paid, the seller executes a draft and
presents it together with the required documents to the issuing bank.
The issuing bank redeems the draft and pays cash to the seller if it
finds that the documents submitted by the seller conform with what
the letter of credit requires. The bank then obtains possession of
the documents upon paying the seller. The transaction is completed
when the buyer reimburses the issuing bank and acquires the
documents entitling him to the goods. Under this arrangement, the
seller gets paid only if he delivers the documents of title over the
goods, while the buyer acquires the said documents and control over
the goods only after reimbursing the bank.16
2.
Characteristics
What characterizes letters of credit, as distinguished from
other accessory contracts, is the engagement of the issuing bank to
pay the seller once the draft and the required shipping documents
are presented to it. In turn, this arrangement assures the seller
of prompt payment, independent of any breach of the main sales
contract. By this so-called “independence principle,” the bank
determines compliance with the letter of credit only by examining
the shipping documents presented; it is precluded from determining
whether the main contract is actually accomplished or not.17
3.
Intertwined Relationships
A letter of credit transaction may thus be seen to be a composite
of at least three (3) distinct but intertwined relationships, each
relationship being concretized in a contract:
In re Dunlap Carpet Co.
Reliance Commodities, Inc. vs. Daewoo Industrial Co., Ltd., G.R. No. 100831,
December 17, 1993.
17
Bank of America, NT & SA vs. Court of Appeals, G.R. No. 105395, December
10, 1993.
15
16
128
BANKING LAWS & JURISPRUDENCE
(a)
One contract relationship links the party applying for
the L/C (the account party or buyer or importer) and the
party for whose benefit the L/C is issued (the beneficiary
or seller or exporter).
(b)
A second contract relationship is between the account
party and the issuing bank. Under this contract,
(sometimes called the “Application and Agreement” or the
“Reimbursement Agreement”), the account party, among
other things, applies to the issuing bank for a specified
L/C and agrees to reimburse the bank for amounts paid
by that bank pursuant to the L/C.
(c)
The third contract relationship is established between the
issuing bank and the beneficiary, in order to support the
contract, under (a) above, of the account party and the
beneficiary to, inter alia, pay certain monies to the latter.18
4.
Parties
There would at least be three (3) parties: (a) the buyer, who
procures the letter of credit and obliges himself to reimburse the
issuing bank upon receipt of the documents of title; (b) the bank
issuing the letter of credit, which undertakes to pay the seller upon
receipt of the draft and proper documents of titles and to surrender
the documents to the buyer upon reimbursement; and (c) the seller,
who in compliance with the contract of sale ships the goods to the
buyer and delivers the documents of title and draft to the issuing
bank to recover payment.
The number of the parties, not infrequently and almost
invariably in international trade practice, may be increased. Thus,
the services of an advising (notifying) bank may be utilized to
convey to the seller the existence of the credit; or, of a confirming
bank which will lend credence to the letter of credit issued by a
lesser known issuing bank; or, of a paying bank which undertakes
to encash the drafts drawn by the exporter. Further, instead of going
to the place of the issuing bank to claim payment, the buyer may
approach another bank, termed the negotiating bank, to have the
draft discounted.19
18
Reliance Commodities, Inc. vs. Daewoo Industrial Co., Ltd., G.R. No. 100831,
December 17, 1993.
19
Bank of America, NT & SA vs. Court of Appeals, G.R. No. 105395, December
10, 1993.
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
* Note:
C.
129
See discussion on Trust Receipts in Chapter 9.
Equity Investments of a Commercial Bank
A commercial bank may invest only in the equities of allied
enterprises as may be determined by the Monetary Board. Allied
enterprises may either be financial or non-financial.
Except as the Monetary Board may otherwise prescribe:
1.
The total investment in equities of allied enterprises shall
not exceed thirty-five percent (35%) of the net worth of
the bank; and
2.
The equity investment in any one enterprise shall not
exceed twenty-five percent (25%) of the net worth of the
bank.
•
D.
Equity Investments of a Commercial Bank in Financial
Allied Enterprises
(i)
A commercial bank may own up to one hundred percent
(100%) of the equity of a thrift bank or a rural bank.
•
(ii)
E.
The acquisition of such equity or equities is subject
to the prior approval of the Monetary Board which
shall promulgate appropriate guidelines to govern
such investments.20
Unlike universal banks, commercial banks may not
own one hundred percent (100%) of the equity of
financial allied enterprises other than a thrift bank
or a rural bank.
Where the equity investment of a commercial bank is in
other financial allied enterprises, including another commercial bank, such investment shall remain a minority
holding in that enterprise.21
Equity Investments of a Commercial Bank in NonFinancial Allied Enterprises
A commercial bank may own up to one hundred percent (100%)
of the equity in a nonfinancial allied enterprise.22
Section 30, GBL.
Section 31, GBL.
22
Section 32, GBL.
20
21
130
BANKING LAWS & JURISPRUDENCE
Table of Equity Investments*
ACTIVITIES
INVESTOR
UB
Publicly-listed
KB
Not
listed
Publicly-listed
Not
listed
TB
RB
COOP
Allied enterprises
Financial Allied
Undertakings
Universal Banks
100%
49%
100%
49%
49%
49%
49%
Commercial
Banks
100%
49%
100%
49%
49%
49%
49%
Thrift Banks
100%
100%
49%
49%
49%
Rural Bank
100%
100%
49%
49%
100%
Coop Bank
NA
NA
NA
NA
30%
Insurance companies
100%
NA
NA
NA
NA
Venture Capital
Corporations
60%
60%
60%
49%
49%
Others
100%
49%
40%
40%
40%
*Sec. X378, MORB, as amended by Circular No. 530, Series of 2006
III. Risk-Based Capital
A.
Minimum Ratio
The Monetary Board shall prescribe the minimum ratio which
the net worth of a bank must bear to its total risk assets which may
include contingent accounts.
(i)
The Monetary Board may require that such ratio be
determined on the basis of the net worth and risk assets
of a bank and its subsidiaries, financial or otherwise,
as well as prescribe the composition and the manner of
determining the net worth and total risk assets of banks
and their subsidiaries.
(ii)
In the exercise of this authority, the Monetary Board
shall, to the extent feasible, conform to internationally
accepted standards, including those of the Bank for
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
131
International Settlements (BIS), relating to risk-based
capital requirements.
(iii) It may alter or suspend compliance with such ratio whenever necessary for a maximum period of one (1) year.
(iv) Such ratio shall be applied uniformly to banks of the same
category.
B.
Effect of Non-Compliance
In case a bank does not comply with the prescribed minimum
ratio, the Monetary Board may:
1.
limit or prohibit the distribution of net profits by such
bank and may require that part or all of the net profits be
used to increase the capital accounts of the bank until the
minimum requirement has been met;
2.
restrict or prohibit the acquisition of major assets and
the making of new investments by the bank, with the
exception of purchases of readily marketable evidences of
indebtedness of the Republic of the Philippines and of the
Bangko Sentral and any other evidences of indebtedness
or obligations the servicing and repayment of which are
fully guaranteed by the Republic of the Philippines, until
the minimum required capital ratio has been restored.
In case of a bank merger or consolidation, or when a bank
is under rehabilitation under a program approved by the Bangko
Sentral, the Monetary Board may temporarily relieve the surviving
bank, consolidated bank, or constituent bank or corporations under
rehabilitation from full compliance with the required capital ratio
under such conditions as it may prescribe.23 (Section 34, GBL)
IV. Limit On Loans, Credit Accommodations
And Guarantees
A.
Single Borrowers Limit
(i)
The total amount of loans, credit accommodations and
guarantees as may be defined by the Monetary Board that
23
Before the effectivity of the rules which the Monetary Board is authorized to
prescribe under this provision, Section 22 of the General Banking Act, as amended,
Section 9 of the Thrift Banks Act, and all pertinent rules issued pursuant thereto,
shall continue to be in force.
132
BANKING LAWS & JURISPRUDENCE
may be extended by a bank to any person, partnership,
association, corporation or other entity shall at no time
exceed twenty percent (20%) of the net worth of such
bank.
Exceptions:
(i)
As the Monetary Board may otherwise prescribe for
reasons of national interest
(ii)
Deposits of rural banks with government-owned or
-controlled financial institutions like the Land Bank of
the Philippines, the Development Bank of the Philippines,
and the Philippine National Bank are exempted from the
Single Borrower’s Limit imposed by the General Banking
Act.24
* Notes:
a.
The basis for determining compliance with single-borrower limit is the total credit commitment of the bank to the
borrower.
b.
Loans refer to all the accounts under the loan portfolio
of a bank as enumerated in the manual of accounts for
banks.
c.
Other credit accommodations refer to credit and specific
market risk exposures of banks arising from accommodations other than loans such as receivables (sales contract
receivables, accounts receivables and other receivables),
and debt securities booked as investments.
d.
Total credit commitment shall include outstanding loans
and other credit accommodations, deferred letters of
credit less margin deposits, and guarantees. Except as
specifically provided, total credit commitment shall be
reckoned on credit riskweighted basis consistent with existing regulations.
(ii)
The total amount of loans, credit accommodations and
guarantees prescribed in the preceding paragraph (i) may
be increased 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,
24
Section 17, Republic Act No. 7353 (An Act Providing for the Creation, Organization and Operation of Rural Banks, and for Other Purposes).
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
133
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.
Exception: Unless otherwise prescribed by the Monetary
Board.
•
Readily marketable goods mean articles of commerce,
agriculture or industry of such uses as to make them the
subject of constant dealings in ready markets with such
frequent quotations as to make their prices easily and
definitely ascertainable, or which lend themselves easily
to disposal by sale at any time to pay the obligations
secured by the said goods.
* Note: In connection with the foregoing, pertinent provisions of
Circular No. 425 are reproduced hereunder:
Circular No. 425, Series Of 2004
The Monetary Board, in its Resolution No. 299 dated
March 11, 2004, approved the following amendments to Section
X303, Subsections X303.1 to X303.5 and Subsection X347.2 of the
Manual of Regulations for Banks (MOR) to implement Section
35 of Republic Act (R.A.) 8791, The General Banking Law (GBL)
of 2000.
SECTION 1. Section X303 of the MOR and its subsections
are hereby amended to read as follows:
SECTION X303. Credit Exposure Limits to a Single
Borrower.
A.
Consistent with national interest, the total amount
of loans, credit accommodations and guarantees that may be
extended by a bank to any person, partnership, association,
corporation or other entity shall at no time exceed twenty
five percent (25%) of the net worth of such bank. The basis for
determining compliance with the single borrower’s limit (SBL)
is the total credit commitment of the bank to or on behalf of the
borrower.
B.
The total amount of loans, credit accommodations
and guarantees prescribed in the first paragraph may be
increased by an additional ten percent (10%) of the net worth
of such bank: Provided, That the additional liabilities are
adequately secured by trust receipts, shipping documents,
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BANKING LAWS & JURISPRUDENCE
warehouse receipts or other similar documents transferring
or securing title covering readily marketable, non-perishable
goods which must be fully covered by insurance.
C.
The above prescribed ceilings shall include: (a) the
direct liability of the maker or acceptor of paper discounted
with or sold to such bank and the liability of a general endorser,
drawer or guarantor who obtains a loan or other credit accommodation from or discounts paper with or sells papers to such
bank; (b) in the case of an individual who owns or controls a
majority interest in a corporation, partnership, association or
any other entity, the liabilities of said entities to such bank; (c)
in the case of a corporation, all liabilities to such bank of all
subsidiaries in which such corporation owns or controls a majority interest; and (d) in the case of a partnership, association
or other entity, the liabilities of the members thereof to such
bank.
D.
Even if a parent corporation, partnership, association, entity or an individual who owns or controls a majority
interest in such entities has no liability to the bank, the liabilities of subsidiary corporations or members of the partnership,
association, entity or such individual shall be combined under
certain circumstances, including but not limited to any of the
following situations: (a) the parent corporation, partnership,
association, entity or individual guarantees the repayment of
the liabilities; (b) the liabilities were incurred for the accommodation of the parent corporation or another subsidiary or of
the partnership or association or entity or such individual; or
(c) the subsidiaries though separate entities operate merely as
departments or divisions of a single entity.
E.
For purposes of this section, loans, other credit accommodations and guarantees shall exclude: (a) loans and
other credit accommodations secured by obligations of the
Bangko Sentral or of the Philippine Government; (b) loans and
other credit accommodations fully guaranteed by the government as to the payment of principal and interest; (c) loans and
other credit accommodations secured by U.S. treasury notes
and other securities issued by central governments and central banks of foreign countries with the highest credit quality
given by any two internationally accepted rating agencies; (d)
loans and other credit accommodations to the extent covered
by the hold-out on or assignment of, deposits maintained in the
lending bank and held in the Philippines; (e) loans, credit accommodations and acceptances under letters of credit to the
extent covered by margin deposits; and (f) other loans or credit
accommodations which the Monetary Board may from time to
time specify as non-risk items.
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
135
F.
The wholesale lending activities of government
banks to participating financial institutions for relending
to end-user borrowers shall at no time exceed a separate
limit of thirty-five percent (35%) of net worth, subject to the
following guidelines: (a) it shall apply only to loans granted to
participating financial institutions (PFIs) on a wholesale basis
for on-lending to end-user borrowers; (b) it shall apply only to
loan programs funded by multilateral, international or local
development agencies, organizations or institutions especially
designed for wholesale lending activities of government banks;
(c) the end-user borrowers of the PFIs shall be subject to the
25% SBL, not the increased ceiling of 35%; and (d) government
banks shall observe appropriate criteria for accrediting PFIs
and for the grant/renewal of credit lines to accredited PFIs.
G.
Loans and other credit accommodations as well as
deposits maintained with, and usual guarantees by a bank to
any other bank or non-bank entity, whether locally or abroad,
shall be subject to the limits as herein prescribed.
Deposits of rural banks and cooperative banks (RBs/
Coop Banks) with government-owned or controlled financial
institutions like the Land Bank of the Philippines and the
Development Bank of the Philippines shall not be covered by
the SBL imposed under R. A. No. 8791.
In municipalities and cities where there are no government
banks, the deposits of RBs/Coop Banks in private banks in said
areas shall not be subject to the SBL. Deposits in private banks
located in other municipalities/cities shall be covered by the
SBL.
The outstanding balance of the deposit in a private
depository bank being used by the Thrift Banks/RBs/Coop Banks
with authority to accept/create demand or current deposits, to
fund checks cleared through the said private depository bank
shall also be exempt from the SBL even if there is a governmentowned or controlled financial institution in the area.
Subsection X303.1 Definition of Terms.
For purposes of this Circular, the following definitions
shall apply:
a.
Total Credit Commitment shall include outstanding
loans and other credit accommodations, deferred letters of credit
less margin deposits, and guarantees. Except as specifically
provided, total credit commitment shall be reckoned on credit
risk-weighted basis consistent with existing regulations.
136
BANKING LAWS & JURISPRUDENCE
b.
Loans shall refer to all the accounts under the loan
portfolio of a bank as enumerated in the manual of accounts
for banks.
c.
Other Credit Accommodations shall refer to credit
and specific market risk exposures of banks arising from accommodations other than loans such as receivables (sales contract receivables, accounts receivables and other receivables),
and debt securities booked as investments.
d.
Bank Guarantee. A bank guarantee is an irrevocable
commitment of a bank binding itself to pay a sum of money in
the event of non-performance of a contract by a third party.
The guarantee is a commitment separate and distinct from the
principal debt or contract.
e.
Net Worth shall mean the total of the unimpaired
paid-in capital including paid-in surplus, retained earnings
and undivided profit, net of valuation reserves and other
adjustments as may be required by the Bangko Sentral.
f.
Qualifying Capital shall mean capital as computed
under Circular 280 dated March 29, 2001 or as defined by the
Monetary Board.
g.
The term “Control of Majority Interest” shall be
synonymous to “controlling interest” and exists when the
parent owns directly or indirectly through subsidiaries more
than one half of the voting power of an enterprise unless, in
exceptional circumstance, it can be clearly demonstrated that
such ownership does not constitute control. Control of majority
interest may also exist even when the parent owns one half or
less of the voting power of an enterprise when there is:
1.
Power over more than one half of the voting
rights by virtue of an agreement with other investors; or
2.
Power to govern the financial and operating
policies of the enterprise under a statute or an agreement;
or
3.
Power to appoint or remove the majority
members of the board of directors or equivalent governing
body; or
4.
Power to cast the majority votes at meetings of
the board of directors or equivalent governing body; or
5.
above.
Any other arrangement similar to any of the
h.
Subsidiary shall refer to a corporation or firm more
than fifty percent (50%) of the outstanding voting stock of which
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
137
is directly or indirectly owned, controlled or held with power to
vote by its parent corporation.
i.
Credit Risk Transfer shall refer to any arrangement
that allows the bank to transfer the credit risk associated with
its loan or other credit accommodation to a third party.
j.
Readily Marketable Goods shall mean articles of
commerce, agriculture or industry of such uses as to make
them the subject of constant dealings in ready markets with
such frequent quotations as to make their prices easily and
definitely ascertainable, or which lend themselves easily to
disposal by sale at any time to pay the obligations secured by
the said goods.
k.
Bill of exchange drawn in good faith against actually
existing values shall mean one which is drawn by a seller on the
purchaser for the purchase price of commodities sold. A bill of
exchange, whether drawn against goods for exports or against
goods to be sold locally, which is discounted or purchased by
a bank is a bill drawn against existing values only when it is
accompanied by shipping documents, warehouse receipts or
other papers, securing title to the goods sold. However, bills
of exchange drawn in good faith against actually existing
values as defined in this paragraph, which are past due or the
maturities of which have been extended, shall be considered
as additional loans authorized under the second paragraph
of this section and shall be subject to the ten percent (10%)
limitation provided therein.
l.
Commercial or business paper actually owned by
the person negotiating the same shall mean a paper arising
from an actual business transaction. A trade acceptance or
promissory note actually owned by the person negotiating the
same is a commercial or a business paper. However, if a bill is
drawn against an agent or fictitious drawee, or if a promissory
note is executed by an agent or fictitious drawee, neither is a
commercial or a business paper. Commercial or business papers
actually owned and discounted by the person negotiating the
same, which are past due or the maturity of which have been
extended, shall be considered as money borrowed and shall be
subject to the limitation of twenty-five percent (25%) provided
in the first paragraph of this Section.
Subsection X303.2 Rediscounted Papers Included in Loan
Limit.
The liabilities to the bank of borrowers whose papers
were rediscounted by banks with the Bangko Sentral shall
not be deemed as having been extinguished by the rediscount,
138
BANKING LAWS & JURISPRUDENCE
but shall be considered as still existing and shall be included
in determining the SBL until such papers are paid by the
borrowers.
Subsection X303.3 Credit Risk Transfer.
Subject to prior approval of the Bangko Sentral, loans
and other credit accommodations covered by a legally effective
credit risk transfer arrangement such as guarantee, letter of
indemnity, standby letter of credit or credit derivative, may
be excluded from the total credit commitment of the bank to a
borrower in reckoning compliance with the single borrower’s
limit.
Subsection X303.4 Exclusions from Loan Limit.
a.
The discount of bills of exchange drawn in good
faith against actually existing values, and the discount of
commercial or business paper which are actually owned by the
person, company, corporation or association negotiating the
same;
b.
Credit accommodations to finance the importation
of rice and corn to the extent of one hundred percent (100%)
of the net worth of the bank concerned shall be excluded in
determining the SBL prescribed herein, subject to the following
conditions:
1. The importation shall be made in pursuance
of a national policy duly enunciated by the National
Government;
2. The importation shall have been approved by the
National Economic Development Authority (NEDA);
3. The letter of credit shall specify that importation
shall be made with certification from the National Food
Authority (NFA), or the consular establishment of the
Philippine government at the source of any such shipment
to the effect that the commodity being imported is either
rice or corn; and
4. The related bills of lading shall specify in
addition to the name of the importer concerned, that the
NFA shall be the consignee of the shipment.
c.
The portion of loans and other credit accommodations
covered by the guarantee of Industrial Guarantee and Loan
Fund;
d.
The total liabilities of a commercial paper issuer
for commercial paper held by a Universal Bank (UB) as a firm
underwriter shall not be counted in determining compliance
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
139
with the SBL within a period of one hundred eighty (180)
days from the acquisition of the commercial paper by the UB:
Provided, That in no case shall such liabilities exceed five
percent (5%) of the net worth of the UB beyond the normal
applicable SBL;
e.
The portion of loans and other credit accommodations
covered by guarantees of international/regional institutions/
multi-lateral financial institutions where the Philippine
Government is a member/shareholder, such as the International
Finance Corporation and the Asian Development Bank;
f.
Loans and other credit accommodations or portion
thereof, specifically provided for with valuation reserves;
provided, that the bank has no unbooked valuation reserves;
g.
Loans and other credit accommodations as a result
of an underwriting or sub-underwriting agreement of debt
securities outstanding for a period not exceeding thirty (30)
calendar days.
Subsection X303.5 Sanctions.
Violations of the provisions of the foregoing rules shall be
subject to the following:
a.
Monetary Penalties — Fines of one-tenth of one
percent (1/10 of 1%) of the excess over the ceiling but not to
exceed Thirty Thousand Pesos (P30,000.00) a day for each SBL
violation shall be assessed on the bank to be reckoned from the
date the excess started up to the date when such excess was
eliminated: Provided, That a maximum fine of Five Hundred
Pesos (P500.00) a day for each violation shall be imposed
against banks with total resources of less than P50 million at
the time of granting of loan/credit accommodation.
b.
Other Sanctions
First Offense — Reprimand for the directors/officers who
approved the credit availment which resulted in the excess
with a warning that subsequent violations will be subject to
more severe sanctions.
Subsequent Offenses –
1.
Fine of One Thousand Pesos (P1,000.00) for directors/
officers who approved the credit availment which resulted in
the excess.
2.
Suspension of the bank’s branching privileges and
access to Bangko Sentral rediscounting facilities until the excess is eliminated.
140
BANKING LAWS & JURISPRUDENCE
3.
Other penalties as the Monetary Board may impose
depending on the gravity of the offense.
SECTION 2. Subsection X347.2 of the MOR is hereby
amended to read as follows:
Subsection X347.2. Ceiling. The total guarantees or similar
arrangements, the nature of which requires the guarantor
to assume the liabilities/obligations of third parties in case
of their inability to pay, that may be issued by a bank and
outstanding at any given time, shall not exceed One Hundred
Percent (100%) of the bank’s qualifying capital.
B.
Inclusions to the Limit
(i)
(ii)
The prescribed ceilings shall include:
a.
the direct liability of the maker or acceptor of
paper discounted with or sold to such bank and the
liability of a general indorser, drawer or guarantor
who obtains a loan or other credit accommodation
from or discounts paper with or sells papers to such
bank;
b.
in the case of an individual who owns or controls
a majority interest in a corporation, partnership,
association or any other entity, the liabilities of said
entities to such bank;
c.
in the case of a corporation, all liabilities to such
bank of all subsidiaries in which such corporation
owns or controls a majority interest; and
d.
in the case of a partnership, association or other
entity, the liabilities of the members thereof to such
bank.
The term “control of majority interest” is synonymous to
“controlling interest” and exists when the parent owns
directly or indirectly through subsidiaries more than
one half of the voting power of an enterprise unless, in
exceptional circumstance, it can be clearly demonstrated
that such ownership does not constitute control. Control
of majority interest may also exist even when the parent
owns one-half or less of the voting power of an enterprise
when there is:
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
141
•
Power over more than one-half of the voting rights
by virtue of an agreement with other investors; or
•
Power to govern the financial and operating policies
of the enterprise under a statute or an agreement;
or
•
Power to appoint or remove the majority members of
the board of directors or equivalent governing body;
or
•
Power to cast the majority votes at meetings of the
board of directors or equivalent governing body; or
•
Any other arrangement similar to any of the above.
(iii) Even if a parent corporation, partnership, association,
entity or an individual who owns or controls a majority
interest in such entities has no liability to the bank, the
Monetary Board may prescribe the combination of the
liabilities of subsidiary corporations or members of the
partnership, association, entity or such individual under
certain circumstances, including but not limited to any of
the following situations:
C.
(a)
the parent corporation, partnership, association,
entity or individual guarantees the repayment of the
liabilities;
(b)
the liabilities were incurred for the accommodation
of the parent corporation or another subsidiary or
of the partnership or association or entity or such
individual; or
(c)
the subsidiaries though separate entities operate
merely as departments or divisions of a single
entity.
Exclusions to the Limit
Loans, other credit accommodations and guarantees shall
exclude:
a.
loans and other credit accommodations secured by obligations of the Bangko Sentral or of the Philippine Government;
142
BANKING LAWS & JURISPRUDENCE
Reason:
•
D.
The State undoubtedly is always solvent.25
b.
loans and other credit accommodations fully guaranteed
by the government as to the payment of principal and
interest;
c.
loans and other credit accommodations covered by
assignment of deposits maintained in the lending bank
and held in the Philippines;
d.
loans, credit accommodations and acceptances under
letters of credit to the extent covered by margin deposits;
and
e.
other loans or credit accommodations which the Monetary
Board may from time to time, specify as non-risk items.
Bank Guarantee
Loans and other credit accommodations, deposits maintained
with, and usual guarantees by a bank to any other bank or non-bank
entity, whether locally or abroad, shall be subject to the limits as
herein prescribed.
A bank guarantee is an irrevocable commitment of a bank
binding itself to pay a sum of money in the event of non-performance
of a contract by a third party. The guarantee is a commitment
separate and distinct from the principal debt or contract.
E.
Contingent Accounts
Certain types of contingent accounts of borrowers may be
included among those subject to these prescribed limits as may be
determined by the Monetary Board.26
F.
Assignment of Credits
Assignment of credit is an agreement by virtue of which the
owner of a credit, known as the assignor, by a legal cause, such as
sale, dation in payment, exchange or donation, and without the need
25
Tolentino vs. Carlos, 66 Phil. 140; Government of the P.I. vs. Judge of the
Court of First Instance of Iloilo, 34 Phil. 167, cited in Joaquin Gutierrez, et al. vs.
Camus, et al., G.R. No. L-6725, promulgated October 30, 1954.
26
Section 35, GBL.
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
143
of the consent of the debtor, transfers his credit and its accessory
rights to another, known as the assignee, who acquires the power to
enforce it to the same extent as the assignor could have enforced it
against the debtor ... It may be in the form of a sale, but at times it
may constitute a dation in payment, such as when a debtor, in order
to obtain a release from his debt, assigns to his creditor a credit he
has against a third person, or it may constitute a donation as when it
is by gratuitous title; or it may even be merely by way of guaranty, as
when the creditor gives as a collateral, to secure his own debt in favor
of the assignee, without transmitting ownership. The character that
it may assume determines its requisites and effects, its regulation,
and the capacity of the parties to execute it; and in every case, the
obligations between assignor and assignee will depend upon the
judicial relation which is the basis of the assignment.27
As a consequence, the third party steps into the shoes of the
original creditor as subrogee of the latter. Moreover, in assignment,
the debtor’s consent is not essential for the validity of the assignment
(Art. 1624 in relation to Art. 1475, Civil Code), his knowledge
thereof affecting only the validity of the payment he might make
(Article 1626, Civil Code). “Article 1626 also shows that payment
of an obligation which is already existing does not depend on the
consent of the debtor. It, in effect, mandates that such payment of
the existing obligation shall already be made to the new creditor
from the time the debtor acquires knowledge of the assignment of
the obligation.’’ The law is clear that the debtor had the obligation
to pay and should have paid from the date of notice whether or not
he consented.
In Sison & Sison vs. Yap Tico and Avanceña, 37 Phil. 587
[1918] it was ruled that definitely, consent is not necessary in order
that assignment may fully produce legal effects. Hence, the duty
to pay does not depend on the consent of the debtor. Otherwise, all
creditors would be prevented from assigning their credits because of
the possibility of the debtor’s refusal to give consent.
“What the law requires in an assignment of credit is not the
consent of the debtor but merely notice to him. A creditor may,
therefore, validly assign his credit and its accessories without the
debtor’s consent (National Investment and Development Co. vs. De
27
Manila Banking Corporation vs. Teodoro, citing Tolentino, COMMENTARIES AND
JURISPRUDENCE ON THE CIVIL CODE OF THE PHILIPPINES, Vol. 5, pp. 165-166, G.R. No. L53955, January 13, 1989.
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BANKING LAWS & JURISPRUDENCE
Los Angeles, 40 SCRA 489 [1971]. The purpose of the notice is only to
inform that debtor from the date of the assignment, payment should
be made to the assignee and not to the original creditor.”28
G.
No Pacto Commissorio in Assignment of Deposits
In general, the creditor cannot appropriate the things given by
way of pledge or mortgage, or dispose of them. Any stipulation to the
contrary is null and void.29 The encashment of the deposit certificates
is not a pacto commissorio which is prohibited under Art. 2088 of
the Civil Code. A pacto commissorio is a provision for the automatic
appropriation of the pledged or mortgaged property by the creditor
in payment of the loan upon its maturity. The prohibition against
a pacto commissorio is intended to protect the obligor, pledgor, or
mortgagor against being overreached by his creditor who holds a
pledge or mortgage over property whose value is much more than
the debt. Where the security for the debt is also money deposited in
a bank, the amount of which is even less than the debt, it was not
illegal for the creditor to encash the time deposit certificates to pay
the debtors’ overdue obligation, with the latter’s consent.30
V. Restriction On Bank Exposure To Directors, Officers,
Stockholders And Their Related Interests
A.
Approval and Other Requirements
(i)
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 from such bank
to 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 the directors of the bank,
excluding the director concerned.
•
Such written approval shall not be required for loans,
other credit accommodations and advances granted
to officers under a fringe benefit plan approved by
the Bangko Sentral.
28
South City Homes, Inc. vs. Insurance Corporation, G.R. No. 135462, December 7, 2001.
29
Art. 2088, Civil Code.
30
Chu vs. Court of Appeals, G.R. No. L-78519, September 26, 1989.
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
(ii)
145
The required approval shall be entered upon the records
of the bank and a copy of such entry shall be transmitted
forthwith to the appropriate supervising and examining
department of the Bangko Sentral.
(iii) Dealings of a bank with any of its directors, officers or
stockholders and their related interests shall be upon
terms not less favorable to the bank than those offered to
others.
B.
Directors
Directors shall include:
C.
D.
(1)
directors who are named as such in the articles of
incorporation;
(2)
directors duly elected in subsequent meetings of the
stockholders; and
(3)
those elected to fill vacancies in the board of directors.
Officers
i.
Officers shall include the president, executive vice president, senior vice president, vice president, general manager, secretary, treasurer, trust officer and others mentioned as officers of the bank, or those whose duties as
such are defined in the by-laws, or are generally known to
be the officers of the bank (or any of its branches and offices other than the head office) either through announcement, representation, publication or any kind of communication made by the bank.
ii.
A person holding the position of chairman, vice-chairman
or any other position of the board who also performs functions of management such as those ordinarily performed
by regular officers shall also be considered an officer.
Stockholder
Stockholder shall refer to any stockholder of record in the
books of the bank/quasi-bank/trust entity, acting personally, or
through an attorney-in-fact; or any other person duly authorized by
him or through a trustee designated pursuant to a proxy or voting
trust or other similar contracts, whose stockholdings in the lending
bank/quasi-bank/trust entity, individual and/or collectively with the
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BANKING LAWS & JURISPRUDENCE
stockholdings of: (i) his spouse and/or relative within the first degree
by consanguinity or affinity or legal adoption; (ii) a partnership
in which the stockholder and/or the spouse and/or any of the
aforementioned relatives is a general partner; and (iii) corporation,
association or firm of which the stockholder and/or his spouse and/or
the aforementioned relatives own more than fifty percent (50%) of
the total subscribed capital stock of such corporation, association or
firm, amount to ONE PERCENT (1%) or more of the total subscribed
capital stock of the bank/quasi-bank/trust entity.
E.
Related Interests
The following are considered related interests:
(1)
Spouse or relative within the first degree of consanguinity
or affinity, or relative by legal adoption, of a director,
officer or stockholder of the bank;
(2)
Partnership of which a director, officer, or stockholder of
a bank or his spouse or relative within the first degree of
consanguinity or affinity, or relative by legal adoption, is
a general partner;
(3)
Co-owner with the director, officer, stockholder or his
spouse or relative within the first degree of consanguinity
or affinity, or relative by legal adoption, of the property or
interest or right mortgaged, pledged or assigned to secure
the loans or other credit accommodations, except when
the mortgage, pledge or assignment covers only said coowner’s undivided interest;
(4)
Corporation, association, or firm of which a director
or officer of the bank, or his spouse is also a director or
officer of such corporation, association or firm, except (a)
where the securities of such corporation, association or
firm are listed and traded in the big board or commercial
and industrial board of domestic stock exchanges and
less than fifty percent (50%) of the voting stock thereof
is owned by any one (1) person or by persons related to
each other within the first degree of consanguinity or
affinity; or (b) where the director, officer or stockholder
of the bank sits as a representative of the bank in the
board of directors of such corporation: Provided, That the
bank representative shall not have any equity interest in
the borrower corporation except for the minimum shares
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
147
required by law, rules and regulations, or by the by-laws
of the corporation: Provided, further, That the borrowing
corporation is not among those mentioned in Items (5),
(6), (7) and (8) below;
F.
(5)
Corporation, association or firm of which any or a
group of directors, officers, stockholders of the lending
bank and/or their spouses or relatives within the first
degree of consanguinity or affinity, or relative by legal
adoption, hold or own at least twenty percent (20%) of the
subscribed capital of such corporation, or of the equity of
such association or firm;
(6)
Corporation, association or firm wholly or majority-owned
or controlled by any related entity or a group of related
entities mentioned in Items (2), (4) and (5) above;
(7)
Corporation, association or firm which owns or controls
directly or indirectly whether singly or as part of a group
of related interest at least twenty percent (20%) of the
subscribed capital of a substantial stockholder of the
lending bank or which controls majority interest of the
bank; and
(8)
Corporation, association or firm in which the lending
bank and/or its parent/subsidiary holds or owns at least
twenty percent (20%) of the subscribed capital of such
corporation, or in the equity of such association or firm,
or has an existing management contract or any similar
arrangement with the lending bank or its parent/
subsidiary.
Effect of Violation
After due notice to the board of directors of the bank, the office
of any bank director or officer who violates the foregoing may be
declared vacant and the director or officer shall be subject to the
penal provisions provided in the New Central Bank Act.
G.
Limits of Loans
(i)
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
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BANKING LAWS & JURISPRUDENCE
as investments of such bank in enterprises owned or
controlled by said directors, officers, stockholders and
their related interests.
(ii)
H.
The outstanding loans, credit accommodations and guarantees 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
unencumbered deposits and book value of their paid-in
capital contribution in the bank.
Exclusions to the Limit
(i)
Loans, credit accommodations and guarantees secured
by assets considered as non-risk by the Monetary Board
shall be excluded from such limit.
(ii)
Loans, credit accommodations and advances to officers
in the form of fringe benefits granted in accordance with
rules as may be prescribed by the Monetary Board shall
not be subject to the individual limit.
(iii) The limit on loans, credit accommodations and guarantees shall not apply to loans, credit accommodations and
guarantees extended by a cooperative bank to its cooperative shareholders. (Section 36, GBL)
I.
Applicability of DOSRI Rules and Regulations to Government Borrowings
Circular No. 547, Series Of 2006, provides that the DOSRI
Rules and Regulations shall also apply to loans, other credit accommodations, and/or guarantees granted to the National Government
or Republic of the Philippines (ROP), its political subdivisions and
instrumentalities as well as government-owned or -controlled corporations (GOCCs), subject to the following clarifications:
1.
Loans, other credit accommodations, and/or guarantees
to the ROP and/or its agencies/departments/bureaus shall
be considered: (a) non-risk; and (b) not subject to any
ceiling;
2.
Loans, other credit accommodations, and/or guarantees
to: (a) GOCCs; and (b) corporations where the ROP, its
agencies/departments/bureaus, and/or GOCCs own at
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
149
least twenty percent (20%) of the subscribed capital stock
shall be considered indirect borrowings of the ROP and
shall form part of the individual ceiling as well as the
aggregate ceiling: Provided, That the following loans, other
credit accommodations, and/or guarantees to GOCCs and
corporations where the ROP, its agencies/departments/
bureaus, and/or GOCCs own at least twenty percent (20%)
of the subscribed capital stock, shall be excluded from the
thirty percent (30%) ceiling on unsecured loans:
a.
Loans, other credit accommodations, and/or guarantees for the purpose of undertaking priority infrastructure projects consistent with the Medium-Term
Development Plan/Medium Term Public Investment
Program of the National Government, duly certified
as such by the Secretary of Socio-Economic Planning;
b.
Loans, other credit accommodations, and/or guarantees granted to participating financial institutions
(PFIs) in the lending programs of the government
wherein the funds borrowed are intended for relending to other PFIs or end-user borrowers; and
c.
Loans, other credit accommodations, and/or guarantees to provide rediscounting facilities and/or guarantee programs for loans granted to the agricultural
sector, and micro, small and medium enterprises.
3.
In view of the fiscal autonomy granted under R.A. 7653
and the independence prescribed under the Constitution,
the BSP shall be considered an independent entity, hence,
not a related interest of the ROP and/or its agencies/
departments/bureaus. Loans, other credit accommodations
and guarantees of the BSP shall be considered: (a) nonrisk; and (b) not subject to any ceiling;
4.
Local government units (LGUs) shall be considered
separate from the ROP, other government entities, and
from one another due to the full autonomy in the exercise
of their proprietary functions and in the management of
their economic enterprises granted to them under the
Local Government Code of the Philippines, subject to
certain limitations provided by law, hence, not a related
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BANKING LAWS & JURISPRUDENCE
interest of the ROP and/or its agencies/departments/
bureaus;
5.
A director who acts as a government representative in the
lending institution shall not be excluded in the deliberation
as well as in the determination of majority of the directors
in cases of loans, other credit accommodations, and
guarantees to the ROP and/or its agencies/departments/
bureaus; and
6.
A director of the lending institution shall be excluded in
the deliberation as well as in the determination of majority of the directors in cases of loans, other credit accommodations, and guarantees to the borrowing government
entity other than the ROP, its agencies, departments or
bureaus where said director is also a director, officer or
stockholder under existing DOSRI regulations.
VI. Securities On Loans And Other Credit
Accommodations
A.
Loans and Other Credit Accommodations against Real
Estate
Loans and other credit accommodations against real estate
shall not exceed seventy-five percent (75%) of the appraised value
of the respective real estate security, plus sixty percent (60%) of the
appraised value of the insured improvements, and such loans may
be made to the owner of the real estate or to his assignees. (Section
37, GBL)
Exception: If the Monetary Board prescribes otherwise.
B.
Loans and Other Credit Accommodations on Security of
Chattels and Intangible Properties
Loans and other credit accommodations on security of chattels
and intangible properties, such as, but not limited to, patents,
trademarks, trade names, and copyrights shall not exceed seventyfive percent (75%) of the appraised value of the security, and such
loans and other credit accommodations may be made to the titleholder of the chattels and intangible properties or his assignees.
(Section 38, GBL)
Exception: If the Monetary Board prescribes otherwise.
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
C.
151
Joint and Solidary Agreement
Joint and Solidary Agreement (JSA) is indubitably a surety, not
a guaranty.31 It is an agreement where parties consent to be jointly
and severally liable. But the solidary liability should be carefully
studied, not sweepingly assumed to cover all liabilities.
The JSA, as a contract of adhesion, should be taken contra
proferentum against the party who may have caused any ambiguity
therein.
D.
Effect of Surety Agreement
Being an onerous undertaking, a surety agreement is strictly
construed against the creditor, and every doubt is resolved in favor
of the solidary debtor. The fundamental rules of fair play require the
creditor to obtain the consent of the surety to any material alteration
in the principal loan agreement, or at least to notify it thereof. Hence,
a bank cannot hold a surety liable for loans obtained in excess of the
amount or beyond the period stipulated in the original agreement,
absent any clear stipulation showing that the latter waived his right
to be notified thereof, or to give consent thereto.
This is especially true where a surety is no longer the principal
officer or major stockholder of the corporate debtor at the time the
later obligations were incurred. He was thus no longer in a position
to compel the debtor to pay the creditor and had no more reason to
bind himself anew to the subsequent obligations.32
An essential alteration in the terms of the Loan Agreement
without the consent of the surety extinguishes the latter’s obligation. As the Court held in National Bank vs. Veraguth, “[i]t is fundamental in the law of suretyship that any agreement between the
creditor and the principal debtor which essentially varies the terms
of the principal contract, without the consent of the surety, will release the surety from liability.”
Indeed, it has been held that a contract of surety “cannot extend
to more than what is stipulated. It is strictly construed against the
31
Applying Article 2047 of the Civil Code, the surety is charged not as a collateral undertaking, but as an original promissor to the loan. See Rodriguez, supra,
p. 71; Goldenrod, Inc. vs. Court of Appeals, 418 Phil. 492, 502, September 28, 2001;
and Philippine National Bank vs. Luzon Surety Co., Inc., 68 SCRA 207, 214, November 29, 1975.
32
Security Bank and Trust Company, Inc. vs. Cuenca, G.R. No. 138544, October 3, 2000.
152
BANKING LAWS & JURISPRUDENCE
creditor, every doubt being resolved against enlarging the liability
of the surety.” Likewise, the Court has ruled that “it is a well-settled
legal principle that if there is any doubt on the terms and conditions
of the surety agreement, the doubt should be resolved in favor of the
surety x x x. Ambiguous contracts are construed against the party
who caused the ambiguity.”
It is a common banking practice to require the JSS (“joint and
solidary signature”) of a major stockholder or corporate officer, as
an additional security for loans granted to corporations. 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 for the purpose
agreed upon, and that it would be paid by the corporation.
In Security Bank and Trust Company, Inc. vs. Cuenca, G.R. No.
138544, October 3, 2000, it was held:
Following this practice, it was therefore logical and
reasonable for the bank to have required the JSS of respondent,
who was the chairman and president of Sta. Ines in 1980
when the credit accommodation was granted. There was no
reason or logic, however, for the bank or Sta. Ines to assume
that he would still agree to act as surety in the 1989 Loan
Agreement, because at that time, he was no longer an officer or
a stockholder of the debtor-corporation. Verily, he was not in a
position then to ensure the payment of the obligation. Neither
did he have any reason to bind himself further to a bigger and
more onerous obligation.
Indeed, the stipulation in the 1989 Loan Agreement
providing for the surety of respondent, without even informing
him, smacks of negligence on the part of the bank and bad faith
on that of the principal debtor. Since that Loan Agreement
constituted a new indebtedness, the old loan having been
already liquidated, the spirit of fair play should have impelled
Sta. Ines to ask somebody else to act as a surety for the new
loan.
In the same vein, a little prudence should have impelled
the bank to insist on the JSS of one who was in a position to
ensure the payment of the loan. Even a perfunctory attempt at
credit investigation would have revealed that respondent was
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
153
no longer connected with the corporation at the time. As it is,
the bank is now relying on an unclear Indemnity Agreement in
order to collect an obligation that could have been secured by a
fairly obtained surety. For its defeat in this litigation, the bank
has only itself to blame.
Incidentally, in La Insular vs. Machuca Go Tanco, et al. it was
held:
It is undoubtedly true that the law looks upon the contract
of suretyship with a jealous eye, and the rule is settled that
the obligation of the surety cannot be extended by implication
beyond specified limits.
VII. Grant And Purpose Of Loans And
Other Credit Accommodations
A.
Amount and Purpose of Loan
(i)
A bank shall grant loans and other credit accommodations
only in amounts and for the periods of time essential for
the effective completion of the operations to be financed.
•
(ii)
Such grant of loans and other credit accommodations
shall be consistent with safe and sound banking
practices.
The purpose of all loans and other credit accommodations
shall be stated in the application and in the contract
between the bank and the borrower.
(iii) If the bank finds that the proceeds of the loan or other
credit accommodation have been employed, without its
approval, for purposes other than those agreed upon with
the bank, it shall have the right to terminate the loan
or other credit accommodation and demand immediate
repayment of the obligation. (Section 39, GBL)
B.
Requirement for Grant of Loans or Other Credit Accommodations
Before granting a loan or other credit accommodation, a bank
must ascertain that the debtor is capable of fulfilling his commitments
to the bank. Toward this end, a bank may demand from its credit
applicants:
a.
a statement of their assets and liabilities;
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BANKING LAWS & JURISPRUDENCE
b.
a statement of their income and expenditures; and
c.
such information as may be prescribed by law or by rules
and regulations of Monetary Board to enable the bank to
properly evaluate the credit application which includes
the corresponding financial statements submitted for
taxation purposes to the Bureau of Internal Revenue.
•
Should such statements prove to be false or incorrect
in any material detail, the bank may terminate any
loan or other credit accommodation granted on the
basis of said statements and shall have the right to
demand immediate repayment or liquidation of the
obligation.
* Note: Even in the absence of the above provision in the GBL, the
bank may still demand immediate repayment because the
borrower lost the benefit of the period as provided under the
Civil Code:
The debtor shall lose every right to make use of the
period:
(1)
When after the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or security
for the debt;
(2)
When he does not furnish to the creditor the guaranties
or securities which he has promised;
(3)
When by his own acts he has impaired said guaranties or securities after their establishment, and when
through a fortuitous event they disappear, unless he
immediately gives new ones equally satisfactory;
(4)
When the debtor violates any undertaking, in consideration of which the creditor agreed to the period;
(5)
When the debtor attempts to abscond.33
In formulating the rules and regulations, the Monetary Board
shall recognize the peculiar characteristics of microfinancing, such
as cash flow-based lending to the basic sectors that are not covered
by traditional collateral.34
33
34
Art. 1198, Civil Code.
Section 40, GBL.
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
155
* Note: Microfinancing loans are small loans granted to the basic
sectors, as defined in the Social Reform and Poverty Alleviation
Act of 1997 (R.A. 8425), and other loans granted to the poor
and low-income households for their microenterprises 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 borrowers’ cash flow and are
typically unsecured.
C.
Reason for Stringent Rules in Granting Loans
A banking corporation is a financial institution with power to
issue its promissory notes intended to circulate as money (known
as bank notes); or to receive the money of others on general deposit,
to form a joint fund that shall be used by the institution for its own
benefit, for one or more of the purposes of making temporary loans
and discounts, of dealing in notes, foreign and domestic bills of
exchange, coin bullion, credits, and the remission of money; or with
both these powers, and with the privileges, in addition to these basic
powers, of receiving special deposits, and making collection for the
holders of negotiable paper, if the institution sees fit to engage in
such business.35 In funding these businesses, the bank invests the
money that it holds in trust of its depositors.36
For this reason, the business of a bank is one affected with public
interest, for which reason the bank should guard against loss due to
negligence or bad faith.37 In approving the loan of an applicant, the
bank concerns itself with proper informations regarding its debtors.
A bank and a financial institution engaged in the grant of loans
is expected to ascertain and verify the identities of the persons it
transacts business with.38
Under the General Banking Law of 2000, banks shall grant
loans and other credit accommodations only in amounts and for
periods of time essential to the effective completion of operations to
be financed, “consistent with safe and sound banking practices.” The
Monetary Board — then and now — still prescribes, by regulation, the
35
Morse, Jr., John T.: A TREATISE ON THE LAW OF BANKS AND BANKING, Vol. I, 6th
Edition, 1928, USA.
36
United Coconut Planters Bank vs. Ramos, G.R. No. 147800, November 11,
2003.
37
Rural Bank of Sta. Ignacia, Inc. vs. Dimatulac, G.R. No. 142015, April 29,
2003.
38
Adriano vs. Pangilinan, 373 SCRA 544 (2002).
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BANKING LAWS & JURISPRUDENCE
conditions and limitations under which banks may grant extensions
or renewals of their loans and other credit accommodations.39
D.
Unsecured Loans or Other Credit Accommodations
The Monetary Board is authorized to issue such regulations
as it may deem necessary with respect to unsecured loans or other
credit accommodations that may be granted by banks.40
E.
Other Security Requirements for Bank Credits
The Monetary Board may, by regulation, prescribe further
security requirements to which the various types of bank credits
shall be subject, and the Board may by regulation,41 reduce the
maximum ratios in connection with loans,42 or, in special cases,
increase the established maximum ratios.43
F.
Authority to Prescribe Terms and Conditions of Loans
and Other Credit Accommodations
Section 43 of the GBL provides:
The Monetary Board may, similarly, in accordance with the
authority granted to it in Section 106 of the New Central Bank
Act, and taking into account the requirements of the economy
for the effective utilization of long-term funds, prescribe the
maturities, as well as related terms and conditions for various
types of bank loans and other credit accommodations. Any
change by the Board in the maximum maturities shall apply only
to loans and other credit accommodations made after the date
of such action. The Monetary Board shall regulate the interest
imposed on microfinance borrowers by lending investors and
similar lenders, such as, but not limited to, the unconscionable
rates of interest collected on salary loans and similar credit
accommodations.
39
New Sampaguita Builders Construction vs. Philippine National Bank, G.R.
No. 148753, July 30, 2004.
40
Section 41, GBL.
41
In accordance with the authority granted to it in Section 106 of the New
Central Bank Act.
42
Established in Sections 36 and 37 of the GBL.
43
Section 42, GBL.
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
157
In this connection, Section 106 of the NCBA provides:
“Section 106. Required Security Against Bank Loans. — In
order to promote liquidity and solvency of the banking system,
the Monetary Board may issue such regulations as it may deem
necessary with respect to the maximum permissible maturities
of the loans and investments which the banks may make, and
the kind and amount of security to be required against the
various types of credit operations of the banks.’’
G.
Amortization on Loans and Other Credit Accommodations
(i)
The amortization schedule of bank loans and other credit
accommodations shall be adapted to the nature of the
operations to be financed.
(ii)
In case of loans and other credit accommodations with
maturities of more than five (5) years, provisions must
be made for periodic amortization payments, but such
payments must be made at least annually.
(iii) When the borrowed funds are to be used for purposes
which do not initially produce revenues adequate for
regular amortization payments therefrom, the bank may
permit the initial amortization payment to be deferred
until such time as said revenues are sufficient for such
purpose, but in no case shall the initial amortization date
be later than five (5) years from the date on which the
loan or other credit accommodation is granted.
(iv) In case of loans and other credit accommodations to
microfinance sectors, the schedule of loan amortization
shall take into consideration the projected cash flow of
the borrower and adopt this into the terms and conditions
formulated by banks. (Section 44, GBL)
H.
Escalation Clause; When Allowable
Parties to an agreement pertaining to a loan or forbearance of
money, goods or credits may stipulate that the rate of interest agreed
upon may be increased in the event that the applicable maximum
rate of interest is increased by the Monetary Board: Provided, That
such stipulation shall be valid only if there is also a stipulation in
the agreement that the rate of interest agreed upon shall be reduced
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BANKING LAWS & JURISPRUDENCE
in the event that the applicable maximum rate of interest is reduced
by law or by the Monetary Board: Provided, further, That the
adjustment in the rate of interest agreed upon shall take effect on
or after the effectivity of the increase or decrease in the maximum
rate of interest.44
In relation to this, the Usury Law provides:
“Sec. 7-a. Parties to an agreement pertaining to a loan or
forbearance of money, goods or credits may stipulate that the
rate of interest agreed upon may be increased in the event that
the applicable maximum rate of interest is increased by law or
by the Monetary Board: Provided, That such stipulation shall
be valid only if there is also a stipulation in the agreement that
the rate of interest agreed upon shall be reduced in the event that
the applicable maximum rate of interest is reduced by law or by
the Monetary Board: Provided further, That the adjustment in
the rate of interest agreed upon shall take effect on or after the
effectivity of the increase or decrease in the maximum rate of
interest.’’45
Escalation clauses are not void per se. However, one “which
grants the creditor an unbridled right to adjust the interest
independently and upwardly, completely depriving the debtor of
the right to assent to an important modification in the agreement”
is void. Clauses of that nature violate the principle of mutuality of
contracts. Article 1308 of the Civil Code holds that a contract must
bind both contracting parties; its validity or compliance cannot be
left to the will of one of them.46
Accordingly, for a stipulation on an escalation clause to be
valid, it should specifically provide (1) that there can be an increase
in interest if increased by law or by the Monetary Board, 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 by the Monetary Board.
The purpose of the law in mandating the inclusion of a deescalation clause is to prevent one-sidedness in favor of the lender
X305.2, Manual of Regulations for Banks.
Act No. 2655 (Usury Law) as amended by P.D. 1684.
46
Equitable PCI Bank vs. Ng Sheurig Ngor, G.R. No. 171545, December 19,
44
45
2007.
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
159
which is considered repugnant to the principle of mutuality of
contracts.
Art. 1308, Civil Code. The contract must bind both
contracting parties; its validity or compliance cannot be left to
the will of one of them.
In order that obligations arising from contracts may have the
force of law between the parties, there must be mutuality between
the parties based on their essential equality. A contract containing
a condition which makes its fulfillment dependent exclusively
upon the uncontrolled will of one of the contracting parties, is
void. The inescapable conclusion is that a de-escalation clause is
an indispensable requisite to the validity and enforceability of an
escalation clause in the contract. In other words, in the absence of
a corresponding de-escalation clause, the escalation clause shall be
considered null and void.47
Effect of Annulment of Escalation Clause
In case the escalation clause is annulled, the principal amount
of the loan is subject to the original or stipulated rate of interest.
Upon maturity, the amount due is subject to legal interest at the
rate of 12% per annum.48
Exception
Even if there is no de-escalation clause, the escalation clause
is still valid if the creditor unilaterally and actually decreased the
interest charges whenever the rate of interest is reduced by law or
the Monetary Board. Thus, it was held by the Supreme Court in one
case:
We are fully persuaded, however, to take particular
exception from said ruling insofar as the case at bar is concerned,
considering the peculiar circumstances obtaining herein. There
is no dispute that the escalation clause in the promissory
note involved in this case does not contain a correlative deescalation clause or a provision providing for the reduction of
the stipulated interest in the event that the applicable maximum
47
48
2007.
Llorin vs. Court of Appeals, G.R. No. 103592, February 4, 1993.
Equitable PCI Bank vs. Ng Sheurig Ngor, G.R. No. 171545, December 19,
160
BANKING LAWS & JURISPRUDENCE
rate of interest is reduced by law or by the Monetary Board.
Notwithstanding the absence of such stipulation, however, it is
similarly not controverted but, as a matter of fact, specifically
admitted by petitioner that respondent APEX unilaterally and
actually decreased the interest charges it imposed on herein
petitioner on three occasions.
Consequently, we hold that with this actuality, the escalation clause involved in this case remains valid and enforceable.
The evil sought to be thwarted with the enactment and by the
application of Presidential Decree No. 1684 is inexistent in the
present case by reason of the actual grant of a concomitant decrease in the interest rates on petitioner’s loan. We do not find
here a situation where it can be said that the parties do not
stand on equal footing, which is the evil proscribed by said decree. Ergo, cessante ratione legis cessat ipsa lex.49
I.
Unilateral Increase of Rates
The “unilateral determination and imposition” of increased
rates is “violative of the principle of mutuality of contracts ordained
in Article 1308 of the Civil Code.” One-sided impositions do not have
the force of law between the parties, because such impositions are
not based on the parties’ essential equality.
The binding effect of any agreement between the parties to a
contract is premised on two settled principles: (1) that obligations
arising from contracts have the force of law between the contracting
parties; and (2) that there must be mutuality between the parties
based on their essential equality to which is repugnant to have
one party bound by the contract leaving the other free therefrom.
Any contract which appears to be heavily weighed in favor of one
of the parties so as to lead to an unconscionable result is void. Any
stipulation regarding the validity or compliance of the contract which
is left solely to the will of one of the parties is likewise invalid.50
A provision in a promissory note authorizing a bank to
increase, decrease or otherwise change from time to time the rate of
interest and/or bank charges “without advance notice,” “in the event
of change in the interest rate prescribed by law or the Monetary
Board of the Central Bank of the Philippines,” does not give the
49
50
3, 2007.
Llorin vs. Court of Appeals, supra.
Floirendo vs. Metropolitan Bank and Trust Co., G.R. No. 148325, September
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
161
bank unrestrained freedom to charge any rate other than that which
was agreed upon. Where the monthly upward/downward adjustment
of interest rate is left to the will of the bank alone, it violates the
essence of mutuality of the contract.51
Although escalation clauses are valid in maintaining fiscal
stability and retaining the value of money on long-term contracts,
giving a party an unbridled right to adjust the interest independently
and upwardly would completely take away from the other party the
“right to assent to an important modification in their agreement”
and would also negate the element of mutuality in their contracts.
Also, the fulfillment of the contract would be “dependent
exclusively upon the uncontrolled will”52 of one party and therefore
void. Moreover, a pro forma promissory note has the character of
a contract d’adhésion,53 “where the parties do not bargain on equal
footing, the weaker party’s [the debtor’s] participation being reduced
to the alternative ‘to take it or leave it.’”54
“While the Usury Law ceiling on interest rates was lifted by
[Central Bank] Circular No. 905, nothing in the said Circular grants
lenders carte blanche authority to raise interest rates to levels which
will either enslave their borrowers or lead to a hemorrhaging of
their assets.” Neither Circular No. 905 nor P.D. 1684, which further
amended the Usury Law, “authorized either party to unilaterally
raise the interest rate without the other’s consent.”55
Unilateral and lopsided policy defeats the purpose of stimulating
the growth of the borrower. Thus, it was held —
Moreover, a similar case eight years ago pointed out to
the same respondent (PNB) that borrowing signified a capital
transfusion from lending institutions to businesses and
industries and was done for the purpose of stimulating their
growth; yet respondent’s continued “unilateral and lopsided
Ibid.
Garcia vs. Rita Legarda, Inc., 128 Phil. 590, 594-595, October 30, 1967, per
Dizon, J.
53
“Labeled since Raymond Baloilles’ ‘contracts by adherence.’ ’’ Qua Chee Gan
vs. Law Union & Rock Insurance Co. Ltd., 98 Phil. 85, 95, December 17, 1955, per
Reyes, J.B.L., J.
54
Philippine National Bank vs. Court of Appeals, supra at note 108, per GriñoAquino, J. See Qua Chee Gan vs. Law Union & Rock Insurance Co. Ltd., supra.
55
New Sampaguita Builders Construction vs. Philippine National Bank, G.R.
No. 148753, July 30, 2004.
51
52
162
BANKING LAWS & JURISPRUDENCE
policy”56 of increasing interest rates “without the prior assent”57
of the borrower not only defeats this purpose, but also deviates
from this pronouncement. Although such increases are not
usurious, since the “Usury Law is now legally inexistent”58 — the
interest ranging from 26 percent to 35 percent in the statements
of account59 — “must be equitably reduced for being iniquitous,
unconscionable and exorbitant.”60 Rates found to be iniquitous
or unconscionable are void, as if it there were no express contract
thereon.61 Above all, it is undoubtedly against public policy to
charge excessively for the use of money.62
It cannot be argued that assent to the increases can be
implied either from the June 18, 1991 request of petitioners
for loan restructuring or from their lack of response to the
statements of account sent by respondent. Such request does not
indicate any agreement to an interest increase; there can be no
implied waiver of a right when there is no clear, unequivocal
and decisive act showing such purpose.63 Besides, the statements
were not letters of information sent to secure their conformity;
and even if we were to presume these as an offer, there was
no acceptance. No one receiving a proposal to modify a loan
contract, especially interest — a vital component — is “obliged
to answer the proposal.”64
J.
Iniquitous, Unconscionable and Exorbitant Interests
The Supreme Court has consistently held that for sometime
now, usury has been legally non-inexistent and that interest can now
Spouses Almeda vs. Court of Appeals, supra, p. 319, per Kapunan, J.
Id., p. 316.
58
Medel vs. Court of Appeals, 359 Phil. 820, 829, November 27, 1998, per Pardo, J. See also People vs. Dizon, 329 Phil. 685, 696, August 22, 1996; Liam Law vs.
Olympic Sawmill Co., 214 Phil. 385, 388, May 28, 1984; People’s Financing Corp. vs.
Court of Appeals,, 192 SCRA 34, 40, December 4, 1990; and Javier vs. De Guzman Jr.,
192 SCRA 434, 439, December 19, 1990.
59
These are billings sent by respondent to petitioner showing the details of its
outstanding claim against the latter as of a given date.
60
Spouses Solangon vs. Salazar, supra, p. 822.
61
Imperial vs. Jaucian, supra, p. 10.
62
De Leon, supra, p. 50.
63
Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. I (1990), p. 29.
64
Philippine Bank of Communications vs. Diamond Seafoods Corporation, G.R.
No. 142420, January 29, 2007.
56
57
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
163
be charged as lender and borrower may agree upon.65 As a matter of
fact, Section 1 of Central Bank Circular No. 905 states that:
SECTION 1. The rate of interest, including commissions, premiums, fees and other charges , on a loan or forbearance of any money,
goods, or credits, regardless of maturity and whether secured or unsecured, that may be charged or collected by any person, whether natural
or judicial, shall not be subject to any ceiling prescribed under
or pursuant to the Usury Law, as amended.66
In Trade & Investment Development Corporation of the
Philippines vs. Roblett Industrial Construction Corporation,67 the
Court has ruled that:
With the suspension of the Usury Law and the removal of interest
ceiling, the parties are free to stipulate the interest to be imposed on
monetary obligations. Absent any evidence of fraud, undue influence,
or any vice of consent exercised by one party against the other, the
interest rate agreed upon is binding upon them.
However, the Supreme Court has held:
i.
Although interest ranging from 26 percent to 35 percent
are not usurious, since the “Usury Law is now legally
inexistent” — the same — “must be equitably reduced for
being iniquitous, unconscionable and exorbitant.” Rates
found to be iniquitous or unconscionable are void, as if
it there were no express contract thereon. Above all, it is
undoubtedly against public policy to charge excessively
for the use of money.68
ii.
The interest at 5.5% per month, or 66% per annum is
iniquitous or unconscionable, and, hence, contrary to
morals (“contra bonos mores”), if not against the law.
The stipulation is void. The courts shall reduce equitably
65
Liam Law vs. Olympic Sawmill Co., G.R. No. L-30771, May 28, 1984, 129
SCRA 439; Medel vs. Court of Appeals, G.R. No. 131622, November 27, 1998, 299
SCRA 481; People vs. Dizon, G.R. No. 120957, August 22, 1996, 260 SCRA 851; People’s Financing Corp. vs. Court of Appeals, G.R. No. 80791, December 4, 1990, 192
SCRA 34; Verdejo vs. Court of Appeals, G.R. No. L-77735, January 29, 1988, 157
SCRA 743.
66
Central Bank Circular No. 905, Series of 1982, 78 Off. Gaz. 7336.
67
G.R. No. 139290, May 19, 2006, 490 SCRA 1.
68
New Sampaguita Builders Construction vs. Philippine National Bank, G.R.
No. 148753, July 30, 2004.
164
BANKING LAWS & JURISPRUDENCE
liquidated damages, whether intended as an indemnity or
a penalty if they are iniquitous or unconscionable.69
iii.
In Medel vs. Court of Appeals, the Supreme Court found
the stipulated interest rate of 5.5 percent per month, or 66
percent per annum, unconscionable. In the present case,
the rate is even more iniquitous and unconscionable, as
it amounts to 192 percent per annum. When the agreed
rate is iniquitous or unconscionable, it is considered “contrary to morals, if not against the law. [Such] stipulation
is void.”70
Cases:
Cuaton vs. Salud
G.R. No. 158382, January 27, 2004
In Ruiz vs. Court of Appeals, we declared that the Usury
Law was suspended by Central Bank Circular No. 905, s.
1982, effective on January 1, 1983, and that parties to a loan
agreement have been given wide latitude to agree on any
interest rate. However, nothing in the said Circular grants
lenders carte blanche authority to raise interest rates to
levels which will either enslave their borrowers or lead to a
hemorrhaging of their assets. The stipulated interest rates are
illegal if they are unconscionable.
Thus, in Medel vs. Court of Appeals, and Spouses Solangon
vs. Salazar, the Court annulled a stipulated 5.5% per month
or 66% per annum interest on a P500,000.00 loan and a 6%
per month or 72% per annum interest on a P60,000.00 loan,
respectively, for being excessive, iniquitous, unconscionable
and exorbitant. In both cases, the interest rates were reduced
to 12% per annum.
In the present case, the 10% and 8% interest rates per
month on the one-million-peso loan of petitioner are even
higher than those previously invalidated by the Court in the
above cases. Accordingly, the reduction of said rates to 12% per
annum is fair and reasonable.
Stipulations authorizing iniquitous or unconscionable
interests are contrary to morals (‘contra bonus mores’), if not
69
70
Medel vs. Court of Appeals, G.R. No. 131622, November 27, 1998.
Imperial vs. Jaucian, G.R. No. 149004, April 14, 2004.
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
165
against the law. Under Article 1409 of the Civil Code, these
contracts are inexistent and void from the beginning. They
cannot be ratified nor the right to set up their illegality as a
defense be waived.
Dio vs. Virgilio
G.R. No. 154129, July 8, 2005
In the instant case, the Court of Appeals found that the
5% interest rate per month and 5% penalty rate per month for
every month of default or delay is in reality interest rate at
120% per annum. This Court has held that a stipulated interest
rate of 5.5% per month or 66% per annum is void for being
iniquitous or unconscionable. We have likewise ruled that an
interest rate of 6% per month or 72% per annum is outrageous
and inordinate. Conformably to these precedent cases, a
combined interest and penalty rate at 10% per month or 120%
per annum, should be deemed iniquitous, unconscionable,
and inordinate. Hence, we sustain the appellate court when
it found the interest and penalty rates in the Deed of Real
Estate Mortgage in the present case excessive, hence legally
impermissible. Reduction is legally called for now in rates of
interest and penalty stated in the mortgage contract.
Spouses Bacolor vs. Banco Filipino Savings And
Mortgage Bank,
G.R. No. 148491, February 8, 2007
Petitioners invoke this Court’s rulings in Almeda vs. Court
of Appeals71 and Medel vs. Court of Appeals72 to show that the
interest rate in the subject promissory note is unconscionable.
Their reliance on these cases is misplaced. In Almeda, what
this Court struck down as being unconscionable and excessive
was the unilateral increase in the interest rates from 18% to
68%. This Court ruled thus:
It is plainly obvious, therefore, from the undisputed facts
of the case that respondent bank unilaterally altered the
terms of its contract by increasing the interest rates of
71
72
G.R. No. 113412, April 17, 1996, 256 SCRA 292.
G.R. No. 131622, November 27, 1998, 299 SCRA 481.
166
BANKING LAWS & JURISPRUDENCE
the loan without the prior assent of the latter. In fact,
the manner of agreement is itself explicitly stipulated by the
Civil Code when it provides, in Article 1956, that “No interest
shall be due unless it has been expressly stipulated in writing.”
What has been “stipulated in writing” from a perusal of the
interest rate provision of the credit agreement signed between
the parties is that petitioners were bound merely to pay 21%
interest x x x.
Petitioners also cannot find refuge in Medel. In this
case, what this Court declared as unconscionable was the
imposition of a 66% interest rate per annum. In the instant
case, the interest rate is only 24% per annum, agreed upon by
both parties. By no means can it be considered unconscionable
or excessive. Verily, petitioners cannot now renege on their
obligation to comply with what is incumbent upon them under
the loan agreement. A contract is the law between the parties
and they are bound by its stipulations.73
K.
Effect of Void Interest Rate
Since the stipulation on the interest rate is void, it is as if there
were no express contract thereon. Hence, courts may reduce the
interest rate as reason and equity demand.74
On the other hand, unless the stipulated amounts are exorbitant, the court will sustain the amounts agreed upon by the parties because, as stated in Pryce Corporation vs. Philippine Amusement and Gaming Corporation, obligations arising from contracts
have the force of law between the contracting parties and should
be complied with in good faith. If the terms of the contract clearly
express the intention of the contracting parties, the literal meaning
of the stipulations would be controlling. The court has to enforce the
contractual stipulations in the manner that they have been agreed
upon for as long as they are not unconscionable or contrary to morals and public policy.75
73
Salvador vs. Court of Appeals, G.R. No. 124899, March 30, 2004, 426 SCRA
74
Imperial vs. Jaucian, G.R. No. 149004, April 14, 2004.
Ang Gobonseng vs. Unibancard Corp., G.R. No. 160026, December 10, 2007.
433.
75
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
L.
167
Reduction of Interest, Penalty and Attorney’s Fees
In the case of Permanent Savings and Loan Bank vs. Velarde,
G.R. No. 140608, February 5, 2007, the Supreme Court ruled:
Equity dictates that we review the amount of the award, considering the excessive interest rate and the too onerous penalty, and,
consequently, the resulting excessive attorney’s fees. Moreover, it would
be inequitable to penalize respondent with such huge interests and
penalties considering the following circumstances: First, the basis of
the Court’s decision that respondent did not specifically deny in his
Answer the genuineness and due execution of the promissory note is a
procedural lapse on the part of respondent’s counsel for which respondent should not be made to suffer beyond the bounds of reason. Second,
respondent cannot be faulted for not settling the loan at an earlier time
because both the trial court and the CA ruled that petitioner failed to
prove the existence of the loan. And lastly, the final resolution of the
case has dragged for several years because of the appeals interposed
by herein petitioner, thus resulting in the escalation of the amount of
the obligation to more than 15 times the amount of the principal loan.
Such unreasonable consequence merits a second look as this Court dispenses not only law but also equity in appropriate cases.76
M.
Prepayment of Loans and Other Credit Accommodations
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 to such reasonable terms
and conditions as may be agreed upon between the bank and its
borrower.77
N.
Legal Compensation
i.
Under Article 1278 of the New Civil Code, compensation
shall take place when two persons, in their own right,
are creditors and debtors of each other. In order that
compensation may be proper, the following must be
established:
76
See Development Bank of the Philippines vs. West Negros College, Inc., G.R.
No. 152359, May 21, 2004, 429 SCRA 50, 61; Cuaton vs. Salud, G.R. No. 158382,
January 27, 2004, 421 SCRA 278, 283.
77
Section 45, GBL.
168
BANKING LAWS & JURISPRUDENCE
(1)
That each one of the obligors be bound principally,
and that he be at the same time a principal creditor
of the other;
(2)
That both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind,
and also of the same quality if the latter has been
stated;
(3)
That the two debts be due;
(4)
That they be liquidated and demandable;
(5)
That over neither of them there be any retention
or controversy, commenced by third persons and
communicated in due time to the debtor.78
ii.
Compensation takes effect by operation of law when
all the requisites mentioned in Article 1279 of the New
Civil Code are present and extinguishes both debts to the
concurrent amount even though the creditors and debtors
are not aware of the compensation. Legal compensation
operates even against the will of the interested parties
and even without their consent.79 Such compensation
takes place ipso jure; its effects arise on the very day on
which all requisites concur.80
iii.
As its minimum, compensation presupposes two persons
who, in their own right and as principals, are mutually
indebted to each other respecting equally demandable
and liquidated obligations over any of which no retention
or controversy commenced and communicated in due
time to the debtor exists. Compensation, be it legal or
conventional, requires confluence in the parties of the
characters of mutual debtors and creditors, although
their rights as such creditors or their obligations as such
debtors need not spring from one and the same contract
or transaction.81
78
79
Article 1279, New Civil Code.
Bank of the Philippine Island vs. Court of Appeals, 325 Phil. 930, 938
(1996).
80
Republic vs. Court of Appeals, G.R. No. 25012, July 22, 1975, 65 SCRA 186,
190.
81
Mavest (U.S.A.) Inc. vs. Sampaguita Garment Corporation, G.R. No. 127454,
September 21, 2005, 470 SCRA 440, 449.
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
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169
iv.
Article 1980 of the New Civil Code provides that fixed,
savings and current deposits of money in banks and
similar institutions shall be governed by the provisions
concerning simple loans. Under Article 1953, of the same
Code, a person who secures a loan of money or any other
fungible thing acquires the ownership thereof, and is
bound to pay the creditor an equal amount of the same
kind and quality. The relationship of the depositors and
the Bank or similar institution is that of creditor-debtor.
Such deposit may be setoff against the obligation of the
depositor with the bank or similar institution.
v.
However, a subsidiary has an independent and separate
juridical personality from that of its parent company;
hence, any claim against the subsidiary is not a claim
against the parent company and vice versa. Thus, in
Spouses Nisce vs. Equitable PCI Bank, Inc., G.R. No.
167434, February 19, 2007, the Supreme Court held:
When petitioner Natividad Nisce deposited her
US$20,500.00 with the PCIB on July 19, 1984, PCIB became the debtor of petitioner. However, when upon petitioner’s request, the amount of US$20,000.00 was transferred to PCI Capital (which forthwith issued Certificate
of Deposit No. 01612), PCI Capital, in turn, became the
debtor of Natividad Nisce. Indeed, a certificate of deposit
is a written acknowledgment by a bank or borrower of the
receipt of a sum of money or deposit which the Bank or borrower promises to pay to the depositor, to the order of the
depositor; or to some other person; or to his order whereby
the relation of debtor and creditor between the bank and
the depositor is created.82 The issuance of a certificate of
deposit in exchange for currency creates a debtor-creditor
relationship.83
Admittedly, PCI Capital is a subsidiary of respondent Bank. Even then, PCI Capital [PCI Express Padala
(HK) Ltd.] has an independent and separate juridical
personality from that of the respondent Bank, its parent
company; hence, any claim against the subsidiary is not a
claim against the parent company and vice versa.84 The ev-
Ma vs. Community Bank, 494 F. Supplement 252.
Gendrickson vs. Buchbinder, 465 F. Supplement 1250.
84
Velarde vs. Lopez, Inc., G.R. No. 153886, January 14, 2004, 419 SCRA 422,
82
83
431.
170
BANKING LAWS & JURISPRUDENCE
idence on record shows that PCIB, which had been merged
with Equitable Bank, owns almost all of the stocks of PCI
Capital. However, the fact that a corporation owns all of
the stocks of another corporation, taken alone, is not sufficient to justify their being treated as one entity. If used
to perform legitimate functions, a subsidiary’s separate
existence shall be respected, and the liability of the parent
corporation, as well as the subsidiary shall be confined to
those arising in their respective business.85 A corporation
has a separate personality distinct from its stockholders
and from other corporations to which it may be conducted.
This separate and distinct personality of a corporation is
a fiction created by law for convenience and to prevent injustice.86
This Court, in Martinez vs. Court of Appeals87 held
that, being a mere fiction of law, peculiar situations or
valid grounds can exist to warrant, albeit sparingly, the
disregard of its independent being and the piercing of the
corporate veil. The veil of separate corporate personality
may be lifted when, inter alia, the corporation is merely
an adjunct, a business conduit or an alter ego of another
corporation or where the corporation is so organized and
controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of
another corporation; or when the corporation is used as a
cloak or cover for fraud or illegality; or to work injustice;
or where necessary to achieve equity or for the protection of
the creditors. In those cases where valid grounds exist for
piercing the veil of corporate entity, the corporation will be
considered as a mere association of persons. The liability
will directly attach to them.88
The Court likewise declared in the same case that the
test in determining the application of the instrumentality
or alter ego doctrine is as follows:
1.
Control, not mere majority or complete stock control,
but complete dominion, not only of finances but
of policy and business practice in respect to the
transaction attacked so that the corporate entity as
85
MR Holdings, Ltd. vs. Bajar, G.R. No. 138104, April 11, 2002, 380 SCRA 617,
86
Spouses Nisce vs. Equitable PCI Bank, Inc., G.R. No. 167434, February 19,
87
G.R. No. 131673, September 10, 2004, 438 SCRA 130.
Id. at 150-151.
641.
2007.
88
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
171
to this transaction had at the time no separate mind,
will or existence of its own;
2.
Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of
a statutory or other positive legal duty, or dishonest
and unjust act in contravention of plaintiff’s legal
rights; and
3.
The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complaint
of.
The Court emphasized that the absence of any one
of these elements prevents “piercing the corporate veil.” In
applying the “instrumentality” or “alter ego” doctrine, the
courts are concerned with reality and not form, with how
the corporation operated and the individual defendant’s
relationship to that operation.89
O.
Development Assistance Incentives
The Bangko Sentral shall provide incentives to banks which,
without government guarantee, extend loans to finance educational
institutions, cooperatives, hospitals and other medical services, socialized or low-cost housing, local government units and other activities with social content.90
P.
Renewal or Extension of Loans and Other Credit
Accommodations
The Monetary Board may, by regulation, prescribe the conditions and limitations under which a bank may grant extensions or
renewals of its loans and other credit accommodations.91
Q.
Banks Cannot Extend Peso Loans to Non-Residents
To curb undue speculation in the foreign exchange market and
to further reinforce the memorandum that peso deposits should be
funded from inward foreign exchange remittance, the Monetary
Board decided to prohibit banks from extending peso loans to nonresidents.92
Id. at 151.
Section 46, GBL.
91
Section 48, GBL.
92
BSP Circular No. 222, Date Issued: 12.24.1999.
89
90
172
BANKING LAWS & JURISPRUDENCE
* Note: Overseas Filipino Workers are considered “residents’’ and,
accordingly, could avail of peso loans from Philippine Banks
for utilization in the Philippines.93
R.
Provisions for Losses and Write-Offs
All debts due to any bank on which interest is past due and
unpaid for such period as may be determined by the Monetary Board,
unless the same are well-secured and in the process of collection shall
be considered bad debts (within the meaning of this Section). The
Monetary Board may fix, by regulation or by order in a specific case,
the amount of reserves for bad debts or doubtful accounts or other
contingencies. Writing off of loans, other credit accommodations,
advances and other assets shall be subject to regulations issued by
the Monetary Board.94
S.
Extraordinary Inflation or Deflation
Article 1250 of the Civil Code reads, “In case an extraordinary
inflation or deflation of the currency stipulated should supervene,
the value of the currency at the time of the establishment of
the obligation shall be the basis of payment, unless there is an
agreement to the contrary.” “Extraordinary inflation exists when
there is an unusual decrease in the purchasing power of currency
(that is, beyond the common fluctuation in the value of currency) and
such decrease could not be reasonably foreseen or was manifestly
beyond the contemplation of the parties at the time of the obligation.
Extraordinary deflation, on the other hand, involves an inverse
situation.”95
It is well-settled that Article 1250 of the Civil Code becomes
applicable only when there is extraordinary inflation or deflation
of the currency. Inflation has been defined as the sharp increase
of money or credit or both without a corresponding increase in
business transaction. There is inflation when there is an increase in
the volume of money and credit relative to available goods resulting
in a substantial and continuing rise in the general price level.96 In
Circular Letter dated 06.18.2004.
Section 49, GBL.
95
Equitable PCI Bank vs. Ng Sheurig Ngor, G.R. No. 171545, December 19,
93
94
2007.
96
Huibonhoa vs. Court of Appeals, 378 Phil. 386, 410 (1999).
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
173
Singson vs. Caltex (Philippines), Inc.,97 the Supreme Court already
provided a discourse as to what constitutes as extraordinary inflation
or deflation of currency, thus —
We have held extraordinary inflation to exist when there is
a decrease or increase in the purchasing power of the Philippine
currency which is unusual or beyond the common fluctuation in
the value of said currency, and such increase or decrease could
not have been reasonably foreseen or was manifestly beyond the
contemplation of the parties at the time of the establishment of
the obligation.
An example of extraordinary inflation, as cited by the Court in
Filipino Pipe and Foundry Corporation vs. NAWASA, supra, is that
which happened to the deutschmark in 1920. Thus:
“More recently, in the 1920s, Germany experienced a case of
hyperinflation. In early 1921, the value of the German mark was
4.2 to the U.S. dollar. By May of the same year, it had stumbled
to 62 to the U.S. dollar. And as prices went up rapidly, so that
by October 1923, it had reached 4.2 trillion to the U.S. dollar!”
(Bernardo M. Villegas & Victor R. Abola, Economics, An Introduction [Third Edition]).
As reported, “prices were going up every week, then every
day, then every hour. Women were paid several times a day so
that they could rush out and exchange their money for something
of value before what little purchasing power was left dissolved
in their hands. Some workers tried to beat the constantly rising
prices by throwing their money out of the windows to their
waiting wives, who would rush to unload the nearly worthless
paper. A postage stamp cost millions of marks and a loaf of
bread, billions.’’ (Sidney Rutberg, “The Money Balloon,’’ New
York: Simon and Schuster, 1975, p. 19, cited in “Economics, An
Introduction’’ by Villegas & Abola, 3rd ed.)
The supervening of extraordinary inflation is never assumed. The
party alleging it must lay down the factual basis for the application of
Article 1250.
Thus, in the Filipino Pipe case, the Court acknowledged that
the voluminous records and statistics submitted by plaintiff-appellant
proved that there has been a decline in the purchasing power of
the Philippine peso, but this downward fall cannot be considered
“extraordinary” but was simply a universal trend that has not spared
our country. Similarly, in Huibonhoa vs. Court of Appeals, the Court
dismissed plaintiff-appellant’s unsubstantiated allegation that the
97
396 Phil. 245, 253-255 (2000).
174
BANKING LAWS & JURISPRUDENCE
Aquino assassination in 1983 caused building and construction costs
to double during the period July 1983 to February 1984. In Serra vs.
Court of Appeals, the Court again did not consider the decline in the
peso’s purchasing power from 1983 to 1985 to be so great as to result in
an extraordinary inflation.
Like the Serra and Huibonhoa cases, the instant case also raises
as basis for the application of Article 1250 the Philippine economic
crisis in the early 1980s — when, based on petitioner’s evidence, the
inflation rate rose to 50.34% in 1984. We hold that there is no legal
or factual basis to support petitioner’s allegation of the existence of
extraordinary inflation during this period, or, for that matter, the
entire time frame of 1968 to 1983, to merit the adjustment of the rentals
in the lease contract dated July 16, 1968. Although by petitioner’s
evidence there was a decided decline in the purchasing power of the
Philippine peso throughout this period, we are hard put to treat this as
an “extraordinary inflation’’ within the meaning and intent of Article
1250.
Rather, we adopt with approval the following observations of
the Court of Appeals on petitioner’s evidence, especially the NEDA
certification of inflation rates based on consumer price index:
xxx (a) from the period 1966 to 1986, the official inflation
rate never exceeded 100% in any single year; (b) the highest
official inflation rate recorded was in 1984 which reached only
50.34%; (c) over a twenty one (21) year period, the Philippines
experienced a single-digit inflation in ten (10) years (i.e., 1966,
1967, 1968, 1969, 1975, 1976, 1977, 1978, 1983 and 1986); (d) in
other years (i.e., 1970, 1971, 1972, 1973, 1974, 1979, 1980, 1981,
1982, 1984 and 1989) when the Philippines experienced doubledigit inflation rates, the average of those rates was only 20.88%;
(e) while there was a decline in the purchasing power of the
Philippine currency from the period 1966 to 1986, such cannot
be considered as extraordinary; rather, it is a normal erosion of
the value of the Philippine peso which is a characteristic of most
currencies.
“Erosion’’ is indeed an accurate description of the trend of decline
in the value of the peso in the past three to four decades. Unfortunate
as this trend may be, it is certainly distinct from the phenomenon
contemplated by Article 1250.
Moreover, this Court has held that the effects of extraordinary
inflation are not to be applied without an official declaration thereof by
competent authorities.
The burden of proving that there had been extraordinary
inflation or deflation of the currency is upon the party that alleges
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
175
it. Such circumstance must be proven by competent evidence, and
it cannot be merely assumed. The Supreme Court in the case of
Citibank, N.A. vs. Sabeniano, G.R. No. 156132, February 6, 2007
held:
In this case, petitioners presented no proof as to how much,
for instance, the price index of goods and services had risen during
the intervening period.98 All the information petitioners provided
was the drop of the U.S. dollar-Philippine peso exchange rate by 17
points from June 1997 to January 1998. While the said figure was
based on the statistics of the Bangko Sentral ng Pilipinas (BSP), it
is also significant to note that the BSP did not categorically declare
that the same constitute as an extraordinary inflation. The existence
of extraordinary inflation must be officially proclaimed by competent
authorities, and the only competent authority so far recognized by this
Court to make such an official proclamation is the BSP.99
Neither can this Court, by merely taking judicial notice of the
Asian currency crisis in 1997, already declare that there had been
extraordinary inflation. It should be recalled that the Philippines
likewise experienced economic crisis in the 1980s, yet this Court did
not find that extraordinary inflation took place during the said period
so as to warrant the application of Article 1250 of the Civil Code.
Furthermore, it is incontrovertible that Article 1250 of the Civil
Code is based on equitable considerations. Among the maxims of equity
are (1) he who seeks equity must do equity, and (2) he who comes into
equity must come with clean hands. The latter is a frequently stated
maxim which is also expressed in the principle that he who has done
inequity shall not have equity.100 Petitioner Citibank, hence, cannot
invoke Article 1250 of the Civil Code because it does not come to court
with clean hands. The delay in the recovery101 by respondent of her
dollar accounts with Citibank-Geneva was due to the unlawful act
of petitioner Citibank in using the same to liquidate respondent’s
loans. Petitioner Citibank even attempted to justify the off-setting or
compensation of respondent’s loans using her dollar accounts with
Citibank-Geneva by the presentation of a highly suspicious and
irregular, and even possibly forged, Declaration of Pledge.
98
Sangrador vs. Valderrama, G.R. No. L-79552, November 29, 1988, 168 SCRA
215, 228-229.
99
Ramos vs. Court of Appeals, G.R. No. 119872, July 7, 1997, 275 SCRA 167,
175.
100
Pilapil vs. Garchitorena, G.R. No. 128790, November 25, 1998, 299 SCRA
343, 359; University of the Philippines vs. Catungal, Jr., G.R. No. 121863, May 5,
1997, 272 SCRA 221, 237.
101
See Gatlabayan vs. Ramirez, 134 Phil. 267, 272 (1968).
176
BANKING LAWS & JURISPRUDENCE
For extraordinary inflation (or deflation) to affect an obligation,
the following requisites must be proven:
T.
1.
that there was an official declaration of extraordinary
inflation or deflation from the Bangko Sentral ng Pilipinas
(BSP);
2.
that the obligation was contractual in nature; and
3.
that the parties expressly agreed to consider the effects of
the extraordinary inflation or deflation.
Purpose of Attorney’s Fees
Attorney’s fees are not an integral part of the cost of borrowing,
but arise only when collecting upon the Notes becomes necessary.
The purpose of these fees is not to give a lender a larger compensation
for the loan than the law already allows, but to protect him against
any future loss or damage by being compelled to retain counsel — inhouse or not — to institute judicial proceedings for the collection
of its credit.102 Courts have has the power103 to determine their
reasonableness104 based on quantum meruit105 and to reduce106 the
amount thereof if excessive.107
VIII. Truth In Lending108
A.
Policy
To protect its citizens from a lack of awareness of the true cost
of credit to the user by assuring a full disclosure of such cost with a
view of preventing the uninformed use of credit to the detriment of
the national economy.
102
De Leon, supra, p. 64. See Andreas vs. Green, 48 Phil. 463, 465, December
16, 1925.
103
The Bachrach Garage and Taxicab Co., Inc. vs. Golingco, 39 Phil. 912, 920921, July 12, 1919; and Bachrach vs. Golingco, 39 Phil. 138, 143-144, November 13,
1918.
104
Article 2208 of the Civil Code.
105
Agpalo, Legal Ethics (4th ed., 1989), p. 323.
106
Sangrador vs. Spouses Valderrama, 168 SCRA 215, 229, November 29,
1988.
107
Manila Trading & Supply Co. vs. Tamaraw Plantation Co., 47 Phil. 513, 524,
February 28, 1925.
108
Republic Act No. 3765 (An Act to Require the Disclosure of Finance Charges
in Connection with Extensions of Credit).
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
B.
177
Disclosure
Any creditor shall furnish to each person to whom credit is
extended, prior to the consummation of the transaction, a clear
statement in writing setting forth the following information:
(1)
the cash price or delivered price of the property or service
to be acquired;
(2)
the amounts, if any, to be credited as down payment and/
or trade-in;
(3)
the difference between the amounts set forth under
clauses (1) and (2);
(4)
the charges, individually itemized, which are paid or to
be paid by such person in connection with the transaction
but which are not incident to the extension of credit;
(5)
the total amount to be financed;
(6)
the finance charge expressed in terms of pesos and
centavos; and
(7)
the percentage that the finance bears to the total amount
to be financed expressed as a simple annual rate on the
outstanding unpaid balance of the obligation.
The rationale of this provision is to protect users of credit from
a lack of awareness of the true cost thereof, proceeding from the
experience that banks are able to conceal such true cost by hidden
charges, uncertainty of interest rates, deduction of interests from
the loaned amount, and the like. The law thereby seeks to protect
debtors by permitting them to fully appreciate the true cost of their
loan, to enable them to give full consent to the contract, and to
properly evaluate their options in arriving at business decisions.109
Substantial compliance would not suffice.
C.
Definitions
i.
109
Credit
1.
any loan, mortgage, deed of trust, advance, or discount;
2.
any conditional sales contract;
UCPB vs. Sps. Beluso, G.R. No. 159912, August 17, 2007.
178
D.
BANKING LAWS & JURISPRUDENCE
3.
any contract to sell, or sale or contract of sale of
property or services, either for present or future delivery, under which part or all of the price is payable
subsequent to the making of such sale or contract;
4.
any rental-purchase contract;
5.
any contract or arrangement for the hire, bailment,
or leasing of property;
6.
any option, demand, lien, pledge, or other claim
against, or for the delivery of, property or money;
7.
any purchase, or other acquisition of, or any credit
upon the security of, any obligation of claim arising
out of any of the foregoing; and
8.
any transaction or series of transactions having a
similar purpose or effect.
ii.
Finance charge: interest, fees, service charges, discounts,
and such other charges incident to the extension of credit
as the Board may by regulation prescribe.
iii.
Creditor: any person engaged in the business of extending
credit (including any person who as a regular business
practice make loans or sells or rents property or services
on a time, credit, or installment basis, either as principal
or as agent) who requires as an incident to the extension
of credit, the payment of a finance charge.
Penalties
1.
Civil — Any creditor who in connection with any credit
transaction fails to disclose to any person the abovestated information shall be liable to such person in
the amount of P100 or in an amount equal to twice the
finance charged required by such creditor in connection
with such transaction, whichever is the greater, except
that such liability shall not exceed P2,000 on any credit
transaction.
Action to recover such penalty may be brought by such
person within one year from the date of the occurrence of
the violation, in any court of competent jurisdiction. The
creditor shall be liable for reasonable attorney’s fees and
court costs as determined by the Court.
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
2.
179
Criminal — Any person who willfully violates the
disclosure requirement shall be fined by not less than
P1,000 or more than P5,000 or imprisonment for not less
than 6 months, nor more than one year or both.
A final judgment rendered in any criminal proceeding
to the effect that a defendant has willfully violated the law
requiring disclosure shall be prima facie evidence against
such defendant in an action or proceeding brought by
any other party against such defendant as to all matters
respecting which said judgment would be an estoppel as
between the parties thereto.
The penalty for the violation of the Truth in Lending Act (TILA)
is P100 or an amount equal to twice the finance charge required
by such creditor in connection with such transaction, whichever is
greater, except that such liability shall not exceed P2,000.00 on any
credit transaction. As this penalty depends on the finance charge
required of the borrower, the borrower’s cause of action would only
accrue when such finance charge is required.110
As can be gleaned from the foregoing, the violation of the
TILA gives rise to both criminal and civil liabilities. Section 6(c) of
the TILA considers a criminal offense the willful violation of the
Act, imposing the penalty therefor of fine, imprisonment or both.
Section 6(a) of the TILA, on the other hand, clearly provides for a
civil cause of action for failure to disclose any information of the
required information to any person in violation of the Act. The
penalty therefor is an amount of P100 or in an amount equal to
twice the finance charge required by the creditor in connection with
such transaction, whichever is greater, except that the liability
shall not exceed P2,000.00 on any credit transaction. The action
to recover such penalty may be instituted by the aggrieved private
person separately and independently from the criminal case for the
same offense.111
The civil action to recover the penalty under Section 6(a) of
the TILA can be jointly instituted with (1) the action to declare the
interests in the promissory notes void, and (2) the action to declare
the foreclosure void. This joinder is allowed under Rule 2, Section 5
of the Rules of Court, which provides:
110
111
Ibid.
Ibid.
180
BANKING LAWS & JURISPRUDENCE
SEC. 5. Joinder of causes of action. — A party may in one
pleading assert, in the alternative or otherwise, as many causes
of action as he may have against an opposing party, subject to the
following conditions:
(a) The party joining the causes of action shall comply with
the rules on joinder of parties;
(b) The joinder shall not include special civil actions or actions
governed by special rules;
(c)
Where the causes of action are between the same parties but
pertain to different venues or jurisdictions, the joinder may be allowed
in the Regional Trial Court provided one of the causes of action falls
within the jurisdiction of said court and the venue lies therein; and
(d) Where the claims in all the causes of action are principally
for recovery of money, the aggregate amount claimed shall be the test
of jurisdiction.
The above actions belong to the jurisdiction of the RTC. Subsection
(c) of the above-quoted Section 5 of the Rules of Court on Joinder of
Causes of Action provides:
(c)
Where the causes of action are between the same parties but
pertain to different venues or jurisdictions, the joinder may be allowed
in the Regional Trial Court provided one of the causes of action falls
within the jurisdiction of said court and the venue lies therein.
E.
Effect of Violation
Violation shall not affect the validity or enforceability of any
contract or transactions.
* Notes:
1.
In Consolidated Bank and Trust Corporation (Solidbank)
vs. Court of Appeals, G.R. No. 91494, July 14, 1995, the Supreme Court held that the lender cannot charge those
that are not stipulated in the promissory notes:
The charging of compounded interest has been held
as proper as long as the payment thereof has been agreed
upon by the parties. In Mambulao Lumber Company vs.
Philippine National Bank, 22 SCRA 359 (1968), we ruled
that the parties may, by stipulation, capitalize the interest due and unpaid, which as added principal shall earn
new interest. In the instant case, private respondents
agreed to the payment of 14% interest per annum, com-
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
181
pounded monthly, should they fail to pay the principal
loan on the date of maturity. xxx
As to handling charges, banks are authorized under
Central Bank Circular No. 504 to collect such charges on
loans over P500,000.00 with a maturity of 730 days or less
at the rate of 2% per annum, on the principal or the outstanding balance thereof, whichever is lower; 1.75% on
loans over P500,000.00 but not over P1,000,000.00; 1.50%
on loans over P1,000,000.00 but not over 2,000,000.00, etc.
Section 7 of the same Circular, however, provides that all
banks and non-bank financial intermediaries authorized
to engage in quasi-banking functions are required to
strictly adhere to the provisions of Republic Act No. 3765
otherwise known as the “Truth in Lending Act” and shall
make the true and effective cost of borrowing an integral
part of every loan contract. The promissory notes signed
by private respondents do not contain any stipulation on
the payment of handling charges. Petitioner bank cannot, therefore, charge private respondents such handling
charges. xxx
The payment of penalty is sanctioned by law, although the penalty may be reduced by the courts if it is
iniquitous or unconscionable (Equitable Banking Corporation vs. Liwanag, 32 SCRA 293 [1970]). The payment of
penalty was provided for under the terms and conditions
of the promissory notes for Loans B and C of George and
George Trade, Inc. The penalty actually imposed, being
only 3% per annum of the unpaid balance of the principal
of said Loan B, is considered reasonable and proper. xxx
A stipulation regarding the payment of attorney’s
fees is neither illegal nor immoral and is enforceable as
the law between the parties as long as such stipulation
does not contravene law, good morals, good customs, public order or public policy (Social Security Commission vs.
Almeda, 168 SCRA 474 [1988]; Reparations Commission
vs. Visayan Packing Corporation, 193 SCRA 531 [1991]).
xxx
The award of attorney’s fees lies within the discretion of the court and depends upon the circumstances of
each case. However, the discretion of the court to award
attorney’s fees under Article 2208 of the Civil Code of the
Philippines demands factual, legal and equitable justification, without which the award is a conclusion without
a premise and improperly left to speculation and conjec-
182
BANKING LAWS & JURISPRUDENCE
ture. It becomes a violation of the proscription against the
imposition of a penalty on the right to litigate (Universal
Shipping Lines, Inc. vs. Intermediate Appellate Court,
188 SCRA 170 [1990]). The reason for the award must be
stated in the text of the court’s decision. If it is stated only
in the dispositive portion of the decision, the same shall
be disallowed. As to the award of attorney’s fees being an
exception rather than the rule, it is necessary for the court
to make findings of fact and law that would bring the case
within the exception and justify the grant of the award
(Refractories Corporation of the Philippines vs. Intermediate Appellate Court, 176 SCRA 539 [1989]).
2.
On the other hand, in the case of UCPB vs. Spouses Beluso, G.R. No. 159912, August 17, 2007, the Supreme Court
held:
The interest rate provisions in the case at bar are
illegal not only because of the provisions of the Civil Code
on mutuality of contracts, but also, as shall be discussed
later, because they violate the Truth in Lending Act. Not
disclosing the true finance charges in connection with the
extensions of credit is, furthermore, a form of deception
which we cannot countenance. It is against the policy of
the State as stated in the Truth in Lending Act: xxx
F.
Exemption of Government
No punishment or penalty shall apply to the Philippine Government or any agency or any political subdivision thereof.
G.
Required Disclosures on Consumer Loans not under
Open-End Credit Plan
Any creditor extending a consumer loan or in a transaction
which is neither a consumer credit sale nor under an open-end
consumer credit plan shall disclose, to the extent applicable, the
following information:
a)
the amount of credit of which the debtor will have the
actual use, or which is or will be paid to him or for his
account or to another person on his behalf;
b)
all charges, individually, itemized, which are included in
the amount of credit extended but which are included in
the amount of credit extended but which are not part of
the finance charge;
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
H.
183
c)
the total amount to be financed or the sum of the amounts
referred to in paragraphs (a) and (b);
d)
the finance charge expressed in terms of pesos and
centavos;
e)
the effective interest rate;
f)
the percentage that the finance charge bears to the total
amount to be financed expressed as a simple annual rate
on the outstanding unpaid balance of the obligation;
g)
the default, delinquency or similar charges payable in the
event of late payments;
h)
a description of any security interest held or to be held or
to be retained or acquired by the creditor in connection
with the extension of credit and a clear identification of
the property to which the security interest relates.112
Exempted Transaction
The foregoing requirements on consumer credit transactions
shall not apply to the following credit transactions:
Those involving extension of credits for business or commercial
purposes, or to the Government and governmental agencies and
instrumentalities, juridical entities or to organizations.113
* Notes:
112
113
i.
Courts have the authority to strike down or to modify
provisions in promissory notes that grant the lenders
unrestrained power to increase interest rates, penalties and other charges at the latter’s sole discretion
and without giving prior notice to and securing the
consent of the borrowers. As previously noted, this
unilateral authority is anathema to the mutuality
of contracts and enable lenders to take undue advantage of borrowers. Although the Usury Law has
been effectively repealed, courts may still reduce iniquitous or unconscionable rates charged for the use
of money. Furthermore, excessive interests, penalties
and other charges not revealed in disclosure statements issued by banks, even if stipulated in the prom-
Article 142, R.A. 7394 (Consumer Act).
Article 145, R.A. 7394 (Consumer Act).
184
BANKING LAWS & JURISPRUDENCE
issory notes, cannot be given effect under the Truth in
Lending Act.114
ii. The Truth in Lending Act is an often ignored. Interestingly, the Supreme Court in one case said:
The time is now ripe to give teeth to the often
ignored forty-one-year old “Truth in Lending Act”115
and thus transform it from a snivelling paper tiger
to a growling financial watchdog of hapless borrowers.116
IX. Foreclosure Of Real Estate Mortgage
A.
Procedure
Section 47 of the GBL provides for the following procedures:
(i)
In the event of foreclosure, whether judicially or
extrajudicially, of any mortgage on real estate which
is security for any loan or other credit accommodation
granted, the mortgagor or debtor 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 property by paying the amount
due under the mortgage deed, with interest thereon at
the rate specified in the mortgage, and all the costs and
expenses incurred by the bank or institution from the
sale and custody of said property less the income derived
therefrom.
(ii)
However, the purchaser at the auction sale concerned
whether in a judicial or extrajudicial foreclosure shall
have the right to enter upon and take possession of such
property immediately after the date of the confirmation of
the auction sale and administer the same in accordance
with law.
114
Philippine Bank of Communications vs. Diamond Seafoods Corporation,
G.R. No. 142420, January 29, 2007.
115
R.A. 3765, effective upon approval on June 22, 1963.
116
Philippine Bank of Communications vs. Diamond Seafoods Corporation,
G.R. No. 142420, January 29, 2007.
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
* Notes:
1.
185
Compare this with Section 7 of Act No. 3135, as
amended,117 which provides:
“Sec. 7. In any sale made under the provisions of this Act, the purchaser may petition the
Court of First Instance (now RTC) of the province
or place where the property or any part thereof
is situated, to give him possession thereof during
the redemption period, furnishing bond in an
amount equivalent to the use of the property for
a period of twelve months, to indemnify the debtor in case it be shown that the sale was made
without violating the mortgage or without complying with the requirements of this Act. Such
petition shall be made under oath and filed in
the form of an ex parte motion in the registration or cadastral proceedings if the property is
registered, or in special proceedings in the case
of property registered under the Mortgage Law
or under section one hundred and ninety-four
of the Administrative Code, or of any other real
property encumbered with a mortgage duly registered with any existing law, and in each case
the clerk of the court shall, upon the filing of
such petition, collect the fees specified in paragraph eleven of section one hundred and fourteen of Act numbered twenty-eight hundred and
sixty-six, and the court shall upon approval of
the bond, order that a writ of possession issue,
addressed to the sheriff of the province in which
the property is situated, who shall execute said
order immediately.”
2.
Note that a purchaser in case of foreclosure by banks
is not required to set up a bond and may enter the
property immediately after the date of confirmation
of the auction sale.
3.
A writ of possession may also be issued after consolidation of ownership of the property in the name of
the purchaser. It is settled that the buyer in a foreclosure sale becomes the absolute owner of the property purchased if it is not redeemed during the period of one year after the registration of sale. Hence,
he is entitled to the possession of the property and
117
An Act to Regulate the Sale of Property under Special Powers Inserted in or
Annexed to Real Estate Mortgages.
186
BANKING LAWS & JURISPRUDENCE
can demand it at any time following the consolidation of ownership in his name and the issuance to
him of a new transfer certificate of title. In such a
case, the bond required in Section 7 of Act No. 3135
is no longer necessary. Possession of the land then
becomes an absolute right of the purchaser as confirmed owner. Upon proper application and proof of
title, the issuance of the writ of possession becomes a
ministerial duty of the court.118
(iii) Any petition in court to enjoin or restrain the conduct of
foreclosure proceedings 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 foreclosure proceeding.
(iv) Notwithstanding Act 3135 (An Act to Regulate the Sale of
Property under Special Powers Inserted in or Annexed to
Real Estate Mortgage), juridical persons whose property
is being sold pursuant to an extrajudicial foreclosure, shall
have the right to redeem the property until, but not after,
the registration of the certificate of foreclosure sale with
the applicable Register of Deeds which in no case shall be
more than three (3) months after foreclosure, whichever
is earlier.119
* Notes: 1. In the accessory contract120 of real mortgage,121 in which
immovable property or real rights thereto are used as
security122 for the fulfillment of the principal loan obligation,123 the bid price may be lower than the property’s
118
Id. at 253-254. LZK Holdings and Development Corp. vs. Planters Development Bank, G.R. No. 167998, April 27, 2007.
119
Owners of property that has been sold in a foreclosure sale prior to the effectivity of the GBL shall retain their redemption rights until their expiration. Section
47, GBL.
120
Rodriguez, Credit Transactions (2nd ed., 1992), pp. 143-144.
121
Also known as a mortuum vadium. Noblejas and Noblejas, Registration of
Land Titles and Deeds (1992 rev. ed.), p. 510.
122
It is a mere lien on and does not create title to the property. Peña, Peña Jr.,
and Peña, Registration of Land Titles and Deeds (1994 rev. ed.), p. 253.
123
Contracts of loan, being consensual, are deemed perfected at the time the
Mortgage is executed. Bonnevie vs. Court of Appeals, 210 Phil. 100, 108, October 24,
1983.
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
187
fair market value.124 In fact, the loan value itself is only
70 percent of the appraised value. A low bid price will
make it easier125 for the owner to effect redemption126 by
subsequently reacquiring the property or by selling the
right to redeem and thus recover alleged losses.
2.
Real property may be mortgaged to aliens, both individuals and corporations. Rep. Act No. 133, as amended by
Rep. Act No. 4882 reads:
SEC. 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 mortgagee or his successorin-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-ininterest 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.
3.
Save in cases of hereditary succession, no private lands
shall be transferred or conveyed except to individuals,
corporations, or associations qualified to acquire or
hold lands of the public domain.127
4.
The redemption period is counted from the date of the
registration of the certificate of sale with the Register of
Deeds.128
De Leon, supra, pp. 398-399.
The Abaca Corp. of the Philippines, represented by the Board of Liquidators
vs. Garcia, 338 Phil. 988, 993, May 14, 1997; citing Tiongco vs. Philippine Veterans
Bank, 212 SCRA 176, August 5, 1992.
126
Aquino, Land Registration and Related Proceedings (2002 rev. ed.), p. 201.
127
Section 7, Article 12, 1987 Constitution.
128
Government Service Insurance System vs. Court of First Instance of Iloilo,
175 SCRA 19; Limpin vs. IAC, 166 SCRA 87; Huerta Alba Resort, Inc. vs. Court of
Appeals, G.R. No. 128567, June 20, 2001.
124
125
188
BANKING LAWS & JURISPRUDENCE
5.
Pursuant to Section 47 of the GBL, a mortgagor whose
real property has been sold at a public auction, judicially
or extrajudicially, for the full or partial payment of an
obligation to any bank, shall have the right, within one
year after the sale of the real estate to redeem the property.
The one-year period is actually to be reckoned from the
date of the registration of the sale. The failure to exercise
that right of redemption by paying the redemption price
within the period prescribed by law effectively divested
him of said right.129
An action for annulment of the mortgage does not
toll the running of the one year period of redemption. In
the case of Sumerariz vs. Development Bank of the Philippines, petitioners therein contended that the one-year
period to redeem the property foreclosed by respondent
was suspended by the institution of an action to annul
the foreclosure sale filed three (3) days before the expiration of the period. To this the Supreme Court ruled that:
“We have not found, however, any statute or
decision in support of this pretense. Moreover, up
to now plaintiffs have not exercised the right of
redemption. Indeed, although they have intimated
their wish to redeem the property in question, they
have not deposited the amount necessary therefor.
It may not be amiss to note that, unlike Section 30
of Rule 39 of the Rules of Court, which permits the
extension of the period of redemption of mortgaged
properties, Section 3 of Commonwealth Act No. 459,
in relation to Section 9 of Republic Act No. 85, which
governs the redemption of property mortgaged to
the Bank does not contain a similar provision.
Again this question has been definitely settled by
the previous case declaring that plaintiffs’ right of
redemption has already been extinguished in view
of their failure to exercise it within the statutory
period.”
Also, in the more recent case of Vaca vs. Court of
Appeals, the Supreme Court declared that the pendency
of an action questioning the validity of a mortgage cannot
bar the issuance of the writ of possession after title to
the property has been consolidated in the mortgagee.
129
Union Bank of the Philippines vs. Court of Appeals, G.R. No. 134068, June
25, 2001.
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
189
The implication is clear: the period of redemption is
not interrupted by the filing of an action assailing
the validity of the mortgage, so that at the expiration
thereof, the mortgagee who acquires the property at the
foreclosure sale can proceed to have the title consolidated
in his name and a writ of possession issued in his favor.
To rule otherwise, and allow the institution of an
action questioning the validity of a mortgage to suspend
the running of the one year period of redemption would
constitute a dangerous precedent. A likely offshoot of
such a ruling is the institution of frivolous suits for
annulment of mortgage intended merely to give the
mortgagor more time to redeem the mortgaged property.
Incidentally, the Supreme Court had the occasion to
rule that Section 47 of the GBL (previously Section 78 of
the General Banking Act130 had the effect of amending
Section 6 of Act No. 3135131 insofar as the redemption
price is concerned when the mortgagee is a bank or a
banking or credit institution. The apparent conflict
between the provisions of Act No. 3135 and the General
Banking Act was, therefore, resolved in favor of the
latter, being a special and subsequent legislation. This
pronouncement was reiterated in the case of Sy vs. Court
of Appeals where it was held that the amount at which
the foreclosed property is redeemable is the amount due
under the mortgage deed, or the outstanding obligation of
the mortgagor plus interest and expenses in accordance
with Section 47 of the GBL.
130
Sec. 78. In the event of foreclosure, whether judicially or extrajudicially, of
any mortgage on real estate which is security for any loan granted before the passage
of this Act or under the provisions of this Act, the mortgagor or debtor whose real
property has been sold at public auction, judicially or extrajudicially, for the full or
partial payment of an obligation to any bank, banking or credit institution, within
the purview of this Act, shall have the right, within one year after the sale of the real
estate as a result of the foreclosure of the respective mortgage, to redeem the property
by paying the amount fixed by the court in the order of execution.
131
Sec. 6. In all cases in which an extrajudicial sale is made under the special
power hereinbefore referred to, the debtor, his successors in interest or any judicial
creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold,
may redeem the same at any time within the term of one year from and after the date
of the sale.
190
B.
BANKING LAWS & JURISPRUDENCE
6.
No personal notice132 is required,133 in case of extrajudicial
foreclosure because an extrajudicial foreclosure is
an action in rem, requiring only notice by publication
and posting, in order to bind parties interested in the
foreclosed property.134
7.
In case no redemption135 was exercised within one year
after the date of registration of the Certificate of Sale
with the Registry of Deeds,136 the highest bidder — has
the right to a writ of possession, the final process that
will consummate the extrajudicial foreclosure. On the
other hand, the mortgagors shall lose all their rights to
the property.137
Demand Before Foreclosure Essential
The issue of whether demand was made before the foreclosure
was effected is essential. If demand was made and duly received by
the mortgagor and the latter still did not pay, then they were already
in default and foreclosure was proper. However, if demand was not
made, then the loans had not yet become due and demandable. This
meant that the mortgagor had not defaulted in their payments
and the foreclosure by the mortgagee was premature. Foreclosure
is valid only when the debtor is in default in the payment of his
obligation.138
Unless demand is proven, one cannot be held in default.139
The mortgagee’s cause of action do not accrue on the maturity
dates stated in the promissory notes. It is only when demand to
pay is made and subsequently refused that the mortgagor can be
132
Philippine National Bank vs. Spouses Rabat, 344 SCRA 706, 716, November
15, 2000.
133
Peña, Peña Jr., and Peña, supra, p. 295.
134
Langkaan Realty Development, Inc. vs. United Coconut Planters Bank, 347
SCRA 542, 559, December 8, 2000.
135
It is an absolute and personal privilege, the exercise of which is entirely dependent upon the will and discretion of the redemptioner. De Leon, supra, p. 408.
136
Sec. 6 of Art No. 3135 and Sec. 47 of R.A. 8791.
The right becomes functus officio on the date of its expiry. Noblejas and Noblejas, supra, p. 572.
137
State Investment House, Inc. vs. Court of Appeals, 215 SCRA 734, 744-747,
November 13, 1992.
138
State Investment House, Inc. vs. Court of Appeals, G.R. No. 99308, November 13, 1992, 215 SCRA 734, 744, citation omitted.
139
Nuñez vs. GSIS Family Bank (Formerly ComSavings Bank), G.R. No.
163988, November 17, 2005.
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
191
considered in default and the mortgagee obtains the right to file
an action to collect the debt or foreclose the mortgage.140 As held in
China Banking Corporation vs. Court of Appeals:141
Well-settled is the rule that since a cause of action requires,
as essential elements, not only a legal right of the plaintiff and a
correlative duty of the defendant but also “an act or omission of the
defendant in violation of said legal right,” the cause of action does
not accrue until the party obligated refuses, expressly or impliedly, to
comply with its duty.
Otherwise stated, a cause of action has three elements, to wit, (1)
a right in favor of the plaintiff by whatever means and under whatever
law it arises or is created; (2) an obligation on the part of the named
defendant to respect or not to violate such right; and (3) an act or
omission on the part of such defendant violative of the right of the
plaintiff or constituting a breach of the obligation of the defendant to
the plaintiff.
It bears stressing that it is only when the last element occurs that
a cause of action arises. Accordingly, a cause of action on a written
contract accrues only when an actual breach or violation thereof
occurs.
Applying the foregoing principle to the instant case, we rule
that private respondent’s cause of action accrued only on July
20, 1995, when its demand for payment of the Home Notes was
refused by petitioner. It was only at that time, and not before that,
when the written contract was breached and private respondent could
properly file an action in court.
The cause of action cannot be said to accrue on the uniform
maturity date of the Home Notes as petitioner posits because at
that point, the third essential element of a cause of action, namely,
an act or omission on the part of petitioner violative of the right
of private respondent or constituting a breach of the obligation of
petitioner to private respondent, had not yet occurred.142 (emphasis
supplied)
Further, in the case of Development Bank of the Philippines vs.
Licuanan, G.R. No. 150097, February 26, 2007, it was held:
The acceleration clause of the promissory notes stated that “[i]n
case of non-payment of this note or any portion of it on demand, when
140
Caltex Philippines, Inc. vs. Intermediate Appellate Court, G.R. No. 74730,
August 25, 1989, 176 SCRA 741, 751.
141
G.R. No. 153267, June 23, 2005, 461 SCRA 162.
142
Id., pp. 167-168, citations omitted.
192
BANKING LAWS & JURISPRUDENCE
due, on account of this note, the entire obligation shall become due
and demandable ….”143 Hence, the maturity dates only indicate when
payment can be demanded. It is the refusal to pay after demand that
gives the creditor a cause of action against the debtor.
C.
Equity of Redemption vs. Right of Redemption
In the case of Huerta Alba Resort Inc. vs. Court of Appeals, G.R.
No. 128567, September 1, 2000, the Supreme Court citing the case of
Limpin vs. Intermediate Appellate Court144 held:
“The equity of redemption is, to be sure, different from and
should not be confused with the right of redemption.
The right of redemption in relation to a mortgage — understood in the sense of a prerogative to re-acquire mortgaged
property after registration of the foreclosure sale — exists only
in the case of the extrajudicial foreclosure of the mortgage. No
such right is recognized in a judicial foreclosure except only
where the mortgagee is the Philippine National Bank or a bank
or banking institution.
Where a mortgage is foreclosed extrajudicially, Act 3135
grants to the mortgagor the right of redemption within one (1)
year from the registration of the sheriff’s certificate of foreclosure
sale.
Where the foreclosure is judicially effected, however, no
equivalent right of redemption exists. The law declares that
a judicial foreclosure sale ‘when confirmed by an order of the
court. . . . shall operate to divest the rights of all the parties
to the action and to vest their rights in the purchaser, subject
to such rights of redemption as may be allowed by law.’ Such
rights exceptionally ‘allowed by law’ (i.e., even after confirmation
by an order of the court) are those granted by the charter of the
Philippine National Bank (Acts No. 2747 and 2938), and the
General Banking Act (R.A. No. 337). These laws confer on the
mortgagor, his successors in interest or any judgment creditor
of the mortgagor, the right to redeem the property sold on
foreclosure — after confirmation by the court of the foreclosure
sale — which right may be exercised within a period of one (1)
year, counted from the date of registration of the certificate of
sale in the Registry of Property.
143
144
Rollo, pp. 12 and 26, emphasis supplied.
166 SCRA 87.
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
193
But, to repeat, no such right of redemption exists in case
of judicial foreclosure of a mortgage if the mortgagee is not
the PNB or a bank or banking institution. In such a case, the
foreclosure sale, ‘when confirmed by an order of the court. . .
shall operate to divest the rights of all the parties to the action
and to vest their rights in the purchaser.’ There then exists
only what is known as the equity of redemption. This is simply
the right of the defendant mortgagor to extinguish the mortgage
and retain ownership of the property by paying the secured debt
within the 90-day period after the judgment becomes final, in
accordance with Rule 68, or even after the foreclosure sale but
prior to its confirmation.
Section 2, Rule 68 provides that —
‘. . . If upon the trial . . . the court shall find the facts set
forth in the complaint to be true, it shall ascertain the amount
due to the plaintiff upon the mortgage debt or obligation,
including interest and costs, and shall render judgment for the
sum so found due and order the same to be paid into court
within a period of not less than ninety (90) days from the date
of the service of such order, and that in default of such payment
the property be sold to realize the mortgage debt and costs.’
This is the mortgagor’s equity (not right) of redemption
which, as above stated, may be exercised by him even beyond
the 90-day period ‘from the date of service of the order,’ and even
after the foreclosure sale itself, provided it be before the order
of confirmation of the sale. After such order of confirmation, no
redemption can be effected any longer.
* Note: Section 2, Rule 68 under the 1997 Revised Rules of Civil
Procedures now reads as follows:
Sec. 2. Judgment on foreclosure for payment or sale. If
upon the trial in such action the court shall find the facts
set forth in the complaint to be true, it shall ascertain the
amount due to the plaintiff upon the mortgage debt or obligation, including interest and other charges as approved by
the court, and costs, and shall render judgment for the sum
so found due and order that the same be paid to the court or
to the judgment obligee within a period of not less than ninety (90) days nor more than one hundred twenty (120) days
from the entry of judgment, and that in default of such payment the property shall be sold at public auction to satisfy
the judgment.
194
D.
BANKING LAWS & JURISPRUDENCE
Right of Redemption may be Extended by Agreement
The right of legal redemption must be exercised within specified
time limits.145 However, the statutory period of redemption can be
extended by agreement of the parties.146
E.
Estoppel
It could be said that a bank consented to the extension of
redemption period specially if it had time to object and did not.
When circumstances imply a duty to speak on the part of the person
for whom an obligation is proposed, his silence can be construed as
consent. Thus, in one case the Supreme Court held:
By its silence and inaction, petitioner misled private
respondents to believe that they had two years within which to
redeem the mortgage. After the lapse of two years, petitioner is
estopped from asserting that the period for redemption was only
one year and that the period had already lapsed. Estoppel in pais
arises when one, by his acts, representations or admissions, or
by his own silence when he ought to speak out, intentionally or
through culpable negligence, induces another to believe certain
facts to exist and such other rightfully relies and acts on such
belief, so that he will be prejudiced if the former is permitted to
deny the existence of such facts.147
F.
Redemption after the Prescriptive Period
The right to redeem becomes functus officio on the date
of its expiry, and its exercise after the period is not really one of
redemption but a repurchase. Distinction must be made because
redemption is by force of law; the purchaser at public auction is
bound to accept redemption. Repurchase however of foreclosed
property, after redemption period, imposes no such obligation. After
expiry, the purchaser may or may not re-sell the property but no law
will compel him to do so. And, he is not bound by the bid price; it is
145
Spouses Estanislao, Jr. vs. Court of Appeals, 414 Phil. 509 (2001); Citing
Basbas vs. Entena, 28 SCRA 665 (1969).
146
Ibaan Rural Bank, Inc. vs. Court of Appeals, 378 Phil. 707 (1999).
147
Ibaan Rural Bank, Inc. vs. Court of Appeals, G.R. No. 123817, December 17,
1999.
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
195
entirely within his discretion to set a higher price, for after all, the
property already belongs to him as owner.148
Query:
Whether or not an alien-owned bank can acquire ownership of residential lot by virtue of a deed of transfer as
settlement of a debt.
No. The reason for this is manifestly the desire and purpose
of the Constitution to place and keep in the hands of the people the
ownership over private lands in order not to endanger the integrity
of the nation. Inasmuch as when an alien buys land he acquires and
will naturally exercise ownership over the same, either permanently
or temporarily, to that extent his acquisition jeopardizes the purpose
of the Constitution.149
Transfer of ownership over land, even for a limited period of
time, is not permissible in view of the constitutional prohibition.150
* Note: A lease of a parcel of land for a total period of 50 years in
favor of an alien corporation is registerable. A lease — unlike
a sale — does not involve the transfer of dominion over the
land.151
G.
Offer to Repurchase Not Waiver to Question the Sale
The Supreme Court has already ruled that an offer to repurchase
should not be construed as a waiver of the right to question the
sale.152 Instead, it must be taken as an intention to avoid further
litigation and thus is in the nature of an offer to compromise.153 By
offering to redeem the properties, the debtor/mortgagor can attain
their ultimate objective: to pay off their debt and regain ownership
of their lands.154
Spouses Robles vs. Court of Appeals, G.R. No. 128053, June 10, 2004.
Register of Deeds of Manila vs. China Banking Corporation, G.R. No. L11964, April 28, 1962.
150
Ibid.
151
Smith Bell & Co. vs. Register of Deeds of Davao (50 O.G., 5239).
152
Rosales vs. Court of Appeals, G.R. No. 137566, February 28, 2001, 353 SCRA
179, 191.
153
Id.
154
Id., pp. 191-192.
148
149
196
H.
BANKING LAWS & JURISPRUDENCE
No Right to Recover if Foreclosure is Not Valid
In one case,155 the Supreme Court ruled:
While it is true that in extrajudicial foreclosure of mortgage, the
mortgagee has the right to recover the deficiency from the debtor,156 this
presupposes that the foreclosure must first be valid.157
I.
Preferred Status of Banks Not Impaired In Case The
Borrower Is Under Rehabilitation
i.
In Metropolitan Bank & Trust Company vs. ASB Holdings,
Inc., G.R. No. 166197, February 27, 2007, the Supreme
Court held that in case of rehabilitation of a corporate
debtor, the rights of a creditor bank are merely suspended,
to wit:
We are not convinced that the approval of the
Rehabilitation Plan impairs petitioner bank’s lien over
the mortgaged properties. Section 6[c] of P.D. No. 902A provides that “upon appointment of a management
committee, rehabilitation receiver, board or body, pursuant
to this Decree, all actions for claims against corporations,
partnerships or associations under management or
receivership pending before any court, tribunal, board or
body shall be suspended.” By that statutory provision, it is
clear that the approval of the Rehabilitation Plan and the
appointment of a rehabilitation receiver merely suspend
the actions for claims against respondent corporations.
Petitioner bank’s preferred status over the unsecured
creditors relative to the mortgage liens is retained, but
the enforcement of such preference is suspended. The loan
agreements between the parties have not been set aside
and petitioner bank may still enforce its preference when
the assets of ASB Group of Companies will be liquidated.
Considering that the provisions of the loan agreements are
merely suspended, there is no impairment of contracts,
specifically its lien in the mortgaged properties.
155
Development Bank of the Philippines vs. Licuanan, G.R. No. 150097, February 26, 2007
156
Prudential Bank vs. Martinez, G.R. No. 51768, September 14, 1990, 189
SCRA 612, 615.
157
See Delta Motor Sales Corporation vs. Mangosing, G.R. No. L-41667, April
30, 1976, 70 SCRA 598, 602.
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
J.
197
ii.
As stressed in Rizal Commercial Banking Corporation vs.
Intermediate Appellate Court,158 such suspension “shall
not prejudice or render ineffective the status of a
secured creditor as compared to a totally unsecured
creditor,” for what P.D. No. 902-A merely provides is that
all actions for claims against the distressed corporation,
partnership or association shall be suspended. This
arrangement provided by law is intended to give the
receiver a chance to rehabilitate the corporation if there
should still be a possibility for doing so, without being
unnecessarily disturbed by the creditors’ actions against
the distressed corporation. However, in the event that
rehabilitation is no longer feasible and the claims against
the distressed corporation would eventually have to be
settled, the secured creditors shall enjoy preference over
the unsecured creditors.159
iii.
The purpose of rehabilitation proceedings is to enable
the company to gain new lease on life and thereby allows
creditors to be paid their claims from its earnings.160
Rehabilitation contemplates a continuance of corporate
life and activities in an effort to restore and reinstate the
financially distressed corporation to its former position of
successful operation and solvency.161 This is in consonance
with the State’s objective to promote a wider and more
meaningful equitable distribution of wealth to protect
investments and the public.162
Writ of Possession
i.
It is basic that after consolidation of title in the buyer’s
name for failure of the mortgagor to redeem, the writ of
possession becomes a matter of right and its issuance to
a purchaser in an extra-judicial foreclosure is merely a
ministerial function.163
G.R. No. 74851, December 9, 1999, 320 SCRA 279.
Metropolitan Bank & Trust Company vs. ASB Holdings, Inc., G.R. No.
166197, February 27, 2007.
160
Rubberworld (Phils.), Inc. vs. NLRC, G.R. No. 126773, April 14, 1999, 305
SCRA 721.
161
Ruby Industrial Corporation vs. Court of Appeals, G.R. Nos. 124185-87,
January 20, 1998, 284 SCRA 445.
162
P.D. 902-A, as amended, First “Whereas” clause.
163
Heirs of Nicolas vs. Metropolitan Bank and Trust Company, G.R. No. 137548,
September 3, 2007.
158
159
198
BANKING LAWS & JURISPRUDENCE
ii.
After the lapse of the redemption period, a writ of
possession may be issued in favor of the purchaser in a
foreclosure sale as the mortgagor is now considered to have
lost interest over the foreclosed property Consequently,
the purchaser, who has a right to possession after the
expiration of the redemption period, becomes the absolute
owner of the property when no redemption is made. In this
regard, the bond is no longer needed. The purchaser can
demand possession at any time following the consolidation
of ownership in his name and the issuance to him of a new
TCT. After consolidation of title in the purchaser’s name
for failure of the mortgagor to redeem the property, the
purchaser’s right to possession ripens into the absolute
right of a confirmed owner. At that point, the issuance of
a writ of possession, upon proper application and proof of
title, to a purchaser in an extrajudicial foreclosure sale
becomes merely a ministerial function. Effectively, the
court cannot exercise its discretion.164
iii.
An injunction to prohibit the issuance of a writ of
possession is utterly out of place. And once the writ of
possession has been issued, the court has no alternative
but to enforce the said writ without delay.165
iv.
It must be emphasized that the proceeding in a petition
for a writ of possession is ex-parte and summary in
nature. It is a judicial proceeding brought for the benefit
of one party only and without need of notice to any person
claiming an adverse interest. It is a proceeding wherein
relief is granted even without giving the person against
whom the relief is sought an opportunity to be heard.
By its very nature, an ex-parte petition for issuance of a
writ of possession is a non-litigious proceeding authorized
under Act No. 3135, as amended. Be that as it may, the
debtor or mortgagor is not without recourse. Section 8 of
Act No. 3135, as amended, provides:
Section 8. Setting aside of sale and writ of
possession. — The debtor may, in the proceedings in
which possession was requested, but not later than
164
Spouses Saguan vs. Philippine Bank of Communications, G.R. No. 159882,
November 23, 2007.
165
Spouses Maliwat vs. Metropolitan Bank and Trust Co., G.R. No. 165971,
September 3, 2007.
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
199
thirty days after the purchaser was given possession,
petition that the sale be set aside and the writ of
possession cancelled, specifying the damages suffered
by him, because the mortgage was not violated or the
sale was not made in accordance with the provisions
hereof, and the court shall take cognizance of this
petition in accordance with the summary procedure
provided for in section one hundred and twelve of
Act Numbered Four hundred and ninety-six; and
if it finds the complaint of the debtor justified, it
shall dispose in his favor of all or part of the bond
furnished by the person who obtained possession.
Either of the parties may appeal from the order of
the judge in accordance with section fourteen of Act
Numbered Four hundred and ninety-six; but the
order of possession shall continue in effect during
the pendency of the appeal.
Thus, a party may file a petition to set aside the foreclosure
sale and to cancel the writ of possession in the same proceedings
where the writ of possession was requested.
X. Major Investments
For the purpose of enhancing bank supervision, the Monetary
Board shall establish criteria for reviewing major acquisitions or
investments by a bank including corporate affiliations or structures
that may expose the bank to undue risks or in any way hinder
effective supervision.166
A.
Ceiling on Investments in Certain Assets
(i)
Any bank may acquire real estate as shall be necessary
for its own use in the conduct of its business.
(ii)
The total investment in such real estate and improvements
thereof, including bank equipment, shall not exceed fifty
percent (50%) of combined capital accounts.
(iii) The equity investment of a bank in another corporation
engaged primarily in real estate shall be considered as
166
Section 50, GBL.
200
BANKING LAWS & JURISPRUDENCE
part of the bank’s total investment in real estate, unless
otherwise provided by the Monetary Board.167
(iv) In determining compliance with such ceiling, the following
rules shall apply:
a.
b.
The investment shall include all real estate and
equipment necessary for the bank’s immediate use
in the transaction of its business, such as:
(1)
Bank Premises — Land and Buildings, Buildings under Construction, Leasehold Rights and
Improvements and Furniture, Fixtures and
Equipment (as defined in the Manual of Accounts for All Banks), owned and used by the
bank in the conduct of its business, including
staff houses, recreational facilities and landscaping costs, net of accumulated depreciation:
Provided, however, That appraisal increment
on bank premises shall not be included in the
total investment in real estate and improvements for purposes of these guidelines; and
(2)
Real properties, equipment or other chattels
purchased by the bank in its name for the benefit of its officers and employees, net of depreciation and in the case of land or other nondepreciable property, net of payments already
made to the bank by the officers and employees
for whose benefits the property was bought,
where such property has not yet been fully paid
and ownership has not yet been transferred to
them.
The following shall be included in the computation
of a bank’s total investment in bank premises:
(1)
167
Section 51, GBL.
(a) The cost of real estate leased in whole or in
part by the bank from a corporation, other than
a corporation primarily engaged in real estate
in which the bank has equity, equivalent to the
amount obtained by applying the percentage
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
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201
of the equity of the bank in the lessor to the
cost of of that portion of the property being
leased, or (b) the amount of equity in the lessor,
whichever is lower, plus the amount obtained
by applying the percentage of the equity of the
bank in the lessor to any outstanding loans of
the lessor with the bank, the proceeds of which
were used to purchase, construct or develop the
real estate used for the bank’s purposes.
(2)
168
The lower of —
(a)
the cost of real estate leased in whole or
in part by the bank from a corporation in
which any or a group of stockholders owning ten percent (10%) or more of the voting stock of the bank, directors and/or officers of the bank, hold or own more than
fifteen percent (15%) of the subscribed
capital stock of the lessor, equivalent to
the amount obtained by applying the percentage of the equity of said stockholders/directors/officers in the lessor to the
cost of that portion of the property being
leased by the bank, or
(b)
the amount obtained by applying the
percentage of the equity of the stockholders/directors/officers in the lessor to any
outstanding loans of the corporation with
the bank, the proceeds of which were used
to purchase, construct or develop the real
estate used for the bank’s purposes. The
equity investment of a bank in a corporation engaged primarily in real estate shall
be included in the computation of the
bank’s total investment in real estate, unless otherwise provided by the Monetary
Board.168
Section X606.2, Manual of Regulations for Banks.
202
BANKING LAWS & JURISPRUDENCE
Problem:
Sometime in 1979, BF Savings and Mortgage Bank (BF) had
to unload some of its branch sites since it has reached its allowable
limit under the General Banking Law as regards real properties.
Under the law, a bank may purchase, hold and convey real estate
as necessary for its accommodation in the transaction of its
business, provided, that the total investment in such real estate and
improvements thereof, including bank equipment, shall not exceed
50% of its net worth.
Thus, the major stockholders of BF formed a corporation known
as TALA Realty Services Corporation (“Tala”). Tala stands for the
names of BF’s four major stockholders. Tala then would purchase
the existing bank sites of BF and lease them back to the latter. BF
defaulted from the payment of rents and in defense thereof raised
the arrangement as an argument. Tala filed a collection case and
denied the arrangement with BF. Is Tala entitled to the rents?
No. Equity dictates that Tala should not be allowed to collect
rent from BF. The factual milieu of the instant case clearly shows
that both BF and Tala participated in the deceptive creation of a
trust to circumvent the real estate investment limit under the
General Banking Law. Just as BF should not be allowed to benefit
from its deceptive ‘warehousing agreement,’ Tala should not also
benefit from the arrangement as it was BF’s major stockholders that
proposed the arrangement and incorporated Tala. Tala committed
deception by participating in the ‘warehousing agreement,’ and
committed another deception when it turned the tables on BF and
denied the arrangement. Allowing Tala to further benefit from the
‘warehousing agreement’ is unconscionable, to say the least.169
BF and Tala are in pari delicto, thus, no affirmative relief
should be given to one against the other.170 BF should not be allowed
to dispute the sale of its lands to Tala nor should Tala be allowed
to further collect rent from BF. The clean hands doctrine will not
allow the creation or the use of a juridical relation such as a trust to
subvert, directly or indirectly, the law.171 Neither BF nor Tala came
to court with clean hands; neither will obtain relief from the court
169
Tala Realty Services Corporation vs. Banco Filipino Savings and Mortgage
Bank, G.R. No. 143263, January 29, 2004.
170
Silangan vs. Intermediate Appellate Court, 196 SCRA 774 (1991).
171
Heirs of Lorenzo Yap vs. Court of Appeals, 312 SCRA 603 (1999).
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
203
as one who seeks equity and justice must come to court with clean
hands.172
B.
Acquisition of Real Estate By Way of Satisfaction of
Claims
(i)
(ii)
Notwithstanding the limitations, a bank may acquire,
hold or convey real property under the following circumstances:
1.
Such as shall be mortgaged to it in good faith by way
of security for debts;
2.
Such as shall be conveyed to it 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 circumstances
above shall be disposed of by the bank within a period of
five (5) years or as may be prescribed by the Monetary
Board.
(iii) The bank may, after said period, continue to hold the
property for its own use, subject to the limitations (50%
of combined capital accounts) under Section 51 of the
GBL.173
* Notes: 1. Relate the phrase “it shall purchase to secure debts due
it” to Article 1302 of the Civil Code:
Art. 1302. It is presumed that there is legal
subrogation:
(1) When a creditor pays another creditor who is preferred, even without the debtor’s knowledge;
(2) When a third person, not interested in the obligation, pays with the express or tacit approval of the
debtor;
172
173
Roque vs. Lapuz, 96 SCRA 741 (1980).
Section 52, GBL.
204
BANKING LAWS & JURISPRUDENCE
(3) When, even without the knowledge of the debtor, a
person interested in the fulfillment of the obligation
pays, without prejudice to the effects of confusion as
to the latter’s share.
2.
See discussion on Special Purpose Vehicles in Chapter
9.
XI. Other Banking Services
A bank may also perform the following services:
1.
Receive in custody funds, documents and valuable objects;
2.
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 securities;
3.
Make collections and payments for the account of others
and perform such other services for their customers as
are not incompatible with banking business;
4.
Upon prior approval of the Monetary Board, act as
managing agent, adviser, consultant or administrator of
investment management/advisory/consultancy accounts;
and
5.
Rent out safety deposit boxes.
In this connection, the GBL provides that:
The bank shall perform the services permitted under 1, 2, 3
and 4 as depositary or as an agent. Accordingly, it shall keep the
funds, securities and other effects which it receives duly separate
from the bank’s own assets and liabilities. The Monetary Board may
regulate the operations in order to ensure that such operations do
not endanger the interests of the depositors and other creditors of
the bank. In case a bank or quasi-bank notifies the Bangko Sentral
or publicly announces a bank holiday, or in any manner suspends the
payment of its deposit liabilities continuously for more than thirty
(30) days, the Monetary Board may summarily and without need
for prior hearing close such banking institution and place it under
receivership of the Philippine Deposit Insurance Corporation.174
174
Section 53, GBL.
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FUNCTIONS OF BANKS
* Note:
A.
205
The last sentence is a misplaced provision.
Safety Deposit Box
1.
Special Kind of Deposit
The contract governing safety deposit box is a special kind of
deposit. It cannot be characterized as an ordinary contract of lease
under Article 1643 of the Civil Code because the full and absolute
possession and control of the safety deposit box is not given to the
renters. The guard key of the box remains with the bank; without
this key, the renters could not open the box. On the other hand, the
bank could not likewise open the box without the renter’s key.175
Thus:
(i)
In case the said key had a duplicate which was made
so that joint renters could have access to the box, the
bank is not liable to either of the renters in case of loss
attributable to either of them. Since both renters agreed
that each should have one (1) renter’s key, it was obvious
that either of them could ask the bank for access to the
safety deposit box and, with the use of such key and the
bank’s own guard key, could open the said box, without
the other renter being present.
(ii)
Where a bank was not aware of an agreement between joint
renters to the effect that the articles were withdrawable
from the safety deposit box only upon both parties’ joint
signatures, and that no evidence was submitted to reveal
that the loss was due to the fraud or negligence of the
bank, the bank is not liable.176
2.
Bailor and Bailee
The Supreme Court explicitly rejected the contention that a
contract for the use of a safety deposit box is a contract of lease nor
did it fully subscribe to the view that it is a contract of deposit to be
strictly governed by the Civil Code provision on deposit. It is, as it
declared, a special kind of deposit. The prevailing rule in American
175
CA Agro-Industrial Development Corp. vs. Court of Appeals, G.R. No. 90027,
March 3, 1993.
176
Ibid.
206
BANKING LAWS & JURISPRUDENCE
jurisprudence — that the relation between a bank renting out safe
deposit boxes and its customer with respect to the contents of the
box is that of a bailor and bailee, the bailment being for hire and
mutual benefit — has been adopted in this jurisdiction.177
3.
Duties May Be Defined By The Parties
“With respect to property deposited in a safe-deposit box by a
customer of a safe-deposit company, the parties, since the relation
is a contractual one, may by special contract define their respective
duties or provide for increasing or limiting the liability of the deposit
company, provided such contract is not in violation of law or public
policy. It must clearly appear that there actually was such a special
contract, however, in order to vary the ordinary obligations implied
by law from the relationship of the parties; liability of the deposit
company will not be enlarged or restricted by words of doubtful
meaning. The company, in renting safe-deposit boxes, cannot
exempt itself from liability for loss of the contents by its own fraud
or negligence or that of its agents or servants, and if a provision of
the contract may be construed as an attempt to do so, it will be held
ineffective for the purpose. Although it has been held that the lessor
of a safe-deposit box cannot limit its liability for loss of the contents
thereof through its own negligence, the view has been taken that
such a lessor may limit its liability to some extent by agreement or
stipulation.”178
Problem:
A rented the Safety Deposit Box of B Bank wherein he placed
his collection of stamps. The said safety deposit box leased by A was
at the bottom or at the lowest level of the safety deposit boxes of the
bank. Floodwater entered into the bank’s premises, seeped into the
safety deposit box leased by A and caused damage to his stamps
collection. B Bank failed to notify A. The bank rejected A’s claim for
compensation for his damaged stamps collection, so, A instituted
an action for damages against the bank. Is the bank guilty of
negligence?
Yes. The bank was guilty of negligence. Bank’s negligence
aggravated the injury or damage to A which resulted from the loss or
Luzan Sia vs. Court of Appeals, G.R. No. 102970, May 13, 1993.
CA Agro-Industrial Development Corp. vs. Court of Appeals, G.R. No. 90027,
March 3, 1993.
177
178
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
207
destruction of the stamp collection. B Bank was aware of the floods;
it also knew that the floodwaters inundated the room where the
Safe Deposit Box was located. In view hereof, it should have lost no
time in notifying A in order that the box could have been opened to
retrieve the stamps, thus saving the same from further deterioration
and loss. In this respect, it failed to exercise the reasonable care and
prudence expected of a good father or a family, thereby becoming
a party to the aggravation of the injury or loss. Accordingly, the
aforementioned fourth characteristic of a fortuitous event is absent
and Article 1170 of the Civil Code, which reads: “Those who in the
performance of their obligations are guilty of fraud, negligence, or
delay, and those who in any manner contravene the tenor thereof, are
liable for damages.” The destruction or loss of the stamp collection
caused A pecuniary loss; hence, he must be compensated therefor.179
XII. Electronic Transactions
The Bangko Sentral shall have full authority to regulate the use
of electronic devices, such as computers, and processes for recording,
storing and transmitting information or data in connection with
the operations of a bank, quasi-bank or trust entity, including the
delivery of services and products to customers by such entity.180
XIII. Outsourcing of Information Technology
Systems/Processes
Subject to prior approval of the Monetary Board, banks may
outsource all information technology systems and processes except
for inherent banking functions. Certain functions affecting the ability
of the bank to ensure the fit of technology services deployed to meet
its strategic and business objectives and to comply with all pertinent
banking laws and regulations, such as, but not limited to, strategic
planning for the use of information technology; determination of
system functionalities; change management inclusive of quality
assurance and testing; service level and contract management;
and security policy and administration, may not be outsourced.
Subject to prior approval of the Monetary Board and submission of
documentary requirements, consultants and/or service providers
179
180
Sia vs. Court of Appeals, G.R. No. 102970, May 13, 1993.
Section 59, GBL.
208
BANKING LAWS & JURISPRUDENCE
may be engaged to provide assistance/support to the bank personnel
assigned to perform such functions.181
XIV. Outsourcing Of Other Functions
i.
Subject to prior approval of the Monetary Board, banks
may outsource data imaging, storage, retrieval and
other related systems; clearing and processing of checks
not included in the Philippine Clearing House System;
printing of bank deposit statements; and such other
activities as may be determined by the Monetary Board.
ii.
Banks may outsource credit card services; printing of
bank loan statements and other non-deposit records, bank
forms and promotional materials; credit investigation and
collection; processing of export, import and other trading
transactions; transfer agent services for debt and equity
securities; property appraisal; property management
services; messenger, courier and postal services; security
guard services; vehicle service contracts; janitorial
services; public relations services; procurement services;
temporary staffing; legal services from local legal counsel;
Provided, That these activities do not include servicing/
handling bank deposits or other inherent banking
functions; and such other activities as may be determined
by the Monetary Board.
XV. Credit Card Transactions182
A.
General Policy
The Bangko Sentral ng Pilipinas (BSP) shall foster the development of consumer credit through innovative products such
as credit cards under conditions of fair and sound consumer credit
practices. The BSP likewise encourages competition and transparency to ensure more efficient delivery of services and fair dealings
with customers.
181
182
2004.
X169.2, Manual of Regulations for Banks.
Circular No. 398 Series of 2003 as amended by Circular No. 454, Series of
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
B.
C.
209
Definition of Terms
a)
“Credit Card” means any card, plate, coupon book or other
credit device existing for the purpose of obtaining money,
property, labor or services on credit.
b)
“Credit Card Receivables” represents the total outstanding
balance of credit cardholders arising from purchases of
goods and services, cash advances, annual membership/
renewal fees as well as interest, penalties, insurance fees,
processing/service fees and other charges.
c)
“Minimum Amount Due” or “ Minimum Payment Required”
means the minimum amount that the credit cardholder
needs to pay on or before the payment due date for a
particular billing period/cycle as defined under the terms
and conditions or reminders stated in the statement of
account/billing statement which may include: (a) total
outstanding balance multiplied by the required payment
percentage or a fixed amount whichever is higher; (b) any
amount which is part of any fixed monthly installment
that is charged to the card; (c) any amount in excess of the
credit line; and (d) all past due amounts, if any.
d)
“Default” or “Delinquency” shall mean non-payment of, or
payment of any amount less than, the “Minimum Amount
Due” or “Minimum Payment Required” within two (2)
cycle dates, in which case, the Total Amount Due for
the particular billing period as reflected in the monthly
statement of account may be considered in default or
delinquent.
e)
“Acceleration Clause” shall mean any provision in the
contract between the bank and the cardholder that gives
the bank the right to demand the obligation in full in
case of default or non-payment of any amount due or for
whatever valid reason.
Risk Management System
To safeguard their interests, banks and subsidiary credit
card companies are required to establish an appropriate system for
managing risk exposures from credit card operations which shall be
documented in a complete and concise manner. The risk management
system shall cover the organizational set-up, records and reports,
accounting, policies and procedures and internal control.
210
BANKING LAWS & JURISPRUDENCE
Written policies, procedures and internal control guidelines
shall be established on the following aspects of credit card operations:
i.
Requirements for application;
ii.
Solicitation and application processing;
iii.
Determination and approval of credit limits;
iv.
Pre-approved cards;
v.
Issuance, distribution and activation of cards;
vi.
Supplementary or extension cards;
vii. Cash advances;
viii. Billing and payments;
ix.
Deferred Payment Program or Special Installment
Plans;
x.
Collection of past due accounts;
xi.
Handling of accounts for write-off;
xii. Suspension, cancellation and withdrawal or termination of card;
xiii. Renewal of cards, upgrade or downgrade of credit
limit;
xiv. Lost or stolen cards and their replacement;
xv.
Accounts of directors, officers, stockholders and
related interests (DOSRI) and employees;
xvi. Disposition of errors and/or questions about the
billing statement/statement of account and other
customers’ complaints; and
xvii. Dealings with marketing agents/collection agents
D.
Minimum Requirements
Before issuing credit cards, banks and/or their subsidiary credit
card companies must exercise proper diligence by ascertaining that
applicants possess good credit standing and are financially capable
of fulfilling their credit commitments. The net take home pay of
applicants who are employed, the net monthly receipts of those
engaged in trade or business, or the net worth or cash flow inferred
from deposits of those who are neither employed nor engaged in
trade or business or the credit behavior exhibited by the applicant
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
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211
from his other existing credit cards, or other lifestyle indicators such
as but not limited to club memberships, ownership and location of
residence and motor vehicle ownership shall be determined and
used as basis for setting credit limits. The gross monthly income
may also be used provided reasonable deductions are estimated for
income taxes, premium contributions, loan amortizations and other
deductions.
All credit card applications, especially those solicited by third
party representatives/agents, shall undergo a strict credit risk
assessment process and the information stated thereon validated
and verified by persons other than those handling marketing.
E.
Information to be Disclosed
Banks or their subsidiary credit card companies shall disclose
to each person to whom the credit card privilege is extended in the
agreement, contract or any equivalent document governing the
issuance or use of the credit card or any amendment thereto or in
such other statement furnished the cardholder from time to time,
prior to the imposition of the charges and to the extent applicable,
the following information:
i.
non-finance charges, individually itemized, which are
paid or to be paid by the cardholder in connection with the
transaction but which are not incident to the extension of
credit;
ii.
the percentage that the interest bears to the total amount
to be financed expressed as a simple monthly or annual
rate, as the case may be, on the outstanding balance of
the obligation;
iii.
the effective interest rate per annum;
iv.
for installment loans, the number of installments, amount
and due dates or periods of payment schedules to repay
the indebtedness;
v.
the default, late payment/penalty fees or similar
delinquency-related charges payable in the event of late
payments;
vi.
the conditions under which interest may be imposed, including the time period, within which any credit extended
may be repaid without interest;
vii. the method of determining the balance upon which
interest and/or delinquency charges may be imposed;
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BANKING LAWS & JURISPRUDENCE
viii. the method of determining the amount of interest and/
or delinquency charges, including any minimum or fixed
amount imposed as interest and/or delinquency charge;
F.
ix.
where one or more periodic rates may be used to compute
interest, each such rate, the range of balances to which it
is applicable, and the corresponding simple annual rate;
and
x.
Other fees, such as membership/renewal fees, processing
fees, collection fees, credit investigation fees and attorney’s
fees.
xi.
For transactions made in foreign currencies and/or outside the Philippines, for dual currency accounts (peso and
dollar billings), as well as payments made by credit cardholders in any currency other than the billing currency:
the application of payments; the manner of conversion
from the transaction currency and payment currency to
Philippine pesos or billing currency; definition or general description of verifiable blended exchange/conversion
rates (e.g., MASTERCARD and/or VISA International
rates on the day the item was processed/posted to the billing statement, plus mark-up, if any) including conversion
commission; and/or other currency conversion charges
and costs arising from the purchase by the card company
of foreign currency to settle the customer’s transactions
shall also be disclosed.
Accrual of Interest Earned
Interest accrued and/or booked shall be reversed and no accrual
of interest shall be allowed ninety (90) days after the credit card
receivable has become past due as defined in Subsec. X 306.1 of the
Manual of Regulations for Banks.
G.
Finance Charges
The amount of finance charges in connection with any credit
card transaction shall refer to interest charged to the cardholder.
H.
Deferral Charges
The bank and the cardholder may, prior to the consummation
of the transaction, agree in writing to a deferral of all or part of one
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
213
or more unpaid installments and the bank may collect a deferral
charge which shall not exceed the rate previously disclosed pursuant
to the provisions on disclosure.
I.
Late Payment/Penalty Fees
No late payment or penalty fee shall be collected from cardholders unless the collection thereof is fully disclosed in the contract
between the issuer and the cardholder: Provided, That late payment
or penalty fees shall be based on the unpaid minimum amount due
or a prescribed minimum fixed amount: Provided, further, That said
late payment or penalty fees may be based on the total outstanding
balance of the credit card obligation, including amounts payable under installment terms or deferred payment schemes, if the contract
between the issuer and the cardholder contains “acceleration clause”
and the total outstanding balance of the credit card is classified and
reported as past due.
J.
Confidentiality of Information
Banks and subsidiary credit card companies shall keep strictly
confidential the data on the cardholder or consumer, except under
the following circumstances:
i.
disclosure of information is with the consent of the
cardholder or consumer;
ii.
release, submission or exchange of customer information
with other financial institutions, credit information bureaus, credit card issuers, their subsidiaries and affiliates;
iii.
upon orders of court of competent jurisdiction or any
government office or agency authorized by law, or under
such conditions as may be prescribed by the Monetary
Board;
iv.
disclosure to collection agencies, counsels and other
agents of the bank or card company to enforce its rights
against the cardholder;
v.
disclosure to third party service providers solely for the
purpose of assisting or rendering services to the bank
or card company in the administration of its credit card
business; and
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BANKING LAWS & JURISPRUDENCE
vi.
K.
disclosure to third parties such as insurance companies,
solely for the purpose of insuring the bank from cardholder
default or other credit loss, and the cardholder from fraud
or unauthorized charges.
Suspension, Termination of Effectivity and Reactivation
Banks or their subsidiary credit card companies shall formulate
criteria or parameters for suspension, revocation and reactivation
of the right to use the card and shall include in their contract
with cardholders a provision authorizing the issuer to suspend or
terminate its effectivity, if circumstances warrant.
L.
Inspection of Records Covering Credit Card Transactions
Banks or their subsidiary credit card companies shall make
available for inspection or examination by the appropriate supervising and examining department of the Bangko Sentral ng Pilipinas
complete and accurate files on card applicant/cardholder to support
the consideration for approval of the application and determination
of the credit limit which shall be in accordance with the verified
debt repayment ability and/or net worth of the card applicant/cardholder.
M.
Offsets
For purposes of transparency and adequate disclosure, the
credit card issuer shall inform/notify the credit cardholder in the
agreement, contract or any equivalent document governing the
issuance or use of the credit card that, pursuant to the provisions
of Articles 1278 to 1290 of the New Civil Code of the Philippines, as
amended the use of his credit card will subject his deposit/s with the
bank to offset against any amount/s due and payable on his credit
card which have not been paid in accordance with the terms of the
agreement/contract.
N.
Handling of Complaints
Banks or subsidiary credit card companies shall give cardholders at least twenty (20) calendar days from statement date to examine charges posted in his/her statement of account and inform
the bank/subsidiary credit card companies in writing of any billing
error or discrepancy. Within ten (10) calendar days from receipt of
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
215
such written notice, the bank/subsidiary credit card company shall
send a written acknowledgement to the cardholder unless the action
required is taken within such ten-day period. Not later than two (2)
billing cycles or two months which in no case shall exceed ninety
(90) days after receipt of the notice and prior to taking any action
to collect the contested amount, or any part thereof, banks/subsidiary credit card companies shall make appropriate corrections in
their records and/or send a written explanation or clarification to
the cardholder after conducting an investigation. Nothing in this
Subsection shall be construed to prohibit any action by the bank/
subsidiary credit card company to collect any amount which has not
been indicated by the cardholder to contain a billing error or apply
against the credit limit of the cardholder the amount indicated to be
in error.
O.
Unfair Collection Practices
Banks, subsidiary/affiliate credit card companies, collection
agencies, counsels and other agents may resort to all reasonable
and legally permissible means to collect amounts due them under
the credit card agreement: Provided, That in the exercise of their
rights and performance of duties, they must observe good faith and
reasonable conduct and refrain from engaging in unscrupulous
or untoward acts. Without limiting the general application of the
foregoing, the following conduct is a violation:
i.
the use or threat of violence or other criminal means to
harm the physical person, reputation, or property of any
person;
ii.
the use of obscenities, insults, or profane language which
amount to a criminal act or offense under applicable
laws;
iii.
disclosure of the names of credit cardholders who allegedly refuse to pay debts, except as allowed under Subsec.
X320.9 and 4301N.9;
iv.
threat to take any action that cannot legally be taken;
v.
communicating or threat to communicate to any person
credit information which is known to be false, including
failure to communicate that a debt is being disputed;
vi.
any false representation or deceptive means to collect or
attempt to collect any debt or to obtain information concerning a cardholder; and
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BANKING LAWS & JURISPRUDENCE
vii. making contact at unreasonable/inconvenient times or
hours which shall be defined as contact before 6:00 A.M.
or after 10:00 P.M., unless the account is past due for
more than sixty (60) days or the cardholder has given
express permission or said times are the only reasonable
or convenient opportunities for contact.
P.
Additional Deposit Does Not Increase Credit Limit
In the case of Aznar vs. Citibank, N.A., (Philippines), G.R. No.
164273, March 28, 2007, the Supreme Court held:
Petitioner next argues that with the additional deposit
he made in his account which was accepted by Citibank, there
was an implied novation and Citibank was under the obligation
to increase his credit limit and make the necessary entries
in its computerized systems in order that petitioner may not
encounter any embarrassing situation with the use of his credit
card. Again, the Court finds that petitioner’s argument on this
point has no leg to stand on.
Q.
Contract of Adhesion
It is settled that contracts between cardholders and the credit
card companies are contracts of adhesion, so-called, because their
terms are prepared by only one party while the other merely affixes
his signature signifying his adhesion thereto.183
R.
Blanket Freedom from Liability Invalid
The Supreme Court held in one case:
In this case, paragraph 7 of the terms and conditions
states that “[Citibank is] not responsible if the Card is not
honored by any merchant affiliate for any reason x x x.” While
it is true that Citibank may have no control of all the actions of
its merchant affiliates, and should not be held liable therefor,
it is incorrect, however, to give it blanket freedom from liability
if its card is dishonored by any merchant affiliate for any
reason. Such phrase renders the statement vague and as the
said terms and conditions constitute a contract of adhesion,
183
Aznar vs. Citibank, N.A., (Philippines), G.R. No. 164273, March 28, 2007;
BPI Express Card Corp. vs. Olalia, 423 Phil. 593, 599 (2001).
CHAPTER 4 — INVESTMENTS, LOANS AND OTHER
FUNCTIONS OF BANKS
217
any ambiguity in its provisions must be construed against the
party who prepared the contract,184 in this case Citibank.185
XVI. Rules on Price Tags/Labels and Providing Prohibition
Against the Imposition of a Surcharge, Extra Charge or
Additional Charge in the Use of Credit/Automated Teller
Machine (ATM)/Debit Cards for Payment of Purchases of
Consumer Products or Services186
A.
One Price Tag Requirement
Every retailer is required to display a price tag to indicate the
price of each consumer good and/or services, as required in Articles
81 to 83 of the Consumer Act of the Philippines or R.A. 7394.187
The price tag must be written clearly, indicating the price of the
consumer product including Value Added Tax (VAT) whenever the
consumer product is VATABLE. Service charge, if any, shall not be
included in the price tag.
B.
Modes of Payment and other Price Tag Practices
It is necessary to consider business practices relative to the
mode of payment to determine compliance with Price Tag Law.
These practices include the following:
Polotan, Sr. vs. Court of Appeals, 357 Phil. 250, 258 (1998).
Aznar vs. Citibank, N.A., (Philippines), G.R. No. 164273, March 28, 2007.
186
Department of Trade and Industry Department Administrative Order No.
10, Series of 2006.
187
Art. 81. Price Tag Requirement. — It shall be unlawful to offer any consumer
product for retail sale to the public without an appropriate price tag, label or marking
publicly displayed to indicate the price of each article and said products shall not be
sold at a price higher than that state therein and without discrimination to all buyers: Provided, That lumber sold, displayed or offered for sale to the public shall be
tagged or labeled by indicating thereon the price and the corresponding official name
of the wood: Provided, further, that if consumer products for sale are too small or the
nature of which makes it impractical to place a price tag thereon price list placed at
the nearest point where the products are displayed indicating the retail price of the
same may suffice.
Art. 82. Manner of Placing Price Tags. — Price tags, labels or markings must
be written clearly, indicating the price of the consumer product per unit in pesos and
centavos.
Art. 83. Regulations for Price Tag Placement. — The concurred department
shall prescribe rules and regulations for the visible placement of price tags for specific
consumer products and services. There shall be no erasures or alterations of any sort
of price tags, labels or markings.
184
185
218
C.
BANKING LAWS & JURISPRUDENCE
1.
When the consumer pays in cash, he shall pay only the
price indicated in the price tag.
2.
When the consumer pays through a credit/ATM/debit
card, he shall pay only the price indicated in the price
tag.
3.
When the retailer offers the consumer an option to pay
in cash, card or on installment, the same is allowed
provided the payment options shall be disclosed by way
of a separate information to the consumer but not in the
price tag.
4.
Price tag indicating a separate CASH PRICE TAG and
REGULAR PRICE TAG on each product or service is not
allowed.
5.
Price tag indicating a separate CASH PRICE TAG and
CARD PRICE TAG on each product or service is not
allowed.
Prohibition Against Surcharging by Retailers
All retailers who honor/accept credit/ATM/debit cards for
payment shall not require the cardholders to pay a surcharge, extra
charge, or additional charge over and above the price tag on the
consumer goods and services.
For Mama, Eileen, Enon and Manny
iii
iv
PREFACE TO THE SECOND EDITION
The latest decisions of the Supreme Court and Bangko Sentral
ng Pilipinas Issuances have been incorporated in the appropriate
sections of this work. Apart from these changes, the basic format of
this work has been maintained.
Thanks to all law professors, students and practitioners who
provided encouragement in improving this humble work.
E.L.D.
E.V.M.D.
Quezon City, Philippines
25 October 2008
v
vi
PREFACE
This humble work is the result of the authors’ sincere desire
and earnest attempt to make banking laws and jurisprudence
simpler to understand and easier to apply when confronted with
actual situations.
It is hoped that this book could extend help or benefit to
students, barristers and those who find interest in or use for banking
laws and selected cases decided by the Supreme Court. Professionals
may also find this book handy and helpful in their practice.
E.L.D.
E.V.M.D.
Quezon City, Philippines
15 July 2006
vii
viii
CONTENTS
Chapter 1
Banks and the Business of Banking
I.
Declared Policy of the State ..............................................
II. Definition of Banks............................................................
III. Nature of Banking Business .............................................
A. Debtor-Creditor Relationship...................................
B. Fiduciary Duty ..........................................................
C. Not a Trust Agreement.............................................
D. Indispensable Institution .........................................
E. Impressed With Public Interest ...............................
F. Degree of Diligence ...................................................
G. Treatment of Accounts With Meticulous Care ........
H. Duty to Keep Records ...............................................
I.
Banks are not Gratuitous Bailees............................
J.
Banks not Expected to be Infallible .........................
K. Dealing with Registered Lands................................
L. Banks may Exclude Persons in
their Premises ..................................................
M. Charging of Interest for Loans .................................
IV. Liability for Acts of Officers and Employees ....................
A. Negligence of Manager .............................................
B. Negligence of Officers ...............................................
C. Negligence of Tellers ................................................
D. Right to Recover From Employees ...........................
E. Liability for Damages ...............................................
F. Respondeat Superior, Diligence in the Selection
and Supervision of Employees.........................
V. Classification of Banks ......................................................
A. Business Name .........................................................
B. Universal Banks .......................................................
C. Commercial Banks....................................................
D. Rural Banks ..............................................................
ix
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1
2
2
3
4
4
5
6
8
8
9
9
10
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19
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20
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22
22
26
26
27
28
28
29
E. Thrift Banks ..............................................................
F. Cooperative Banks ....................................................
G. Islamic Banks ...........................................................
H. Other Banks ..............................................................
I.
Non-Stock Savings and Loan Associations .............
J.
Quasi-Banks ..............................................................
K. Offshore Banks .........................................................
VI. Authority to Engage in Banking and
Quasi-Banking Functions ........................................
A. Authority from the Bangko Sentral .........................
B. Determination by the Monetary Board ...................
C. Authority of Supervising and Examining
Department ......................................................
D. Extension of Examining Powers ..............................
E. Certificate of Authority to Register .........................
VII. Service of Summons Upon Banks .....................................
A. Service under the Rules of Court .............................
B. Strict Compliance is Necessary................................
29
33
34
36
37
37
38
42
42
43
45
45
46
48
48
48
Chapter 2
Organization, Management and Administration
of Banks, Quasi-Banks and Trust Entities
I.
Organization of Banks ......................................................
A. Conditions .................................................................
B. Capabilities ...............................................................
C. Capital Requirements...............................................
D. Incorporators/Subscribers ........................................
E. Bank Branches ..........................................................
II. Stockholdings.....................................................................
A. Treasury Stocks ........................................................
B. Foreign Stockholdings ..............................................
C. Acquisition of Voting Stock in a
Domestic Bank .................................................
D. Family Groups or Related Interests ........................
III. Board of Directors .............................................................
A. Number of Directors .................................................
B. Directors of Merged or Consolidated Banks............
C. Meetings ....................................................................
D. Compensation and Other Benefits of
Directors and Officers ......................................
IV. Fit and Proper Rule ...........................................................
A. Powers of the Monetary Board.................................
x
50
50
50
51
52
53
53
53
54
56
57
57
57
58
58
59
60
60
B.
C.
Disqualifications .......................................................
Disqualifications/Prohibitions Under
the Corporation Code .......................................
D. Disqualifications/Prohibitions Under
the NCBA .........................................................
E. Disqualification/Prohibition Under
the PDIC (Philippine Deposit Insurance
Corporation) Law .............................................
F. Disqualification/Prohibition Under
Republic Act No. 7353 ......................................
G. Disqualification/Prohibition Under Appendix 38,
Manual of Regulations for Banks
(Guidelines for the Organization
of Cooperative Banks) ......................................
H. Prohibition on Public Officials .................................
V. Banking Days and Hours ..................................................
A. Number of Days and Hours......................................
B. Rules and Regulations ..............................................
VI. Automated Teller Machines..............................................
A. Off-site Automated Teller Machines (ATMs) ..........
B. Mobile ATMs .............................................................
VII. Independent Auditor .........................................................
VIII. Financial Statements ........................................................
A. Publication of Financial Statements .......................
IX. Publication of Capital Stock .............................................
X. Settlement of Disputes ......................................................
XI. Strikes and Lockouts.........................................................
A. Unsettled Labor Disputes ........................................
B. Reports of Strikes and Lockouts ..............................
XII. Laws Governing Other Types of Banks ...........................
61
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65
67
67
67
68
68
68
69
71
71
72
72
73
73
76
76
76
76
77
77
Chapter 3
Deposit Functions of Banks
I.
Kinds of Deposits ...............................................................
A. Demand Deposits ......................................................
B. Savings Deposits .......................................................
C. Negotiable Order of Withdrawal (NOW)
Accounts............................................................
D. Time Deposits ...........................................................
E. Deposit Substitute Operations
(Quasi-Banking Functions) ......................................
F. Foreign Currency Deposits.......................................
xi
78
78
87
89
90
91
92
II.
III.
IV.
V.
VI.
VII.
G. Anonymous and Numbered Accounts ......................
Administration of Deposits ...............................................
A. Specimen Signatures, ID Photos .............................
B. Minors and Corporations as Depositors ..................
C. Time of Payment of Interest on Time
Deposits/Deposit Substitutes ..........................
D. Treatment of Matured Time Deposits/
Deposit Substitutes ..........................................
E. Clearing Cut-Off Time ..............................................
F. Booking of Cash Deposits .........................................
G. Booking of Non-Cash Deposits .................................
H. Booking of Deposits After Regular
Banking Hours .................................................
I.
Average Daily Balance .............................................
Survivorship Agreement ...................................................
A. Definition...................................................................
B. Survivorship Agreement not Invalid per
se but may be Violative of Law ........................
Nature of Bank Deposits ...................................................
A. Nature .......................................................................
B. Set-Off .......................................................................
Duties of Banks .................................................................
A. Meticulous Care ........................................................
B. Payment to Proper Party..........................................
C. In Case of Death of Depositor ..................................
Secrecy Of Bank Deposits .................................................
A. Purposes ....................................................................
B. Privacy .......................................................................
C. Absolute Confidentiality ...........................................
Exceptions to Secrecy of Deposits.....................................
A. Exceptions Under the Bank Secrecy Law ...............
B. Garnishment .............................................................
C. Secrecy and Exemption from Attachment
and Garnishment of Foreign Currency
Deposits Cannot be Used as Device for
Wrongdoing ......................................................
D. Graft and Corruption................................................
E. Authority to Inquire Into Bank Deposits
Under the Anti-Money Laundering Act ..........
F. Periodic or Special Examination ..............................
G. In Camera Inspection by the Ombudsman .............
H. Preliminary Attachment ..........................................
I.
Disclosure of Dormant Accounts ..............................
xii
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96
96
97
98
99
99
100
100
100
100
101
101
102
102
102
104
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105
105
105
106
106
106
107
108
108
109
111
113
114
114
115
116
116
J.
K.
Authority of the Commissioner of Internal
Revenue to Inquire into Deposits ....................
Waiver by DOSRI .....................................................
117
118
Chapter 4
Investments, Loans and Other Functions of Banks
I.
Operations of Universal Banks ........................................
A. Powers of a Universal Bank .....................................
B. Equity Investments of a Universal Bank: ...............
C. Equity Investments of a Universal Bank
in Financial Allied Enterprises .......................
D. Equity Investments of a Universal Bank
in Non-Financial Allied Enterprises ...............
E. Equity Investments of a Universal Bank in
Non-Allied Enterprises ....................................
F. Investments in Non-Allied or
Non-Related Undertakings..............................
G. Equity Investments in Quasi-Banks .......................
II. Operations Of Commercial Banks ....................................
A. Powers of a Commercial Bank .................................
B. Issuance of Letters of Credit ....................................
C. Equity Investments of a Commercial Bank ............
D. Equity Investments of a Commercial Bank
in Financial Allied Enterprises .......................
E. Equity Investments of a Commercial Bank in
Non-Financial Allied Enterprises ...................
III. Risk-Based Capital ............................................................
A. Minimum Ratio .........................................................
B. Effect of Non-Compliance .........................................
IV. Limit on Loans, Credit Accommodations
and Guarantees.........................................................
A. Single Borrowers Limit ............................................
B. Inclusions to the Limit .............................................
C. Exclusions to the Limit ............................................
D. Bank Guarantee........................................................
E. Contingent Accounts.................................................
F. Assignment of Credits ..............................................
G. No Pacto Commissorio in Assignment
of Deposits ........................................................
V. Restriction on Bank Exposure to Directors, Officers,
Stockholders and Their Related Interests...............
A. Approval and Other Requirements..........................
xiii
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120
120
121
122
123
124
124
124
124
125
129
129
129
130
130
131
131
131
140
141
142
142
142
144
144
144
B.
C.
D.
E.
F.
G.
H.
I.
Directors ....................................................................
Officers ......................................................................
Stockholder ...............................................................
Related Interests ......................................................
Effect of Violation .....................................................
Limits of Loans .........................................................
Exclusions to the Limit ............................................
Applicability of DOSRI Rules and Regulations
to Government Borrowings..............................
VI. Securities on Loans and Other Credit
Accommodations .......................................................
A. Loans and Other Credit Accommodations
Against Real Estate .........................................
B. Loans and Other Credit Accommodations
on Security of Chattels and Intangible
Properties .........................................................
C. Joint and Solidary Agreement .................................
D. Effect of Surety Agreement ......................................
VII. Grant and Purpose of Loans and
Other Credit Accommodations .................................
A. Amount and Purpose of Loan ...................................
B. Requirement for Grant of Loans or
Other Credit Accommodations ........................
C. Reason for Stringent Rules in Granting
Loans.................................................................
D. Unsecured Loans or Other Credit
Accommodations...............................................
E. Other Security Requirements for Bank
Credits ..............................................................
F. Authority to Prescribe Terms and Conditions
of Loans and Other Credit
Accommodations...............................................
G. Amortization on Loans and Other
Credit Accommodations ...................................
H. Escalation Clause; When Allowable ........................
I.
Unilateral Increase of Rates ....................................
J.
Iniquitous, Unconscionable and Exorbitant
Interests............................................................
K. Effect of Void Interest Rate ......................................
L. Reduction of Interest, Penalty and
Attorney’s Fees .................................................
M. Prepayment of Loans and Other Credit
Accommodations...............................................
N. Legal Compensation .................................................
xiv
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145
145
146
147
147
148
148
150
150
150
151
151
153
153
153
155
156
156
156
157
157
160
162
166
167
167
167
O.
P.
Development Assistance Incentives ........................
Renewal or Extension of Loans and
Other Credit Accommodations ........................
Q. Banks Cannot Extend Peso Loans to
Non-Residents ..................................................
R. Provisions for Losses and Write-Offs.......................
S. Extraordinary Inflation or Deflation .......................
T. Purpose of Attorney’s Fees .......................................
VIII. Truth in Lending ...............................................................
A. Policy .........................................................................
B. Disclosure ..................................................................
C. Definitions .................................................................
D. Penalties ....................................................................
E. Effect of Violation .....................................................
F. Exemption of Government .......................................
G. Required Disclosures on Consumer Loans
Not Under Open-End Credit Plan...................
H. Exempted Transaction .............................................
IX. Foreclosure of Real Estate Mortgage ...............................
A. Procedure ..................................................................
B. Demand Before Foreclosure Essential ....................
C. Equity of Redemption vs. Right
of Redemption...................................................
D. Right of Redemption May be Extended
by Agreement ...................................................
E. Estoppel .....................................................................
F. Redemption after the Prescriptive Period ...............
G. Offer to Repurchase Not Waiver to
Question the Sale .............................................
H. No Right to Recover if Foreclosure is Not Valid .....
I.
Preferred Status of Banks Not Impaired in Case
the Borrower is Under Rehabilitation ............
J.
Writ of Possession .....................................................
X. Major Investments ............................................................
A. Ceiling on Investments in Certain Assets ...............
B. Acquisition of Real Estate By Way of
Satisfaction of Claims ......................................
XI. Other Banking Services ....................................................
A. Safety Deposit Box ....................................................
XII. Electronic Transactions ....................................................
XIII. Outsourcing of Information Technology
Systems/Processes ....................................................
XIV. Outsourcing of Other Functions .......................................
xv
171
171
171
172
172
176
176
176
177
177
178
180
182
182
183
184
184
190
192
194
194
194
195
196
196
197
199
199
203
204
205
207
207
208
XV. Credit Card Transactions .................................................
A. General Policy ...........................................................
B. Definition of Terms ...................................................
C. Risk Management System........................................
D. Minimum Requirements ..........................................
E. Information to be Disclosed......................................
F. Accrual of Interest Earned .......................................
G. Finance Charges .......................................................
H. Deferral Charges.......................................................
I.
Late Payment/Penalty Fees .....................................
J.
Confidentiality of Information .................................
K. Suspension, Termination of Effectivity
and Reactivation ...............................................
L. Inspection of Records Covering Credit
Card Transactions ............................................
M. Offsets........................................................................
N. Handling of Complaints ...........................................
O. Unfair Collection Practices ......................................
P. Additional Deposit Does Not Increase
Credit Limit ......................................................
Q. Contract of Adhesion ................................................
R. Blanket Freedom from Liability Invalid .................
XVI. Rules on Price Tags/Labels and Providing Prohibition
Against the Imposition of a Surcharge,
Extra Charge or Additional Charge in the
Use of Credit/Automated Teller Machine
(ATM)/Debit Cards for Payment of Purchases
of Consumer Products or Services ...........................
A. One Price Tag Requirement .....................................
B. Modes of Payment and Other Price
Tag Practices ....................................................
C. Prohibition Against Surcharging by Retailers ........
208
208
209
209
210
211
212
212
212
213
213
214
214
214
214
215
216
216
216
217
217
217
218
Chapter 5
Prohibited Transactions and Cessation
of Banking Business
I.
II.
Prohibited Transactions ....................................................
A. Prohibition to Act as Insurer ...................................
B. Prohibited Acts .........................................................
C. Prohibition Against Outsourcing
Certain Banking Functions .............................
Conducting Business in an Unsafe or
Unsound Manner ......................................................
xvi
219
219
220
221
221
III. Prohibition on Dividend Declaration................................
IV. Unauthorized Advertisement or Business
Representation ..........................................................
V. Placement Under Conservatorship ..................................
A. Governing Law ..........................................................
B. Grounds for Appointment of Conservator ...............
C. Qualifications of Conservator...................................
D. Period of Conservatorship ........................................
E. Remuneration ...........................................................
F. Expenses of Conservatorship ...................................
G. Terminations of Conservatorship ............................
H. Final and Executory .................................................
I.
Exclusive Power to Appoint .....................................
J.
Not a Precondition ....................................................
K. Powers of Conservator Cannot Impair the
Obligations of Contracts ..................................
VI. Cessation of Banking Business.........................................
A. Voluntary Liquidation ..............................................
B. Receivership and Involuntary Liquidation .............
C. Close Now Hear Later Scheme ................................
D. Effect of Filing a Petition for Review.......................
E. Reasons Behind Receivership and
Involuntary Liquidation ..................................
F. Effects of Receivership and Liquidation ..................
VII. Disposition and Distribution of Assets.............................
A. Distribution of Assets ...............................................
B. Disposition of Revenues and Earnings ....................
C. Disposition of Banking Franchise ............................
D. Liabilities ..................................................................
222
224
225
225
225
227
227
227
227
227
228
228
228
228
230
230
231
247
248
249
250
257
257
258
258
258
Chapter 6
Foreign Banks and Trust Operations
I.
II.
Foreign Banks ...................................................................
A. Transacting Business in the Philippines.................
B. Acquisition of Voting Stock in a
Domestic Bank .................................................
C. Local Branches of Foreign Banks ............................
D. Head Office Guarantee .............................................
E. Summons and Legal Process ....................................
F. Laws Applicable ........................................................
G. Revocation of License of a Foreign Bank.................
Entry of Foreign Banks .....................................................
xvii
259
259
260
261
261
268
270
271
271
III. Trust Operations ...............................................................
A. Authority to Engage in Trust Business ...................
B. Conduct of Trust Business .......................................
C. Registration of Articles of Incorporation
and By-Laws of a Trust Entity ........................
D. Minimum Capitalization ..........................................
E. Powers of a Trust Entity ..........................................
F. Transactions Requiring Prior Authority .................
G. Deposit for the Faithful Performance
of Trust Duties .................................................
IV. Bond of Certain Persons for the Faithful
Performance of Duties ..............................................
A. Bond Requirements ..................................................
B. Exemption of Trust Entity from Bond
Requirement .....................................................
V. Operations of Trust Entity................................................
A. Separation of Trust Business from
General Business .............................................
B. Investment Limitations of a Trust Entity ...............
C. Real Estate Acquired by a Trust Entity ..................
D. Investment of Non-Trust Funds ..............................
E. Sanctions and Penalties ...........................................
F. Exemption of Trust Assets from Claims..................
G. Establishment of Branches of a
Trust Entity ......................................................
H. Advertisement of Services ........................................
I.
Money of Government ..............................................
276
276
277
278
279
279
280
281
282
282
283
283
283
284
285
286
286
286
286
287
287
Chapter 7
The Bangko Sentral ng Pilipinas
I.
II.
Creation, Responsibilities And Corporate
Powers of the Bangko Sentral ..................................
A. Declared Policy of the State .....................................
B. Creation of the Bangko Sentral ng Pilipinas ..........
C. Responsibility and Primary Objective
of the Bangko Sentral ......................................
D. Corporate Powers of the
Bangko Sentral.................................................
E. Power to Prosecute ...................................................
F. Estoppel .....................................................................
Authority of the Bangko Sentral ......................................
A. Supervisory Powers of the Bangko Sentral .............
xviii
288
288
288
289
290
290
291
292
292
B.
Phase Out of Bangko Sentral Powers Over
Building and Loan Associations ......................
C. Policy Direction; Ratios, Ceilings
and Limitations ................................................
III. The Monetary Board .........................................................
A. Composition ..............................................................
B. Vacancies ...................................................................
C. Qualifications of Members of the
Monetary Board ...............................................
D. Disqualifications of Monetary Board
Members ...........................................................
E. Grounds for the Removal of Monetary
Board Members ................................................
F. Meetings, Quorum, Decisions and
Proceedings of the Monetary Board ................
G. Deputy Governors may Attend Meetings
of the Monetary Board .....................................
H. Salaries of the Governor and Members
of the Monetary Board .....................................
I.
Personal or Pecuniary Interest ................................
J.
Scope of Authority of the Monetary Board ..............
K. Responsibility of Members of the
Monetary Board, Officials, Examiners,
and Employees of the Bangko Sentral ............
IV. The Governor and Deputy Governors of the
Bangko Sentral .........................................................
A. Powers and Duties of the Governor .........................
B. Powers of the Governor as Representative
of Monetary Board and the Bangko
Sentral ..............................................................
C. Emergencies ..............................................................
D. Limitations on Outside Interests of the
Governor and the Full-time Members
of the Board ......................................................
E. Number and Functions of Deputy
Governors .........................................................
V. Operations Of The Bangko Sentral ..................................
A. Research and Statistics of the Bangko
Sentral ..............................................................
B. Scope of Authority of Bangko Sentral to
Obtain Data and Information..........................
C. Training of Technical Personnel ..............................
D. Scope of Supervision and Examination
by the Bangko Sentral .....................................
xix
293
293
294
294
294
295
295
296
297
302
302
302
302
306
307
307
308
308
309
309
310
310
310
311
311
E. Restraining Order or Injunction ..............................
VI. Director, Officer or Stockholder, and
Related Interest ........................................................
A. Contracting Loans ....................................................
B. Prohibitions Against Personnel of the
Bangko Sentral.................................................
VII. Examination of Banking Institutions ..............................
A. Frequency of Examination .......................................
B. Affording Opportunity to Examine ..........................
C. Service Fees ..............................................................
VIII. Administration ..................................................................
A. Operating Departments of the Bangko
Sentral ..............................................................
B. Required Reports and Publications of
the Bangko Sentral ..........................................
C. Annual Report of the Bangko Sentral .....................
D. Signatures on Statements: .......................................
IX. Profits, Losses, and Special Accounts...............................
A. Fiscal Year ................................................................
B. Computation of Profits and Losses ..........................
C. Distribution of Net Profits........................................
D. Revaluation Profits and Losses ................................
E. The Auditor ...............................................................
X. Penalty for Violation .........................................................
A. Penalty for Refusal to Make Reports
or Permit Examination ....................................
B. Penalty for the Willful Making of a
False or Misleading Statement on
a Material Fact .................................................
C. Proceedings Upon and Penalty for Violation
of NCBA and Other Banking Laws,
Rules, Regulations, Orders or
Instructions ......................................................
D. Administrative Sanctions on Banks
and Quasi-Banks ..............................................
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Chapter 8
Currency, Monetary Stabilization and Functions
of the BSP
I.
The Unit of Monetary Value .............................................
A. The Peso ....................................................................
B. Definition of Currency ..............................................
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C. Value of Currency .....................................................
Issue of Means of Payment ...............................................
A. Exclusive Issue Power ..............................................
B. An Exception to Territoriality of Penal Laws .........
C. Liability for Notes and Coins ...................................
D. Legal Tender Power ..................................................
E. Characteristics of the Currency ...............................
F. Printing of Notes and Mining of Coins ....................
G. Interconvertibility of Currency ................................
H. Replacement of Currency Unfit for
Circulation ........................................................
I.
Retirement of Old Notes and Coins .........................
III. Domestic Monetary Stabilization .....................................
A. Guiding Principle on Monetary Stabilization .........
B. Power to Define Terms .............................................
C. Action When Abnormal Movements
Occur in the Monetary Aggregates,
Credit, or Price Level .......................................
IV. International Monetary Stabilization ..............................
A. International Monetary Stabilization .....................
B. International Reserves .............................................
C. Composition of the International Reserves .............
D. Action When the International Stability
of the Peso is Threatened ................................
E. Means of Action ........................................................
V. Operations In Gold And Foreign Exchange .....................
A. Purchases and Sales of Gold ....................................
B. Purchases and Sales of Foreign Exchange ..............
C. Foreign Asset Position of the Bangko
Sentral ..............................................................
D. Emergency Restrictions on Exchange
Operations ........................................................
E. Acquisition of Inconvertible Currencies ..................
F. Exchange Rates.........................................................
G. Operations with Foreign Entities ............................
VI. Regulation of Foreign Exchange Operations
of the Banks ..............................................................
A. Foreign Exchange Holdings of the Banks ...............
B. Requirement of Balanced Currency
Position .............................................................
C. Regulation of Non-Spot Exchange
Transactions .....................................................
D. Other Exchange Profits and Losses .........................
II.
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E. Information on Exchange Operations......................
VII. Loans to Banking and Other Financial
Institutions................................................................
A. Guiding Principles ....................................................
B. Authorized Types of Credit Operations ...................
C. Loans for Liquidity Purposes ...................................
VIII. Emergency Loans and Advances ......................................
A. Nature of Emergency Loans or Advances ...............
B. When Granted ...........................................................
C. Limits ........................................................................
D. First Tranche ............................................................
E. Second Tranche .........................................................
F. Shares As Collateral .................................................
G. Overdraft ...................................................................
IX. Credit Terms......................................................................
A. Interest and Rediscount ...........................................
B. Endorsement .............................................................
C. Repayment of Credits ...............................................
D. Other Requirements .................................................
E. Provisional Advances to the National
Government ......................................................
F. Prohibitions ...............................................................
X. Open Market Operations for the Account
of the Bangko Sentral ...............................................
A. Principles of Open Market Operations ....................
B. Purchases and Sales of Government
Securities ..........................................................
C. Issue and Negotiation of Bangko Sentral
Obligations .......................................................
XI. Composition Of Bangko Sentral’s Portfolio .....................
XII. Bank Reserves ...................................................................
A. Reserve Requirements ..............................................
B. Definition of Deposit Substitutes .............................
C. Required Reserves Against Peso Deposits ..............
D. Required Reserves Against Foreign
Currency Deposits ............................................
E. Reserves Against Unused Balances of
Overdraft Lines ................................................
F. Increase in Reserve Requirements ..........................
G. Computation on Reserves.........................................
H. Reserve Deficiencies .................................................
I.
Interbank Settlement ...............................................
J.
Exemption from Attachment and
Other Purposes.................................................
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XIII. Selective Regulation of Bank Operations ........................
A. Guiding Principle ......................................................
B. Margin Requirements Against Letters
of Credit ............................................................
C. Required Security Against Bank Loans ..................
D. Portfolio Ceilings ......................................................
E. Minimum Capital Ratios ..........................................
F. Coordination of Credit Policies ................................
XIV. Functions As Banker of The Government........................
A. Designation of Bangko Sentral as
Banker of the Government ..............................
B. Representation with the International
Monetary Fund.................................................
C. Representation with Other Financial
Institutions .......................................................
D. Official Deposits ........................................................
E. Fiscal Operations ......................................................
F. Other Banks as Agents of the Bangko
Sentral ..............................................................
G. Remuneration for Services .......................................
XV. The Marketing and Stabilization of Securities
for the Account of the Government ..........................
A. Issue of Government Obligations.............................
B. Methods of Placing Government Securities ............
C. Servicing and Redemption of the
Public Debt .......................................................
D. The Securities Stabilization Fund ...........................
E. Resources of the Securities Stabilization
Fund ..................................................................
F. Profits and Losses of the Fund .................................
XVI. Functions As Financial Advisor of The
Government...............................................................
A
Financial Advice on Official Credit
Operations ........................................................
B. Representation on the National Economic
and Development Authority ............................
XVII. Privileges ..........................................................................
A. Tax Exemptions ........................................................
B. Exemption from Customs Duties .............................
C. Applicability of the Civil Service Law .....................
XVIII. Transitory Provisions of the NCBA ...............................
A. Phase-out of Fiscal Agency Functions .....................
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B.
C.
D.
E.
F.
G.
H.
I.
Phase-out of Regulatory Powers Over
the Operations of Finance Corporations
and Other Institutions Performing
Similar Functions.............................................
Implementing Details ...............................................
Transfer of Assets and Liabilities ............................
Mandate to Organize ................................................
Separation Benefits ..................................................
Repealing Clause ......................................................
Transfer of Powers ....................................................
Suspense Accounts....................................................
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Chapter 9
Unclaimed Balances and Trust Receipts
I.
II.
Unclaimed Balances ..........................................................
A. Definition...................................................................
B. Procedures .................................................................
C. Penalties ....................................................................
D. Immunity from suit ..................................................
E. Disclosure of Service and Maintenance Fees
on Dormant Accounts.......................................
F. Reclassification .........................................................
G. Escheats Under the Rules of Court .........................
H. The State as an Heir of a Decedent .........................
Trust Receipts....................................................................
A. Policy .........................................................................
B. Definition of Terms ...................................................
C. Trust Receipt Transaction........................................
D. Form of Trust Receipts; Contents ............................
E. Currency in which a Trust Receipt may
be Denominated ...............................................
F. Rights of the Entruster ............................................
G. Entruster not Responsible on Sale
by Entrustee .....................................................
H. Obligations of the Entrustee ....................................
I.
Liability of Entrustee for Loss .................................
J.
Rights of Purchaser for Value and in
Good Faith ........................................................
K. Validity of Entruster’s Security Interest
as Against Creditors ........................................
L. Violation of the Trust Receipts Law ........................
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M.
N.
Application ................................................................
Penalty ......................................................................
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Chapter 10
Deposit Insurance
I.
Roles of Philippine Deposit Insurance
Corporation ...............................................................
II. Powers of PDIC as a Corporate Body ...............................
III. Board of Directors .............................................................
A. Composition ..............................................................
B. Disqualification of Appointive Members .................
C. Quorum .....................................................................
D. Per Diem....................................................................
E. Authority of the Board..............................................
IV. Officers ...............................................................................
A. The President ............................................................
B. The Vice-President ...................................................
C. Bank Examiners .......................................................
D. Claim Agents.............................................................
E. Investigators .............................................................
V. Deposit Insurance Coverage .............................................
A. Deposit Liabilities .....................................................
B. Statutory Liability of PDIC ......................................
C. A Deposit Must in Fact be Made..............................
D. Holder in Due Course not Applicable ......................
E. Liability Under the Negotiable Instrument
vs. The Guaranty Fund....................................
F. Deposit Insurance of Foreign
Currency Deposits ............................................
G. Duty to Indicate Insurance on Deposits ..................
VI. Assessment ........................................................................
A. Assessment Rate .......................................................
B. Certified Statement of Assessment Base
and Assessment Due ........................................
C. Refund and Credit ....................................................
D. Termination ..............................................................
E. Trust Funds ..............................................................
F. Payment of Dividends and/or Interests ...................
G. Civil Penalties ...........................................................
VII. Deposit Insurance Fund....................................................
VIII. Unsound Practice ..............................................................
IX. Reports by Insured Banks ................................................
xxv
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X. Prohibitions on PDIC Personnel.......................................
XI. Legal Assistance ................................................................
XII. Dealings by PDIC Personnel with Banks ........................
A. Designation as Directors and Officers
of Banks ............................................................
B. Borrowing from Banks .............................................
XIII. Receivership.......................................................................
A. Appointment .............................................................
B. Powers .......................................................................
C. Suits Filed by PDIC ..................................................
D. Distribution of Assets ...............................................
XIV. Payments of Insured Deposits ..........................................
A. Manner of Payment ..................................................
B. Proof of Claims ..........................................................
C. Settlement Period and Penalties in Case
of Failure to Settle ...........................................
D. Notice.........................................................................
E. Discharge...................................................................
F. Recognition of Owner ...............................................
G. Withholding of Payment...........................................
H. Prescription ...............................................................
XV. Investment by PDIC..........................................................
XVI. Extension of Loans ............................................................
XVII. Borrowings .......................................................................
XVIII. Issuance of Bonds ...........................................................
XIX. Reports and Audit .............................................................
XX. Miscellaneous ....................................................................
A. Signs ..........................................................................
B. Merger or Consolidation of Insured Banks .............
C. Protection Against Losses ........................................
D. Directors, Officers and Employees of
Insured Banks ..................................................
XXI. Criminal Penalties ............................................................
XXII. Fines .................................................................................
XXIII. TRO and Injunction ........................................................
XXIV. Reorganization ................................................................
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Chapter 11
Anti-Money Laundering
I.
Concepts .............................................................................
A. Policies.......................................................................
B. Covered Institutions .................................................
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C. Covered and Suspicious Transaction .......................
D. Monetary Instrument ...............................................
E. Unlawful Activities ...................................................
F. Money Laundering Offense ......................................
II. Jurisdiction and Prosecution ............................................
A. Jurisdiction of Money Laundering Cases ................
B. Prosecution of Money Laundering ...........................
III. Anti-Money Laundering Council ......................................
A. Composition ..............................................................
B. Functions ...................................................................
IV. Prevention of Money Laundering; Customer
Identification Requirements and
Record Keeping .........................................................
A. Customer Identification............................................
B. Record Keeping .........................................................
C. Reporting of Covered and Suspicious
Transactions .....................................................
D. Freezing of Monetary Instrument
or Property........................................................
E. Authority to Inquire into Bank Deposits.................
V. Ex Post Facto Clause .........................................................
VI. Forfeiture ...........................................................................
A. Civil Forfeiture .........................................................
B. Claim on Forfeiture Assets ......................................
C. Payment in Lieu of Forfeiture..................................
VII. Mutual Assistance among States .....................................
A. Request for Assistance from a Foreign
State ..................................................................
B. Powers of the AMLC to Act on a Request
for Assistance From a Foreign State...............
C. Obtaining Assistance From Foreign States ............
D. Limitations on Request for Mutual
Assistance .........................................................
E. Requirements for Requests for Mutual
Assistance From Foreign States .....................
F. Authentication of Documents...................................
G. Extradition ................................................................
VIII. Penalties ............................................................................
A. Penalties for the Crime of Money
Laundering .......................................................
B. Penalties for Failure to Keep Records .....................
C. Malicious Reporting ..................................................
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D. Breach of Confidentiality .........................................
Prohibitions Against Political Harassment .....................
Implementing Rules and Regulations ..............................
Congressional Oversight Committee................................
A. Composition ..............................................................
B. Powers of the Congressional
Oversight Committee .......................................
XII. Rules and Regulations for Banks and Non-Bank
Financial Institutions to Combat Money
Laundering ................................................................
XIII. Prosecution of Money Laundering Rule ...........................
IX.
X.
XI.
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Chapter 12
Special Purpose Vehicle
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
L.
M.
N.
O.
P.
Q.
R.
S.
T.
U.
V.
Policies.......................................................................
Definitions .................................................................
Organization .............................................................
Powers of An SPV .....................................................
Period for Filing of Applications ..............................
Authorized, Subscribed and Paid-Up
Capital of the SPV............................................
Submission of SPV Plan ...........................................
Approval ....................................................................
Issuance of IUIs ........................................................
Permitted Investors ..................................................
Notice and Manner of Transfer of Assets ................
Nature of Transfer ....................................................
Assumption of Rights and Obligations ....................
Tax Exemptions and Fee Privileges ........................
Additional Tax Exemptions and Privileges .............
Privileges of Participating FIs .................................
Abuse of Tax Exemptions and Privileges ................
Redemption Periods ..................................................
Books of Accounts and Records ................................
Reports ......................................................................
Penalties ....................................................................
Applicability Clause..................................................
xxviii
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481
483
483
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489
489
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490
491
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495
APPENDICES
A
—
Bar Questions ...........................................................
499
B
—
Republic Act No. 7653 — The New
Central Bank Act ......................................................
520
Republic Act No. 8791— The General
Banking Law of 2000 ................................................
574
C
—
xxix
ABBREVIATIONS
GBL
—
General Banking Law
NCBA
—
New Central Bank Act
MORB
—
Manual of Regulations for Banks
PDIC
—
Philippine Deposit Insurance Corporation
BSP
—
Bangko Sentral ng Pilipinas
SPV
—
Special Purpose Vehicle
AMLA
—
Anti-Money Laundering Act
xxx